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2010 – WHAT’S NEXT?2010 – WHAT’S NEXT?

Mark L. Greenberg - Mercuria Energy AmericaMark L. Greenberg - Mercuria Energy AmericaMelanie Gray - Partner, Weil, Gotshal & Manges LLPMelanie Gray - Partner, Weil, Gotshal & Manges LLP

Michael A. Saslaw - Partner, Weil, Gotshal & Manges LLPMichael A. Saslaw - Partner, Weil, Gotshal & Manges LLP

ASSOCIATION OF CORPORATE COUNSEL ASSOCIATION OF CORPORATE COUNSEL

HOUSTON CHAPTERHOUSTON CHAPTER

December 8, 2009December 8, 2009

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AgendaAgendaI.I. TransactionalTransactional

A.A. TransactionsTransactions FinancingFinancing Distressed PlaysDistressed Plays PIPEsPIPEs

B.B. Capital MarketsCapital Markets Return of IPOSReturn of IPOS Debt Exchange OffersDebt Exchange Offers Covenant Lite HangoverCovenant Lite Hangover Less Earnings GuidanceLess Earnings Guidance Rating Agency ReformsRating Agency Reforms

C.C. Corporate GovernanceCorporate Governance Shareholder Rights/Proxy AccessShareholder Rights/Proxy Access Proxy FightsProxy Fights Executive Compensation InitiativesExecutive Compensation Initiatives

II.II. LitigationLitigationA.A. Litigation on the RiseLitigation on the RiseB.B. Major Categories of CasesMajor Categories of CasesC.C. What 2010 will Bring?What 2010 will Bring?

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A.A. Transactions - FinancingTransactions - Financing Credit market remains tight - Impact of limited financing for Credit market remains tight - Impact of limited financing for

2010:2010: Volume and size decrease.Volume and size decrease.

Not likely to see many large transactions in 2010.Not likely to see many large transactions in 2010.

Many deals may arise from liquidity needs.Many deals may arise from liquidity needs.

Greater equity funding – 50 to 100%.Greater equity funding – 50 to 100%.

Much lower leverage levels, frequently below 4x.Much lower leverage levels, frequently below 4x.

Strategic transactions will dominate. Strategic transactions will dominate.

Increased and more stringent financial covenants and ratings Increased and more stringent financial covenants and ratings or performance based conditions.or performance based conditions.

Financing terms more lender friendly.Financing terms more lender friendly.

Non-traditional financing will be an important source of Non-traditional financing will be an important source of financing (e.g., seller financing).financing (e.g., seller financing).

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A.A. Transactions – Distressed Transactions – Distressed PlaysPlays

In re Charter Communications, Inc. In re Charter Communications, Inc. JP Morgan Chase & Co. filed a complaint with respect to Charter’s JP Morgan Chase & Co. filed a complaint with respect to Charter’s

chapter 11 prepackaged bankruptcy which sought to keep chapter 11 prepackaged bankruptcy which sought to keep existing terms on its credit facilities. Chase asserted that Charter existing terms on its credit facilities. Chase asserted that Charter had defaulted on its debt because a change of control had had defaulted on its debt because a change of control had occurred.occurred.

JPM debt in current market would likely be 1,000 basis points JPM debt in current market would likely be 1,000 basis points higher.higher.

Under the reorganization plan, a large portion of majority holder Under the reorganization plan, a large portion of majority holder Paul Allen’s pre-bankruptcy economic stake would be passed to Paul Allen’s pre-bankruptcy economic stake would be passed to four noteholders. JP Morgan argued that the four noteholders had four noteholders. JP Morgan argued that the four noteholders had acted collectively and as a group would own more than 35% of acted collectively and as a group would own more than 35% of Charter’s stock, thus a technical change of control had occurred Charter’s stock, thus a technical change of control had occurred and Charter had breached a covenant.and Charter had breached a covenant.

