Chesapeake gets pistol-whipping from shareholders

June 8, 2012

By Robert Cyran and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Chesapeake Energy has gotten a pistol-whipping from shareholders. The besieged U.S. gas giant’s owners voted overwhelmingly against directors who were up for re-election and the board’s executive pay plan, while favoring a slew of investor proposals to improve Chesapeake’s governance. It’s hard to see how boss Aubrey McClendon can keep running this circus.

McClendon tried hard to placate investors ahead of the annual meeting on Friday with a series of half-measures. Chesapeake agreed to ditch four loyalists from the nine-strong board. Newcomers will be named by the two largest shareholders, including Carl Icahn, and will be far harder to push around.

And the firm pulled out stops both big and small to suck the air out of the shareholder revolt. Hours before the meeting, the Oklahoma-based group announced the sale of pipelines and related assets for more than $4 billion, to partner Global Infrastructure Partners, in an attempt to assuage concerns over the firm’s liquidity. And the formerly press-friendly company relegated the media to watching a news feed of the meeting.

None of these measures worked. The executive pay plan was backed by less than a third of shareholders. Nearly all voters – 97 percent – backed supermajority voting for directors, making it easier to kick them out. The only directors up for election, Burns Hargis and Richard Davidson, were forced to tender their resignation after receiving scant votes. Finally, investors voted to reincorporate Chesapeake in Delaware, making it easier to amend company bylaws and mount board challenges.

Though McClendon until recently ran Chesapeake as a personal fiefdom, at this stage it’s hard to see how he can remain even in a straitjacketed role. Shareholders were already calling for his head. The results from today’s annual meeting are the corporate equivalent of riots in the street – with the fury pointed directly at McClendon’s debt-fueled empire building and the conflicted intertwining of his personal interests with those of shareholders. With such anger, it’s hard to see how he can govern at all.

Unfortunately for shareholders, McClendon effectively booby-trapped the firm with a monstrously complex configuration that includes seven joint ventures, 10 volumetric production payment agreements and multiple separate holding companies. The architect may be required to unwind these structures. The best outcome would be for the newly empowered board to begin the process of separating Chesapeake from McClendon.

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