Poison Put Provisions in Debt Financing

Presenting a live 90-minute webinar with interactive Q&A

Poison Put Provisions in Debt Financing: Lessons on Enforceability From Recent Cases Navigating Change-in-Control Provisions That Protect Against Shareholder Activists and Hostile Takeovers

WEDNESDAY, FEBRUARY 4, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Today’s faculty features:

Kai Haakon E. Liekefett, Partner, Vinson & Elkins, Houston Muir Paterson, Managing Director, Goldman Sachs & Co., New York David W. Wicklund, Partner, Vinson & Elkins, New York

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Source: Carl Icahn’s website www.shareholderssquaretable.com Poison Puts in Debt Financings

Strafford Live Webinar February 4, 2015

I. Poison Puts, Hostile Bids and Shareholder Activism (Muir Paterson, [email protected], Goldman Sachs)

II. Case Law on Poison Put Provisions (Kai Haakon E. Liekefett, [email protected], Vinson & Elkins)

III. Drafting, Negotiation and Use of Poison Puts (David W. Wicklund, [email protected], Vinson & Elkins)

Appendix: Presenter Bios

Muir Paterson

Introduction

The History of Poison Puts

• Change of control provisions (a.k.a. “poison puts”) became popular during the wave of junk bond-fueled hostile tender offers in the 1980s

 In the 1988 leveraged buyout of RJR Nabisco by KKR, KKR borrowed billions to finance the acquisition and did not refinance RJR Nabisco’s existing debt

 After the acquisition, RJR Nabisco was in greater debt and more likely to default, thereby significantly reducing the value of the pre-existing debt • In response to investor demand for protection against this ‘event risk,’ issuers started to give investors the right to sell their bonds back to the issuer, either at par or a premium

 Initially, the puts were exercisable only if there was the threat of a hostile takeover

 Since most target boards eventually agreed to a ‘friendly’ takeover at gunpoint, it became common to make these puts exercisable upon any change in ownership • Today, most public companies have poison puts in their credit agreements, bond indentures or both Today, there are approximately 4,500 debt instruments with poison puts

Types of Poison Puts

Bond Indentures vs. Credit Agreements

Indentures Credit Agreements

• Usually contains a covenant • Usually contains an event of relating to a change of control default relating to a change of control • Requires the issuer to offer to purchase all of the bonds at a • Requires the administrative agent, purchase price in cash equal to upon the written request of a 101% of the principal amount majority of the lenders, to: (i) plus accrued and unpaid interest terminate the commitments; (ii) declare the principal amount and interest outstanding immediately due and payable; and (iii) terminate any letters of credit

Poison Puts and Hostile Takeovers

Poison Puts Rarely Deter Hostile Bids

• Companies often gloss over the fine print of the poison put provisions

• When the supply of credit is abundant, these provisions have no impact on M&A activity

• However, during economic downturns such as the 2008/09 financial crisis (or currently in the oil and gas industry), it can become difficult to refinance bank or bond debt

• In difficult market conditions, poison puts can act as an impediment to friendly M&A activity. By contrast, it is rare for poison puts to deter hostile takeover offers because hostile bidders are typically financially strong enough to refinance the target’s debt (as long it still makes economic sense for them despite the potentially substantial refinancing cost) In practice, poison puts rarely deter hostile takeover bids

Poison Puts, Hostile Bids and Shareholder Activism

Unsolicited and Hostile Takeover Offers 2005 – 2014

Unsolicited and Hostile Activity is at Record Levels

$728 87% 87% $640 78% $577

69% 64% 63% 63% 58% 56% 57%

$393 Volume ($bn) $273

$265 Withdrawnas of % Total $499 $468 $442 $170 $127 $128 $115 $249

$149 $171 $132 $111 $74 $66

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Withdrawn Volume Completed / Pending Volume Withdrawn Volume as % of Total Hostile Activity

Poison Puts and Shareholder Activism

Poison Puts have Impacted Shareholder Activism

• Today, most public companies have negotiated poison put provisions that are triggered not only if the company is acquired, but also if a shareholder dissident unseats a majority of the company’s incumbent directors (a.k.a. “proxy puts”)

• Incumbent boards have used the specter of a debt default in proxy contests during the current wave of shareholder activism

• Recent case law has challenged change-of-control triggers tied to board seat changes on the basis that they dilute the shareholder franchise  This will be discussed in Part II today

