Risk & Compliance

Startling Strategy: Sue the Shareholder

Vaalco reacts to "misleading" mailings by hedge fund Nanes Delorme and Pilatus Energy with federal-court allegations that they violated securities ...
Stephen TaubMay 15, 2008

Vaalco Energy is trying an unsual tactic to stave off a proxy fight: suing its shareholders.

The independent oil producer filed an action against New York City-based hedge fund Nanes Delorme Partners I L.P., and Pilatus Energy SA, of Zug, Switzerland, in federal court, alleging they violated securities laws by sending misleading information to shareholders in an effort to install three of their nominees on Vaalco’s board, according to the Associated Press.

Back in March, Nanes Delorme, Vaalco’s biggest shareholder, called on Vaalco to put itself up for sale, saying the company could receive at least $7.12 per share. The stock closed at $7.35 on Tuesday, its highest price in more than a year.

While the lawsuit seems to turn the pattern of shareholder litigation against companies on its head, it is hardly without precedent. Several companies that are targets of shorts, including Overstock and Biovail, have sued hedge funds.

The Vaalco lawsuit alleges that Pilatus is “acting in concert” with Nanes Delorme, and claims the companies’ main motive is “is to obtain a short-term profit for themselves by forcing a quick sale of the company at prices higher than they paid,” according to the Associated Press.

Of course, the lawsuit describes what many activist hedge funds do every week. In fact, it is not uncommon to see several activist hedge funds repeatedly invest in the same potential targets.

According to the AP, the suit identifies Pilatus as an “until-recently-hidden Vaalco investor” and a “secret partner” of Nanes Delorme.

On Wednesday, Nanes Delorme fired off a new letter to Vaalco stockholders urging them to vote for its minority slate of director nominees at Vaalco’s annual meeting on June 4.

Julien Balkany, a Managing Member of Nanes Balkany Partners LLC, the General Partner of Nanes Delorme Partners, stated: “We believe that VAALCO has great potential, but that the company will continue to materially underperform without new independent representatives on the Board. In addition, rather than provide a clear strategic plan to rebuild stockholder value, the company has chosen to evade the critical issues facing Vaalco by filing a desperate and baseless lawsuit aimed at disenfranchising stockholders and ‘chilling’ the democratic process and to defend its failures by launching a campaign rooted in misleading facts and unnecessary scare tactics designed to distract stockholders from the company’s poor performance.”

The press statement continued, “We believe the current encumbent directors — most of who own little to no stock in the company — will say and do just about anything to entrench its members, protect its own interest, and ignore the legitimate concerns of stockholders.” A seven-page letter to shareholders was attached to the statement.

Representatives of Pilatus could not be immediately reached for comment.

Last week, Vaalco urged shareholders to vote for its slate of directors, asserting that its board and management have a track record of delivering superior stockholder returns. “We strongly believe that the objectives of Nanes Delorme Partners and Pilatus Energy are very different from your objectives,” the company added.