In addition to EQT’s 1Q19 update yesterday, Toby and Derek Rice filed a lawsuit against EQT, alleging the company is trying to confuse shareholders by requiring some of board candidates the Rice boys are proposing get commingled with EQT’s own slate of candidates. The Rice boys say the lawsuit is aimed at “preventing EQT from manipulating shareholder election.” The Rices want to elect their own board, tossing out the existing board and following that, tossing out EQT’s current senior management.
Let’s begin with the announcement made yesterday by the Rice boys:
Toby Z. Rice, on behalf of the Rice Team, today filed a lawsuit in Pennsylvania State Court against EQT Corporation (NYSE: EQT) and its Board of Directors. The lawsuit seeks to prevent EQT and the Board from taking actions that the Rice Team believes are designed to thwart its proxy campaign and manipulate the outcome of the upcoming contested election of directors at EQT’s 2019 Annual Meeting of Shareholders, which is taking place on July 10, nearly eight months after the Rice Team engaged with EQT at the request of some of the Company’s largest shareholders.
The complaint alleges that EQT is attempting to create an uneven playing field by taking the highly unusual and unfair step of requiring, as a condition of the submission of nominations, that the Rice Team’s nominees consent to being named in EQT’s proxy materials. The Rice Team believes that there is no such requirement in EQT’s bylaws and that any such requirement would violate Pennsylvania law. EQT should either follow the common and well-established practice of each side’s nominees appearing on separate proxy cards, or it should consent to the use of a universal proxy card, with all nominees appearing on the same card. The Rice Team believes that this coercive tactic by EQT is designed to preserve the incumbent directors’ majority control of EQT by creating the deceptive appearance that the Rice Team’s nominees support the incumbents, when, in fact, they do not.
“We believe both sides agreeing to use a universal proxy card would reflect best-in-class corporate governance, as the most qualified directors would be elected regardless of which proxy card a shareholder voted on,” said Toby Rice. “We also believe it is unconscionable for the EQT Board to attempt to coerce shareholder votes by allowing a loss of the election to potentially trigger substantial penalties under EQT’s credit agreement. In our view, these entrenching actions, coupled with other unfair actions such as EQT delaying its annual meeting to July rather than holding it in April as it has historically done, are attempts to manipulate the corporate machinery to gain a tactical advantage rather than allow shareholders to have their voices heard in a timely and fair manner.”
The complaint also outlines additional attempts by the Board to gain an unfair advantage in the solicitation process. These include refusing to approve the Rice Team’s nominees in a timely fashion to avoid triggering an event of default under EQT’s outstanding credit agreement if a majority of the existing members of the Board are replaced at the Annual Meeting. Upon an event of default, EQT could be required to immediately pay the full amount of unpaid principal and interest then outstanding. Based on EQT’s latest SEC filings, this amount is at least $800 million. The Board can prevent an event of default and the acceleration of this debt by approving the Rice Team’s nominees as continuing directors for purposes of the credit agreement. The Board, however, so far has failed to do so. By failing to approve the Rice Team’s nominees, it appears the Board is willing to penalize shareholders for voting against the incumbent directors by triggering a costly default under EQT’s credit agreement.
The allegations in the complaint, along with EQT’s failure to capitalize on synergies created by the merger with Rice Energy, underscore the Rice Team’s belief that EQT’s current Board is incapable of addressing the fundamental concerns being raised across EQT’s shareholder base. EQT’s unwillingness to meaningfully respond to the Rice Team or to resolve the issues cited in the complaint demonstrates, in the Rice Team’s view, that EQT intends to manipulate the election to perpetuate the incumbent directors’ control rather than allow shareholders to decide for themselves EQT’s future direction.
With two competing proposals for EQT’s future, it will be up to shareholders to decide who should lead EQT. The Rice Team has a proven, detailed business plan for improving EQT’s operations and delivering value for all EQT shareholders and employees. A copy of the presentation outlining the Rice Team plan can be found at www.eqtpathforward.com.
