Chesapeake Energy Corp. (CHK)’s annual meeting can proceed, a judge ruled, over the objections of shareholders who sought to delay tomorrow’s event.
U.S. District Judge Vicki Miles-LaGrange in Oklahoma City yesterday denied a shareholders’ request to delay the meeting, saying additional disclosures about Chief Executive Officer Aubrey K. McClendon’s compensation and loans weren’t crucial to investors’ considerations at the gathering.
“The court finds plaintiffs have not met their burden of showing irreparable injury” if the annual meeting goes forward, Miles-LaGrange concluded in her 10-page ruling.
The ruling came two days after Chesapeake officials agreed to replace almost half of the company’s board in the wake of criticism of directors’ lax oversight of McClendon’s activities. Billionaire investor Carl Icahn pushed the second-largest U.S. natural-gas producer to replace four of the company’s eight non- executive directors.
Chesapeake shareholders are scheduled to vote tomorrow on whether to re-elect two members of the current board and on a so-called “say on pay” resolution about McClendon’s compensation.
“We believe the judge made the correct decision and look forward to holding our annual shareholder meeting as scheduled,” Michael Kehs, a Chesapeake spokesman, said in a telephone interview yesterday.
Investor lawyer Matthew Houston of Manhattan’s Harwood Feffer LLP argued for the delay before Miles-LaGrange. He didn’t immediately reply to after-hours voice-mail and e-mail messages seeking comment on yesterday’s ruling.
“This is not a well-functioning board,” Houston told the court on June 5, referring to the announcement that four of its directors were being replaced. “Shareholders should not be in an adversarial position with their board of directors”
The lawyer told LaGrange his clients didn’t want to cancel the meeting, merely postpone it so they could obtain additional information.
“What plaintiffs are really asking for,” company attorney Robert Varian countered, “is that this court erect some sort of barrier between Chesapeake and its shareholders. It would be an extraordinary remedy.”
The U.S. Securities and Exchange Commission had reviewed and approved Chesapeake’s shareholder proxy, Varian told the judge.
“You don’t need any more information to vote,” he said.
The Oklahoma City-based company’s shares have dropped in the wake of falling gas prices and media reports that McClendon was using personal stakes in the company’s wells to obtain loans. Chesapeake rose more than 7 percent to $18.21 in New York Stock Exchange composite trading.
As of Dec. 31, McClendon, 52, had $846 million in loans covering his well-ownership costs. The program, which allowed him to own as much as 2.5 percent of almost every well the company drilled, required the CEO to pay development costs proportionate to his stake.
McClendon’s compensation package also has drawn criticism from investors. The natural-gas companies cut McClendon’s pay 15 percent last year to $17.86 million in response to concerns that it was excessive.
The reduced compensation included $13.6 million in stock awards, a $1.95 million bonus and $975,000 in salary, according to an April filing with the U.S. Securities and Exchange Commission.
This month, Chesapeake officials cut directors’ pay by 20 percent and halted their personal use of corporate airplanes amid criticism of the company’s management.
Shareholders sought the delay to gather more data on the loans, made by EIG Global Energy Partners LLC, Union Bank and TCW Asset Management, to see if they create any conflicts of interest, according to court filings.
“It is crucial for plaintiffs to have full information regarding Defendant McClendon’s financing arrangements and whether the board had knowledge of these arrangements in order to determine whether to re-elect certain of those board members to represent their interests and whether to approve an incentive plan for members of the board and its officers, including McClendon,” investors’ lawyers said in a May 29 court filing.
Chesapeake’s lawyers countered in their own filings that the company had fully disclosed McClendon’s compensation and his loans secured by interests in the company’s wells in earlier proxy filings.
Chesapeake officials announced last month that McClendon will step down as board chairman when a replacement is named.
Icahn and Southeastern Asset Management Inc., Chesapeake’s two largest shareholders, pushed for a board shakeup after saying that McClendon’s risk-taking and overspending has led to a $22 billion cash crunch and helped the share price erode by almost 30 percent this year.
Memphis-based Southeastern’s 13.6 percent stake in Chesapeake makes it the largest holder, followed by Icahn, who owns 7.6 percent of the company’s shares. Southeastern will propose three of the new directors and Icahn will name the fourth, the company said June 5.
McClendon built Chesapeake into the second-largest U.S. gas producer by amassing fields that cover an area half the size of New York state.
As one of the first explorers to embrace horizontal drilling and hydraulic fracturing, McClendon helped usher in a renaissance in U.S. gas and oil production with discoveries such as the Haynesville Shale in Louisiana and Utica Shale in Ohio.
The company is in advanced talks to sell pipelines to Global Infrastructure Partners for more than $4 billion, said two people with knowledge of the matter. The energy explorer is discussing selling its entire stake in Chesapeake Midstream Partners LP (CHKM) and other pipeline assets, said the people, who spoke on condition of anonymity because the talks are private. The negotiations may lead to a deal within days and could also fall apart, the people said.
Exxon Mobil Corp. (XOM), based in Irving, Texas, is the largest U.S. gas producer. As a glut of North American gas drove prices to a 10-year low in April, Chesapeake warned May 1 that it may run out of cash to fund drilling projects as early as next year. Alembic Global Advisors estimates the company’s cash-flow shortfall may Reach $22 billion by the end of 2013.
The case is Deborah G. Mallow IRA SEP Investment Plan v. McClendon, 12-cv-436, U.S. District Court, Western District of Oklahoma (Oklahoma City).
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