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Mad meeting


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.

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.

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.

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

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.

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.

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.

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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