Chesapeake Energy’s (NYSE:CHK) Chief Executive Officer Aubrey McClendon might not fully understand the concept of borrowing. McClendon has been sued by a shareholder over potential conflicts of interest after a report surfaced accusing the CEO of borrowing as much as $1.1 billion against his stake in thousands of company wells. Surely, $1.1 billion is not high on the list of suitable borrowing items, at least not to investors.
McClendon was busy taking out the loans over the past three years, an activity undisclosed to shareholders. According to analysts and academics, this raised concerns that McClendon’s personal financial deals could compromise his fiduciary duty to Chesapeake.
EIG Global Energy Partners has been McClendon’s biggest personal lender and a big financier for Chesapeake. The lawsuit states some analysts believe EIG’s investors have been given favorable terms from the company on financing deals. However McClendon and the company have said that no conflict exists. Chesapeake has not commented on the matter.
The lawsuit was filed in the U.S. District Court of Western District of Oklahoma and was brought by Deborah Mallow IRA SEP Investment Plan. Court documents reveal several Chesapeake directors to be defendants. The lawsuit says that action is brought to address material disclosure violations permitted by the board of directors and to ensure that any damages suffered by the company will not affect materially affect operations or innocent shareholders.
According to the report, the borrowed sum was used to fund McClendon’s operating costs, an unusual corporate perk allowing him to take a 2.5 percent interest in every well drilled by the company. McClendon used the stakes as collateral on the loans according to loan documents filed in the five states.
McClendon’s investments are significantly under water because of large up-front development costs. The lawsuit states that this was expected to change as the wells mature.
It is possible that the defendants have exposed the company to class action securities fraud liability. The plaintiff is seeking to require the CEO and other board members to disclose all material facts relating to McClendon’s loans, arrange independent oversight for the borrowings to identify any threats to the company, and to rescind the rule that allowed McClendon to invest in the wells in the first place.
McClendon was the highest-paid CEO among all S&P companies in 2008, making $112 million in compensation. The company’s market value fell more than $500 million on the day the report surfaced.