However, the restructuring allowed Allen to maintain a minimum However, the restructuring allowed Allen to maintain a minimum 35% voting stake. The bankruptcy court ruled that the plan did 35% voting stake. The bankruptcy court ruled that the plan did not trigger a change in control as the noteholders did not act not trigger a change in control as the noteholders did not act collectively as a group and Allen would retain sufficient voting collectively as a group and Allen would retain sufficient voting power.power.

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A.A. Transactions - PIPESTransactions - PIPES Due to current market conditions we expect to see an increase Due to current market conditions we expect to see an increase

in the use of PIPEs (private investments in public equity) as a in the use of PIPEs (private investments in public equity) as a capital raising tool and source of liquidity.capital raising tool and source of liquidity.

These PIPEs are not expected to be like the last generation of These PIPEs are not expected to be like the last generation of PIPEs which were very pro-investor (e.g., “death spiral” PIPEs which were very pro-investor (e.g., “death spiral” conversion rates).conversion rates).

PIPEs allow for quick access to capital when access to public PIPEs allow for quick access to capital when access to public equity markets is not available and can be an attractive way to equity markets is not available and can be an attractive way to purchase minority interests in public companies.purchase minority interests in public companies.

PIPEs allow issuers to avoid committing publicly to a financing PIPEs allow issuers to avoid committing publicly to a financing transaction and allow for less transaction costs and regulatory transaction and allow for less transaction costs and regulatory hurdles.hurdles.

Private equity more likely to engage in less leveraged Private equity more likely to engage in less leveraged investments such as PIPEs.investments such as PIPEs.

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B.B. Capital Markets – Return of Capital Markets – Return of IPOsIPOs

For the first quarter of 2009 the number of IPOs remained low.For the first quarter of 2009 the number of IPOs remained low.

In the first six months of 2009, 14 IPOs collectively raised $2.3 billion. In the first six months of 2009, 14 IPOs collectively raised $2.3 billion.

On a quarter-to-quarter basis there were sizable improvements.On a quarter-to-quarter basis there were sizable improvements.

2 deals in first quarter that raised $720 million.2 deals in first quarter that raised $720 million.

12 deals in the second quarter that raised $1.6 billion.12 deals in the second quarter that raised $1.6 billion.

20 deals in the third quarter that raised $5.8 billion.20 deals in the third quarter that raised $5.8 billion.

High profile IPOs during 2009 include Verisk Analytics ($1.875 High profile IPOs during 2009 include Verisk Analytics ($1.875 billion), A123 Systems ($380 million) and Talecris Biotherapeutics billion), A123 Systems ($380 million) and Talecris Biotherapeutics ($950 million).($950 million).

Although a long way from its prior peak (IPOs proceeds are barely Although a long way from its prior peak (IPOs proceeds are barely 25% of proceeds in 2006-2007) the IPO markets seems to be 25% of proceeds in 2006-2007) the IPO markets seems to be showing a positive trend toward renewed activity.showing a positive trend toward renewed activity.

Private equity may be an important source of 2010 IPOs.Private equity may be an important source of 2010 IPOs.

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B.B. Capital Markets - Debt Capital Markets - Debt Exchange OffersExchange Offers

In response to the credit crisis, companies have turned to In response to the credit crisis, companies have turned to debt exchange offers in order to address liquidity issues.debt exchange offers in order to address liquidity issues.

GMAC, CIT Group, Harrah’s Entertainment, Realogy and Merrill GMAC, CIT Group, Harrah’s Entertainment, Realogy and Merrill Lynch.Lynch.

As more corporate debt becomes due in 2010, exchange As more corporate debt becomes due in 2010, exchange offers will likely be a restructuring option.offers will likely be a restructuring option.

Not all exchange offers are successful.Not all exchange offers are successful.

Energy Future HoldingsEnergy Future Holdings

Debt exchange offer was unsuccessful with noteholders.Debt exchange offer was unsuccessful with noteholders.

Energy Future Holdings sought an exchange of up to $6 billion.Energy Future Holdings sought an exchange of up to $6 billion.

