OKLAHOMA CITY (Reuters) - Chesapeake Energy Corp (CHK.N) shareholders delivered a sweeping rebuke of the company's Chief Executive Aubrey McClendon and its board on Friday, by rejecting two directors up for reelection in a reaction to a governance crisis that has engulfed the company.
The shareholders' vote came just hours after Chesapeake said it plans to sell its pipeline and related assets to Global Infrastructure Partners for more than $4 billion, as part of efforts to close a colossal $10 billion cash shortfall this year.
Chesapeake, the nation's second-largest natural gas producer, has been under fire from investors since Reuters reported that McClendon had arranged for more than $1 billion in personal financing - from a lender who is also a big source of funding for the company - in a situation that may put his interests at odds with those of shareholders.
The company said the two directors - V. Burns Hargis, president of Oklahoma State University, and Richard Davidson, a former chief executive officer of Union Pacific Corp (UNP.N) - had tendered their resignations from the board after winning the backing of fewer than a quarter of the shareholder votes cast.
"It's an overwhelming opposition vote that represents the total collapse of investor confidence in the entire board," Michael Garland, head of corporate governance for the New York City comptroller, said after the annual meeting of investors.
Garland described the mood in the meeting as "subdued."
Shareholders also soundly rejected the company's executive officer compensation program, with only 20 percent backing the measure. However, that vote is only an advisory measure and is not binding.
"Obviously, we'll be studying the result of the vote today and see what needs to be done," McClendon told the investor meeting at the company's sprawling campus in Oklahoma City.
Security was tight at the meeting, with uniformed officers guarding entrances to the campus, and media banned from attending. Chesapeake said thrice as many investors as last year had registered to attend the meeting, which lasted just over an hour.
One shareholder, Gerald Armstrong, suggested to McClendon that his tenure at the helm may be coming to an end, and criticized the board for failing to heed shareholder votes in the past.
"Accountability is what it's all about, and it's time for a change," activist investor Armstrong said. "It's likely you (McClendon) might not be with us next year."
His comments were echoed by David Dreman, chairman of Dreman Value Management LLP which owns about 1 million Chesapeake shares, who reiterated on CNBC that McClendon should resign or be fired.
A representative of billionaire investor Carl Icahn praised the embattled CEO as being a "great oil and gas man," but said even McClendon needed tight supervision by a strong board.
McClendon said last month he will step down as chairman, and Chesapeake announced on Monday it will replace four of its current board members with directors chosen by its top shareholders - activist Carl Icahn and Mason Hawkins' Southeastern Asset Management. This would give shareholder-backed directors a majority on the board.
The new board members' names will be announced by June 22.
Shares of Chesapeake have lost about half their value over the last year as it seeks to convince shareholders that it is still a good investment, despite steep drops in profits and a spate of corporate governance scandals surrounding McClendon.
The company has been the fastest-growing gas producer in the United States in recent years, but a slump in natural gas prices earlier this year to their lowest in a decade shrank revenue that Chesapeake had planned to use to trim debt and to fund operations.
Chesapeake is planning to sell between $9.0 billion and $11.5 billion in assets this year to cover a $10 billion cash shortfall, including lucrative property in West Texas' Permian Basin.
At the meeting on Friday, McClendon sought to reassure shareholders, saying the company was entering a new phase where it will focus on producing oil and gas from about 10 basins, a departure from its "land grab" strategy.
"It will be a completely different company to invest in," McClendon said.
The company has said it expects to trim more than $3 billion of debt by the end of the year. Debt investors welcomed the announcement about the planned pipeline sale, pressuring the price of its credit default swaps, which are used to insure the company's debt against potential default.
Five-year credit default swaps tightened by 15 basis points to 687 basis points earlier on Friday. That means it costs $687,000 a year for five years to insure $10 million of debt.
Shares of Chesapeake were up about 2.6 percent at $18.32 on the New York Stock Exchange in afternoon trading.
(Additional reporting by Michael Erman in New York and Swetha Gopinath in Bangalore. Editing by Bernadette Baum)