Proxy puts have impacted shareholder activism campaigns, but recent case law may change this

Poison Puts, Hostile Bids and Shareholder Activism

Activist Fund AUM 2010 – 2014

Activists can Access Increasing Amounts of Capital

$219.8 EAUM:  Recently raised $2.5 bn $8.9 bn

$162.3 EAUM:  Raised ~$3 bn through a $16.8 bn European IPO

$113.5 $102.7 EAUM:  Raised $2 bn over the course of $94.7 $9.4 bn 2014

EAUM:  Received commitments for $3.3 $9.8 bn bn over a 3-month span in 2013

EAUM:  Plans to raise up to $1.5 bn in $14.6 bn new funds Q4 2010 Q4 2011 Q4 2012 Q4 2013 Current

Source: Thomson, public sources (includes reported equity assets under management of activists included in the FactSet “SharkWatch 50”)

Hedge Funds CAGR 2009 – 2013

Activist Funds have Outperformed other Hedge Funds

Source: Goldman Sachs & Co.

Shareholder Activism 2003 – 2014

The Tide of Shareholder Activism is Rising 600

500 511 499

443 450 400 383 378 373 364 363 300

249 200

133 121 100 113 110 107 109 94 94 91 95 69 67 77 44 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Targets with > 500 million Market Cap 2010 – 2014

Large Cap Companies have Increasingly Become Targets

101

63 59

2010 2011 2012 2013 2014

Source: Thomson, public sources

Growing Support From Mainstream Investors

Pension Funds and Some Long-Only Investors Have Been Willing to Go “Public” in Support of Activist Positions Willingness to Support Activist Nominees in Proxy Fights1

Institutional Company Activist Investor % Proxy Fights Voted “FOR” Firm Name a Dissident Nominee T. Rowe Price Associates 73.9 % Pershing Square

Janus Capital Management 60.0

Icahn / Fidelity Management & Research 58.6 Southeastern Morgan Stanley Wealth Management 50.0

MFS Investment Management 50.0

Starboard Actively Actively Managed TIAA – CREF 50.0

Franklin Advisors 33.3 Trian Norges Bank Investment Mgmt 50.0 %

Mellon Capital 47.4

Icahn

Geode Capital 47.2

BlackRock 33.3 Trian

Index Index Funds State Street Global 20.0

Northern Trust 16.7 JANA The Vanguard Group 4.3

1 Institutional Shareholder Services. Results of definitive proxy fights at Russell 3000 companies, Jan 2010 – 2014 (defined as the percentage of situations in which the majority of sub- funds voted either for management or dissident nominees)

Activist Success Rate 2003 – 2014

Activists Have Become Very Successful

100%

90%

80% 73% 70% 59% 60% 57% 60% 55% 54% 55% 51% 52% 50% 49%

Success Rate (%)* Rate Success 50%

40% 36%

30% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

*Percentage of outright or partial victories or settlements Source: SharkRepellent by dissidents of total nominations of opposing slates

Campaign Types in 2014

The Majority of Proxy Contests are for Short Slates

Board Control Oppose Management 31% Proposal 1%

Withhold the Vote Campaign Minority Board 2% Representation Stockholder Proposal 57% 4% Oppose M&A Transaction 4%

Source: SharkRepellent

ISS Recommendations 2009 – 2014

ISS Support for Dissidents has been Significant

5% 6% 5% 6% 16% 7%

50% 48% 41% 47% 37%

52%

45% 45% 55%

50% 57% 32%

2009 2010 For Dissident (1) 2011 For Incumbent (2) 2012 2013 Split 2014

(1) Support for more than half of the dissident slate (2) Support for more than half of the incumbent board slate Source: SharkRepellent

Board Seats Through Settlements 2005 vs. 2014

Activist Attainment of Board Seats – 2005 Activist Attainment of Board Seats – 2014

In the mid-2000s, companies became increasingly Today, over three quarters of activist board seats are willing to settle with activists in order to avoid a proxy now gained through settlement agreements contest

Settled Went to Vote 24% Without Fight Settled Went to Vote 31% Without Fight 38% 41%

Settled Before Vote 35% Settled Before Vote 31%

“I'm even surprised… being admitted to all these boards without a proxy fight would have been unthinkable only a year ago.” -Carl Icahn

Source: FactSet, Shark Repellent, The Wall Street Journal Note: Includes all proxy fights at companies with market cap greater than $500mm at time of campaign.

