Chesapeake Board Takes Dispute With Activist Investor Public

Chesapeake Energy Corp. (CHK), the U.S. energy producer that lost half its value in the past year, publicly rebuked an activist investor who urged holders to vote against two incumbent directors.

In a letter signed by Chief Executive Officer Aubrey McClendon and director Merrill A. “Pete” Miller, the company said it has already made “significant” changes to compensation for its board and CEO in response to shareholder feedback.

The board also will replace McClendon as chairman and has taken “swift action” to address shareholder concerns about a program that allows the CEO to own a stake in almost all company wells, according to the letter. McClendon and Miller responded to criticism outlined by New York City Comptroller John Liu in a May 17 letter to shareholders.

As comptroller, Liu oversees 1.9 million shares of Chesapeake stock owned by New York City pension funds, which is “less than 0.25% of Chesapeake’s common shares outstanding,” the Chesapeake CEO and director wrote in their letter. Liu urged shareholders to vote against Richard Davidson and V. Burns Hargis, the two directors who will be up for re-election at the June 8 annual meeting.

Both are members of the audit committee that Chesapeake said is reviewing loans McClendon received to help fund his costs in the well-ownership program. Liu chided the two directors for their “costly failure to act in the best interests of shareowners.”

‘Strong, Highly Qualified’

Hargis, president of Oklahoma State University, and Davidson, former chairman of Union Pacific Corp. (UNP), are “strong, highly qualified independent directors,” according to Chesapeake’s letter today.

Liu countered Chesapeake’s response today with a statement calling the company’s remedies “overdue and only incremental.”

“Had the board responded meaningfully to repeated concerns from shareowners over the years, Chesapeake would not be in the costly governance mess it is in today,” Liu said in the statement.

Monitoring Failure

Separately, Glass, Lewis & Co. became the third advisory firm to recommend shareholders withhold votes for Davidson and Hargis.

As members of the board’s audit committee, Davidson and Hargis “failed to adequately monitor” transactions by McClendon that “pose a clear and substantial risk for potential conflicts of interest,” Glass, Lewis analysts Glen Perry and Courteney Keatinge wrote today.

They also recommended shareholders vote against executive pay and support four shareholder proposals whose sponsors argue they would improve corporate governance.

Institutional Shareholder Services and Egan-Jones Proxy Services issued similar advice on May 20 and May 21.

Chesapeake fell 1.8 percent to $14.82 at 5:39 p.m. after the close of regular trading in New York. Shares closed a year ago at $30.20.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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