This excerpt taken from the CHK DEF 14A filed Apr 28, 2006.
Aubrey K. McClendon
We have an employment agreement with Mr. McClendon which provides, among other things, for an annual base salary of not less than $950,000, bonuses at the discretion of the Board of Directors (through its Compensation Committee), eligibility for equity awards under the Companys stock compensation plans and benefits, including club membership and personal accounting support. For safety, security and efficiency, Mr. McClendon is required to use aircraft owned or leased by the Company for business and personal use in the Western Hemisphere and is not required to reimburse the Company for any costs related to such use. In addition, Mr. McClendons immediate family members may use such Company aircraft for their personal use to the same extent. When a family member travels without Mr. McClendon, he is required to reimburse the Company for the variable costs of such use.
The employment agreement with Mr. McClendon has a term of five years commencing July 1, 2005, which term is automatically extended for one additional year on each January 31 unless the Company provides 30 days prior notice of non-extension. In addition, for each calendar year during which the employment agreement is in effect, Mr. McClendon is required to hold shares of the Companys common stock having an aggregate investment value equal to 500% of his annual base salary and bonus.
The Company may terminate its employment agreement with Mr. McClendon at any time without cause; however, upon such termination he is entitled to continue to receive Base Compensation (defined as salary equal
to his base salary on the date of termination plus annual bonus compensation equal to the bonus compensation he received during the twelve month period preceding the termination date) and benefits including office space, secretarial and accounting support and company aircraft usage for the balance of the contract term.
The employment agreement further provides that if, during the term of the agreement, there is a change of control and within three years thereafter (a) the agreement expires; (b) the agreement is not extended and Mr. McClendon resigns within one year after the non-extension; (c) he is terminated other than for cause, death or incapacity; (d) he resigns as a result of (i) a change in his duties or title, (ii) a reduction in his compensation, (iii) a required relocation more than 25 miles from his then current place of employment, or (iv) a default by the Company under the agreement; (e) the agreement has not been assumed by any successor to or parent of the Company; or (f) he has agreed to remain employed by the Company for a period of three months to assist in the transition and thereafter resigns, then Mr. McClendon will be entitled to a severance payment in an amount equal to three times his Base Compensation, plus three times the value of his benefits provided during the preceding twelve months, plus a gross-up amount to be paid with respect to any excise or income taxes or penalties imposed on the severance payment. Change of control is defined in this agreement to include:
(1) a person acquiring beneficial ownership of 20% or more of the Companys outstanding common stock or the voting power of the Companys existing voting securities unless one of the circumstances described in clause 3(i), (ii) and (iii) below exists or it is an acquisition directly from the Company or an acquisition by the Company or a Company employee benefit plan;
(2) a majority of the members of the Incumbent Board is replaced by directors who were not nominated or elected by the Incumbent Board (the current directors and directors later nominated or elected by a majority of such directors are referred to as the Incumbent Board);
(3) the consummation of a business combination such as a reorganization, merger, consolidation or sale of all or substantially all of the Companys assets unless following such business combination (i) the persons who beneficially owned the Companys common stock and voting securities immediately prior to the business combination beneficially own more than 60% of such securities of the corporation resulting from the business combination in substantially the same proportions, (ii) no person beneficially owns 20% or more of such securities of the corporation resulting from the business combination unless such ownership existed prior to the business combination, or (iii) a majority of the members of the board of directors of the corporation resulting from the business combination were members of the Incumbent Board at the time of the execution or approval of the business combination agreement; and
(4) the approval by the shareholders of a complete liquidation or dissolution of the Company.
If Mr. McClendon becomes incapacitated, as determined by the Companys Board of Directors, and is unable to perform his duties set out in the employment agreement for a period of four consecutive months, the Board may terminate his services. In the event such a termination should occur, Mr. McClendon is entitled to receive compensation and benefits through the remaining term of the agreement. If Mr. McClendon dies during the term of the agreement, the Company is obligated to continue payments of base salary for twelve months after the date of his death.
In the event any payment by the Company to Mr. McClendon is subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any interest or penalties related to such excise tax, he will be entitled to receive a gross-up payment from the Company. The gross-up payment will be equal to the amount such that after payment of all taxes (including penalties and interest on the taxes) on the gross-up payment, Mr. McClendon will retain an amount of the gross-up payment equal to the excise tax imposed.
Mr. McClendon is prohibited from engaging in various activities outside his employment with the Company without the approval of the Board of Directors. His employment agreement also provides for a six-month non-competition period after the termination of his employment and prohibits disclosure of confidential information
for a one-year period following the termination of the agreement. In addition, the agreement contains non-solicitation restrictions with respect to employees, contractors, customers, vendors and subcontractors.