On April 22, 2019, Toby Z. Rice, together with the other participants named herein (collectively, the “Rice Group”), filed a preliminary proxy statement and accompanying WHITE proxy card with the Securities and Exchange Commission (“SEC”), and the Rice Group intends to file a definitive proxy statement and accompanying WHITE proxy card with the SEC, to be used to solicit votes for the election of its slate of highly-qualified director nominees at the 2019 annual meeting of stockholders of EQT Corporation, a Pennsylvania corporation (“EQT”).
THE RICE GROUP STRONGLY ADVISES ALL STOCKHOLDERS OF EQT TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS NOW OR AS THEY BECOME AVAILABLE BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS ARE OR WILL BE AVAILABLE AT NO CHARGE ON THE SEC’S WEB SITE AT HTTP://WWW.SEC.GOV, OR BY CONTACTING D.F. KING & CO., INC., THE RICE GROUP’S PROXY SOLICITOR, BY PHONE (212-269-5550) OR E-MAIL ([email protected]). IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS’ PROXY SOLICITOR.
The participants in the proxy solicitation are anticipated to be Toby Z. Rice, Derek A. Rice, the Rice Energy 2016 Irrevocable Trust (the “Rice Trust”), Andrew L. Share, Rice Investment Group, L.P. (“Rice Investment”), Daniel J. Rice III, J. Kyle Derham, William E. Jordan, Lydia I. Beebe, Lee M. Canaan, Jay C. Graham, Dr. Kathryn J. Jackson, D. Mark Leland, John F. McCartney, Daniel J. Rice IV, and Hallie A. Vanderhider.
As of the date hereof, Toby Z. Rice beneficially owns directly 400,000 shares of Common Stock, no par value, of EQT (the “Common Stock”), Derek A. Rice directly and indirectly beneficially owns 272,651 shares of Common Stock, the Rice Trust directly beneficially owns 5,676,000 shares of Common Stock, Andrew L. Share, as the trustee of the Rice Trust, may be deemed to beneficially own 5,676,000 shares of Common Stock that are beneficially owned directly by the Rice Trust, Daniel J. Rice III directly and indirectly beneficially owns 1,011,407 shares of Common Stock, J. Kyle Derham directly and indirectly beneficially owns 50,000 shares of Common Stock, William E. Jordan directly and indirectly beneficially owns 103,285 shares of Common Stock, John F. McCartney directly beneficially owns 743 shares of Common Stock and Daniel J. Rice IV directly beneficially owns 219,609 shares of Common Stock. As of the date hereof, Mmes. Beebe, Canaan, Jackson and Vanderhider and Messrs. Graham and Leland and Rice Investment do not own any shares of Common Stock. (1)
EQT released the following statement in response to the lawsuit and the Rice press release:
EQT Corporation (NYSE: EQT) today issued the following statement in response to the lawsuit recently filed by Toby Z. Rice in Pennsylvania State Court.
EQT’s Board is in the process of reviewing the Rice Team nominees and will make a recommendation to shareholders in connection with the filing of the Company’s proxy statement. EQT will make decisions at the appropriate time.
We believe the lawsuit filed today by Toby Rice is an unconstructive attempt to distract from the strong first quarter results EQT announced today and the continued successful execution of the Company’s new strategic plan. The Company’s outstanding financial and operational performance demonstrates that it is on track to achieve the ambitious free cash flow targets set out in January. Notably, over the last two quarters EQT has generated more than $300 million in adjusted free cash flow (a non-GAAP measure). Management continues to be laser-focused on turning EQT into a free cash flow machine.
With a world-class asset base, a clear and compelling strategic plan, and an experienced, restructured leadership team focused on operational efficiency, EQT is creating significant long-term value for all its shareholders and other stakeholders. (2)
EQT CEO Rob McNally says the Rice boys are just trying to upstage him and the good news that came from EQT’s first quarter performance (see today’s lead story).
Main Element of the Lawsuit
So what is this business of proxy cards and universal proxy cards all about?
We have to confess, we’re a bit out of our element here. We’ve never seen a proxy card for corporate voting, especially for a company with dueling slates of candidates. This is not like going to the election poll in November and marking which candidate you want, regardless of party. In the case of voting for company boards, either you vote for one complete slate of candidates (EQT), or the other (Rice). You can’t mix-and-match candidates from the two proxy cards. That is, unless you attend the annual meeting in person and vote at the meeting. In that case you can mix-and-match.
