Not everyone who launches a proxy fight expects – or even wants – to win it. Certainly Dr Peter Falb, founding partner of Boston-based money manager Dane, Falb, Stone & Co, knew he had no hope of winning control of the tiny Texan oil company Toreador Royalty Inc when he launched a proxy fight against it back in the spring of this year.
But then that wasn’t really the point of going into battle; his goal was to draw attention to the fact that, at least in his view, Toreador’s management were underperforming, overpaying themselves, and refusing to take into account the interests of the company’s shareholders. He wanted to put the company on notice that at least one significant shareholder was prepared to stand up for its rights.
The story goes like this. By February of this year, Falb and his colleagues were pretty fed up with the goings-on at Nasdaq-listed oil and gas micro-cap Toreador Royalty, especially with its management’s failure to return value to shareholders. The 1994 year end had seen the company’s revenues down by 6 per cent to $1.9 mn; its net earnings down a massive 62 per cent to just $126,000. At this point, Dane, Falb held 10 per cent of Toreador’s shares, which had made no lasting gains since 1988, according to Peter Falb. ‘In nearly seven years, the shareholders have seen no return,’ he says.
The crux of Falb’s complaint was that management was being rewarded handsomely for mediocrity. ‘Despite the company’s poor performance, the board continued to retain, support and reward the same management team,’ noted Falb. So on March 10 of this year he decided it was time for action, and wrote to Peter Vig, Toreador’s chairman, president and CEO, outlining his disgruntlement. ‘We got no reply,’ recalls Falb. ‘So we wrote a second letter.’
In response to this second missive, he got an answer requesting a meeting. An informal meeting duly took place in Boston on March 29, but from Falb’s point of view it could hardly have been less productive. Vig showed no willingness to compromise; and his subsequent actions seemed tailor-made to frustrate Dane, Falb further.
At the meeting itself, the dissidents explained their view that the company’s overhead and administrative costs were far in excess of the amount needed to run the company effectively. The level of benefits paid to Vig was highlighted as one particular bone of contention. ‘The simple fact,’ says Falb, ‘is that managements in this country are by and large very highly compensated. As an investor, if I make a reasonable return, I’m happy to see these people overpaid.’ But that was hardly the case here. ‘Since Vig came on board at Toreador,’ Falb goes on, ‘shareholders have made a slight loss.’ Meanwhile, he claims, Vig was taking home $250,000 a year in salary and benefits – including $30,000 in club dues. ‘That’s 2 per cent of the company’s net 1994 revenues,’ he notes.
Dane, Falb’s suggestion was that Toreador should cut general and administrative costs by $150,000 a year; put a share repurchase programme in place; reduce its board of directors to seven and nominate four new members. The company’s response was that such a cost reduction would have a negative impact on Toreador’s long-term outlook, while share repurchasing would do nothing for shareholder value.
‘In fact, we received no really substantive response to our complaints,’ says Falb. ‘In my view, it’s wise for companies, particularly smaller ones, to pay reasonable attention to major shareholders. But Toreador did not do that; it failed even to offer us a compromise. That’s what we were looking for: the last thing I wanted was a proxy fight.’
Nevertheless, a proxy fight was what followed, not least because in reaction to the meeting with Dane, Falb, Toreador set about adopting a poison pill provision ‘to protect shareholders against certain types of unfair or coercive takeover tactics.’
Under its shareholder rights plan, announced in early April, the company said it would distribute one preferred share purchase right for each outstanding common share. These rights would entitle holders to buy stock in the company, or a company seeking to acquire it, in certain instances – specifically where a third party acquired, or announced an intention to acquire, 20 per cent or more of the company’s equity.
On May 5, just two weeks before Toreador’s annual meeting, scheduled to take place on May 18, a committee of dissident shareholders, led by Dane, Falb and called the Committee To Maximize Shareholder Value, filed proxy materials with the SEC setting out its own plans. The group reported beneficial ownership of nearly 16 per cent of Toreador’s stock and said that it had retained Georgeson & Co to advise it. The filed materials were subsequently mailed to shareholders in an effort to seek proxies for Dane, Falb’s own slate of five directors who were nominated to take control of Toreador’s board.