On the expiration date, November 10, 2009, only $357.5 million in On the expiration date, November 10, 2009, only $357.5 million in notes were tendered and about $256.6 million notes were set to be notes were tendered and about $256.6 million notes were set to be issued in the exchange.issued in the exchange.

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B.B. Capital Markets – Covenant Capital Markets – Covenant Lite HangoverLite Hangover

Prior to the credit crisis and market collapse, “covenant Prior to the credit crisis and market collapse, “covenant lite” agreements were standard.lite” agreements were standard.

As a consequence of the restrictive credit landscape, As a consequence of the restrictive credit landscape, covenant lite deals no longer exist. covenant lite deals no longer exist.

Financial ratios and maintenance covenants are highly Financial ratios and maintenance covenants are highly negotiated and will be strictly enforced.negotiated and will be strictly enforced.

Existing covenant lite debt has delayed day of reckoning.Existing covenant lite debt has delayed day of reckoning.

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C.C. Capital Markets – Less Capital Markets – Less Earnings GuidanceEarnings Guidance

Current trend in 2009 and going forward is less or no Current trend in 2009 and going forward is less or no quarterly earnings and revenue guidance.quarterly earnings and revenue guidance.

Examples include: Unilever, Ford, Berkshire Hathaway, General Examples include: Unilever, Ford, Berkshire Hathaway, General Electric, Intel, Microsoft, Texas Instruments.Electric, Intel, Microsoft, Texas Instruments.

Due to the current economic environment, companies are Due to the current economic environment, companies are avoiding providing specific targets citing reasons such as avoiding providing specific targets citing reasons such as impracticality or irresponsibility.impracticality or irresponsibility.

Less emphasis on quarter-to-quarter results, but also less Less emphasis on quarter-to-quarter results, but also less transparency.transparency.

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B.B. Capital Markets - Rating Agency Capital Markets - Rating Agency ReformsReforms

Financial crisis called into question the viability of the Financial crisis called into question the viability of the Rating Agencies.Rating Agencies.

New SEC rules and proposals designed to strengthen SEC New SEC rules and proposals designed to strengthen SEC oversight, enhance disclosure and improve the quality of oversight, enhance disclosure and improve the quality of credit ratings.credit ratings.

New RulesNew Rules Nationally recognized statistical rating organizations (NRSROs) Nationally recognized statistical rating organizations (NRSROs)

are prohibited from providing structuring advice relating to the are prohibited from providing structuring advice relating to the securities they rate.securities they rate.

Prohibit one person participating in a rating decision and Prohibit one person participating in a rating decision and negotiating the fee for the same rating.negotiating the fee for the same rating.

Prohibit rating personnel from receiving gifts over $25.Prohibit rating personnel from receiving gifts over $25. Expand recordkeeping time records.Expand recordkeeping time records. Increase NRSRO required disclosures and require NRSROs to Increase NRSRO required disclosures and require NRSROs to

report to the SEC annually on the number of ratings actions in report to the SEC annually on the number of ratings actions in each ratings class.each ratings class.

References to credit ratings removed from certain SEC rules References to credit ratings removed from certain SEC rules and forms.and forms.

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B.B. Capital Markets - Rating Agency Capital Markets - Rating Agency ReformsReforms

Proposed Rules Proposed Rules

Require NRSROs to disclose their history of ratings actions.Require NRSROs to disclose their history of ratings actions.

Encourage more competition.Encourage more competition.

Report on Compliance Reviews.Report on Compliance Reviews.

Provide more information on conflicts of interest and the Provide more information on conflicts of interest and the magnitude of conflicts.magnitude of conflicts.

Highlight rating shopping and other key information.Highlight rating shopping and other key information.

