Chesapeake did not offer details about why its co-founder was stepping down, but an email and statement from McClendon point toward clashes with the company’s new board of directors.
In an email to Chesapeake employees, McClendon said the action was mutually agreed upon by him and the board. “Although this is due to certain philosophical differences that exist between the board and me,” he wrote, “the separation will be amicable and smooth.”
CNBC reported that board members had become concerned about a so-called “Aubrey discount” that kept share prices down and essentially forced the CEO out. Board Chairman Archie Dunham, for his part, stressed in the official announcement that an internal company review “has not revealed improper conduct” by McClendon, and that the board’s “decision to commence a search for a new leader is not related to the board’s pending review of his financing arrangements and other matters.”
McClendon wrote that he was “resigning,” while the company’s news release termed it a “retirement” and that he would leave once a successor is appointed.
That release also noted that McClendon will “receive his full compensation and other benefits to which he is entitled in accordance with the terms of his employment agreement.”
Over three decades, Chesapeake rose from an innovative start-up to the nation’s second-largest producer of natural gas. The company is a major employer in Oklahoma and is responsible for millions of dollars in charitable giving in Oklahoma City and the state.
However, because of falling natural gas prices and precarious financing of company operations, Chesapeake has had to sell off large portions of its assets to bring down a formidable debt.
In an email to employees following the announcement of McClendon’s departure, board Chairman Archie Dunham emphasized that the company is not for sale and that it will continue with the current $6 billion drilling and completion plans.He said other employee benefits — including a cafeteria, fitness center and child care center — would not be shut down.
“Our truly top-notch 12,000 employees remain the company’s best asset, and we will continue to retain and attract the best talent in the industry,” Dunham wrote.
Since McClendon co-founded Chesapeake, he has been allowed to own up to 2.5 percent interest in almost every well drilled by Chesapeake in a given year. The perk, known as the Founders Well Participation Program, also required McClendon to pay his share of upfront costs associated with drilling the wells.
When the stock market crashed in 2008, McClendon was left in an unenviable position. Amid falling stock prices, his brokers who had loaned him money for stock purchases began to make margin calls, which require money to be deposited into the account of the loan or for assets to be sold.
McClendon unloaded more than 31 million shares, spooking investors further and, according to Reuters, causing stock prices to tumble another 40 percent.
Later, Chesapeake’s board approved a controversial agreement with McClendon. Among other things, it permitted the company’s purchase of his personal map collection for $12 million, a $20 million stock grant and provided a $75 million “well cost incentive” bonus.
The move outraged some shareholders. Lawsuits were filed against Chesapeake, spurring some reforms of the company’s compensation program.
While the Founders Well Participation Program required McClendon to pay his share of upfront costs in drilling wells in which he had a personal interest, the “well cost incentive” bonus in his 2008 contract was to be exclusively used for this purpose.
But $75 million can go quickly when there are hundreds of wells to be drilled and taxes to be paid.
According to company documents filed with the U.S. Securities and Exchange Commission, the total after-tax amount of McClendon’s bonus was $43.5 million.
In addition, Chesapeake, in its filing, stated that it expected the bonus to be spent on McClendon’s share under the Founders Well program by the end of 2009.
Reuters bags a billionaire
It was April 18, 2012, when Reuters reported that McClendon had obtained $1.1 billion in personal loans over three years.
To receive those loans (some from a company already invested in Chesapeake), Reuters reported, McClendon pledged his Founders Well Participation Program stake in Chesapeake wells. The revelations raised concerns that his personal dealings could negatively influence company dealings.
By the time the story broke, the company already was in the process of selling off assets to bring its staggering debt under control. An avalanche of stories followed, including reports that hedge funds controlled by McClendon from Chesapeake offices dealt in the same commodities.
In the wake of the news accounts, McClendon agreed to step down as board chairman. Chesapeake’s board stated it planned on the early elimination of the Founders Well program.
By late May, billionaire activist investor Carl Icahn had purchased a 7.6 percent stake in Chesapeake and was calling for the replacement of the board. The following month, shareholders voted to reject two board members: Oklahoma State University President Burns Hargis and ex-Union Pacific CEO Richard Davidson.
Prior to that shareholder meeting, Chesapeake announced that four board members would be appointed by Icahn and shareholder group Southwest Asset Management, along with former Conoco CEO Dunham as chair, giving shareholders majority control of the board.
Exit stage Aubrey
Under clawback terms in McClendon’s contract, his $75 million bonus would have to be repaid if he were to retire before Dec. 31. He would have to pay back the entire amount multiplied by the number of months between departure date and Dec. 31, divided by 60 months. A departure date of April 1 could leave him owing Chesapeake around $11.3 million.
Two sources with knowledge of the matter, however, told Oklahoma Gazette that McClendon’s terms of leaving will be classified as a “termination without cause.”
According to documents filed with the SEC, the pay plan for such a departure by McClendon as of Dec. 31, 2011, would entitle him to a $14.6 million cash payment, around $33.6 million in restricted stock awards, $1.3 million in benefits and $2.5 million in personal travel on the corporate jet.
A source close to the matter said McClendon will receive monthly severance payments in the amount of his salary and a capped bonus for a total of four years.
In McClendon’s email to employees, he said he believes the future of Chesapeake is bright.
“I will always treasure the time we have spent together building Chesapeake into the unique and dynamic company that it is today,” McClendon wrote.
“In many respects, our accomplishments are unique, and I will always remain immensely grateful for the time I have spent with you building CHK into the industry leader that it is today. My best wishes to you all and onward and upward from here!”
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