El Paso Corp. could be forced to pay out more than $75 million in severance benefits if disgruntled investors, Selim K. Zilkha and Oscar S. Wyatt, succeed in replacing the company’s existing board of directors with their own slate of candidates at the upcoming stockholders meeting in June.

The Houston-based energy company made this disclosure in a preliminary proxy statement filed with the Securities and Exchange Commission (SEC) last Wednesday.

Not surprisingly, El Paso attacked both Zilkha, a Los Angeles businessman, and Houston oilman Wyatt, saying that they haven’t offered shareholders a road map for returning the company to financial health. El Paso, on the other hand, noted it was already carrying out a “detailed operational and financial plan” to get the company back on its feet, including selling non-core assets, cutting annual expenses, settling long-standing legal and regulatory matters, obtaining new credit facilities and installing board members who have “substantial management expertise” in the oil and natural gas industry.

Zilkha filed a preliminary proxy statement with the SEC in March, signaling his intent to wrest control of the board from El Paso and replace it with his own nine-member board. He is said to be “working closely” with Wyatt, a sharp critic of El Paso management. Zilkha owns 8.9 million shares of common stock in El Paso, and Wyatt has 4.678 million shares of company stock. Both men acquired their holdings through the sale of their companies to El Paso.

Noting that this was a “critical period” for El Paso, the company urged shareholders to vote against the Zilkha-Wyatt proxy campaign. “We believe that continuity of knowledge and direction is critical and that a wholesale change in our board of directors would adversely affect the execution of our plan and would threaten the achievement of these objectives,” it said in the preliminary proxy material.

El Paso reminded shareholders that Zilkha was a former director of El Paso, during which time he “was in favor of and supported El Paso’s strategic decisions” — the very decisions the company said he is now criticizing. Zilkha “did not vote against, or dissent from a single decision made by our board.”

Moreover, the company cited several “conflicts or potential conflicts of interest” involving Wyatt and El Paso. Wyatt founded Coastal Corp., which was sold to El Paso in 2001.

“Industry trade publications…have reported NuCoastal [Wyatt’s new company] has been seeking to acquire energy assets that compete with El Paso, including Enron’s Transwestern natural gas pipeline system…In addition. [he] has been a bidder for certain El Paso assets,” the company said. Wyatt also is currently a lead plaintiff in a shareholder lawsuit against El Paso, and has participated in a “negative letter-writing campaign” against the company, it noted.

El Paso further identified instances of questionable behavior by Wyatt while he oversaw Coastal. It noted Wyatt and another Coastal official pled guilty to “knowingly and willfully” violating federal crude oil pricing regulations in connection with 1975 sales of domestic and foreign crude, and he was enjoined in 1979 from ever owning interests in certain former Coastal subsidiaries (now owned by El Paso) under a settlement of charges that Coastal failed to provide winter gas supplies to several Texas cities in the 1970s.

In an attempt to short-circuit the proxy battle of Zilkha and Wyatt, El Paso last Monday nominated a slate of directors that is heavy in energy experience for shareholders to vote on at the company’s upcoming annual meeting.

Five nominees for the 12-member board have “extensive management and operating experience in the oil and gas industry” at more than a dozen energy companies, including Conoco, CONSOL Energy Inc., Lone Star Gas, Ocean Energy, Phillips Petroleum, Shell, Sonat Inc., Texaco, Transocean Inc. and United Meridian Corp., El Paso said.

Four of the nominees joined the El Paso board this year, the company noted. The newest member is James L. Dunlap, a business consultant and former president and COO of Ocean Energy/United Meridian (1996-1999). Prior to that, he was associated with Texaco Inc. for 33 years, El Paso noted.

Also named this year were Robert W. Goldman, business consultant and one-time senior vice president of finance and CFO of Conoco; J. Michael Talbert, chairman of Transocean since October 2002, and former president and CEO of Lone Star Gas Co.; and John Whitmore, current chairman of CONSOL Energy, past chairman of Union Texas Petroleum Holdings Inc., and a 30-year veteran of Phillips Petroleum, according to El Paso.

El Paso’s other board nominees include John M. Bissell, chairman of BISSELL Inc., Juan Carlos Braniff, vice chairman of Grupo Financiero BBVA Bancomer, Anthony W. Hall Jr., city attorney in Houston, TX, Ronald L. Kuehn Jr., chairman and CEO of El Paso, J. Carleton MacNeil Jr., financial consultant for Securities and Investment Brokerage, Thomas R. McDade, senior partner of McDade Fogler Maines LLP, Malcolm Wallop, chairman of Western Strategy Group and former U.S. senator, and Joe B. Wyatt, chancellor emeritus of Vanderbilt University.

“The combined expertise of El Paso’s nominees in the energy industry, finance, academia and the law, and the mix of new directors and directors with detailed knowledge of our company, will create a board that is particularly well-equipped to help us achieve our long-term goals,” said El Paso’s Kuehn.

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