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C.C. Corporate Governance - Corporate Governance - Shareholder Rights/Proxy AccessShareholder Rights/Proxy Access

In 2009, the SEC responded to the market crisis and In 2009, the SEC responded to the market crisis and corporate governance scandals by adopting new rules and corporate governance scandals by adopting new rules and submitting proposals that not only mandate heightened submitting proposals that not only mandate heightened disclosure, but also require that companies respond more disclosure, but also require that companies respond more directly to their shareholders’ interests. This represents a directly to their shareholders’ interests. This represents a recognition that the disclosure-oriented policies of the SEC recognition that the disclosure-oriented policies of the SEC did not prevent post-Enron debacles.did not prevent post-Enron debacles.

Corporate Governance Corporate Governance Amendment to Item 401 of Regulation S-K - Would expand Amendment to Item 401 of Regulation S-K - Would expand

disclosure for background and qualifications of directors and disclosure for background and qualifications of directors and nominees.nominees.

Amendment to Item 407 of Regulation S-K - Would require a Amendment to Item 407 of Regulation S-K - Would require a new disclosure with respect to a company’s leadership new disclosure with respect to a company’s leadership structure including requiring the company to disclose why structure including requiring the company to disclose why their structure is the best structure.their structure is the best structure.

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C.C. Corporate Governance - Corporate Governance - Shareholder Rights/Proxy AccessShareholder Rights/Proxy Access

New Item to Form 8K – Would require more timely disclosure of New Item to Form 8K – Would require more timely disclosure of annual meeting results. Companies would have to disclose annual meeting results. Companies would have to disclose voting results from shareholder meetings within four business voting results from shareholder meetings within four business days of the meeting.days of the meeting.

Companies would be required to provide further disclosure on Companies would be required to provide further disclosure on potential conflicts of interest of compensation consultants that potential conflicts of interest of compensation consultants that advise the board regarding executive compensation.advise the board regarding executive compensation.

Shareholder Access/Proxy Solicitation RulesShareholder Access/Proxy Solicitation Rules Proposed changes to federal proxy rules would remove Proposed changes to federal proxy rules would remove

impediments to the exercise of shareholders’ rights to impediments to the exercise of shareholders’ rights to nominate and elect directors to company boards of directors.nominate and elect directors to company boards of directors.

Rule 14a-11 of the Securities Exchange Act of 1934 - Proposed rule Rule 14a-11 of the Securities Exchange Act of 1934 - Proposed rule would create a direct right of access for shareholders to the would create a direct right of access for shareholders to the company’s proxy materials for nominating board members. company’s proxy materials for nominating board members.

Rule 14a-8 of the Securities Exchange Act of 1934 - Proposal Rule 14a-8 of the Securities Exchange Act of 1934 - Proposal would allow shareholders to include in the company’s proxy would allow shareholders to include in the company’s proxy materials a proposal to amend the company’s bylaws to provide materials a proposal to amend the company’s bylaws to provide for a shareholder access regime.for a shareholder access regime.

Changes will not be in effect by 2010 proxy season for year-end Changes will not be in effect by 2010 proxy season for year-end companies.companies.

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C.C. Corporate Governance - Corporate Governance - Shareholder Rights/Proxy AccessShareholder Rights/Proxy Access

SEC approved changes to NYSE Rule 452 that SEC approved changes to NYSE Rule 452 that removes brokers’ discretionary voting in director removes brokers’ discretionary voting in director elections.elections.

Under the prior Rule 452, brokers were permitted to Under the prior Rule 452, brokers were permitted to vote upon uncontested director elections if the vote upon uncontested director elections if the shareholder had not provided specific voting shareholder had not provided specific voting instructions to the broker.instructions to the broker.

Under the change to Rule 452, the election of Under the change to Rule 452, the election of directors is a “non-routine” matter. Brokers are directors is a “non-routine” matter. Brokers are prohibited from voting upon such matters without prohibited from voting upon such matters without specific instructions from their clients.specific instructions from their clients.

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C.C. Corporate Governance – Proxy Corporate Governance – Proxy FightsFights

A byproduct of the current economic climate and recent A byproduct of the current economic climate and recent financial crisis is an increase in shareholder activism.financial crisis is an increase in shareholder activism.