Kai Haakon E. Liekefett

Delaware Court of Chancery, May 12, 2009

The Amylin Case: Facts

The Facts

• On June 8, 2007, Amylin Pharmaceuticals, Inc. issued a series of convertible senior notes due 2014 under an indenture with The Bank of New York Mellon Trust Company as the trustee

• The indenture was governed by New York law and contained a change of control provision

• The change of control provision included a proxy put prong, which gave the noteholders the right to require Amylin to repurchase their notes at face value upon a “Fundamental Change”

Case Law on Poison Put Provisions

The Amylin Case: Facts (Cont’d)

• The language of the indenture’s proxy put was as follows:

 “Fundamental Change” included if “at any time the Continuing Directors do not constitute a majority of the Company's Board of Directors….”

 “Continuing Directors” was defined as: “(i) individuals who on the Issue Date constituted the Board of Directors and (ii) any new directors whose election to the Board of Directors or whose nomination for election by the stockholders of the Company was approved by at least a majority of the directors then still in office (or a duly constituted committee thereof) either who were directors on the Issue Date or whose election or nomination for election was previously so approved.”

Case Law on Poison Put Provisions

The Amylin Case: Facts (Cont’d)

• On January 28, 2009, Carl Icahn notified Amylin of its intention to nominate a slate of five directors to Amylin’s 12-member board

• On January 29, 2009, Eastbourne Capital Management notified Amylin of its intention to nominate its own five-person slate

• On March 9, 2009, Eastbourne sent a letter to the board urging it to “approve” the dissident slates for purposes of the indenture

• On March 24, 2009, a shareholder of Amylin filed a class action complaint against Amylin and each of its directors alleging breaches of the fiduciary duties of care and loyalty by the board (i) in the adoption of the indenture regarding the proxy put provision; (ii) in failing to approve the dissident nominees in order to defuse the proxy put and (iii) for misleading and coercive disclosure of the risks presented by the proxy put provision in the company’s Form 10-K

Case Law on Poison Put Provisions

The Amylin Case: Facts (Cont’d)

• Amylin believed that its board had the ability to approve the dissident slates for purposes of the indenture and sought confirmation of its view from the trustee

• The trustee declined to provide the requested confirmation. The trustee argued that the incumbent directors cannot “approve” as a “Continuing Director” any person whose election the incumbent directors publicly oppose. In this trustee’s view, the word “approve” is synonymous with “endorse or recommend”

• Amylin filed a cross-claim against the trustee, and sought declaratory relief that it can approve the dissident nominees for purposes of the indenture while simultaneously recommending against their election to the board

Case Law on Poison Put Provisions

The Amylin Case: Facts (Cont’d)

• Prior to trial, the shareholder dropped its fiduciary duty claims against Amylin’s board under a partial settlement. As a result, the only matters before the court were whether the board has the power and the right under the indenture to approve the dissident nominees

• Moreover, Eastbourne reduced the number of its candidates to three and Icahn reduced the number of his candidates to two. As a result, only five of the 12 board seats of Amyln remained contested. This made a majority board turnover impossible

• Nevertheless the Court agreed to rule on whether the board had the power to approve the dissident nominees

Case Law on Poison Put Provisions

The Amylin Case: Decision The Decision • Power to Approve:

 Vice Chancellor Lamb held that, in the abstract, generally a board has the power to approve a slate of dissident nominees for purposes of an indenture without endorsing them and may simultaneously recommend and endorse its own slate instead

• Right to Approve:

 The court then turned to the question of whether the Amylin board properly exercised the right to approve in this case

 The court stated that a company has an implied duty of good faith and fair dealing under an indenture. Therefore, a board may approve the dissident nominees only if it determines in good faith that the election of the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders

 Due to an underdeveloped record, the court treated this issue as unripe

The SandRidge Case

Delaware Court of Chancery, March 8, 2013

The SandRidge Case: Facts

The Facts • TPG-Axon is a hedge fund that held approximately 7% of the shares of SandRidge Energy, Inc.

