El Paso Braces for a Boardroom Brawl - TheStreet

At

El Paso

(EP)

, a high-stakes popularity contest is starting to heat up.

Dissident shareholders ignited the fire last week by calling for the ouster of the Texas energy company's board and proposing a slate of respected industry experts as replacements.

El Paso responded by calling the proxy fight "highly disruptive" and, under fresh pressure, delivering a down payment on its turnaround promise to shareholders.

A week after shareholders launched the organized revolt, El Paso sprang a flurry of good news on the market. The company arranged a $1 billion financing package that will be used to retire debt and free up restricted cash as early as next month. It regained access to the capital markets through this week's planned sale of $700 million worth of unsecured notes at the subsidiary level. It found a buyer willing to pay $500 million for some of the company's fuel reserves and -- even after expanding its asset sale target by a like amount -- finished more than 30% of its full-year asset sale program.

In short, cash-strapped El Paso bought some breathing room. And relieved investors exhaled.

Shares of El Paso, which bottomed out this month at $3.33, jumped nearly 10% to $5 following Tuesday's news.

"Management is to be admired for doing some very painful, but right, things," said John Olson, an analyst at Sanders Morris Harris who owns stock in the company. "But it remains to be seen ...

what the new direction of the company will be.

"Hopefully, there are grounds for compromise."

Drawing the Line

For now, though, a war is brewing.

Selim Zilkha, El Paso's largest independent shareholder, has issued an ultimatum: El Paso's entire 11-member board must resign immediately. Or Zilkha -- with backing from vocal El Paso critic Oscar Wyatt -- will attempt to oust the directors at this summer's shareholder meeting.

In the meantime, Zilkha's proposed slate of directors has won some high praise from El Paso's own supporters.

"We have known several of these individuals for 10 to 20 years, and would suggest that this proposed board is as deep a bench of energy talent available in Houston at large," Olson wrote last week.

Olson went on to point out that all but one of the proposed directors has solid energy experience. In contrast, he said, three of the company's current 12 directors "have very good energy backgrounds."

Olson described El Paso as a victim of "a liquidity trap, mostly of its own making." But he stopped well short of embracing an expensive proxy fight, saying he much prefers a peaceful end to the current battle.

So far, however, neither side has shown a willingness to budge. Zilkha demanded an entire overhaul even after El Paso apparently invited him to suggest new additions to the current board. Rebuffed, the company is now urging shareholders to support its current leadership -- and questioning Zilkha's motives for promoting a "hand-picked" slate of candidates.

"Given all the recent actions by the company and our efforts to reach out to Mr. Zilkha, we can only conclude that he is focused on punishing El Paso over the past rather than constructively working with us to improve our future," the company said in an official response last week.

Absent a compromise, Olson has predicted an ugly shareholder fight that will cost El Paso $30 million it can't afford to spare.

"Both sides have lined up some very high-priced legal talent, itching to go," Olson said. "If nothing else, both sides figure that El Paso has much more value than the current stock price."

The dissidents are fighting for a chance to restore the company -- and its ailing stock price -- in as little as two years. Meanwhile, the company's current leadership is asking for more time to carry out its own turnaround plan.

But the latter group stands to profit handsomely, whether it wins or not.

Paying the Piper

El Paso has carefully directed shareholders to review compensation information in its proxy statements ahead of the next annual meeting. There, shareholders will discover how much they are paying to keep the current leadership -- and how much it will cost them if they don't.

By now, El Paso is almost notorious for its generous executive pay. In 2001, the company showered William Wise, now a lame duck CEO, with more than $20 million in salary and bonuses. It also rewarded other top-ranking executives with the maximum bonuses allowable, making their compensation stand out even in an industry known for its big paychecks.

The El Paso board -- itself nicely compensated -- justified the pay because of El Paso's strong performance during the final year of the energy trading boom. With that boom over, some executive bonuses have disappeared and paychecks have drifted lower.

But El Paso critics complain that rank-and-file employees, not management, have borne the brunt of the downturn.

In one of his final acts before announcing his resignation, Wise suspended company matches to employee 401(k) plans. He called the decision a difficult, but necessary, one that would save El Paso $33 million annually in much-needed cash.

Since then, some have pointed to El Paso's corporate jet -- worth an estimated $33 million itself -- as a less painful cut.

But El Paso's latest proxy shows that Wise is apparently a part owner of that jet. Beginning in 2001, the company began awarding Wise a "one-fourth fractional interest in a mid-size corporate jet" to sweeten his long-term commitment to El Paso.

By then, the company had established a clear pattern of taking good care of its executives -- and protecting them for those who might be stingier. A change in control, like that now proposed by dissident shareholders, would trigger more than expensive legal fees. It would also activate a "severance protection plan" that could prove far more costly for the company.

Under the plan, El Paso's top executives are entitled to severance benefits equal to three times their annual compensation -- including the maximum bonuses allowable. They also can order El Paso to buy the homes they purchased when the company relocated from El Paso to Houston. And they can make the company pick up the tab for any legal fees they incur attempting to keep these benefits in place.

"That's not generous," said one outraged shareholder. "That's

expletive ridiculous!"

El Paso board members, who approved the compensation, also enjoy their perks. Nonemployee directors collect $80,000 annually for sitting on the board. They pick up an additional $15,000 annually if they chair a committee (besides the nominating committee). They also receive a retirement benefit credit, equal to their annual retainer, in the form of deferred El Paso shares.

In addition, they immediately receive 5,000 stock options when they are first elected to the board and 3,000 stock options every year they retain their seat. And finally, after two years on the board, they can earmark $1 million to be donated in their name to charities of their choice after they die.

Zilkha, the former owner of a company El Paso acquired, has already walked away from a seat on that high-priced board once. The company now says Zilkha vacated his seat so he could freely sell El Paso stock. And it criticizes Zilkha for returning to challenge the board now.

"As a former member of the El Paso board, and later as an advisory director of the company, Mr. Zilkha supported the strategic decisions he is now criticizing," the company said. "Mr. Zilkha's decision to take such action at this time is highly disruptive to the company."

El Paso has strongly urged shareholders to reject Zilkha's proposal and support its current "high-quality board."