Universal proxies allow stockholders to vote for nominees of their choosing from both the company and alternative slates. With universal proxies you CAN mix-and-match. The Rices’ say in their press release that either EQT should should send out two different proxy cards–one with EQT’s slate of proposed board members, the other with Rice’s proposed board, OR use a universal proxy card. What does such a card look like? We couldn’t locate an image of one to show you, unfortunately. We imagine that each slate of candidates is somehow separated on a universal proxy card, by those the company supports and those the “activists” support.
The Rices indicate EQT wants to include some of Rice’s proposed candidates on their card, which would confuse shareholders and perhaps steer them to the EQT proxy card when voting. EQT says unless the Rice candidates agree to their terms, to include their names on EQT’s proxy statements, they won’t list them at all–holding it over Rice as leverage. The Rice boys are crying foul. That’s mainly what the lawsuit is about–how the slates of candidates are presented to shareholders for voting in the proxy cards that go out.
This is what the Council of Institutional Investors says about universal proxy cards:
When a director election has more nominees than available board seats, shareowners typically receive two versions of the proxy card: one from the company and one from the shareholder who nominated the alternative candidate(s). Each card provides a different list of nominees, neither list is complete, and shareowners are prohibited from using both cards to vote. Thus, depending on the combination of candidates a shareowner supports, he or she may be disenfranchised.
“Universal” proxy cards solve this problem by listing all duly nominated board candidates, allowing shareowners vote for the precise combination of nominees they wish to represent them.* That precision is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake.
In 2016 the SEC proposed a rule to institute this much-needed reform. CII has made available a brief FAQ on why it supports the commission’s proposal. (A more in-depth response to the SEC’s propsal is available below under “Correspondence.”) A 2018 white paper by MacKenzie Partners observed that while the rule is yet to be finalized, the universal proxy is gaining traction as a sensible approach to carrying out contested elections. (3)
Second Element of the Lawsuit
There is a second element to the lawsuit that’s important to note. The Rice boys say EQT will not approve their list of candidates as “continuing directors” should they get elected. Which is confusing. What does that mean?
Let’s use an example. Suppose the Rice slate of candidates gets elected and all of the existing EQT board members are tossed. Since the company has not officially sanctioned or approved the new directors, and since the directors are on the hook for company debt obligations, it may trigger a default. EQT owes something like $800 million to various banks and lenders. A new board that is not officially sanctioned would give lenders the right to call in all outstanding loans, immediately, throwing the company into chaos and possibly into default.
The Rices say that’s playing dirty. We think of it like creating a poison pill: “If you elect the Rice slate, kiss the company goodbye.” The Rices want to ensure that doesn’t happen when/if they take over.
Our understanding of all this may be off a bit (we’re open to being corrected by our sharp readers, or by Rice or EQT).
This is how Reuters reports the proxy lawsuit news:
The chief executive of EQT Corp has rejected allegations in a lawsuit filed on Thursday by a founder of Rice Energy Inc to prevent the oil and gas producer from “manipulating” the outcome of its forthcoming board election.
Toby and his brother Derek Rice were part of the founding team of Rice Energy, which was bought by EQT in November 2017. They are pushing for a change in EQT’s strategy and replacement of its board.
Toby, in a statement, alleged that EQT might name Rice nominees in its proxy statement against their wishes, giving an impression that his nominees support the company’s current board. Warring parties commonly send separate proxy cards, he added.
“We believe both sides agreeing to use a universal proxy card would reflect best-in-class corporate governance, as the most qualified directors would be elected regardless of which proxy card a shareholder voted on,” said Toby Rice.
The Rice brothers had nominated nine candidates to the EQT board, which currently has 12 directors.
In an interview with Reuters, EQT CEO Rob McNally insisted there was no attempt by the board of the company to manipulate the nomination process, and said it would file its preliminary proxy material in the “next few weeks.”
“This is something timed to distract the market from a good set of results from the company,” McNally said, referring to EQT’s first-quarter earnings released earlier on Thursday.
EQT’s shares were trading 2.1% lower at mid-afternoon.