• Beginning in November 2012, TPG-Axon started to publicly demand various governance reforms while asserting that SandRidge had been underperforming

• The SandRidge board responded to these demands by adopting a poison pill and amending its bylaws to inhibit stockholder action by written consent

• In December, TPG commenced a formal consent solicitation to declassify SandRidge’s seven-member board and to remove and replace all of its incumbent directors, prompting the SandRidge board to initiate its own consent revocation solicitation to defeat TPG’s dissident slate

Case Law on Poison Put Provisions

The SandRidge Case: Facts (Cont’d)

• In its preliminary consent revocation statement, the SandRidge board warned stockholders that replacing all of the company’s directors, as TPG intended, would trigger a put right in respect of the company’s outstanding $4.3 billion principal amount of debt, and that “[a] mandatory refinancing of this magnitude would present an extreme, risky and unnecessary financial burden”

• The language of the indenture’s proxy put was as follows:

 “During any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors […] (together with any new directors whose election to such board or whose nomination for election by the stockholders of the […] was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of such Board of Directors then in office”

Case Law on Poison Put Provisions

The SandRidge Case: Facts (Cont’d)

• As the SandRidge board itself acknowledged, it could negate the risk posed by the proxy put by approving the dissident nominees, thereby averting a “change of control” that would trigger the proxy put

• Gerald Kallick, a SandRidge stockholder unaffiliated with TPG-Axon, initiated litigation on January 7, 2013, seeking a mandatory injunction ordering the SandRidge board to “approve” TPG-Axon’s nominees for the limited purpose of neutralizing the effect of the proxy put

• In a Form 8-K filed on February 8, 2013, the SandRidge board made, in the court’s words, an “about-face,” claiming noteholders would be unlikely to exercise the put because the notes were trading above the redemption price

• Furthermore, Morgan Stanley, SandRidge’s financial advisor, had offered to refinance the debt, thus providing the backup financing necessary to ameliorate the financial risks attributable to approving the TPG-Axon slate

Case Law on Poison Put Provisions

The SandRidge Case: Facts (Cont’d)

• The SandRidge board continued to withhold approval of TPG-Axon’s slate, citing concern over their supposed lack of relevant experience and fear that credit would become more difficult to obtain if SandRidge obtained a reputation for “circumventing” change of control provisions

The SandRidge Case: Decision

The Decision • Chancellor Strine decided not to apply the Blasius standard of review, but to apply the intermediate standard of review set forth in Unocal instead

• The court, relying on Amylin, reaffirmed that the duty of loyalty requires the board to exercise contractually conferred discretion in the best interests of the corporation and its stockholders, limited only by honoring its contractual obligations to creditors under the implied covenant of good faith and fair dealing

• Therefore, “a board that acts in good faith must seek to protect the stockholders’ ability to make an uncoerced choice of directors.”

• Chancellor Strine held that a board has an affirmative obligation to nullify a proxy put by approving a dissident slate unless there is a “specific and substantial risk to the corporation or its creditors posed by the rival slate”

The Healthways Case

Delaware Court of Chancery, October 14, 2014

The Healthways Case: Facts

The Facts

• In 2010, Healthways, Inc. and Sun Trust entered into an amended and restated revolving credit and term loan agreement that contained a proxy put

• Subsequently, Healthways came under pressure from stockholders, and, in 2012, the stockholders approved a precatory proposal to declassify Healthways’ board. In response, Healthways amended its articles of incorporation to phase out the staggered board

• Less than two weeks after the 2012 stockholder vote on declassification, Healthways and SunTrust amended the credit agreement. The amendment revised the definition of “Continuing Director” to exclude directors nominated as a result of an actual or threatened proxy contest even if the board approved such directors (a.k.a. “dead hand feature”)

Case Law on Poison Put Provisions

The Healthways Case: Facts (Cont’d)

• The amended language of the credit agreement’s proxy put was as follows:

 “Continuing Directors” was defined as: “with respect to any period, any individuals (A) who were members of the board of directors on the first day of such period, (B) whose election or nomination to that board was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of that board, or (C) whose election or nomination to that board was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of that board (excluding, in the case of both clauses (B) and (C), any individual whose initial nomination for, or assumption of office as, a member of that board occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors)”

Case Law on Poison Put Provisions

The Healthways Case: Facts (Cont’d)

• In January 2014, North Tide Capital, a company that owned 11% of Healthways’ stock, indicated to the Healthways board that it intended to wage a proxy fight. After negotiation, North Tide gained representation on the Healthways board. The North Tide directors were not considered “Continuing Directors” for purposes of the “dead hand” proxy put

• Stockholders of Healthways filed a class action lawsuit against Healthways’ directors and SunTrust, alleging that (1) the directors breached their fiduciary duties by entering into a credit agreement with a “dead hand” proxy put and (2) SunTrust aided and abetted these breaches