Tom L. Ward
On February 9, 2006, Tom L. Ward, our former President and Chief Operating Officer and a co-founder of the Company, resigned as a director, officer and employee of the Company. Our Board of Directors accepted Mr. Wards resignation effective February 10, 2006 and approved a proposed resignation agreement with Mr. Ward in recognition of his significant contributions to the Company, his participation in the founding and success of the Company and his agreement to assist in the transition of his duties for a six-month period after his resignation. The Board authorized Mr. McClendon to complete negotiations of the agreement with Mr. Ward. Mr. Wards resignation agreement was included as Exhibit 10.2.5 of our current report on Form 8-K filed with the Securities and Exchange Commission on February 15, 2006. Upon his resignation, his employment agreement with the Company, which provided for Mr. Wards full-time employment as Chesapeakes President and Chief Operating Officer and was substantially identical to Mr. McClendons employment agreement described above, terminated.
The resignation agreement provided for Mr. Wards resignation from his employment and directorship with Chesapeake and his positions as an officer, director and/or manager of any Chesapeake subsidiary. In addition, Mr. Ward agreed to act as a consultant to Chesapeake for a period of six months from the effective date of the resignation agreement (the Consulting Period) to assist in the transition of his responsibilities.
During the Consulting Period, Mr. Ward receives no cash compensation but the Company provides him support staff for personal administrative and accounting services and the use of the fractional ownership interests of the Companys aircraft in accordance with historical practices. Mr. Ward is permitted by the resignation agreement to employ support staff personnel that report directly to him.
The resignation agreement further provided for the immediate vesting of all of Mr. Wards unvested stock options and restricted stock on February 10, 2006. As a result of such vesting, options to purchase 724,615 shares of Chesapeakes common stock at an average exercise price of $8.01 per share and 1,291,875 shares of restricted common stock became immediately vested. The estimated Black-Scholes value of these stock options was approximately $15.7 million and the fair market value of the previously restricted common stock was approximately $38.3 million as of February 10, 2006. Mr. Ward exercised all of his outstanding stock options to purchase 7,815,808 shares of common stock on March 14, 2006.
The resignation agreement requires Mr. Ward to notify the Company if he acquires or enters into an agreement to acquire, directly or indirectly, any oil and gas interest or business that violates his employment agreement. If he should acquire a company or package of properties that includes interests covered by the non-competition provisions of his employment agreement and the allocated value of such interests is less than 25% of the total purchase price, the Companys sole remedy will be the right to purchase the interests at Mr. Wards cost. The resignation agreement also included a release of claims by Mr. Ward and the Company and indemnification by Mr. Ward.
Other Executive Officers
The Company has an employment agreement with Mr. Rowland that is in effect through September 30, 2006. It provides for an annual base salary of not less than $375,000. Mr. Rowlands employment agreement requires him to hold not less than 25,000 shares of the Companys common stock throughout the term of the agreement. Mr. Rowlands agreement provides for bonuses at the discretion of the Compensation Committee of the Board of Directors and eligibility for stock-based compensation and benefits, including an automobile allowance, club membership and personal accounting support. Mr. Rowlands employment agreement permits
him to continue to conduct oil and gas activities individually and through various related or family-owned entities, but prohibits him from acquiring, attempting to acquire or aiding another person in acquiring an interest in oil and gas exploration, development or production activities other than certain permitted activities without the Companys approval.
The Company also has employment agreements with Mr. Johnson and Ms. Burger in effect through September 30, 2006, with minimum annual base salaries of $230,000 for Mr. Johnson and $300,000 for Ms. Burger. Each agreement provides that the executive officer is eligible for bonuses, stock-based compensation and other benefits. The agreements require each executive to acquire and continue to hold at least 10,000 shares of the Companys common stock.
As a result of Mr. Wards resignation, Steven C. Dixon was appointed Executive Vice PresidentOperations and Chief Operating Officer effective February 13, 2006. The Company has an employment agreement with Mr. Dixon in effect through September 30, 2006 which provides for a minimum annual base salary of $325,000 and eligibility for bonuses, stock-based compensation and other benefits. Mr. Dixons agreement requires him to acquire and continue to hold at least 10,000 shares of the Companys common stock.
The Company may terminate any of its employment agreements with Messrs. Rowland, Dixon and Johnson and Ms. Burger at any time without cause; however, upon such termination each is entitled to continue to receive base compensation (defined as the executives base salary on the date of termination) and benefits for 180 days.
The employment agreements for Messrs. Rowland, Dixon and Johnson and Ms. Burger further provide that if, during the term of the agreement, there is a change of control, the executive officer will be entitled to a severance payment in an amount equal to 200% of the sum of (i) the executive officers base salary as of the date of the change of control and (ii) annual bonus compensation paid to the executive during the twelve month period immediately prior to the change of control. The right to such compensation is subject to the executive officers continued compliance with the terms of the employment agreement. The definition of change of control in these agreements is the same as the definition in Mr. McClendons employment agreement.