When SandRidge Energy announced Wednesday that its founder, chairman and CEO, Tom Ward, was leaving, the company issued a press release carefully crafted to insinuate that the move was its own timely, strategic decision. “New leadership is in the best interests of the company and its shareholders at this time,” the statement said.
However, the move was yet another victory for New York–based activist hedge fund firm TPG-Axon Capital Management, even though the investor agreed to drop its plan for a proxy fight when it worked out a settlement with the energy company back in March. In fact, had the board not canned Ward by June 30, it would have lost control of the company altogether.
Under the settlement, Oklahoma City–based SandRidge agreed to place four of the hedge fund firm’s nominees on the energy company’s board of directors. More critically, the board also said at that time that if it did not terminate Ward by June 30, three current directors would resign, and one additional TPG-Axon nominee would be elected, resulting in TPG-Axon obtaining majority control of the board. Exit Ward.
This is a big deal. Researchers at FactSet’s SharkWatch shareholder activism database confirm that they have seen settlements granting a dissident investor additional board seats in the future depending on specific circumstances, but they don’t recall ever seeing one based on terminating the chairman.
SandRidge’s settlement and Ward’s departure are also blows to the special-event poison pill the company installed back in November. Also called shareholder rights plans, poison pills essentially give all shareholders — except the one the company doesn’t like and feels threatened by — the right to buy more shares at deep discounts under certain circumstances. A rights plan generally stipulates that the pill will be triggered when the hostile investor accumulates between 15 and 20 percent of the shares. The goal is to make the company prohibitively expensive for the unwanted investor to acquire control of the company without management or board support.
In November, after TPG-Axon raised its stake to 6.5 percent and the hedge fund firm Mount Kellett Capital Management publicly urged SandRidge to review strategic alternatives, including changing the CEO, the energy company instituted a pill that would be triggered if an individual or some other investor acquired just 10 percent of the stock or an institutional investor filing as a passive investor owned 15 percent. The company would argue that the pill stopped the clock and prevented TPG-Axon and other investors from acquiring the company on the cheap and against its wishes.
However, while it is true that the hedge fund firm did not in fact take over the company, it still got its way. It gained several critical seats on the board. And it even got the company to sack the founder and CEO.
Even so, Ward will most likely enjoy the last laugh. After the company’s hired gun, law firm Mayer Brown, determined that Ward did not merit a termination for cause after a four-month investigation into allegations that he engaged in improper related-party transactions in certain oil and gas properties, the company announced he was fired without cause. This is a critical legal status. It means Ward is entitled to his severance package under his employment contract.
So, while TPG-Axon can tell shareholders they finally got the bum out, Ward stands to collect a lump-sum cash payment of $53.5 million, consisting of three times the average of his last three annual bonuses, his accrued vacation, and the value of the restricted stock that Ward would have received over the next three years if he had remained employed by the company, and his current base salary to be paid for 36 months. In addition, his 6,331,475 shares of previously granted restricted stock immediately vests.
Activist investors are wielding a lot more influence these days. But they still don’t have the power to cancel outrageously high severance deals previously approved by friendly boards of directors.