• The plaintiffs also sought a declaratory judgment that the “proxy put” was invalid and unenforceable under Delaware law

• The defendants filed motions to dismiss

The Healthways Case: Decision

The Decision

• Fiduciary Duty Claim:

 In a bench ruling, Vice Chancellor Laster denied the directors’ motion to dismiss. In denying the motion, he rejected Healthways’ claim that the dispute was not ripe because the proxy put had not yet been triggered

 The court likened the “dead hand” proxy put to poison pills and deal protection provisions in merger agreements. It found that the existence of this provision “necessarily has an effect on people’s decision- making” about running a proxy contest – a “Sword of Damocles”

 Furthermore, the court pointed to the fact that the North Tide directors were not considered “Continuing Directors” and thus as different for purposes of the proxy put. In the court’s view, this presented a current injury

The Healthways Case: Decision (Cont’d)

 The denial of the motion to dismiss does not mean that the adoption of a dead hand proxy put was a per se breach of fiduciary duty

 Rather, the courts emphasized that the facts will need to be developed, “namely, what the board did or didn’t do or knew or didn’t know and what the back and forth was, if there was any, with SunTrust”

• Aiding and Abetting Claim:

 The court also denied SunTrust’s motion to dismiss on the aiding and abetting claim

 Vice Chancellor Laster stated that the Amylin and SandRidge precedents put lenders on notice that “dead hand” proxy puts were “highly suspect” because of their “recognized entrenching effect” and could lead to a fiduciary duty breach by borrowers

Case Law on Poison Put Provisions

The Healthways Case: Decision (Cont’d)

 Moreover, the court pointed to the fact that the credit agreement was amended to include the “dead hand” feature only after there were threats of a proxy contest by certain stockholders

 The court recognized that evidence of an arm’s-length negotiation generally negates claims for aiding and abetting liability. However, Vice Chancellor Laster stated that negotiating for the best deal does not accord a party the privilege afforded to arm’s-length negotiators if they “take advantage of a conflict of interest that the fiduciary counterparts on the other side of the negotiating table face”

 According to the court, these facts were sufficient at the pleading stage to show “knowing participation” by SunTrust and therefore sufficient to survive a motion to dismiss. The court noted that it is possible that SunTrust did not aid or abet anything and that discovery was needed to understand whether the “dead hand” proxy put was added in response to stockholder pressure or for another reason

Case Law on Poison Put Provisions

Executive Summary

Summary

• Amylin: A board has the power and right to approve an opposing director slate for purposes of a proxy put if it determines that the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders

• SandRidge: A board has an affirmative obligation to approve a dissident slate unless there is a specific and substantial risk to the corporation or its creditors posed by the rival slate

• Healthways: Directors who agree to a “dead hand” proxy put may be liable for breach of fiduciary duty. A lender may be liable for aiding and abetting if it knowingly participates in these breaches

III. Drafting, Negotiation and Use of Poison Puts

David W. Wicklund

Drafting of Poison Put Provisions A Common “Change of Control” Definition “Change of Control” shall mean the occurrence of any of the following: (1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more series of related transactions, of all or substantially all of the Company’s assets and the assets of the Company’s subsidiaries, taken as a whole, to any person, other than the Company or one of its subsidiaries; (2) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any person becomes the beneficial owner, directly or indirectly, of more than 50% of the Company’s outstanding voting stock; (3) the Company consolidates with, or merges with or into, any person, or any person consolidates with, or merges with or into, the Company; (4) the adoption of a plan relating to the Company’s liquidation or dissolution; (5) at any time the Continuing Directors do not constitute a majority of the Company’s Board of Directors.

Drafting, Negotiation and Use of Poison Puts

Drafting of Poison Put Provisions (Cont’d)

Basic “Proxy Put”

• “Change of Control” shall mean the occurrence of any of the following: […] (5) at any time the Continuing Directors do not constitute a majority of the Company's Board of Directors

• “Continuing Directors” shall mean individuals (A) who were members of the board on the date hereof, (B) whose election or nomination to that board was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of that board, or (C) whose election or nomination to that board was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of that board

Drafting of Poison Put Provisions (Cont’d)

Primary Proxy Put Drafting Variations

Component Shareholder Friendly Debtholder/Board Friendly (i.e., narrow change-of-control trigger) (i.e., broad change-of-control trigger) Determination Any 12 month period (or 24 month Any time since the issuance of the Period period) bonds or closing of the loan

