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TheStreet Open House

Cliffs Natural Resources Top Brass Cash In as Activists Take Over

NEW YORK (TheStreet) -- Casablanca Capital unseated the board of Cliffs Natural Resources (CLF), but the company will still grant stock awards to Cliffs' outgoing directors and many top executives. As Casablanca's nominees were elected to take control of Cliffs' board, the last move of the outgoing board was to authorize a compensation plan that would reward them with millions of dollars' worth of stock grants.

It is perhaps ironic that shareholders, who suffered from the over 80% decline in Cliffs' stock over the past six years, allowed for a last payout to the company's outgoing directors and executives.

Shareholders backed a six-director slate run by Casablanca at Cliffs' July 29 annual shareholder meeting, meaning the fund's nominees would take control of the struggling mining company's board. But results from the vote also show that a majority of Cliffs shareholders backed a large pay package for the board and executive team they had voted to replace.

Must Read: Activists Unseat Cliffs Board as Change Looms

About 56% of shareholders voted for Cliffs' 2014 director, executive and employee compensation plan, allowing for a near-doubling in Cliffs' total stock awards to 11 million shares. Cliffs' compensation plan for directors included the authorization of 300,000 shares for non-employee directors and retention RSU's for top executives.

As results of the shareholder vote filtered in on July 29, the last move of Cliffs' outgoing board was to authorize stock grants and pay packages, which also came with an amendment to change-in-control features that allowed for an accelerated vesting in the event that a director or employee was fired.

Perhaps, the stock awards underscore just how tough the contest was between Casablanca and Cliffs. Casablanca, with a 5.2% stake in Cliffs of about $200 million, was able to unseat the board of what once was an S&P 500 listed U.S. mining leader.

At one point, Casablanca and Cliffs even appeared near a settlement that would leave the company in control of its board. Then after Cliffs' sent one Casablanca board nominee on a five-state tour to interview with existing directors, the company severed lines of communication.

Cliffs then threatened a default of the company if Casablanca's nominees won control of control of its board. In the days before July's shareholder vote, Cliffs cut its board nominees in order to win the backing of proxy advisory firms and maintain majority control of the board.

Ultimately, Cliffs' board only won when it came to pay.

Top executives at Cliffs are already cashing in on their new compensation package. Five top executives, including Cliffs' CFO Terrance Paradie, have exercised a total about 128,000 stock awards, which were granted on a cost-less basis, according to recent filings with the Securities and Exchange Commission. At current market prices those awards are worth in excess of $2 million.

Board directors and outgoing CEO Gary Halverson also appear poised for a nice payout.

Casablanca sharply criticized pay packages for board members and top executives as the fund pressed its case leading up to July's shareholder vote. Chairman James Kirsch stood to be paid as much as $4.5 million in 2014, Casablanca said in its proxy to shareholders, which asked that investors vote against the company's director, executive and employee pay packages.

Directors and employees may also receive 2014 stock awards, which will vest if they are terminated by the company. Casablanca declined to comment for this story.

Change Occurs

Change is likely to be the major story for Cliffs in 2014 and beyond. On Thursday, Casablanca's lead director, Laurenco Goncalves, replaced Kirsch and Halverson as Cliffs' new chairman and CEO.

"Cliffs has a unique position of strength in iron ore in the Great Lakes region, many valuable assets in other sectors elsewhere in the US and around the world, and talented employees at all levels of the company," Golcalves said in a Thursday statement.

"While there is much to be done and many challenges ahead of us, there is also much promise. I can assure all of our stakeholders we are hitting the ground running," he added.

Casablanca has a 90-day plan to initiate change at Cliffs, which will hinge on a simultaneous effort to improve the company's operational performance and the initiation of a strategic review of non-core assets in Canada, the coal sector and the Asia-Pacific region. Casablanca's operational and financial restructuring of Cliffs will be the key to whether the fund sees a payoff from its activist efforts.

Cliffs shares were trading below $17 on Friday morning. Filings with the SEC show that Casablanca purchased its Cliffs shares at an average price of $25. Hedges may have mitigated a big 2014 slump in Cliffs' share price, but Casablanca has said it believes the company may be worth in excess of $50 a share if its plans are implemented.

Must Read: Hedge Funder Sees KKR's Next Deal In Washington Mutual's Shell

-- Written by Antoine Gara in New York

Clarification: This story was amended to clarify that Cliffs will pay stock awards to outgoing directors.

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