Texas Industries, Inc. Proxy Fight Texas Industries, Inc. Proxy Fight

Three incumbent directors on Texas Industries’ nine member Three incumbent directors on Texas Industries’ nine member board were replaced by directors nominated by Shamrock board were replaced by directors nominated by Shamrock Holdings, Inc., a 10% stakeholder. Holdings, Inc., a 10% stakeholder.

Shamrock’s nominees were elected by an overwhelming 4-1 Shamrock’s nominees were elected by an overwhelming 4-1 margin. margin.

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C.C. Corporate Governance - Executive Corporate Governance - Executive Compensation InitiativesCompensation Initiatives

Focus of many regulations and rules in 2009 – New Focus of many regulations and rules in 2009 – New rules and proposals are more aligned with long-term rules and proposals are more aligned with long-term results.results.

Frequent topic of shareholder proposals in 2009 are Frequent topic of shareholder proposals in 2009 are including numerous “say-on-pay” proposals.including numerous “say-on-pay” proposals.

Some U.S. companies have already voluntarily adopted Some U.S. companies have already voluntarily adopted “say-on-pay.” “say-on-pay.”

The shareholder votes are non-binding and advisory in The shareholder votes are non-binding and advisory in nature but provide shareholders with an opportunity to nature but provide shareholders with an opportunity to provide feedback with respect to executive compensation.provide feedback with respect to executive compensation.

Examples of companies that have adopted “say-on-pay” Examples of companies that have adopted “say-on-pay” include Verizon and Aflac.include Verizon and Aflac.

New corporate governance initiatives create concern that New corporate governance initiatives create concern that the federal government is imposing on state regulatory the federal government is imposing on state regulatory power.power.

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C.C. Corporate Governance - Executive Corporate Governance - Executive Compensation InitiativesCompensation Initiatives

Legislative Developments:Legislative Developments:

Shareholder Bill of Rights Act of 2009 was introduced in the Shareholder Bill of Rights Act of 2009 was introduced in the Senate on May 19, 2009.Senate on May 19, 2009.

Would provide shareholders with new rights with respect to Would provide shareholders with new rights with respect to corporate governance and enhanced authority over the corporate governance and enhanced authority over the nomination, election and compensation of public company nomination, election and compensation of public company executives.executives.

Corporate and Financial Institution Compensation Fairness Corporate and Financial Institution Compensation Fairness Act of 2009 was passed by the House on July 31, 2009.Act of 2009 was passed by the House on July 31, 2009.

Requires advisory notes on executive compensation for public Requires advisory notes on executive compensation for public companies subject to the proxy rules as well as enhanced companies subject to the proxy rules as well as enhanced compensation committee independence for listed companies.compensation committee independence for listed companies.

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C.C. Corporate Governance - Executive Corporate Governance - Executive Compensation InitiativesCompensation Initiatives

SEC Proposals:SEC Proposals:

Proposals made on November 23, 2009 to amend Items 402 Proposals made on November 23, 2009 to amend Items 402 and 407 of Regulation S-K. and 407 of Regulation S-K.

Would require companies to provide information on how Would require companies to provide information on how compensation policies create incentives that affect the compensation policies create incentives that affect the company’s risk-taking initiative and risk management policies. company’s risk-taking initiative and risk management policies. This section would apply to employees generally including non-This section would apply to employees generally including non-executive officers. executive officers.

Would require companies to report stock and option awards in Would require companies to report stock and option awards in the summary compensation table and directors compensation the summary compensation table and directors compensation table using fair value rather then the dollar amount required to table using fair value rather then the dollar amount required to be reported for GAAP purposes.be reported for GAAP purposes.

Would require expanded disclosure with respect to potential Would require expanded disclosure with respect to potential conflicts of interest involving compensation consultants.conflicts of interest involving compensation consultants.

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A.A. Litigation on the RiseLitigation on the Rise

The number of cases relating to the mortgage meltdown The number of cases relating to the mortgage meltdown and credit crisis exploded in 2008 and 2009. and credit crisis exploded in 2008 and 2009.