Approval Approval of a majority of the original Approval of 66-2/3% of the original Threshold directors or subsequent “Continuing directors or subsequent “Continuing Directors” Directors” “Dead Hand” None Any individual whose initial Feature nomination for or assumption of office as a director occurred as a result of an actual or threatened solicitation of proxies or consents

Without a record that a board obtained tangible economic benefits for the company, or at a minimum negotiated vigorously to protect the shareholder franchise, a poison put provision with all of the above listed debtholder/board friendly provisions will come under heightened scrutiny

Drafting of Poison Put Provisions (Cont’d)

Determination Period

• “Change of Control” shall mean the occurrence of any of the following: […] (5) [at any time] OR [during any period of [12/24] consecutive months] the Continuing Directors do not constitute a majority of the Company's Board of Directors

• “Continuing Directors” shall mean individuals (A) who were members of the board [on the date hereof] OR [on the first day of any period of [12/24] consecutive months], (B) whose election or nomination to that board was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of that board, or (C) whose election or nomination to that board was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of that board

Drafting of Poison Put Provisions (Cont’d)

Approval Threshold

• “Change of Control” shall mean the occurrence of any of the following: […] (5) at any time the Continuing Directors do not constitute a majority of the Company's Board of Directors

• “Continuing Directors” shall mean individuals (A) who were members of the board on the date hereof, (B) whose election or nomination to that board was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least [a majority of the directors] OR [66 ⅔% of the directors] of that board, or (C) whose election or nomination to that board was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of that board

Drafting of Poison Put Provisions (Cont’d)

“Dead Hand” Feature

• “Change of Control” shall mean the occurrence of any of the following: […] (5) at any time the Continuing Directors do not constitute a majority of the Company's Board of Directors

Drafting, Negotiation and Use of Poison Puts

Negotiation of Poison Put Provisions

The Interests of Companies and Debtholders

Company Debtholders

• Deterrence against proxy • Ability to re-evaluate

Put Put

contests by dissident investment in the event of a

shareholders (excludes short board turnover

slates) Pros

Pros • Protection against potential

Proxy Proxy

• Increased marketability of downgrade of the debt of of the debt

• Potentially lower cost of debt

• Ability to refinance might be • Liability exposure for

limited at the time of the underwriters and arrangers triggering • Reputational risk for

• Potential disenfranchisement underwriters and arrangers

Cons Cons

of shareholders of Proxy Put Proxy of of Proxy Put Proxy of • Liability exposure for board

Negotiation of Poison Put Provisions (Cont’d)

Current Market Dynamics

Bonds Credit Facilities

• Mega and large cap IG • Credit agreements typically include CoC

bonds often do not an have provisions any CoC provisions • Most CoC provisions include the “proxy

• IG bonds with CoC typically put” prong Grade Bonds (1) exclude the “proxy put” • Certain lenders are pushing hard for the Investment Investment prong and (2) use a “double “dead hand” feature in light of the trigger” (ratings downgrade) current shareholder activism wave and the large number of settlements • HY bonds issues typically

include CoC provisions • By contrast, other lenders shy away from the “dead hand” feature due to the

Yield Yield • However, new HY bond - potential liability post-Healthways issues typically exclude the Bonds “proxy put” prong (at least for High first time issuers)

Drafting, Negotiation and Use of Poison Puts

Use of Poison Put Provisions

How to use Proxy Puts in Proxy Contests • Companies should be cautious about using the specter of a debt default as an argument for shareholders to vote in favor of the incumbent directors • If requested, a board should approve a dissident slate unless there is a specific and substantial threat to the company • If the approval of a dissident slate is not in the company’s best interests, the board should maintain a consistent message regarding its reasons for not approving the slate and provide tangible evidence of the potential threat • A board should not amend a poison put in a way that makes it more board friendly once a proxy contest is pending, threatened or expected • If a company’s debt includes a “dead hand” feature, the board should consider requesting a waiver or amendment, and the trustee or administrative agent should consider the liability risk in evaluating such request A board’s contractual obligations to debtholders are limited, but its fiduciary obligations to shareholders are omnipresent

Presenter Bios

Muir Paterson

Muir is a senior member of the Mergers & Acquisitions Group, focused on advising clients globally on how to prepare for and respond to shareholder activism and hostile mergers and acquisition.

