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Mad meeting

Chesapeake’s annual shareholders meeting this week comes at the height of controversy for its board and CEO.

Clifton Adcock June 6th, 2012

As Chesapeake Energy’s annual shareholder meeting approaches Friday, investors and energy company experts are watching to see what more might unfold at the top of the embattled energy company.

Aubrey McClendon
Credit: Shannon Cornman

Since spring, when Reuters published the first of several damaging stories about Chesapeake CEO Aubrey McClendon’s financial dealings, the company has made a number of substantial changes.

Those developments included removing McClendon from the company’s board chairmanship, ending its Founder Well Participation Program, or FWPP (which gave McClendon a stake in every well drilled and was the collateral for $1.1 billion in personal loans to him) and reduced the compensation of its board of directors.

The initial Reuters story showed that McClendon’s loans to pay for his stake in the program may have created a conflict of interest, while subsequent stories revealed a $200 million hedge fund McClendon ran with Chesapeake co-founder Tom Ward (currently SandRidge Energy’s CEO) traded in oil and gas, the same commodities produced by Chesapeake and over which the company holds sizable sway.

The meeting comes while Chesapeake is facing intense scrutiny from shareholders and outside groups. In addition to lawsuits from some shareholders, billionaire activist investor Carl Icahn and companies controlled by him recently purchased around $785.3 million worth of Chesapeake stock, more than 7 percent of the outstanding stock. Icahn followed that with a harsh letter to Chesapeake’s board, stating that while the company was undervalued, there should be a major overhaul of its board of directors.

“To engender any meaningful credibility among shareholders, corporate governance reforms cannot, in our view, be led by directors whose irresponsible actions have brought this company to the edge of the proverbial cliff,” Icahn wrote.

He proposed that four of the nine-member board be replaced by two people designated by his company and two by Southeastern Asset Management, the company’s largest shareholder.

Chesapeake paid heed. On June 4, it agreed to replace four board members, with three new independent board members to be selected by Southeastern Asset Management and one selected by Icahn-controlled companies. A fifth board member also will be retiring, according to Chesapeake, although it did not name who that would be.

“We appreciate the board’s willingness to listen to shareholders and to respond appropriately,” Icahn said in a statement. “Under Aubrey’s leadership, Chesapeake has assembled great assets and I am confident I can help the company create significant shareholder value from these assets.”

Election season

The Chesapeake campus
Credit: Mark Hancock

Under a state law passed in 2010 with the backing of Chesapeake, board members serve staggered terms. As a result, only two current board members — Union Pacific board chairman Richard K. Davidson and Oklahoma State University President Burns Hargis — are up for election this year.

However, the company indicated it will seek relief from this statute. Chesapeake officials said they will try to amend its bylaws at the shareholder meeting that would allow the entire board to be up for election at the next shareholder meeting.

Philip Weiss, an oil and gas securities analyst for Argus Research Group, said much of Icahn’s criticism was valid, matching much of his own previous concerns about Chesapeake.

Meanwhile, New York State Comptroller Thomas P. DiNapoli issued a letter asking shareholders to withhold their votes from re-electing Davidson and Hargis. DiNapoli is the trustee for the New York State Common Retirement Fund, a long-term shareholder of Chesapeake stock.

“The board, which holds Chesapeake’s future in its hands, must be held accountable to the company’s shareholders, and must protect the long-term interests of the company instead of promoting parochial interests of maintaining incumbent control,” DiNapoli wrote.

Pension tension

Other stories, such as one published May 25 by Bloomberg News, questioned whether there was a conflict of interest in McClendon owning part of the Oklahoma City Thunder basketball team. Over four years, Chesapeake reportedly has doubled spending on the team for box seats, tickets and naming rights for the arena. New York City Comptroller John C. Liu, who oversees that city’s pension fund investments in Chesapeake and other firms, assailed the spending/

Chesapeake responded that the New York City pension fund owns less than .25 percent of the company’s stock and reiterated that the board had already taken dramatic actions in terms of corporate governance reform.

Carl Icahn

The company also stood by Hargis and Davidson, issuing a news release that called them “highly credentialed professionals who bring to the board financial, operational and legal expertise.”

Russell Glass, managing partner of RDG Capital Management in New York City, said he knows both Icahn and McClendon, and that Icahn’s investment is a sign that the company’s stock is likely undervalued/

Glass said some of the reforms implemented by the board were appropriate and that some of Icahn’s criticisms were reasonable.

Still, Glass added that many of the concerns brought to light over the past few months — including McClendon’s personal dealings with financiers who also were helping fund Chesapeake and the existence of the FWPP — spurred unfair attacks on McClendon who, Glass believes, deserves credit for building Chesapeake into an industry giant.

Glass said he expects there will be some sort of compromise reached between the company’s management and shareholders.

“I would reasonably expect some heated discussion and debate,” he said, “but I think there will ultimately be a resolution to this that will satisfy both management and shareholders.”

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