Despite becoming the largest U.S. natural gas producer when it acquired Rice Energy, shares of Pittsburgh-based EQT have underperformed.
The Rice brothers blame EQT management for not fulfilling the Appalachian-focused firm’s potential, while the company has insisted the duo’s projections are inflated and based on outdated market conditions.
Shares of EQT have lost 42% of their value since its Rice Energy acquisition in November 2017, while the broader S&P 500 Energy index has declined only about 3% in the same period. (4)
And this is how the Pittsburgh Post-Gazette‘s Anya Litvak reports it:
Rob McNally, the CEO of the nation’s largest natural gas producer EQT Corp., wanted to stick to the talking points. The company’s “culture changes” over the past six months; its cash flow; faster drilling; better fracking.
And he mostly got his wish during the Downtown-based company’s call with analysts Thursday morning.
It took 45 minutes for someone to acknowledge that Toby Rice, former president of Rice Energy Inc. and current EQT shareholder/agitator, had announced a lawsuit against EQT just 10 minutes before Mr. McNally began reading the company’s achievements.
The complaint, filed in Allegheny County Court of Common Pleas, alleges that EQT is trying to give an unfair advantage to its nominees to the board of the directors as Mr. Rice, his brother Derek Rice and other former Rice Energy executives mount a proxy battle with their own slate of candidates.
Mr. McNally waved off the lawsuit just as he’s been trying to wave off the challenge to his leadership over the past several months.
“Much ado about nothing,” he said.
He was chief operating officer of EQT when the company bought Rice Energy for $6.7 billion in 2017, a transaction he strongly supported. Then, shortly after being named CEO in November 2018, Mr. McNally became a target of shareholder efforts to replace EQT’s leadership with former Rice executives. The face of the effort is Toby Rice.
Mr. Rice, with support from at least two hedge funds, believes he should take over as CEO and has put together a roster of nine director nominees who would make that happen. Shareholders will decide the direction of the company at EQT’s annual meeting, scheduled for July 10.
But shareholders must choose only one proxy card to cast their votes: either Rice’s white card which has nine nominees, including one current EQT board member, Danny Rice, or EQT’s proxy card which has yet to be revealed but is expected to include a 12-member board. They cannot pick and choose nominees from both.
Mr. Rice is alleging that EQT might try to include some Rice nominees in its proxy materials, thereby steering shareholders to its card and controlling the process.
The lawsuit also says that EQT’s agreement with lenders would deem a change of control at the company — e.g. a majority new board — an event of default, which could force the company to pay back $800 million earlier than expected. To avoid that, Mr. Rice is proposing that EQT approve the Rice nominees for this purpose.
Mr. McNally said that the language about default is open to interpretation and that the current board is still reviewing Rice’s nominees.
“Our board is going to do what’s right for the shareholders,” he vowed. “We’re not going to put the company in jeopardy. We’re not going to put our shareholders in jeopardy.”
Besides, he said, filing the lawsuit on the morning of earnings is a blatant attempt to divert the conversation from EQT’s “outstanding financial and operational performance.”
The Rice team, through a statement, snubbed the company’s results on Thursday.
“Even if EQT achieves its guidance for 2019, which it failed to do in 2018, it would still be the highest cost operator in the basin so nothing has changed the urgent need to replace leadership and institute the Rice Plan,” the statement said.
In its proxy, the Rice team said it has developed a plan for the first 100 days after its takeover and will be revealing that to investors over the coming weeks. (5)
As we keep saying, stay tuned for the next episode of Dallas/Dynasty!
(1) Team Rice/Businesswire (Apr 25, 2019) – Rice Team Files Lawsuit to Prevent EQT from Manipulating Shareholder Election
(2) EQT Corporation (Apr 25, 2019) – EQT Issues Statement in Response to Lawsuit
(3) Council of Institutional Investors (undated) – Universal Proxy Cards
(4) Reuters (Apr 25, 2019) – EQT Corp CEO rejects Rice Energy board manipulation lawsuit
(5) Pittsburgh (PA) Post-Gazette (Apr 25, 2019) – EQT tries to tout results as Rice team unveils lawsuit
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