Be Patient

https://horizonkinetics.com/wp-content/uploads/Q4-2019-Horizon-Kinetics-Commentary_FINAL.pdf

It is true, nothing much has changed so far. For better or worse, that could probably be said about most of the stocks we own at some point during the time we’ve held them. Even the very successful ones. There have been periods measuring in years during the time we’ve held Texas Pacific Land Trust (“TPL”) when nothing had changed. Lately, of course, there have been ongoing changes at TPL. It is probably common knowledge, now, but can’t not be mentioned, that last week the Conversion Exploration Committee announced that it had arrived at its much awaited conclusion. The Committee unanimously recommended to the Trustees of TPL that the Trust convert to a Delaware C-corp. That recommendation was made with the input of Credit Suisse as outside financial advisor as well as outside legal counsel. It should not escape notice that the Trustees are, in fact, on the Committee, so I suppose they took part in formally notifying
themselves.

The Committee also recommended that if such a conversion takes place, it should be structured so as to be a tax-free transaction to shareholders. Such changes require the customary regulatory filings and approvals, such as with and by the SEC and NYSE. No doubt, we’ll be hearing more in the coming weeks, since the Committee chose to extend its term for one more month, through the end of February. It could as easily have made it two months or three.

C-Corp Conversion Details

https://www.tpltrust.com/investors/news-events/press-releases/detail/100/texas-pacific-land-trust-committee-recommends-conversion-to

The decision of whether to convert TPL into a c-corporation is subject to determination of the current Trustees. The Committee recommended that, if the Trustees elect to authorize the conversion, the conversion should follow a process intended to ensure a smooth transition that would be tax-free to shareholders. As proposed, TPL would transfer all its assets, including cash, land, Texas Pacific Water Resources, and other assets, to a wholly-owned limited liability company subsidiary of TPL (“TPL Holdco”). TPL would then contribute all of the equity in TPL Holdco, holding all of TPL’s assets, to a newly-created corporation (“TPL Corporation”). Current shareholders of the Trust would receive an amount of shares in TPL Corporation proportional to their ownership of shares in the Trust. When this process as recommended is completed, shares of the Trust would be cancelled. Shareholders of the Trust would not need to take any action to receive the new shares in TPL Corporation.

 

Great opportunity to split the new shares too. Would be amazing/horrifying if the Trustees went rogue and decided not to adopt. Given all we’ve been through I wouldn’t be surprised. That certainly isn’t the base case though.

Some folks were wondering about a unit holder vote to convert. That doesn’t appear to be the case.

Much remains unsaid about governance of the new entity. Also not mentioned is the plan for returning accumulated cash and cash going forward.

September Update Submitted

Trust Retains Credit Suisse as Financial Advisor

DALLAS–(BUSINESS WIRE)–The Conversion Exploration Committee (the “Committee”) of Texas Pacific Land Trust (NYSE: TPL) (the “Trust” or “TPL”) today provided the first in a series of updates on its deliberations.

The Trust, after Trust management and the Committee interviewed a number of potential financial advisors, retained Credit Suisse to assist the Trust and the Committee in developing its recommendation to the Trustees.

The Committee’s deliberations to date have been productive and informative. The Committee has met three times, both in person and over the phone. Although its deliberations are confidential, the Committee will provide monthly progress reports to shareholders as required by its Charter before issuing a final recommendation by the end of year.

The Committee is chaired by John R. Norris III and David E. Barry, the incumbent Trustees of TPL. Its additional members are (in alphabetical order): Four-Star General Donald G. Cook, USAF (Retired); Craig Hodges, Chief Executive Officer of Hodges Capital; Dana McGinnis, Founder and Chief Investment Officer of Mission Advisors; Eric L. Oliver, Founder and President of SoftVest Advisors and Murray Stahl, Chairman of Horizon Kinetics.

Productive.  Informative.  Hired bankers.  Met three times.  Sounds like progress.

Current EVP/COO Sameer Parasnis is a CS alum.

