Tex. Pac. Land Corp. v. Horizon Kinetics LLC

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TEXAS PACIFIC LAND CORPORATION, Plaintiff, v. HORIZON KINETICS LLC, HORIZON KINETICS ASSET MANAGEMENT LLC, SOFTVEST ADVISORS, LLC, and SOFTVEST, L.P., Defendants.

C. A. No. 2022-1066-JTL

Court of Chancery of Delaware

December 1, 2023

Submitted: July 10 2023

A Thompson Bayliss, Adam K. Schulman, Peter C. Cirka, G. Mason Thomson, ABRAMS &BAYLISS LLP, Wilmington, Delaware Yolanda C. Garcia, Tayler G. Bragg, SIDLEY AUSTIN LLP Dallas, Texas; Alex J. Kaplan, Charlotte K. Newell, Robert M. Garsson, Cassandra Liu, Deborah Sands, SIDLEY AUSTIN LLP, New York, New York; Elizabeth Y. Austin, SIDLEY AUSTIN LLP, Chicago, Illinois; Robin Wechkin, SIDLEY AUSTIN LLP, Issaquah, Washington; Counsel for Plaintiff Texas Pacific Land Corporation.

Rolin P. Bissell, James M. Yoch, Jr., Alberto E. Chavez, Michael A. Carbonara, Jr., YOUNG CONAWAY STARGATT &TAYLOR LLP, Wilmington, Delaware; Christopher E. Duffy, John Goodwin, VINSON &ELKINS LLP, New York, New York; Robert Ritchie, K. Virginia Burke DeBeer, VINSON &ELKINS LLP, Dallas, Texas; Counsel for Defendants Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors, LLC, and SoftVest, L.P.

POST-TRIAL OPINION

LASTER, V.C.

A board of directors recommended that stockholders vote for a charter amendment to increase the corporation's authorized shares. The defendants voted against the amendment. The corporation asserts that a stockholders agreement bound the defendants to follow the board's recommendation. The defendants respond that exceptions to the voting commitment enabled them to vote against the amendment. They also say that the doctrine of unclean hands bars the corporation from relying on the voting commitment because the directors breached their duty of disclosure when soliciting stockholder approval.

This post-trial decision holds that the defendants breached the voting commitment. The exceptions are ambiguous, but the extrinsic evidence establishes that the commitment bound the defendants to vote with the board. The disclosure violations do not negate the defendants' contractual obligation. Plus, the defendants were guilty of worse misconduct.

As a remedy, the court applies the equitable maxim that treats as done what ought to have been done. The defendants' shares are deemed voted in favor of the amendment. Accordingly, the amendment is declared to have been approved.

I. FACTUAL BACKGROUND

The facts are drawn from the post-trial record. Having evaluated the credibility of witnesses and weighed the evidence, the court makes the following findings.^[1]

A. The Company

Texas Pacific Land Corporation (the "Company") is one of the largest landowners in Texas. The Company's predecessor-the Texas Pacific Land Trust (the "Trust")-was formed in 1888 to hold land previously owned by the bankrupt Texas and Pacific Railway Company. The railroad had mortgaged its real estate to secure bond issuances. When the railroad defaulted, the Trust was formed for the benefit of the bondholders, and the bondholders received trust certificates representing their proportionate economic interest in the Trust. The declaration of trust prevented the Trust from issuing more trust certificates.

Three trustees governed the Trust's affairs. Once elected, each served until resignation, disqualification, or death.

B. The Proxy Contest And Settlement Agreement

In February 2019, one of the trustees resigned, creating a vacancy. The two remaining trustees-John R. Norris and David E. Barry-nominated Donald G. Cook, a retired four-star general, to fill the vacancy.

A group of investors owning approximately 25% of the Trust certificates opposed Cook's nomination, The investors nominated Eric Oliver, the founder and president of SoftVest Advisors, LLC ("SoftVest"), an investment advisor with a fund that held a significant number of Trust certificates.

A proxy contest ensued. As part of that fight, the Trust sued Oliver in federal court.

In July 2019, the parties reached a settlement that included the Trust's agreement to form a committee that would evaluate the possibility of converting into a corporation (the "Conversion Committee"). The members of the Conversion Committee included Norris and Oliver. The other members were Murray Stahl of Horizon Kinetics Asset Management ("Horizon"); Craig Hodges of Hodges Capital; and Dana McGinnis of Mission Advisors. All controlled investment advisors with funds that owned significant numbers of Trust certificates. Each was part of the group that opposed Cook's nomination.

