Lawndale Capital Management Sends Letter to Equal Energy Board Regarding Montclair Offer
Equal's 3rd largest shareholder urges Board to consider all alternatives and strengthen governance
Mill Valley, CA (April 3, 2013) - Lawndale Capital Management, LLC and its affiliate funds ("Lawndale") hold over 1.5 million shares, or more than 4%, of the outstanding equity of Equal Energy, Ltd. ("Equal" or the "Company.") On April 2, 2013, Lawndale sent a letter to Equal's board of directors, responding to March 25, 2013 press releases by Montclair Energy and Equal concerning Montclair's offer to acquire Equal for $4/share (the "Montclair Offer") and others' indications of interest in a transaction with Equal. Lawndale's letter did not support the Montclair Offer; rather, Lawndale recommended that the Company take certain actions to improve the board's independence and governance so that it could properly evaluate the Montclair Offer, and other alternatives to maximize Equal's shareholder value.
Lawndale's letter, a copy of which is set forth, below, proposed the following specific points:
- The board should pro-actively approach additional parties, as well as work with the Company's financial advisers to determine if there are other financial alternatives which could maximize shareholder value;
- The board should immediately revise the Company's bylaws to repeal recent amendments that could be used in a manner to inappropriately limit shareholder action or otherwise disenfranchise shareholders;
- The board should add to its board a new, independent director introduced by Lawndale which Equal's Governance Committee already determined to be qualified and value-added.
Andrew Shapiro, President of Lawndale, issued the following statement: "While we are pleased that Equal's board appears to be undertaking a process evaluating proposals it has received, we would encourage Equal and its advisors to become more proactive to maximize shareholder value. Such actions should include, at a minimum, working with the board's advisers to consider all alternatives that may improve value as well as adding new, independent directors that can provide strong and independent oversight of the process."
Lawndale's letter also criticized the board for engaging in a number of recent actions that have the potential to reduce shareholder value and are contrary to best corporate governance practices. Examples of such actions include recently adopting by-law amendments, which go beyond prevailing practices and potentially entrench the current board and limit shareholders from proposing new nominees, diluting shareholders through the issuance of several hundred thousand shares of new stock and options and apparently not restricting insiders from purchasing stock on the open market when the board knew of, but had not disclosed, the Montclair Offer or others' indications of interest.
Mr. Shapiro's statement added, "We believe independent directors more focused on shareholders and governance would have raised the obvious governance and possible legal liability issues created by these questionable actions. For these reasons, unless the by-laws are revised, we will need to consider whether we can support the by-law changes if they are eventually submitted for a vote at the upcoming shareholders meeting."
The full text of Lawndale's letter follows:
April 2, 2013
Chairman - Governance and Nominating Committee
Equal Energy, Ltd.
Board of Directors
Equal Energy, Ltd.
As you know, Lawndale Capital Management, LLC, through the funds it manages, now owns over 1.5 million shares and over 4% of Equal Energy, Ltd. (NYSE: EQU) ("Equal" or the "Company".) After last week's disclosure of the Montclair Energy, LLC group's holdings, Lawndale and its affiliates ("Lawndale") are Equal's 3rd largest independent shareowner.
Lawndale is one of the leading activist fund managers in the U.S., with a long history of demonstrating how proper corporate governance can lead to increased shareholder value. For over 20 years, we have worked with companies, managements and shareholders to improve governance at companies that we invest in, and this experience has led us to conclude that certain fundamental actions can be taken which will improve both corporate performance and shareholder value.
We purchased our sizable ownership in Equal over the past few months with the expectation that near- and medium-term prospects in the NGL markets (particularly propane) and medium- and long-term prospects in the natural gas markets would improve, which would benefit all companies in this market. More specifically, we believed that Equal's market price failed to fairly reflect both these prospects and prospects specific to Equal's own energy production and reserves. As important, our decision to acquire a significant ownership position in Equal was based upon our careful review of Equal's governance structure, and our conclusion that we could add value to Equal and its shareholders by working to improve the company's board composition and governance structures.
We write this letter in response to the March 25, 2013 press releases by Montclair Energy that it made a proposal to acquire Equal for the price of $4/share and by Equal that it has received expressions of interest in a transaction with Equal from "a number of" other parties (the "March 25th Releases".) We have also now begun review of the Company's preliminary Proxy Statement (Schedule 14A) filed with the SEC on March 28, 2013 (the "Proxy".)
As an initial matter, based upon our analysis to date, we want you to know that we agree with the Board's preliminary assessment that the $4 per share price offered by Montclair for Equal does not recognize the intrinsic value of Equal. For that reason, and based upon our substantial experience in these matters, we were pleased to read that Equal's board of directors formed a special committee of independent directors (the "Special Committee") and engaged financial advisors to evaluate all proposals presented to the Company. However, we feel that Equal and its advisors should not limit its evaluation simply to proposals "presented" to the Company but work with its financial advisers to reach out to any potentially interested party for additional proposals that could maximize shareholder value. As part of this process, we would expect that Equal would approach the multiple parties who participated in last year's asset sale process as well as such companies as New Source Energy Partners, L.P. (NYSE: NSLP), a newly public entity also focused on Equal's Oklahoma Hunton operational area. We note that New Source recently went public at and continues to trade at valuation multiples, substantially higher than Montclair's proposed purchase price.