TPL 2.0 : Investor Preferences

Investor Preferences in C-Corp Conversion:

  1. No dilution.  Share issuance of any kind should be prohibited in the corporate charter.  Any changes to this policy should require a significant majority vote. 
  2. Share repurchases should remain the primary method of returning capital.
    1. If a dividend is necessary, it should be regular and consistent.
  3. Board members, including originating board members, must be voted upon by shareholders.  Board terms should be of reasonable length.
  4. Board should be of reasonable size so as to function healthily at all times. Independent directors should outnumber executive members. 
  5. Remain in “business of going out of business”.  Primary duty of corporation is return of capital via royalty collections and asset sales.
    1. State limitations on additional business activity such as new business ventures and additional land/royally acquisitions.  
  6. Executives shall be required to purchase shares via dedicated cash compensation and/or company loans to ensure that shareholder and management incentives are aligned.  Executives should be required to attain and maintain some material level of ownership. 
  7. Executive compensation should be simple and oriented towards long term results.
  8. Stock shall be split regularly so as to facilitate liquidity for repurchases.
  9. Transparency in reporting of results and material events should be commensurate with those expected of a $5B+ publicly traded corporation.
  10. Corporation must hold an annual meetings and be regularly open to investor communcation.
  11. NO DEBT!

The list above was kept short deliberately.  Spin-offs, head count, and other business decisions (in my opinion) should be the responsibility of directors and management with interests and incentives that are aligned with those of shareholders (TPL 2.0).

Update 6/22/20:  This post was originally written on 8/11/19.  Almost a year later we have some clarity on the board makeup.  Looks like a win and a loss.  Highlighted above.

Settlement Agreement

Docs posted on Edgar.  Some things that caught my eye below.  Big things to me are 1) 5 of 7 votes are needed for a decision or recommendation which puts concerns around the perceived 4/3 split to rest and 2) montly updates to investors.

8-K

Committee. The Committee will continue to be governed by its charter dated June 23, 2019, as amended and restated on July 30, 2019 (the “Committee Charter”). The CEC shall complete its work by December 31, 2019 (the “Committee Period”), unless the CEC determines otherwise. All decisions and recommendations of the Committee shall require the affirmative vote of at least five of the seven members. Due to the legal obligations of the Trustees as fiduciaries, the Committee’s recommendation will be non-binding on the Trustees and the Trust. If the Committee recommends a plan of Conversion (as defined below) by the end of the Committee Period, the Trustees will have a time period of 30 days following the receipt of such recommendation to decide whether to implement such plan of Conversion (such time period, the “Decision Period”).

Settlement Agreement

The Committee shall be comprised of a maximum of seven members. The members of the Committee shall be: (i) John R. Norris III; (ii) David E. Barry; (iii) General Donald G. Cook, USAF (Ret.); (iv) Dana McGinnis; (v)  Eric Oliver; (vi) Murray Stahl; and (vii) Craig Hodges. The Committee members shall serve for so long as the Committee is in existence or until their earlier resignation or death, in which case the remaining members of the Committee shall as promptly as practicable select a replacement with the approval of five Committee members then serving and consent of the Trustees (such consent not to be unreasonably withheld, delayed or conditioned). Mr. Norris and Mr. Barry shall serve as co-chairmen of the Committee (“Co-Chairmen”). The Co-Chairmen shall coordinate all their activities in consultation with other Committee members. The Committee may remove any member of the Committee (other than the Trustees) with the affirmative vote of five of the other Committee members if the Committee determines, in good faith, that reason exists to remove such member.

All members of the Committee agree to promptly confer and, if necessary, submit to mediation in front of a JAMS mediator in Dallas, Texas, within 20 days of any disputes arising out of or relating to this Charter.

Conversion Exporation Committee Charter

Without the prior written consent of the Trust, neither the Committee nor any of its members shall make any public announcements or other disclosures relating to the Committee and its work that has not previously been disclosed, including, but not limited to, discussions, recommendation, work product, and materials. Beginning in September, the Committee shall provide a report of its work to shareholders on a monthly basis provided that the Trustees approve such report (such approval not to be unreasonably withheld). Upon completion of its work, the Committee shall provide a final report to shareholders with the Committee’s recommendations provided that the Trustees approve such report (such approval not to be unreasonably withheld).