As reported by Fei-Lu Qian in an April PomTalk post, the Louisiana Municipal Police Employees’ Retirement System (“LAMPERS”) took the responsible step in demanding answers and accountability from directors of Chesapeake Energy by filing a “books and records” demand in a state court of Oklahoma. If the demand is granted, shareholders of Chesapeake will be able to examine the company’s corporate documents to see if the board’s approval of a $75 million bonus to its chief executive officer was proper. In the May/June issue of The Pomerantz Monitor, Marc Gross more fully explains the background of the lawsuit commenced by Pomerantz on behalf of LAMPERS to recoup the $75 million bonus.
The extraordinary bonus was awarded to Chesapeake’s CEO and co-founder, Aubrey McClendon. McClendon’s total compensation for 2008 was $105 million, making him the highest paid executive in the country at a time when the company’s earnings plummeted 50% and stock price tumbled 60%. The company claims that it granted the bonus – five times McClendon’s average annual compensation, including both salary and bonus – to reward him for his role in selling off certain oil and gas properties during 2008.
The real purpose of the bonus, we submit, was to bail out McClendon from his personal financial problems precipitated by the fall in the company’s share price. In other words, Chesapeake used corporate funds to insulate its CEO from the consequences of the corporate meltdown, while shareholders got stuck with their losses
The bail out was even larger than at first appeared. After the lawsuit was filed, Chesapeake issued a Proxy Statement indicating that it also agreed to pay McClendon over $12 million for his personal art collection.
In its opposition to our lawsuit, Chesapeake argues that if it weren’t for the bonus, McClendon might have jumped ship in favor of other opportunities. This seems far fetched, given that McClendon founded the company and still has a sizable stake in its wells. Moreover, the Board had other ways to insure his retention, like lowering the share ownership requirement – which it did – and providing loans to help him meet his obligations.
A similar books and records strategy was used successfully at the start of the Disney/Ovitz excess compensation case, and is favored by Delaware courts. Although Chesapeake is an Oklahoma corporation, that state follows Delaware corporate law.
We believe that the Chesapeake case warrants support by other public pension funds concerned with corporate governance reforms, either by direct intervention or a letter to the court. If ever there was a time to draw the line on excess compensation, it is now.
In pursuing this claim, Pomerantz harkens back to its roots. The firm’s first major case was Gallant v. Mitchell, where Abe Pomerantz sought to recoup interest-free loans that officers of National City Bank awarded themselves to tide them through the Great Depression (loans which they ultimately forgave). After trial, Abe recovered $1.8 million, a small fortune in the 1930’s.
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