SandRidge Energy Inc. investors persuaded a judge to bar the energy company’s directors from impeding their efforts to replace the board in a proxy fight, according to court filings.
Delaware Chancery Court Judge Leo Strine in Wilmington concluded today that SandRidge directors can’t seek to strong-arm shareholders into rejecting a slate of board candidates backed by hedge fund TPG-Axon Capital Management LP and other activist investors in a March 15 proxy contest. Officials of New York-based TPG have been soliciting votes to oust the directors, including Chief Executive Officer Tom Ward, since January.
SandRidge investors should have the “right to make a free, uncoerced choice” about whether to replace all seven of the company’s directors, Strine said in a 38-page decision.
TPG, SandRidge’s third-largest shareholder, and Mount Kellett Capital Management LP have called on the oil and natural-gas producer to bring in new directors and remove Ward from his post as chairman because of the company’s poor performance. The energy company’s shares have fallen 78 percent since its 2007 initial public offering, according to data compiled by Bloomberg.
Greg Dewey, a SandRidge spokesman, and Anton Nicholas, a spokesman for TPG-Axon, didn’t immediately respond to voice messages and e-mails seeking comment on the ruling.
TPG and Mount Kellett officials, owners of a combined 11 percent stake in SandRidge, want managers to cut overhead by selling the company’s planes and reducing employee compensation. They also want SandRidge to refocus its business on oil-drilling projects.
The ruling reinforces the idea that shareholders shouldn’t be pressured by either side in the proxy fight over the board, said Jason Wangler, an analyst with Wunderlich Securities Inc. in Houston.
“TPG is allowed to present the facts and SandRidge is allowed to present the facts,” Wrangler said in a telephone interview. “Outside of that, there should be nothing else.”
Jerald Kallick, a SandRidge shareholder, filed suit in January arguing company officials wrongfully interfered with TPG’s and Mount Kellett’s efforts to gather shareholder votes and win a board majority.
Lawyers for Kallick and other shareholders said in court filings that SandRidge directors are misusing provisions tucked into lender agreements covering the company’s $4.3 billion in debt that allow for payment on the notes to be accelerated.
Directors are pointing to the fact that the notes can be called if TPG and Mount Kellett are successful in the proxy contest to “coerce” investors into voting for the current board, the shareholders contend. While the board has the power to disable those provisions, it refuses to do so, the investors said in court filings.
Kallick also is seeking to “de-stagger” elections for board members. That would mean that all directors would come up at the same time for a vote.
Directors’ decision to keep the accelerated-debt provisions in place “is an effort to improperly manipulate the election,” shareholders’ lawyers said in a Feb. 20 filing.
SandRidge’s attorneys counter that such change-of-control provisions are routinely demanded by lenders in connection with corporate debt and there are “substantial risks” involved in disabling them.
Such a move could impair “the company’s ability to obtain financing in the future,” SandRidge’s lawyers said in a March 6 filing.
In his ruling, Strine said directors’ refusal to deactivate the debt-acceleration provisions violated their legal duties to act in shareholders’ best interests.
“The incumbent board’s behavior is redolent more of the pursuit of an incremental advantage in a close contest, where a small margin may determine the outcome, than of any good-faith concern for the company, its creditors or its stockholders,” the judge wrote.
As part of the injunction, Strine ordered SandRidge officials not to rely on so-called “consent revocations” they’ve gathered as part of the proxy fight. Those revocations provide support for incumbent directors.
Wunderlich’s Wangler said it’s unclear how Strine’s ruling will affect the proxy contest. TPG-Axon needs 50 percent of SandRidge’s shareholders to vote in its favor, which is a high threshold, the analyst said. Any unvoted shares effectively are counted as votes to keep the existing board.
“I still feel it’s going to be tough to get enough of an uproar for enough shareholders to get up and vote,” he said. Wangler rates Sandridge a hold and doesn’t own any of its shares.
Mark Lebovitch, a New York-based lawyer for Kallick, said in a phone interview that the ruling could play a major role in “what has become a very close proxy contest.”
In his derivative suit, Kallick contends SandRidge’s board has granted Ward lavish pay packages despite the company’s performance. Directors have approved “more than $150 million in compensation for Ward over the past five years,” the investor said in his complaint.
The board also previously allowed Ward to acquire interests in the company’s wells in return for contributing a share of the drilling costs, according to the complaint. SandRidge later ended that program.
The energy company has disclosed that it acquired working interests in leases from WCT Resources LLC, which is owned by trusts benefiting Ward’s children, according to filings with the U.S. Securities and Exchange Commission.
In a Jan. 17 letter to the company, Mount Kellett officials said SandRidge managers should hire outside lawyers to investigate business transactions between Ward, his son, Trent Ward, and the company.
SandRidge directors said Jan. 25 an internal review of the company’s transactions with firms controlled by Ward and his family “found no evidence of impropriety.”
SandRidge fell a penny to $5.81 in New York Stock Exchange composite trading today.
SandRidge’s 8.125 percent bonds due in 2022 rose more than 1 percent to 108.75 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The case is Kallick v. SandRidge Energy Inc., CA 8182-CS, Delaware Chancery Court (Wilmington).