Chicago: Billionaire investor Carl Icahn bought a 7.56 per cent stake in Chesapeake Energy Corp and demanded new directors amid growing shareholder concern about management of the second-largest US natural-gas producer.

Four of Chesapeake's nine directors should be replaced by candidates nominated by Icahn and other major investors, the 76-year-old hedge fund manager said on Friday in a letter to the Oklahoma City-based company's board that was included in a US Securities and Exchange Commission filing.

The current board has failed to rein in overspending and has a chief executive officer with an appetite for too much risk, he wrote.

"Corporate governance reforms cannot, in our view, be led by directors whose irresponsible actions have brought this company to the edge of the proverbial cliff," Icahn wrote.

"Having the current board select a new chairman without shareholder approval and without allowing for shareholder representation is akin to asking the fox, who has plundered the hen house, to choose another fox to assist it in standing guard over the remaining hens."

Chesapeake lost almost half of its market value in the past year as the impact of plummeting gas prices was compounded by revelations that chief executive officer Aubrey McClendon used personal stakes in the company's wells to obtain more than $800 million (Dh2.9 billion) in private loans.

The board said May 1 it will replace McClendon with an independent chairman and halt the perk that allowed him to amass personal stakes in Chesapeake property.

Chesapeake's immediate priority is finding a new chairman, the company said in a statement on Friday responding to Icahn's letter.

"After an independent chairman is named, the board's nominating committee will consult with shareholders and carefully review Mr Icahn's request for board representation," the company said.

The company outspent cash flow in 19 of the past 21 years and warned this month that it may run out of money next year. Chesapeake is facing a $22 billion shortfall between cash flow and spending by the end of 2013, said James Sullivan, an analyst at Alembic Global Advisors in New York.

Unchecked risk taking

"Rather than act as a source of stability and provide assurance to shareholders, this board has led the company through a highly publicised spate of corporate governance breakdowns while amassing an astounding" funding gap, Icahn wrote in Friday's letter.

Icahn accused McClendon of "unchecked risk taking" and criticised the board for "half-hearted" efforts to improve governance that he said were intended to let it "skate by for one more year".

Chesapeake shares rose 1.6 per cent to $16.06 at 4.35pm on Friday after the close of regular US stock trading. The stock has declined 29 per cent this year after a 14 per cent fall in 2011.

A 7.56 per cent stake would make Icahn the second-largest investor in Chesapeake, after Southeastern Asset Management Inc, the Memphis-based investment company run by Mason Hawkins that owns 13.2 per cent.

Icahn said in his letter he recently asked McClendon over dinner to consider allowing direct shareholder representation on the board. The idea was rejected the next day, a move Icahn described as "completely disingenuous and illogical".

"This club needs to be broken up. Nobody has been on the side of shareholders," said Fadel Gheit, a New York-based analyst for Oppenheimer and Co, who rates the stock "outperform" and owns none.

"Carl Icahn is an opportunistic guy. He's seen an opening and he's not going to let it go."

Icahn said this is his second attempt to reform Chesapeake's board in as many years. In late 2010, he said, he acquired a "substantial position in the company" and used that leverage to cajole management into selling assets, closing a funding shortfall and slowing land purchases.

At the time, his requests for shareholder representation on the board were rebuffed and management soon reverted to its former strategy of large land acquisitions and costly drilling programmes, Icahn said in the letter. Frustrated, he sold his Chesapeake stock.

Time will tell

"It's too early to tell what he can really accomplish." said Philip Weiss, a New York-based analyst for Argus Research Corp who rates Chesapeake shares as "sell". "This can hardly be bad for shareholders."

Icahn said he expects the board to answer his demands before the annual shareholders' meeting scheduled for June 8, according to the letter.

"Chesapeake shareholders will benefit neither from a constant stream of negative news reflecting upon the companies troubled past, nor from a half-hearted attempt by the board to make the minimum possible number of changes to skate by for one more year," Icahn wrote.

"The board must not only find a way to eliminate the enormous funding gap, but also the more substantial credibility gap."

Sack four directors

Icahn recommended in his letter replacing four of the current directors with two of his nominees and two to be named by another big holder such as Southeastern. Icahn noted that director Louis Simpson, a former Warren Buffett protige, should not be one of the four directors dismissed.

Simpson is a member of the nominating and corporate governance committee handling the search for a new chairman. The other member of that committee, and its chairman, is former US Senator Don Nickles.

A representative from Southeastern Asset Management did not immediately return a phone call.