El Paso Corp.’s board responded last 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 last 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 were filed with the Securities and Exchange Commission (SEC). Zilkha, a wealthy businessman who lives in Los Angeles, contends that the prospect of paying out large severance or other compensation packages would be financially burdensome, and could cause shareholders to re-think efforts 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. 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.

According to the company’s 2002 proxy statement, officers of El Paso and its subsidiaries would, in the event of a “change in control,” be entitled to three times their annual salaries, including maximum bonus amounts; continued life and health insurance for 18 months after leaving; supplemental pension benefits; and payment of their legal fees and expenses to enforce the rights and benefits under the company’s plan.

In 2001, Wise received $1.3 million in annual salary, a $3.4 million bonus, and $210,481 in other annual compensation. He also had more than $2.4 million in restricted stock awards and securities options that year, the proxy statement reported.

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 NGI, Feb. 24).

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 individual stockholders, Zilkha and Wyatt still will need the support of key institutional investors in the company to assume control of the Houston firm.

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