In 2008 alone, 576 new cases involving financial institutions In 2008 alone, 576 new cases involving financial institutions were filed, exceeding the 559 cases filed over a six year were filed, exceeding the 559 cases filed over a six year period from the U.S. savings and loan crisis.period from the U.S. savings and loan crisis.

Scapegoats for the ’08 crisis have yet to be fully identified Scapegoats for the ’08 crisis have yet to be fully identified and investors will seek to recoup whatever they can from and investors will seek to recoup whatever they can from whatever sources they can find.whatever sources they can find.

No slow-down in litigation is expected for 2010.No slow-down in litigation is expected for 2010.

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A.A. Litigation on the RiseLitigation on the Rise Litigation continues to be dominated by contract, labor/ Litigation continues to be dominated by contract, labor/

employment, mortgage-related and auction-rate securities, employment, mortgage-related and auction-rate securities, and personal injury disputes. and personal injury disputes.

Approximately 40% of securities cases filed in 2008-2009 Approximately 40% of securities cases filed in 2008-2009 related to the credit crisis and economic meltdown were related to the credit crisis and economic meltdown were securities fraud class actions. securities fraud class actions.

Fortune 1000 companies, or their subsidiaries, have been Fortune 1000 companies, or their subsidiaries, have been named in about 60% of cases filed.named in about 60% of cases filed.

Most based on allegations of temporary inflation in a company’s Most based on allegations of temporary inflation in a company’s stock price due to inaccurate or incomplete disclosures to stock price due to inaccurate or incomplete disclosures to shareholders. Directors and officers were named as defendants shareholders. Directors and officers were named as defendants in 95% of these class actions.in 95% of these class actions.

Directors and officers were name in 70% of all securities class Directors and officers were name in 70% of all securities class actions.actions.

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A.A. Litigation on the RiseLitigation on the Rise More discovery of fraud as government authorities tighten More discovery of fraud as government authorities tighten

rules and regulations – more government enforcement rules and regulations – more government enforcement actions – especially by SEC and CFTC, as these actions – especially by SEC and CFTC, as these organizations were the most embarrassed by the ’08 crisis.organizations were the most embarrassed by the ’08 crisis.

During 1978-2004, SEC brought about 700 enforcement During 1978-2004, SEC brought about 700 enforcement actions; almost half were accompanied by private class actions; almost half were accompanied by private class actions; this percentage is expected to increase.actions; this percentage is expected to increase.

The task of working through the backlog of cases is likely to The task of working through the backlog of cases is likely to extend years into the future.extend years into the future.

Only area of litigation that seemed to cool in 2009 was Only area of litigation that seemed to cool in 2009 was patent infringement, but this area is expected to begin patent infringement, but this area is expected to begin increasing in 2010 as economy stabilizes.increasing in 2010 as economy stabilizes.

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B.B. Major Categories of CasesMajor Categories of Cases

Securities cases;Securities cases;

Class actions;Class actions;

Commercial contract disputes;Commercial contract disputes;

Labor/Employment class actions;Labor/Employment class actions;

Bankruptcy-related adversary proceedings, particularly Bankruptcy-related adversary proceedings, particularly fraudulent transfer actions.fraudulent transfer actions.

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C.C. What 2010 Will Bring?What 2010 Will Bring?

Class action suits should increase – investors banning Class action suits should increase – investors banning together to save litigation costs, but not wanting to just together to save litigation costs, but not wanting to just walk away.walk away.

Shareholders will be quicker to attack companies when Shareholders will be quicker to attack companies when shareholder value is at risk or declining – probably a shareholder value is at risk or declining – probably a function of the increasing demand for transparency. function of the increasing demand for transparency.

Possible federal and state attacks on any program Possible federal and state attacks on any program ultimately passed by Congress relating to healthcare, the ultimately passed by Congress relating to healthcare, the environment or the derivatives markets. environment or the derivatives markets.

Increasing focus on the lawyers involved in financial sector.Increasing focus on the lawyers involved in financial sector.