RPX Corp. (RPXC), the patent aggregator and risk management company run by CEO John Amster, said it reached a settlement agreement with Mangrove Partners, the investment manager run by Nathaniel August, and has appointed a Mangrove representative to its board.
San Francisco-based RPX said Gilbert Palter will serve as a director and a member of the board's compensation committee. Palter will receive an initial restricted stock unit with a target value of $175,000.
With the addition of Palter, RPX's board will now include eight directors, six of them independent. The settlement agreement also provides that Mangrove and RPX will mutually seek to identify an additional new director to the board.
RPX and Mangrove also agreed to mutually seek to identify an additional new director.
In connection with the settlement agreement, RPX’s board has approved a $50 million increase in the company's share buyback authorization, for a total authorization of $150 million. As of March 31, the company had repurchased approximately $50 million of its shares under the original $100 million authorization.
Under the settlement agreement, Mangrove Partners has agreed to certain standstill and voting provisions. For example, Mangrove agreed not to submit any stockholder proposal or notice of nomination or other business for consideration to the board.
Mangrove also agreed to maintain no more than a 9.9% stake in RPX and not to sell more than 1% of RPX's outstanding shares to a third party who is an activist with respect to RPX and who will have more than a 5% stake in RPX.
The investment manager also agreed not to effect or seek certain strategic transactions involving RPX.
In a letter to shareholders of San Francisco-based RPX on Thursday, March 17, August expressed his deep dissatisfaction among other things with RPX’s business plan, the performance of its stock, its use of cash, its refusal to pay dividends and its excessive pay practices, which he noted were more generous on average than those of Goldman Sachs Group Inc.
Mangrove claimed to be RPX’s fifth largest shareholders after recently buying about 2.58 million shares for more than $28 million. Prior to that, Mangrove owned just over half a million shares of RPX stock worth more than $5 million.
Among other things, August was critical of RPX’s purchase of Inventus Solutions for $232 million in cash, which he said “appears to be a costly mistake.”
He has recommended that going forward, RPX “should forgo any M&A activity unless the returns from that activity are greater than both the company’s cost of capital and the returns from repurchasing stock.”
August also was critical of what he called RPX’s “excessive employee compensation,” which Mangrove estimated averaged $400,000 per RPX employee in 2015.
He also has criticized the company for “investing substantial sums in ‘growth’ projects that appear to have little chance of ever being profitable.”
Among the projects he cited were RPX’s litigation insurance product. “Based on our conversations with management, we believe that there is the equivalent of approximately 20 full time employees dedicated to insurance-related efforts.”
He estimated that RPX also has the equivalent of another 20 full-time employees dedicated to other speculative projects such as creating a B2B marketplace or clearinghouse for patents.
“Based on the average compensation of employees at the company, these pet projects cost shareholders approximately $16 million annually.”
He had noted that while the company has been discussing many of these projects for the past five years, they have produced only minimal revenue.
“We believe the company should stop investing in these projects and should instead externally fund them by raising venture capital. If venture capital cannot be found, these projects should be discontinued.”
He also had blasted the growth of RPX’s core subscription revenue, which he has said has steadily slowed from 21% in 2013 to nearly 0% in 2016, based on the company’s guidance.
He had said RPX should restructure its sales force to refocus compensation on growing the core, profitable business. He also urged the board re-evaluate the company’s management team to determine whether the right managers are present to guide the company to a new phase of growth.
Other criticisms included what August called “insular corporate governance” and “cash hoarding.”
He had noted RPX has generated over $165 million of free cash flow yet it has paid no dividends to shareholders and repurchased only $26 million of stock.
August had estimated that over the next three years, RPX should be able to return more than $800 million to shareholders considering its likely cash generation, its current cash balance, and its capacity for incremental debt.
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