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Carl Icahn Increases Stake in Chesapeake, Demands Board Seats

Carl Icahn
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Carl Icahn

Activist investor Carl Icahn raised his stake in Chesapeake Energy to 7.65 percent, according to a filing with the Securities and Exchange Commission, and hammered its leadership in a letter accusing the company of “woefully inadequate” corporate governance.

"The basic function of a board is to oversee management and to hold it accountable,” Icahn wrote in a letter to the Chesapeake board attached to the filing. "We believe the board has failed this duty in a dramatic fashion. Rather than act as a source of stability and provide assurance to shareholders, this board has led the company through a highly publicized spate of corporate governance breakdowns while amassing an astounding $16 billion funding gap, which we believe has contributed to the share-price decline of over 55% from the 52-week high.”

Icahn argued adamantly for shareholder representation on the board and expressed disappointment that, after broaching that idea at a recent dinner meeting with Aubrey McClendon, Chesapeake's founder, CEO and chairman, the company subsequently refused to consider the idea until it had named a successor chairman.

He demanded that Chesapeake remove four directors from its board. He would have them replaced with two directors he selects and two directors selected by another large shareholder.

Icahn warned in the letter that if the company did not comply with the board changes, "we, as activists, will immediately take whatever 'actions' we feel are necessary to protect the value of this company."

Chesapeake responded in a statement, saying: "We share Mr. Icahn’s belief that Chesapeake shares are substantially undervalued by the market today. The board and senior management are executing a plan that we believe will deliver a higher stock price and better recognize the underlying value of the company’s assets."

The company said the board's immediate priority is to name an independent non-executive chairman and then it would consult with shareholders and carefully review Icahn's request for board representation.

In the letter, Icahn also found fault with Chesapeake's search process for the chairman post, saying that “having the current board select a new chairman without shareholder approval and without allowing for shareholder representation is akin to asking the fox, who has plundered the hen house, to choose another fox to assist it in standing guard over the remaining hens.”

Icahn’s nearly 8% position, which he appears to have put on in recent weeks as the company’s shares tumbled, may make the investor Chesapeake’s third-largest shareholder, after Southeastern Asset Management and Wellington Management.

In recent months, Chesapeake and its board have been embarrassed by a series of public criticisms, including assertions that McClendon has wielded too much power over the years. As a result of that, critics have said, McClendon has been granted unreasonably-high pay and the enjoyment of undue perks like the liberal use of a private jet and the freedom to run a hedge fund alongside his work at Chesapeake’s helm.

Chesapeake announced on May 1 that it would seek a new chairman to replace McClendon with no prior ties to the company. That selection process, currently underway, has been shrouded in secrecy, and no outside search firm has yet been hired, according to someone familiar with the matter. The board hopes to have a new chairman in time for the annual meeting, which will be held in two weeks in Oklahoma City.

Icahn isn’t alone in his complaints. Memphis-based Southeastern Asset Management, which holds more than 13% of Chesapeake’s stock, has also been a recent public critic of the company. On May 2, the typically buttoned-up money manager changed its investment status to activist, and has made clear its desire for the separation of Chesapeake’s chairman and CEO roles, among other things.

Chesapeake stock is down 29% this year.

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