Is Parkland Corp (TSX: PKI) gearing up for something big?
Upon reading through Parkland’s recently filed proxy document, I noticed an unusual statement that outlined changes to their incentive plans (RSU and Stock Option). The company stated that they amended the incentive plans on November 1, 2023 to further clarify change of control definitions, termination provisions, and amendments to disability and retirement policies. The company then went as far as saying that these amendments were “...procedural or housekeeping in nature…”. As soon as I read that sentence, my ears perked up.
The new incentive plans were released to the public on February 12, 2024, which seemed odd given that the changes occurred three-and-a-half months ago. The existing policy had been previously amended on March 2, 2023 so I also found it a bit peculiar that the company would once again be updating the documents.
The noticeable changes to the incentive plans were:
A “Disability” definition was specifically added to the policy. The company also added wording as it relates to the termination of an individual on long-term disability. It now defines the termination date of an individual as the effective date of the disability, even if the individual is currently employed by the company.
Wording as it relates to an involuntary termination without cause was also added. Restricted Stock Units (RSU’s) not yet vested on the termination date would now be eligible for pro-rata vesting up until the individuals effective termination date.
For the sake of argument, if one believes that these changes aren’t normal housekeeping, then I would posit an alternative explanation:
My interpretation of these changes was to (1) clean-up the potential liabilities associated with individuals on long-term disability and (2) ensure that executives get additional payouts should they be terminated without cause.
The former would assure a company acquiring Parkland (or its major assets) that the long-term disability liabilities are clearly-defined, while the latter lines executives' pockets should they get dismissed in a takeover scenario.
The above facts on their own are circumstantial in nature so I decided to look deeper to understand the large shareholders, the board members, and the power dynamics going on in the company.
Parkland had been in the sights of activist investor Engine Capital LP since March 2023. Engine was specifically calling for the company to: sell (or spin-off) the company’s Burnaby refinery, become a pure play fuel and convenience retailer similar to Alimentation Couche-Tard, and refresh long-standing board members. Engine held ~2% of Parkland shares at the time they went public with their requests.
Near coincidentally that afternoon, Parkland announced a shareholder support agreement with its largest shareholder, Simpson Oil. Simpson Oil held ~19% of Parkland shares, and under the agreement would be entitled to nominate up to two directors to the company’s board. Under the support agreement, these two board members would be obligated to vote in favour of any board recommendations. The most amusing part of this agreement is that Parkland agreed to reimburse Simpson Oil up to $200k to cover the cost of drafting it.
As a side note, Simpson Oil acquired their stake in the company after Parkland bought their Carribean fuel retailing business in exchange for $PKI.TO shares. Simpson Oil hadn’t originally bought the shares for investment purposes.
As the year went on and activist season started to swing around in late September 2023, Engine Capital once again went public with calls to revisit capital allocation, increase share repurchases and sell non-core assets to pay down debt.
Fast forward to December 2023 when Parkland announced that both Simpson Oil board members had resigned from the board. These departures came ~8 months after they had officially joined the board. As a result of these resignations, Simpson Oil would no longer be bound by the support agreement effective March 31, 2024.
Simpson Oil felt strongly enough about Parkland’s announcement that they put out their own press release correcting and stating a few items. Two key sentences stood out to me (emphasis mine):
“Parkland has been on notice that the standstill and voting obligations of Simpson Oil terminated in accordance with the terms of the Governance Agreement as a result of earlier material changes in the composition of senior management of Parkland.”
“Simpson Oil remains committed to the core energy industry and will continue to invest and participate in companies in the industry that adopt strong corporate governance practices and prioritize the interests of shareholders.”
Simpson Oil’s press release seems to imply that something very material occurred with Parkland senior management during their tenure on the board, which they thought would nullify the support agreement. Secondly, because Simpson Oil isn't allowed to disparage Parkland publicly per the agreement, shareholders need to read between the lines in the second bullet point. Simpson Oil alludes that Parkland is not upholding strong corporate governance practices or prioritizing shareholder interests.
It’s quite clear to me that Simpson Oil planned these resignations in late December to ensure enough time for the shareholder agreement to end, and for them to have full control of their shares before the upcoming AGM expected in May 2024.
In response to this, Parkland’s board did what any self-serving board would do, and it announced that it would hold its AGM one month earlier than it typically does. Its 2024 AGM would now occur on March 28, 2024, whereas it would have typically occurred in early May.
I’m going to reiterate that. The AGM is now occurring a mere 3 days before the Simpson Oil support agreement is set to end. Talk about tilting the odds in your favour.
On March 3, 2024, Simpson Oil put out a press release outlining that the Parkland board purposely moved the meeting early to ensure Simpson Oil would still be bound by the support agreement. Simpson Oil also explicitly noted once again that they are not allowed to disparage the company under the existing support agreement guidelines. It’s safe to say that Simpson Oil is pissed off.
At this point, it is quite clear that both Engine Capital and Simpson Oil are seeking to make major changes at the company. Unfortunately for them, Simpson Oil won’t be able to flex their voting muscle at this year's AGM given Parkland board’s smart maneuvering.
While the current board will live to see another day, I think the writing is on the wall. Parkland has incredibly valuable assets but has suffered from poor capital allocation, lousy corporate governance and an increasingly entrenched board. In my opinion, this all leads down one road: put the company (and/or major assets) up for sale.
The period between November through March is a pretty common period to evaluate strategic alternatives since it aligns well with the annual planning process companies go through.
A sale would allow the current board members to save face, instead of waiting for the shoe to drop at the next AGM. By then, Simpson Oil won’t be bound by the shareholder agreement, and will likely seek to replace the entire board.
If Parkland is preparing for a sale process, it would make sense to update incentive plans, disability and retirement definitions, and change of control wording. Recent filings also show the company made changes to their Code of Conduct.
It seems to me that Parkland is getting its house in order before running a formal sales process. Only time will tell if that proves true.