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Aubrey McClendon Not Done Delighting Us

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Aubrey McClendon, Chesapeake Energy's delightfully shady former CEO who was forced out by shareholders who found him more shady than delightful, is the sort of person about whom I might say "never change, Aubrey," if that seemed necessary. It does not:

Aubrey McClendon, the controversial former chief executive of Chesapeake Energy, is attempting to stage a comeback by trying to raise $1bn in capital from private equity firms and sovereign wealth funds for his new company. ... He has set up the new company’s offices near the Chesapeake campus he built during his 24 years at the company and AEP billboards advertising for staff are visible from the site.

That's how you get around a noncompete! Or would be except that his noncompete seems to have been negotiated by a ravenous pack of lawyers who were warned to be extra careful around Aubrey McClendon, and as I read it he can't hire anyone who comes to him from Chesapeake via the billboard.1 But, really: is that the point?

Anyway Aubrey is mounting his comeback with American Energy Partners, his new private onshore E&P company,2 which he wants to fund with private equity and SWFs. I've long been a fan of Aubrey's for his brazenness in having somewhat conflicting interests in wells owned by his public company, semi-secretly borrowing against those interests, running a hedge fund out of his office in his spare time, and generally not giving much of a hoot for the niceties of corporate governance. Others have been fans even longer for the whole leading-the-shale-gas-revolution thing, and the general making of a lot of money, though that fell off a bit in recent years.3

My general view on Aubrey has longbeen that his apparent addiction to and talent for looking for, purchasing, selling, trading in, borrowing against, and generally messing around with oil and gas wells and the things that come out of them are good things for an E&P founder and CEO, but that they're somewhat out of place in a public company CEO. Because telling public company shareholders something to the effect of "trust me, I got a lot of balls in the air, but I'm gonna make you some money one way or another" is not really the paradigm. Why should they trust you? Public company shareholders, stereotypically,4 don't get to look you in the eye and decide that they trust you. In lieu of personal relationships of trust and handshakefulness and potential kneecapping, they have Governance. Governance has its flaws but most of the time it really does produce management structures that more or less try to make money for shareholders and not fleece them.

But it also produces some Type I errors,5 where people who more or less make money for shareholders, and more or less don't fleece them, nonetheless just come off looking fleecy enough that they've gotta go. This creates an opportunity for private equity and other forms of money that (1) don't feel themselves particularly bound by the Standard Governance Model and (2) can substitute other forms of control, like concentrated ownership and negotiated contracts and eye-looking, for generic dispersed-public-ownership good governance.

And, I suppose, they can charge more for their money than the dispersed public shareholders can. It's a nice opportunity that they get, and that the public shareholders don't. Which is a little sad for them. Public markets, in addition to their other flaws, also might have a sub-optimal level of fleecing.

McClendon targets $1bn funds for new group [FT]

1.Section 13 reads in part:

To the extent permitted by applicable law in the State of Oklahoma, for one year from the Effective Date, the Executive agrees not to hire any employee of the Company as of or after the Separation Date, except that Executive (or any affiliated entity, agent or employee of the Executive) may solicit for hire and hire: (a) those employees that have been assigned to the Executive to provide the Accounting Support set forth in Section 4.7 of the Employment Agreement, (b) any employee assigned to the Executive as an assistant, (c) any employee who has been terminated by the Company (but who has not voluntarily departed the Company), at any time, (d) any employee who elects (or has elected) to accept any voluntary severance or retirement program offered by the Company, or (e) any employee for which the Company consents in writing in advance to the Executive soliciting and hiring. ... Regardless of whether a Company employee contacts the Executive (or any affiliated entity, agent or employee of the Executive) and regardless of whether an employee of the Company responds to a general solicitation of employment, the Executive (and any affiliated entity, agent or employee of the Executive) is still barred and prohibited from hiring the Company employee unless the employee falls within the exceptions set forth in parts (a) through (e) above.

So even if the billboard was totally innocent he still couldn't hire anyone from Chesapeake until January 29, 2014, without the company's permission.

2.Here is its spiffy and gloriously euphemistic website: "A Partnership Forged By Opportunity."

3.Some stock price CAGRs:

Aubrey announced his retirement on January 29, effective April 1; I used January 29 as the retirement date. XLE is the oil and gas sector SPDR ETF, which started trading in December 1998. SPX is the S&P 500.

4.I mean, whatever, the big ones do.

5.Blech, nontechnically, you know what I mean.


One More Thing For Governance Day

Felix Salmon put up a great note from a reader about investment banking conflicts; it's fantastic so go read it. But this is a tiny bit unfair: You and many other commentators seem to have some misconceptions about what exactly large, sophisticated clients such as El Paso’s board hire investment bankers to do. Its always funny how, in the minds of pundits everywhere, those conniving and all-powerful one-percenters who sit on corporate boards become impotent and completely incapable of independent decision-making once an investment banker walks into the room. The basic argument is that repeat-player investment bankers provide value not by telling brainless executives whether to accept or reject a merger, but by providing intelligent decisionmakers with access and relationships, and relationships come with conflicts. As he says: When sophisticated clients (management teams, company boards, PE funds, etc) hire M&A bankers, they typically hire them for two main reasons (in addition to the legally required shams referred to as “fairness opinions”): Execution and Connections. Of those things, connections are higher-value and inextricable from conflicts. If you're hiring someone to sell you to Company X, a bank who has done work for Company X - heck, who owns 20% of Company X - is the bank you want. And sure maybe their "conflict" will cause them to advise you to sell for a lowball price so that Company X appreciates them more but, hey, nobody's forcing you to take their advice. So, yes, this is all true. But he's maybe a little too harsh on the commentators and their misconceptions.

Nuns, Whores, DCFs

For some reason it is corporate governance day at Dealbreaker, so here is a grab-bag of inchoate nonsense (for a change!). First of all look at this: The third-largest U.S. proxy adviser recommended that El Paso Corp shareholders vote against a proposed $23 billion sale of the company to Kinder Morgan Inc, switching its position after comments made by a Delaware judge. Egan-Jones Proxy Services said in a report that it was withdrawing its endorsement of the deal because of "the conflicts of interest cited by (Delaware Chancery Court judge Leo Strine) and the attendant doubts cast on the deal." How should you take this? Well, one way to take it would be: if you paid me to tell you how to vote on things, you'd probably want me to look into those things and decide if they're good things for you, and if they are tell you to vote for them and if not etc. So Egan-Jones* went and looked at this merger and decided it was a good merger and that its clients should vote for it. Then they learned about the conflicts of interest cited by the Delaware court, most of which were publicly available long before the opinion came out,** and changed their minds. Suggesting that they didn't really do a bang-up job of examining the merger to begin with. But that's a stupid way of looking at Egan-Jones's role because, really, you're an EP shareholder and you're like "oh Egan-Jones ran a DCF and this price looks good to them"? You can go read the DCFs of actual investment banks if that's the sort of thing that gets you going. Nobody's actually paying proxy advisors (do people pay them? I don't know) for actual advice on how they should actually vote their shares. Instead they're paying (maybe?) for some vague patina of good "corporate governance," which means something like "good processes and independent boards and no conflicts of interest" and gets lots of chin-stroking academic articles written about it.