El Paso Corp.’s board responded Thursday to accusations that directors, faced with possible ouster at the company’s shareholder meeting this year, may vote out generous severance packages for displaced officers to dampen any drive by stockholders to unseat the board.

Ronald L. Kuehn, El Paso’s lead director, dismissed the allegations that were leveled earlier this week by Selim K. Zilkha, the company’s largest stockholder who is spearheading an effort to take control of El Paso’s current board. Both Zilkha’s letter and Kuehn’s response have been filed with the Securities and Exchange Commission (SEC). Zilkha, a wealthy businessman who lives in Los Angeles, contends that large severance or other compensation packages would deprive shareholders of their rights to unseat the existing El Paso board.

In a letter to El Paso on Tuesday, Zilkha said he was troubled that Chairman William Wise and other board members, who oversaw the company while its equity market capitalization fell from more than $37 billion to $3 billion, would receive expensive severance packages if he and other shareholders are successful in unseating the current board at the upcoming annual meeting (see Daily GPI, March 6). Zilkha’s action, according to El Paso, would amount to a “change in control” of company leadership, and would trigger severance compensation.

“As a former director of our company, you [Zilkha] are aware of the terms of our change of control [severance] arrangements, which date back to 1992 when the company went public,” wrote Kuehn in his letter. Zilkha was particularly interested in the severance benefits to be paid to Wise, who announced in February that he would resign as El Paso chairman at the end of 2003 and hand over his title of CEO as soon as the board finds a replacement.

“Be confident that any arrangements [the El Paso board enters] into with our new CEO, as well as those with Bill Wise relating to his departure from the company, will be approved by our independent Compensation Committee and our board, acting in the best interests of the company and all its stockholders,” Kuehn told Zilkha.

But “we will not allow the important objective of finding a new CEO to be put on hold because of your proxy contest,” he said.

In late February, Zilkha and another key El Paso investor, Oscar S. Wyatt Jr., said they would attempt to wrest control of the current 12-member El Paso board from the financially weakened company at the shareholder meeting, and replace it with a nine-member board. The proposed board would include Zilkha, but not Wyatt (see Daily GPI, Feb. 20).

Zilkha, 75, owns 8.9 million shares of common stock in El Paso; he acquired his holdings when he sold his company, Zilkha Energy Co., in 1998 to Sonat Inc., which was swallowed by El Paso the following year. Wyatt, 74, owns 4.678 million shares of El Paso common stock. He sold Coastal Corp., the company he founded, to El Paso for $24 billion in 2001. Wyatt has been a harsh critic of El Paso’s Wise over the past months, and is leading a class-action lawsuit accusing the company of engaging in fraudulent schemes and conduct.

While El Paso’s top stockholders, Zilkha and Wyatt still will need the support of key institutional investors in the company to assume control of the Houston company.

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