Corporate Investor Communications, Inc (CIC), Toreador’s proxy firm of many years standing, then swung into action with its own fight team. CIC’s expansive headquarters in Carlstadt, New Jersey contain everything from printing presses to fax broadcast facilities and a phone centre. As soon as Dane, Falb filed, CIC started firing off a series of fight letters.
According to Michael Mackey, vice president at CIC, one of the key strategies for proxy fight success is being first out and last out. He says three Toreador letters had hit the ground before Dane, Falb had got off its first shot. ‘We were armed with information before the fight started,’ Mackey comments. ‘When the filing occurred, all we had to do was flip the trigger. We worked with Toreador and law firm Thompson & Knight of Dallas on a letter, sent it to the print shop, then straight to the Street.’
Dane, Falb’s apparent desire to manage an oil and gas company could easily be construed as odd. Toreador could argue that its current board members included former presidents of public oil companies, prominent Texas lawyers, and the former director of a leading oil and gas lending bank. In other words, the oil patch establishment had put its stamp on the existing board.
By contrast, as CIC’s first ‘stop, look and listen’ letter pointed out, no member of Dane, Falb’s slate had any experience in the oil and gas business. Of course, from Dane, Falb’s standpoint, there was never any real expectation that they would end up running the company, but that didn’t prevent CIC pursuing this course of argument, undoubtedly to good effect.
‘There was a wealth of available mud to sling at Dane, Falb,’ says Mackey. ‘The Boston-based committee was underqualified when compared to the existing board’s experience in managing a Texas oil and gas company.’ And the defence team also exploited southerners’ general dislike for northern know-it-alls. CIC noted that all five members of the Dane, Falb committee liked to emphasise their Ivy League degrees, while one still noted his Phi Beta Kappa membership 30 years after graduation. Another committee member cited his position as president of the New England Wildflower Society. ‘Serving the wildflower is commendable, as is college academic achievement,’ the letter said, ‘but they are certainly no substitute for hard-won knowledge and experience in the Texas oil and gas business.’
According to Mackey, there are certain things shareholders don’t like to hear. ‘They don’t like long-winded explanations. They do like charts and plain facts,’ he asserts. ‘The guts of the Toreador fight turned out to be two fight letter charts – one showing Dane, Falb’s assets under management against the Dow Jones Industrial Average, the other showing Toreador’s net reserves against the US active rig count. Pictures like that are worth more than words.’
In fact, the plunging line that depicted Dane, Falb’s assets under management was wholly misleading – if technically accurate. To a Texas rancher, it suggested that the fund manager had lost more than half its clients’ money in five years. In fact this was far from the truth. Falb doesn’t dispute the numbers – $233 mn at year-end 1989 dropping to $96 mn in five years. But, crucially, he points out that Dane, Falb wound down its institutional business over that period, paring activities down to just retail clients. The number of client portfolios actually dropped from 307 to 155. ‘But our clients all made money,’ Falb explains.
Toreador’s claim that the money manager had a loss of $41,185 in 1993 was also misleading. Dane, Falb is a sub-chapter S corporation, which means it is treated as a partnership for tax purposes. Thus income or losses flow through to the individual partners’ returns. In 1993, there was a major tax increase, so Dane, Falb made a very large contribution to the profit sharing plan. On paper, the fund did run at a loss, but only in order to limit its tax burden.
Falb, who has a PhD from Harvard and is a professor in applied mathematics at Brown University, says Toreador’s statements gave an incomplete picture. ‘They cited figures which they said showed imprudent management of Dane, Falb,’ he notes. ‘In fact the opposite was true. On the other hand, in the seven years tenure of Toreador’s management and board, the stockholders have made no money. We tried to make our views known, but they didn’t listen.’
Mackey concedes the unexciting history of Toreador’s stock price over recent years: ‘The share price was $3 in 1988 when Toreador’s president was granted an option to buy shares and today’s market price is still $3 per share. But Toreador is in a tough industry. It has been building assets so as to maximise the benefit for shareholders if there is a turnaround in the market place.’
