Wednesday, May 29, 2013

An undisclosed cause: Mr Mulacek and Interoil

Today Interoil published a solicitation of proxies. Buried in this - about twenty pages in - is the following extract regarding the recent resignation of Mr Mulacek - the CEO.
Phil Mulacek – Chief Executive Officer 
In February 2012, we entered into an employment agreement with Phil Mulacek as then Chief Executive Officer. No contract had previously been in existence governing our employment relationship with Mr. Mulacek. The employment contract provided for an initial three year term and for automatic one year extensions thereafter in the absence of notice of termination from the Corporation.

The employment contract provided that if during the term of employment Mr. Mulacek's employment was (i) terminated by us except for "Cause" before or after a “Change of Control”; (ii) terminated due to "Disability"; (iii) terminated by him for "Good Reason"; or (iv) terminated within 3 years following a “Change of Control” of the Corporation, then Mr. Mulacek would be entitled to be paid, in the aggregate and within 30 days, (a) a lump sum amount equal to $3,600,000, (b) all accrued and unused annual leave which leave had accrued at the rate of 60 days per year from the commencement of the employment agreement, (c) an amount equivalent to 365 days’ paid annual leave as a “Foundation Leave Benefit”, and (d) an annual bonus amount equivalent to 50% of Mr. Mulacek’s base salary pro-rated from the commencement of the calendar year until the date of termination.

Payments were subject to certain conditions including, (i) provision by Mr. Mulacek of a general release to the Corporation in an agreed form within 21 days of termination, (ii) not competing with the Corporation’s business or soliciting its employees for 90 days after such termination, and (iii) maintaining confidentiality of the Corporation’s “Confidential Information”.

In the event of Mr. Mulacek’s death during his employment under the employment contract, his estate beneficiaries would be entitled to receive a lump sum payment of $3,600,000, together with any other accrued and unpaid benefits existing at his death.

We were permitted to terminate Mr. Mulacek's employment contract for "Cause". Cause includes wilful neglect or misconduct resulting in material damage to the Corporation, wilful and repeated refusal or failure to perform or wilful disregard of his duties, conviction of any felony, acts of fraud, embezzlement or misappropriation, conviction for discrimination against or harassment of any employee, or breach of the covenants in the agreement. 
Mr. Mulacek retired as an employee of InterOil effective 30 April 2013.
So what "wilful neglect or misconduct resulting in material damage to the Corporation, wilful and repeated refusal or failure to perform or wilful disregard of his duties, conviction of any felony, acts of fraud, embezzlement or misappropriation, conviction for discrimination against or harassment of any employee, or breach of the covenants in the agreement" permitted Interoil to terminate Mr Mulacek's contract for cause?

That is of course interesting - but this is downright peculiar from the same document:
Election of Directors
Our Articles of Continuance provide that we must have a minimum of three and a maximum of fifteen directors as determined by a resolution of our Board. The number of directors is presently eight. Directors elected at the Meeting will serve until the next annual meeting of Shareholders or, if earlier, until they resign, are removed or are disqualified. The term of office of each of our current directors who is not re-elected will expire at the Meeting.

The Board has set the number of directors to be elected at the Meeting at eight. Management of InterOil proposes to nominate each of Gaylen Byker, Phil Mulacek, Roger Grundy, Roger Lewis, Ford Nicholson, Sir Rabbie Namaliu and Samuel Delcamp (each of whom is currently a director), and Sir Wilson Kamit, as directors of InterOil. Mr. Christian Vinson, currently a director, and also Executive Vice President Corporate Development & Government Affairs, has indicated his intention to retire as an employee and director of the Corporation and will not seek re-election as a director at the Meeting.
It will be interesting to see how these observations from the same document are reconciled.


There is of course a possibility that the words "were permitted" do not mean what they appear to mean. Indeed this is almost the only way I can reconcile the two observations above.



Anonymous said...

There is no contradiction or inconsistency. Mr Mulacek resigned, be was not fired for cause.

His resignation does not entitle him to a payout as outlined, and no "good reason" was stated.

That the contract permitted termination for cause, suggests nothing of actual termination. The contact is historical because is came to an end upon Mr Mulacek's resignation.

The language is plain, there is little ambiguity.

Anonymous said...

Great catch john. The fun never ends with IOC!

Anonymous said...

Anonymous #1,

I don't understand -- are you saying there's another item falling under For Cause?


If so, why would that be the one item (out of 6 different items carefully spelled out in the proxy) omitted from the proxy description of For Cause?

Anonymous said...

The issue is whether "permitted" means that they actually did. It sort of implies it, but then why did they say "he resigned" instead of "we terminated for cause".

I think it's unclear.

Anonymous said...

Maybe I'm crazy, but this doesn't seem unclear to me at all.

Order of events: sign contract, CEO retires, contract terminates, proxy written.

Given the contract is no longer in force, any description takes on the past tense "the contract PROVIDED," "payments WERE SUBJECT," and (importantly for this post) "we WERE PERMITTED".