Prior to joining the firm, Muir worked at Wellington Management Company, where he served as director of corporate governance and was responsible for governance analytics, proxy voting and company engagement. Before that, he was co-head of the M&A and Proxy Fight Research Group at Institutional Shareholder Services (ISS), where he co-created the M&A Edge suite of products to provide analysis and voting recommendations on M&A and shareholder activism. During this period, Muir also served on ISS’ Global Policy Committee. Prior to ISS, Muir held various M&A investment banking positions in London, Hong Kong and New York.

Muir earned an LLB (First Class Honours) in Law from The University of Edinburgh in 1994, and is a CFA charterholder.

Muir Paterson Managing Director New York 781.369.0430 [email protected]

Kai Haakon E. Liekefett

Kai is the head of Vinson & Elkins’ Shareholder Activism Response Team and a corporate partner with more than decade of experience practicing in Houston, New York, London, Duesseldorf, Hong Kong and Tokyo. He has extensive experience advising both target companies and activists on shareholder activism campaigns, including proxy contests and just vote no campaigns. Moreover, he advises domestic and international companies, as well as financial advisors, in connection with public and private mergers and acquisitions. Kai holds a Ph.D., magna cum laude, from Freiburg University; an Executive MBA, summa cum laude (best of his class) from Münster Business School; and an LL.M., James Kent Scholar, from Columbia Law School. He is admitted to practice in New York, Texas and Germany.

Select Representative Experience • Conn’s in connection with activist activity by Luxor Capital and Greenlight Capital • Dakota Plains in connection with activist activity by Lone Star Value • Endeavour International in its proxy contest defense against the Talisman Group • Miller Energy in its proxy contest defense against Bristol Capital and Lone Star Value Kai Haakon E. Liekefett • Gastar Exploration in connection with activist activity by Kleinheinz Capital Partners Partner • Crest Financial in its proxy contest against the $6 billion Clearwire-Sprint merger • Oil States in connection with activist activity by JANA Partners Houston • Endeavor in connection with activist activity by Steelhead, O-Cap and Lone Star Value 713.758.3839 • Oiltanking Partners in its $6 billion sale to Enterprise Products [email protected] • C&J Energy in its $2.86 billion merger with Nabors’ completion and production businesses

• Energy XXI in its $2.3 billion acquisition of EPL Oil & Gas

• Inergy in its $8 billion merger with Crestwood (2nd largest 2013 energy deal)

• Evercore in Kinder Morgan’s $38.5 billion acquisition of El Paso (largest 2011 M&A deal) • Westlake Chemical in its unsolicited $1.2 billion takeover offer for Georgia Gulf • Plains All American in its unsolicited $1 billion takeover offer for SemGroup ©2015 Vinson & Elkins LLP 55 Presenter Bios

David W. Wicklund

David is a partner based in the New York office and is a member of the firm’s Finance Practice Group. David’s practice focuses primarily on complex acquisition and leveraged financings. David has experience representing private equity sponsors and their portfolio companies and other public and private borrowers (both investment grade and non-investment grade) in a variety of domestic and cross-border financings, in the context of acquisitions and otherwise. David’s experience extends to the areas of syndicated loans, high-yield bond offerings, asset- based facilities and uni-tranche facilities. He also has significant experience representing lenders in connection with mezzanine financings.

David holds a J.D. from Georgetown University Law Center and a B.A. from Williams College. He is admitted to practice in New York.

Select Representative Experience • Targa Resources Partners and Targa Resources Corp. in a secured acquisition financing in furtherance of the acquisition of Atlas Energy and Atlas Pipeline Partners in a transaction David W. Wicklund valued at $7.7 billion • TPG Capital in the financing of the $1.8 billion acquisition of natural gas properties in Partner Wyoming’s Jonah field from Encana Corporation

New York • Energy XXI in the financing of the $2.3 billion acquisition of EPL Oil & Gas, Inc., creating the

212.237.0021 largest publicly traded independent producer on the Gulf of Mexico shelf [email protected] • The Carlyle Group in its $3.3 billion acquisition of Getty Images • Privately held corporation in its $6 billion acquisition of an NYSE-listed global manufacturer and supplier of consumer food and beverage packaging and storage products • Private equity firm in its $1.9 billion acquisition of a provider of technology and strategic consulting services • Private equity firms in their $1.1 billion acquisition of a claims management services company ©2015 Vinson & Elkins LLP 56