Guest Post: Andrew Shapiro is Founder, President and Portfolio Manager of Lawndale Capital Management, an investment advisor that has managed activist hedge funds focused on small- and micro-cap companies for over 21 years, one of the longest periods of experience deploying an activist/relational investment strategy today.
Lawndale Capital Management, LLC and its affiliate funds (“Lawndale”) own more than 1.769 million, or more than 4.9%, of the shares of Equal Energy, Ltd. (N-EQU) (“Equal” or the “Company,”) entitled to vote on matters relating to Equal’s proposed acquisition by Petroflow Energy Corp for $5.43/share (plus an additional $0.05/share dividend) at the Company’s upcoming July 8, 2014 Special Meeting.
Over the course of the past year, Lawndale, as one of Equal’s largest shareholders, has disclosed its opposition to unsolicited takeover bids by Montclair Energy (“Montclair”) of $4, $4.75 and $4.85 per share. Lawndale has also expressed concern with Equal’s agreement to be completely acquired by Petroflow for only $5.43/share vs. higher value alternatives Lawndale considers possible.
One of the higher value alternatives Lawndale suggested Equal’s board pursue was a $6/share dutch tender and leveraged recapitalization that would allow Equal shareholders continued participation in what Lawndale views as favorable prospects for Equal’s vast energy resources. Montclair subsequently published an analysis that a leveraged $6/share repurchase plan would provide $7.01-$9.97/share of aggregate value to Equal shareholders. Equal’s Board has rejected such a plan for undisclosed reasons.
Based on Lawndale’s review of the proxy for Equal’s Special Meeting, it is disappointed a fairly robust auction process resulted in a low sales price. However, Lawndale believes that the sales agreement’s low break-up fee did not preclude higher alternative bids. In the absence of a credible higher-valued alternative proposal, Lawndale will reluctantly vote its shares “FOR” the proposed acquisition (Proposal #1). If a desirable alternative proposal emerges in time, Lawndale will change its vote to oppose the current transaction.
Andrew Shapiro, President of Lawndale, stated, “We believe Lawndale’s active involvement in this process contributed to the increased bids and minimal deal protection hurdles.”
Shapiro added, “While we fail to understand why Equal’s Board didn’t have the company pursue a much higher-valued leveraged buyback alternative, Montclair and other potential bidders have had ample opportunity to put forth higher, firm fully-financed offers.”
Lawndale will also vote “AGAINST” the proposal to approve senior management’s severance “Golden Parachute” compensation (Proposal #2) for the following reasons: 1) In Lawndale’s opinion, Equal CEO Don Klapko has already been overcompensated; 2) Mr. Klapko’s severance plan is tied to this very same overcompensation, and 3) the excessive severance plan creates a misaligned bias toward a complete sale of the Company vs. alternatives that allow shareholders to continue participating in Equal’s future growth.
Shapiro added, “The ‘Golden Parachute’ proposal garners our NO vote for more compelling reasons than what caused Equal’s ‘Say-On-Pay’ vote to go down in flaming defeat at last year’s Annual Meeting. We hope the Board heeds shareholder’s wishes this time around.”
About Lawndale Capital Management, LLC
Lawndale Capital Management, a San Francisco Bay Area-based investment advisor, has managed activist hedge funds focused on creating and unlocking shareholder value in small- and micro-cap companies for over 21 years. Lawndale applies a private equity approach through active and relational ownership of public company securities. In most investments, Lawndale plays a constructive relational role by actively working with boards and management teams to help them achieve their strategic and operating goals. In other instances, Lawndale is a direct value-unlocking catalyst, utilizing a range of tools that include aggressively promoting improvements in a company’s governance and operational structures, proxy actions, asserting shareowner’s legal rights and taking active roles in restructuring and buyout proposal negotiations.
Lawndale Voting Recommendations Below – Votes Against Board Position in Bold
|#||PROPOSAL TEXT||Lawndale||FLORIDA SBA||CBIS|
|1||Approve Acquisition by Petroflow Canada Acquisition Corp., a Wholly-Owned Subsidiary of Petroflow Energy Corporation||For||For||For|
|2||Advisory Vote on Golden Parachutes||Against||For||For|
While not specific to the pending sale, GMIAnalyst had a couple of observations worth noting:
- Shareholders should be aware that more than 10 percent of shares were voted against the company’s advisory vote on executive compensation (‘say on pay’) at the most recent annual meeting. Given generally very high levels of support for say-on-pay votes in this market (last year, only about 3.2% of companies in this market received 10 percent or more dissenting votes), this result indicates a significant level of shareholder discomfort with the company’s executive compensation practices.
- Unvested equity awards partially or fully accelerate upon the CEO’s termination, characteristic of 37.8% of companies in the home market. Accelerated equity vesting allows executives to realize pay opportunities without necessarily having earned them through strong performance.
FYI, last year’s advisory vote on executive compensation lost on a count of 44%/55%. Additionally, Equal’s CEO Don Klapko won his reelection vote last year by a count of 51%, with 49% against.