Did Aubrey McClendon breach his fiduciary duties to Chesapeake shareholders?

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Bowing to pressures from their shareholders, Chesapeake Energy Corp.’s directors have forced co-founder and CEO Aubrey McClendon to step down as chair, all over his personal financial dealings, including the taking of up to $1.1 billion in loans against his stakes in Chesapeake oil and gas wells.  A Reuters investigation has found, McClendon also ran a lucrative business on the side: a $200 million hedge fund that traded in the same commodities Chesapeake produces.  Is such behaviour to be tollerated and is it a breach of McClendon’s fiduciary duties as CEO and Chair of the Board of Directors?

An officer or director of a corporation owes a formal fiduciary relationship to the corporation and shareholders, such as: 

a)Duty of Loyalty The duty of loyalty “requires an extreme measure of candor, unselfishness, and good faith on the part of the officer or director.” A corporate officer or director must act in good faith and must not allow his or her personal interest to prevail over the interest of the corporation. An officer or director is considered “interested” when he “makes a personal profit from a transaction by dealing with the corporation or usurps a corporate opportunity.”

b)Duty of Care Texas law imposes on corporate officers and directors a duty to exercise due care in the management of the corporation’s affairs. If they breach that duty, they are liable to the corporation for any loss it may suffer as a result of their neglect.

c)Duty of Full Disclosure The duty of full disclosure on all matters affecting the corporation, including disclosing when the officer or director will personal benefit for contracts or certain actions.

d)Duty of Obedience The duty of obedience “requires a director to avoid committing acts, i.e., acts beyond the scope of the powers of a corporation as defined by its charter or the laws of the state of incorporation.”

From first glance it looks as if McClendon did breach his fiduciary duty of Full Disclosure and Loyalty.  It will be interesting to see what the shareholders think and whether a class action lawsuit is filed by them.

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