Chesapeake’s Board Reluctantly Steps Up (CHK)

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The board of directors of Chesapeake Energy Corp. (NYSE: CHK) has “determined that it does not intend to extend the company’s Founder Well Participation Program (FWPP) with its chief executive officer, Aubrey K. McClendon, beyond its present 10-year term ending December 31, 2015.” The FWPP gives McClendon the right to acquire a 2.5% working interest in any new wells the company drills.

The board also said that it will “negotiate” with McClendon for an early termination to the existing agreement. Considering that the board has been extremely solicitous of McClendon’s desires in the past, one shouldn’t expect too much from this negotiation. Whatever deal is struck is sure to compensate McClendon generously.

McClendon himself will disclose information related to the interests he has acquired through the FWPP since 2011 and the board “is reviewing the financing arrangements between Mr. McClendon (and the entities through which he participates in the FWPP) and any third party that has had or may have a relationship with the company in any capacity.” McClendon is reported to have borrowed up to $1.1 billion using his interests in Chesapeake’s wells as collateral without disclosing the loans to shareholders, calling into question his exercise of his fiduciary duty to the company and its shareholders.

The board also clarified a statement it made in an earlier press release:

The statement that “the Board of Directors is fully aware of the existence of Mr. McClendon’s financing transactions” was intended to convey the fact that the Board of Directors is generally aware that Mr. McClendon used interests acquired through his participation in the FWPP as security in personal financing transactions. The Board of Directors did not review, approve or have knowledge of the specific transactions engaged in by Mr. McClendon or the terms of those transactions.

So the board knew McClendon may have had a conflict of interest, but chose to turn its head to the details. The whole bunch should be tossed out, along with McClendon. None of the board has even seen fit to resign, whether in disgust or shame.

Chesapeake’s shares are up 0.4% in the first few minutes of trading this morning, at $18.21 in a 52-week range of $17.03-$35.75.

Paul Ausick