CIC’s next move against Dane, Falb involved its taking aim at the opposition’s proxy solicitor, Georgeson & Co. A 1989 article in The New York Times was quoted as saying that Georgeson ‘has concluded that companies with poison pills received higher takeover premiums than companies without.’ In the same article, a Georgeson executive described criticism of his firm’s studies as ‘just so much nit-picking by zealots.’ CIC says that Toreador considered Georgeson’s studies carefully in its deliberations prior to adoption of its rights plan, and points out that about one half of US companies have rights plans.
Back in Boston, Dane, Falb continued to pursue its own campaign under the committee’s banner. The firm’s five nominees, if they were elected, would have wanted to introduce three key changes at Toreador: the implementation of a share repurchase plan; the slashing of general and administrative expenses; rescission of the poison pill; and a link between management compensation and growth in shareholder value.
Dane, Falb’s fight letter went on to point out that while Toreador’s board and management claimed substantial ownership of stock, a significant portion of holdings were options not yet exercised, representing no actual cash investment in the company. The dissidents could at least understand why management had no desire to invest their own money, but it was hardly a vote of confidence in their own ability.
A significant prong in Dane, Falb’s proxy attack was the idea of a share repurchase plan to maximise shareholder value. If the oil and gas market was down, why would Toreador not buy back stock? The intellectually inclined Dane, Falb backed up its claims with a battery of mathematical studies.
In response, CIC argued that although share repurchase programmes are undoubtedly good for a company with cash, Toreador was a company that leveraged off its assets. Buying back shares would have meant sacrificing marketing dollars; and, anyway, raising the stock price through share repurchasing would not guarantee that the price would hold up over the long term.
‘As a significant investor in Toreador, Dane, Falb had a legitimate gripe over stock price,’ Mackey acknowledges. ‘But this was a problem that Toreador understood. Moreover, it was an issue the company was communicating to its shareholders about. We pointed out that analysts following Toreador believed the company was moving in the right direction, positioning itself for a market turnaround.’
One of the unique aspects of the Toreador solicitation was that a huge proportion of the investor base comprised retail shareholders from west Texas. Some 42 per cent of Toreador’s 2-3,000 shareholders were registered holders; and smaller investors in retail accounts made up another 36 per cent. CIC says voting returns from retail investors are generally lower than from registered holders but that, when they do vote, they are nearly always supportive of management. Because of this, Mackey points out that any dissident, however strong its platform, would be hardpressed to win in such a situation.
Moreover, in this case, Toreador was able to build on the basis of good existing relationships with most of its investors. Texas-native Peter Vig, the company’s chairman, spent up to ten hours on the phone each day during the fight period, personally arguing management’s merits. In fact, when contacted for this story, Vig declined to comment out of consideration for Dane, Falb, which remains a significant shareholder.
When Toreador’s May 18 annual meeting rolled around, some may have feared the consequences of a confrontation between the west Texas oil man and the Boston money manager. Should side arms, tar, feathers and university degrees all be checked at the door? Clearly not, since it turned out to be a civilised event, with both Toreador and Dane, Falb displaying a gentlemanly respect for each other’s points of view. Nevertheless, the Boston contingent was soundly trounced. With 15.7 per cent of Toreador, Dane, Falb only got 20 per cent of the votes.
Surprisingly, Vig’s greatest challenge at the meeting came in the form of Earl Westmoreland, the octogenarian ex-chairman of Toreador and an oil man of the ‘old school’. With a significant stake in Toreador, Westmoreland held great sway among shareholders. He addressed several pointed questions to Vig, demanding to know exactly why Dane, Falb’s proposals wouldn’t work. Vig responded ably, emphasising the fact that the 1990s oil and gas climate was a far cry from that of the 1970s.
And that, one might think, is the end of that: a fight on a minimalist scale that nevertheless involved a major scramble for shareholder support. But for Peter Falb it is far from over. ‘This was a first wake-up call,’ he warns. ‘There are lots of possible future avenues.’ These include reducing or selling the stock, as well as legal action. ‘My guess – and it’s purely a guess at this stage – is that it will end up in a very expensive law suit. It’s not my desire’ he says. ‘But managements of small companies which have substantial shareholders of means should listen to them and take their interests into consideration.’