Furthermore, in light of the favorable prospects upon which we based our investment, we feel the board, working with the Company's financial advisors, should consider additional potential restructuring or other transactions that may increase shareholder value in the short-term, while also allowing shareholders the opportunity to continue to participate in the Company's long-term growth prospects.
Critical to any decision is the process engaged in by the board, which should be led by strong, independent directors. As you know, on February 21, 2013, Lawndale submitted the names and resumes of two highly qualified independent and energy sector-experienced individuals (that we independently found and interviewed) to Equal's Governance and Nominating Committee for inclusion as part of the Company's director nominee slate, replacing legacy directors of your choosing. As residents of Houston, Texas, these independent nominees lived closer to Equal's sole remaining operations in Oklahoma than current legacy board members who all reside in Canada. We proposed these individuals - who again had no prior contact or experience with Lawndale - because we strongly believed in the need to improve the independence and strength of Equal's board, particularly in light of the Company's increased liquidity and narrowed focus on the Company's sole remaining assets in Oklahoma. It is imperative that capital allocation choices are properly, objectively and independently weighed as well as the decision to remain an independent public company vs. merging with another, or being completely bought out.
Candidly, Lawndale was dismayed at your initial refusal to bring our nominees into a process for new directors that included only insider-sourced nominees. Our understanding is that the board's initial process began shortly before we identified the potential new candidates, and that the board process was conducted at the same time that Equal's board amended the Company's by-laws in a manner which potentially entrenches the current board and limits shareholders from proposing new nominees.
We are glad you learned to appreciate the independence and qualifications of the nominees we suggested. Likewise, through dialogue and interviews, we became comfortable enough with your insider-sourced prospective nominees to reduce our shareholder representation request to include just one of the two nominees we submitted for the Company's upcoming May Annual Meeting slate. You and your committee initially chose Mr. Robert Parkey.
Unfortunately, according to the preliminary Proxy, you apparently have now chosen to not nominate Mr. Parkey to Equal's board of directors. We can only assume that the reason for your actions- despite your admission that he would be a good independent director, whose presence would benefit all shareholders- is because Lawndale is unwilling to enter into the overly broad and wholly improper "standstill" agreement proposed by your counsel. As you know, the standstill agreement you proposed would effectively prohibit Lawndale from communicating with the Company's other shareholders about issues of mutual concern. As a general matter, requesting that Lawndale enter into such a standstill was inappropriate given that Mr. Parkey is an independent director with no prior affiliation with Lawndale.
However, your request is especially egregious in these circumstances insofar as it was made at a time when you obviously knew about the issues raised in the March 25th Releases, but did not inform Lawndale or the public of this information prior to urging Lawndale to enter into the standstill agreement. Attempting to induce a significant shareholder to enter into a standstill without disclosing material information such as the fact that a third party has made a premium bid to acquire the Company and may be planning to run a proxy contest against the Company's nominees is, to say the least, not what Lawndale considers to be a model of good corporate governance.
Some of the Company's other recent actions also give us great cause for concern. For example, it is now clear that Equal's board issued several hundred thousand shares of new stock, authorized stock options with grant date pricing potentially not reflecting Montclair's offer and/or others interest in the Company, and apparently did not take steps to preclude insiders from purchasing shares of stock in the open market from sellers who did not have the benefit of this undisclosed information. We believe independent directors more focused on shareholders and good governance would have raised the obvious governance and possible legal liability issues created by the above transactions.
All of these actions make it critical for Equal to elect highly qualified and engaged independent directors whose interests and actions are solely aligned with shareholders and who are free of conflicts under both the letter and spirit of listing regulations. Lawndale has provided Equal with the names and background information of such individuals-individuals who, quite frankly, we believe Equal would be fortunate to have as directors and who have no prior affiliation with Lawndale.
In addition to including Mr. Parkey amongst the nominees for Equal's board, we believe the Board should also reconsider and revise its recently adopted advance notice by-laws and other recent by-law amendments. We believe that these actions may have been taken in haste, going beyond what is customary and necessary, and send an improper message to the market that Equal is not interested in engaging with its shareholders. We note that the preliminary Proxy recently filed for the May 13, 2013 Annual Meeting asks shareholders to approve all your by-law changes as part of one bundled measure. While some of the changes adopted by the Board may have been minor, bundling those in one proposal along with other unacceptably entrenching amendments, in particular, certain aspects of the advance notice by-law, may not be changes that Lawndale can support as it is presently drafted.
At this time, while Equal is about to engage in a process to determine the future of the Company, it is particularly important for the board to have the confidence of the Company's shareholders and for the shareholders to believe that the board is acting in an informed and independent manner. The board can start this process by eliminating many of the barriers it recently adopted to shareholder participation in the election process, adding some strong new independent nominees to the board and then conducting a full, and fair and thorough evaluation of all alternatives to maximize shareholder value.
We believe it is in the best interests of the Company and its shareowners for all of us to work together to expeditiously improve the Board's composition and the Company's corporate governance practices. I would appreciate it if you would contact me at the earliest opportunity to move forward addressing the concerns we have previously discussed and as outlined above.
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 20 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.
Disclosure: I am long EQU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: At time of writing, author and/or funds author manages hold a long position in this issuer. Author and the funds may buy or sell securities of this issuer at any time.