At least two Chesapeake Energy Corp. shareholders have filed lawsuits against CEO Aubrey McClendon and other board members after a news report this week revealed McClendon had secured up to $1.1 billion in loans to pay for his stake in the company’s wells. Chesapeake on Friday reiterated its position that the program aligns the interests of the company and its chief executive by allowing McClendon to buy a 2.5 percent stake in all of its wells. “The company believes the FWPP (Founders Well Participation Program) fosters and promotes the development and execution of the company’s business,” Chesapeake said in a preliminary proxy statement filed in advance of its annual meeting in June. Connecticut resident Christopher Snyder and New York-based Deborah G. Mallow IRA SEP Investment Plan are asking a federal judge in Oklahoma City to rescind the loan program and force McClendon and the rest of Chesapeake’s board to disclose all material facts about the loans. The lawsuits filed in federal court in Oklahoma City were spurred by a Reuters report on a series of loans secured by McClendon to fund his investment in the well program, which has been available to him as Chesapeake’s co-founder since 1993. One of the loans involved EIG Global Energy Partners, a private equity firm that was involved in a $1.25 billion deal last fall for a piece of Chesapeake’s operations in Ohio’s emerging Utica Shale play. “Such huge loans raise serious conflicts of interest,” the lawsuit alleges. “They can easily cloud the CEO’s judgment on key issues ranging from how quickly Chesapeake should generate cash flow, to how it operates wells, to how aggressively it can bargain with EIG on financing terms.” A Chesapeake spokesman said Friday the company is aware of the lawsuits. “We ... will vigorously defend the allegations,” said Michael D. Kehs, Chesapeake’s vice president of strategic affairs and public relations. “We don’t believe it is appropriate to discuss matters related to the litigation at this time.” The company also has denied any conflict or wrongdoing in its disclosures about the well program and McClendon’s loans, but its stock has suffered. Chesapeake’s stock closed Friday at $17.44 a share, down more than $1.50 since news of McClendon’s loan deals broke Wednesday.
Other lawsuitsChesapeake’s Founders Well Participation Program has been at the center of shareholder litigation before. Many shareholders sued McClendon after he received a $75 million bonus in 2008 — after falling natural gas prices caused the company’s stock price to plummet — so he could continue funding his participation in the program. The company also paid McClendon $12 million for his antique map collection. A consolidated lawsuit in Oklahoma County District Court was settled in January, as McClendon agreed to buy back his map collection with interest, and Chesapeake promised to adopt “significant” governance reforms. That settlement is on hold as the Oklahoma Supreme Court considers an appeal from two shareholders who filed federal lawsuits against Chesapeake shortly before the agreement was reached in state court. Shareholders M. Lee Arnold and James Clem are not sure the settlement is fair, according to their appeal. Their civil cases in federal court in Oklahoma City have been stayed, pending a resolution of their appeal. The shareholders who have sued McClendon and Chesapeake’s other board members are not the only ones dissatisfied with their leadership. Argus Research analyst Phil Weiss on Friday suggested replacing them all, questioning the “financial engineering” the company has used to obscure its true financial position. “When we consider the full financial picture at Chesapeake, including its high debt levels (both on- and off-balance-sheet), its use of financial engineering, the relatively low quality of its financial data, the questionable nature of some of the CEO’s transactions with the company, and the apparent unwillingness of the board to put a stop to at least some of these practices, we believe the best thing for investors would be to replace the board and/or the CEO,” Weiss wrote in a note to his clients. “We have long maintained our view that the company has a strong asset base (though it could be less attractive than we have believed if natural gas prices don’t rise to more profitable levels). “However, we think that investors are likely to keep the company in the penalty box without a real change in its financial practices. Such change needs to start at the top.” Standard & Poor’s on Friday questioned McClendon’s personal deal with EIG Global Energy, The Wall Street Journal reported, saying the loan “heightens the potential for problematic conflicts of interests, or the perception thereof.”
Program detailsChesapeake broadened its disclosures about the well program Friday in its preliminary proxy statement. The company notes the program does not prohibit McClendon from sales or financing transactions involving his stake in Chesapeake wells. “From time to time, Mr. McClendon has sold FWPP interests separately and concurrent with sales by the company of its interests in the same properties,” according to the regulatory filing. The proxy statement has blank spots to show McClendon’s investment and earnings from the program. “Over the life of the FWPP, Mr. McClendon has typically mortgaged his interests acquired under the FWPP with one or more lenders, some of which also have lending, investment or advisory relationships with the company. Mr. McClendon’s mortgages with these lenders secure loans used in whole or in part to fund Mr. McClendon’s well costs,” according to the statement. “The company does not extend loans to Mr. McClendon for participation in the FWPP or any other purposes. The company does not review or approve financings of Mr. McClendon’s personal assets, including his FWPP interests. “In addition, the company has no obligation to repay any loans Mr. McClendon may obtain nor are any of the company’s interests in any assets exposed to such loans or the mortgages securing them.”