C. The Conversion Committee Recommends A Conversion.

In January 2020, the Conversion Committee reviewed draft resolutions recommending that the Trust convert into a Delaware corporation. They also reviewed a plan of conversion for accomplishing it (the "Conversion Plan"). Sidley Austin LLP presented the Conversion Plan. JX 71.

After the presentation, the committee members "engaged in a discussion among themselves and with Sidley regarding the number of shares of common stock of the Potential Corporation to be authorized under the certificate of incorporation." Id. at 2. Oliver, Stahl, and Hodges opposed the issuance of additional shares. They wanted the corporation to operate as the Trust had historically by not issuing additional equity. Stahl Tr. 192-93; Oliver Tr. 245-46. No decision was reached, and the resolutions were amended to state that the Trustees would "continue to consult with the Committee on ... the number of authorized common shares." JX 71 at 2.

The Conversion Committee unanimously adopted the revised resolutions and recommended that that the Trustees approve the Conversion Plan. The plan documentation had two parts. Annex A described the steps involved in the conversion. It noted that the Trust would form the Company as a wholly owned subsidiary and then spin it off, "distributing all shares of its common stock to holders of sub-share certificates of the Trust." Id. at 9. An organization chart reflected that the Trusts' existing certificate holders would "receive 100% of the shares of common stock of [the Company] as a distribution in liquidation of [the Trust]." Id. at 12. That was an accurate description of what happened. It did not memorialize an agreement on whether the Company could issue additional equity.

Annex B provided "an overview of key governance terms" for the Company. Id. at 14. The annex identified fifteen items:

(1) stockholder representation on the board of directors (the "Board"), "[s]ubject to negotiations of a shareholder agreement containing customary standstill provisions.";

(2) a classified board structure;

(3) majority voting for director elections;

(4) the ability of stockholders to act by written consent only if requested by the Board;

(5) director removal for cause by at least a majority of the outstanding shares;

(6) a 90-120 day advance notice requirement for director nominations and stockholder proposals;

(7) giving the Board the exclusive right to fix its size at between seven and eleven members;

(8) giving the Board the exclusive power to fill director vacancies; (9) requiring the affirmative vote of a majority of the outstanding shares for adopting, amending, or repealing bylaws;

(10) an exclusive forum provision in the charter designating the courts of Delaware and Texas;

(11) authority to issue blank check preferred stock;

(12) indemnification;

(13) directors and officer insurance;

(14) advancement; and

(15) director exculpation.

Id. at 14-18. The list of key governance terms did not identify an agreement on the corporation's authority to issue new shares. That point had been left open.

D. The Stockholders Agreement

Over the following months, the Trust negotiated a stockholders agreement with the investors who wanted representation on the Board. SoftVest, Horizon, and Mission Advisors executed the final agreement. JX 116 (the "Stockholders Agreement" or "SA"). SoftVest designated Oliver as its director representative; Horizon designated Stahl; and Mission Advisors designated McGinnis. In each case, the investment advisor and the fund that held Trust certificates and would hold Company shares after the conversion signed the Stockholders Agreement.^[2] Hodges and his firm did not sign.

Section 2 of the Stockholders Agreement, titled "Voting Commitments and Restrictions," stated that the signatory stockholders must vote all shares of Common Stock beneficially owned by such Stockholder and over which such Stockholder has voting authority at each Stockholder Meeting in accordance with the Board's recommendations as such recommendations of the Board are set forth in the applicable definitive proxy statement filed with the SEC (the "Board Recommendations").

SA § 2(a) (the "Voting Commitment"). The Voting Commitment was subject to two exceptions:

Notwithstanding [the Voting Commitment], the Stockholders shall not be required to vote in accordance with the Board Recommendation for any proposals

(i) related to an Extraordinary Transaction or

(ii) related to governance, environmental or social matters; provided, however, that the Stockholders shall be required to vote in accordance with the Board Recommendation for any proposal relating to any corporate governance terms that would have the effect of changing any of the corporate governance terms set forth in the plan of conversion recommended by the Conversion Exploration Committee of the Trust on January 21, 2020.

Id. § 2(b) (formatting added). The first exception is the "Transaction Exception." The second exception is the "Subject Matter Exception." The Subject Matter Exception contains an exclusion i.e., an exception to the exception, that restores the obligation to comply with the Voting Commitment "for any proposal ... that would have the effect of...