I read nothing in that disclosure to even come close to suggesting that they fired him for cause.

Greg S said...

If Anonymous #1 is right, then the lawyers who drafted the proxy statement have their heads up their ass and should be fired.

By saying they were "permitted" to terminate for cause, and listing the possible reasons constituting "cause," they are implying he was fired for one of those reasons. But Anon #1 is correct - it doesn't say that explicitly.

Here is one possible explanation: when Mr. Mulacek resigned, he agreed he was not entitled to the severance. "Good reason" is not defined here. Perhaps it is pretty broad. So, in order to clean up any legal loose ends and make clear he would not be entitled to the payment, he may have stipulated that the termination was "for cause." That would explain the strange term "permitted."

But John, your confusion is entirely justified. If my interpretation is right, the company lawyers are so deep in legalese that they cannot understand the plain language implications of their drafting.

Greg S said...

Actually, Anon @12:59 AM makes a good point - the terms are all in past tense and are merely descriptive of the terms of the contract, not what they did. The only part that describes what happened is the statement that he resigned.

Seems like the most likely explanation. I stand by my point that the lawyers are idiots.

Anonymous said...

Interoil?.... pffft.

John. whether surf or financed based, how is it that every single Oz based blog, has totally ignored the fuckery that goes by the name of BBG- Bilabong?

Black Sambo said...

If you read the extract in the context of the rest of the proxy - you will see that John has misread the extract. The same wording is used but in a different tense for other directors. For example, in respect of William Jasper III (the COO): "We are permitted to terminate Mr. Jasper's employment contract for "Cause". Cause includes conviction of an offence involving pecuniary dishonesty or sentencing to any period of imprisonment, acts of fraud or misappropriation, engagement in any material activity which directly competes with the business of InterOil or by failure to cure a breach of the agreement within a reasonable time."

In relation to Mr Jasper, the above paragraph doesn't mean that there has been a breach. It just means that if there is a breach amounting to cause then the company could terminate the contract.

The proper reading re Mr Mulacek is: he resigned. Contract came to an end. Previously, when the contract was on foot - the company had a right to terminate for cause IF that had occurred.

You don't terminate your CEO for cause and then allow him to remain on the Board of Directors.

Pretty simple stuff. Perhaps a case of wanting to see what isn't there due to "short-coloured" glasses.

Disclosure: short IOC myself (but not for this reason).

Anonymous said...

Black Sambo - huh? John's entire point is that the proxy says, "Mulacek's employment has been terminated For Cause. For Cause only includes these 6 items." Since Resignation is not one of these 6 items, John is pointing out that the implication is Mulacek's guilt for one (or more) of the other 6.

Observing the irony of allowing Mulacek to remain on the BoD is the EXACT same joke John just made.

What you just said "solves" nothing -- you just restate the absurdity of the proxy legalese in 300% more words than John's article. In the publishing industry, that's called "filler."

Greg S. -- agreed, the lawyers have their heads jammed up their #2 holes.

Anonymous said...

""Mulacek's employment has been terminated For Cause. For Cause only includes these 6 items"


That's not what it says. It says that Mulacek's employment agreement, which is no longer in force due to his retirement, could have been terminated for cause.

It doesn't say that if there was cause, just that if there was, the agreement could be terminated. If there was cause, Interoil did not exercise the option to fire Mulacek as he retired.

It also doesn't say if Mulacek was entitled to his termination payment or not. Under the terms of the agreement Mulacek is entitled to the payment in the event of his resignation as long as it was for a "good reason".

As far as a company putting someone on their board, who had violated their employment agreement, you can bet that IOC would have no problem doing that.

The whole thing is very murky with Mulacek suddenly resigning with a weeks notice and yesterday's news that his brother in-law was out too.

Unknown said...

I think you hit the nail on the head with words not meaning what their supposed to mean. That very well could be one of the ways these guys quietly shuffle assets around the globe.

Funny, check this out. Start of April legal relationship starts (marriage), ends a month later (separation and just 1 full day off), and even the 21 days Mulacek had to release the company (she filled on the button).

Donny Shekels

Jason said...

I'm not trying to flame people here, but there is an astounding inability to read and understand displayed in the original post and several of the comments.

After listing every other provision of his employment contract, I suppose they could have inserted, "Since Mr. Mulacek was not a slave or indentured servant, he was permitted to retire at will." Would that make the last sentence more clear?

I guess they don't speak English in Australia, but "terminated" and "retired" are completely different things.

I could give a crud about IOC either way. Hempton, usually you are wat better than this. Was this another wine inspired post?

Anonymous said...

"I'm not trying to flame people here, but I'm trying to flame people here."

Insults don't usually convince anyone of anything. Try again.

Anonymous said...

i dont think even Mulacek believed there is anywhere close to 9tcf of gas there, which is why he was (allegedly) short his own stock, and why Exxon is only expecting to prove up 4-5tcf. thats a lot of market cap for the remaining hot air

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.