Still reeling from a press pounding, the Chesapeake Energy board of directors today announced that they and CEO Aubrey McClendon will end the Founders Well Participation Program (FWPP) early—on June 30, 2014 (18 months before it was due to end). The program grants McClendon the right to up to 2.5 percent ownership in each well drilled by the company, but also requires him to kick in his portion of the drilling costs. McClendon was using loans or mortgages to come up with his portion of the cash needed to drill—loans which now total nearly $1.4 billion. So stung by the revelation of just how much McClendon has borrowed, the board and McClendon will end the program.
But also part of today’s announcement is that the board of directors is looking for a non-executive chairperson. Currently, McClendon is the chairman of the board in addition to his role as CEO. When a new non-executive chairperson is found, McClendon will relinquish his role as chairman but stay at the helm as CEO. This is, no doubt, an effort to show the company is being more rigorous and impartial when it comes to the decisions by the board. That is, they want to reassure stockholders that everything is fine in the company, and that no financial funny business is going on behind the scenes.
Today’s announcement from Chesapeake:
Chesapeake Energy Corporation today announced that its Board of Directors has renegotiated the terms of the company’s Founder Well Participation Program (FWPP) with Chairman and Chief Executive Officer Aubrey K. McClendon to provide for the early termination of the FWPP on June 30, 2014, 18 months before the end of its current term on December 31, 2015. Mr. McClendon will receive no compensation of any kind in connection with the early termination of the FWPP.
The FWPP, which was approved by shareholders for a 10-year term in 2005, in conjunction with Mr. McClendon’s employment agreement with the company, provides Mr. McClendon a contractual right to participate and invest as a working interest owner (with up to a 2.5% working interest) in new wells drilled on the company’s leasehold. Mr. McClendon has agreed to forego such contractual right 18 months early without compensation.
The Board of Directors will name an independent, Non-Executive Chairman in the near future. The Board’s Nominating and Corporate Governance Committee is considering potential candidates with no previous substantive relationship with Chesapeake and will be soliciting input from major shareholders. Upon the appointment of a Non-Executive Chairman, Mr. McClendon will relinquish the position of Chairman and continue as Chief Executive Officer. Mr. McClendon has indicated his support of the Board’s decision to name a Non-Executive Chairman and waived any rights he might have under his employment agreement as a result of no longer serving as Chairman. As previously announced, 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.
Merrill A. (“Pete”) Miller, Jr., Chesapeake’s Lead Independent Director and President and Chief Executive Officer of National Oilwell Varco, said, “The Board is focused on serving the interests of shareholders. We believe separation of the Chairman and CEO roles will improve Chesapeake’s corporate governance and the early termination of the FWPP will eliminate a source of controversy, both of which should send a positive signal to the market and improve shareholder value. The Board appreciates Aubrey’s cooperation in these measures and has confidence in Chesapeake’s future, based on its superb assets, strong management team and talented employees.”
Aubrey K. McClendon, Chesapeake’s Chairman and CEO, said, “I am completely supportive of the Board’s plans to separate the positions of Chairman and CEO and to bring an independent Chairman onto the Board. This action reflects our determination to uphold strong corporate governance standards and will also enable me to focus my full time and attention on execution of the company’s strategy, the implementation of our transformation into a major oil producer and the completion of our asset monetization and joint venture objectives.”
O. Mason Hawkins, Chairman and Chief Executive Officer of Southeastern Asset Management, the company’s largest shareholder, said, “We are pleased that the Board has listened to our input and believe it has made the right decision by ending the FWPP early and seeking an independent Chairman. Aubrey was right to recognize that these actions are in the best interests of the Company and its shareholders. We support management’s continuing efforts to unlock and deliver the value embedded in Chesapeake’s assets.”*
*Chesapeake Energy (May 1, 2012) – Chesapeake Energy Corporation Board and Aubrey K. McClendon Agree to Early Termination of Founder Well Participation Program