Dallas Business Journal (November 30, 2021): TPL sparks more disputes with investors amid corporate governance concerns

https://www.bizjournals.com/dallas/news/2021/11/30/texas-pacific-land-corporate-governance.html

By Catherine Leffert – Staff Writer, Dallas Business Journal

Nov 30, 2021

Texas Pacific Land Corporation was set to turn a new leaf this year. 

The 133-year-old public company reorganized from a trust to a corporation in January, and as a result, appointed a nine-member board of directors. But in the last three months, the corporation has made efforts to exclude multiple shareholder proposals from its annual meeting, rescheduled to a later date and defended its classified board structure, which some corporate governance experts claim reduces the firm's value.

Shareholders said they don’t doubt the financial strength of Texas Pacific. But they aren’t as confident in the board’s corporate governance.

In October, shareholder Gabi Gliksberg submitted a proposal to Texas Pacific that the board should be declassified, and each board member should undergo annual reelection. Texas Pacific’s board is currently classified, or staggered, which means the nine members are divided into three classes, with each three-director class serving three-year terms.

A month later, the company postponed its annual shareholder meeting from Nov. 16 to Dec. 29, to "review and respond" to shareholder proposals. Two days after it announced the postponement, Texas Pacific sent a "no-action request" to the Securities and Exchange Commission to exclude Gliksberg’s proposal from the meeting. 

The company said in a prepared statement to Dallas Business Journal that its classified board structure was recommended while still a trust by the Conversion Exploration Committee. The committee was made up of trustees and investors, most of whom became board members. 

“The structure is intended to provide stability and continuity to ensure a smooth transition from a trust structure to a c-corporation, and to enable TPL Corporation to attract and retain highly qualified directors who have a focus on the long-term objectives of the company,” a Texas Pacific spokesperson said in a prepared statement to Business Journal.

Texas Pacific Land owns about 800,000 acres in West Texas, primarily in the Permian Basin. The company operates two lines of business: land and resource management and Texas Pacific Water Resources, which together generate revenue through oil and gas royalties, commercial leases, water sourcing and infrastructure development, among other facets.

This isn't the first time Texas Pacific has had friction with investors. The latest contention is a mirror as to why Texas Pacific restructured in the first place.

In 2019, the company entered a months-long proxy battle, spurred by disagreement about who should fill a position after a trustee died. The clash was rife with lawsuits and personal attacks between major investors and trustees until a settlement between the parties led to the corporation's transition. The nine-person board was born of former trustees, activist investors and a mix of the parties' picks.

Tim Schwartz, whose firm Schwartz Investment Counsel owns an almost-1% stake in Texas Pacific, said he was glad when the trust converted to a corporation.

“I think that was a huge positive for the company,” Schwartz said. “But since then, I would say there's been not as much progress as we would have hoped in terms of the corporate governance. And to us, it feels like the board is not that conducive to additional corporate governance improvements. The actions they've taken over the past few weeks, that just solidifies that opinion.”

Last week, the SEC said in a letter it wouldn’t approve Texas Pacific’s exclusion request if Gliksberg modified language of his proposal, which he did, though the crux remained the same.

“It is my firm view that if the board of TPL truly cares about what is in the best interests of the company and its stockholders, then it should immediately pass a resolution recommending an amendment to the company's charter that would declassify the board, allowing for all directors to be elected on an annual basis, and then put that proposed amendment before the stockholders for a vote,” Gliksberg said in an open letter published Nov. 16.

James Spindler, the University of Texas at Austin Mark L. Hart, Jr. Endowed Chair in Corporate and Securities Law and a professor at the McCombs School of Business, said implementing a classified board like Texas Pacific’s can be controversial. Classified boards can entrench directors, protecting them from removal in hostile takeovers or proxy battles — like the one Texas Pacific faced two years ago. 

“There's a general concern among reformers and activist investors, and I think in the larger corporate communities, that classified boards have some negative consequences,” Spindler said. “(They) tend to entrench management. So if you have management that's making bad decisions, or making self-interested decisions, it's a lot harder to kick them out.”

Harvard Law School professors Alma Cohen and Director of the Program on Corporate Governance Lucian Bebchuk — experts on corporate governance — found through research that there’s a correlation between classified boards and “an economically meaningful reduction in firm value.”

A Texas Pacific spokesperson said the staggered board facilitates institutional knowledge year-to-year, which is especially important for the company due to the “long-term nature” of its assets and business. 

Schwartz, who said his firm has owned shares in Texas Pacific since 2015, said the company’s efforts to exclude Gliksberg’s proposal are a “huge red flag.” The major shareholder added he sent an email to all the board members in support of Gliksberg’s proposal, but said he had only heard back from one director. 

“The company maintains an active and capable investor relations function, and regularly interfaces with current and prospective stockholders,” Texas Pacific said in a prepared statement. “Our investor relations email is openly posted on our website, and the company responds to any inbound questions or concerns.”

Texas Pacific has shown strong financial performance. Since the company’s conversion to a corporation in January, Texas Pacific’s stock has shot up more than 45% to about $1,263 per share, as of Tuesday morning. Last year, the company brought in $303 million in revenue, paid more than $200 million in dividends, and sits at nearly a $10 billion market capitalization, per a June investor presentation. It also holds no debt on its balance sheet. 

Though Schwartz said he doesn’t have a problem with the financial performance of the company, he thinks the board is trying to entrench itself by requesting to exclude Gliksberg’s proposal. He added that there are other shareholders who are unhappy with current corporate governance.

“Staggered boards have less accountability to shareholders, less reason to be responsive to shareholder interests, and greater ability to entrench themselves,” Gliksberg said in his open letter. “Declassified boards, by contrast, are widely, if not universally, regarded as more responsive and accountable to corporate shareholders.”

Texas Pacific's shareholder meeting is about one month away — scheduled to be sandwiched between Christmas and New Year's — and it's still unclear what all will be included on the proxy materials for investors.