2010 – WHAT’S NEXT?

1. 2010 – WHAT’S NEXT? ASSOCIATION OF CORPORATE COUNSEL HOUSTON CHAPTER December 8, 2009 Mark L. Greenberg - Mercuria Energy America Melanie Gray - Partner, Weil, Gotshal & Manges LLP Michael A. Saslaw - Partner, Weil, Gotshal & Manges LLP

2. Agenda I. Transactional A. Transactions • Financing • Distressed Plays • PIPEs B. Capital Markets • Return of IPOS • Debt Exchange Offers • Covenant Lite Hangover • Less Earnings Guidance • Rating Agency Reforms C. Corporate Governance • Shareholder Rights/Proxy Access • Proxy Fights • Executive Compensation Initiatives II. Litigation A. Litigation on the Rise B. Major Categories of Cases C. What 2010 will Bring?

3. A. Transactions - Financing • Credit market remains tight - Impact of limited financing for 2010: • Volume and size decrease. • Not likely to see many large transactions in 2010. • Many deals may arise from liquidity needs. • Greater equity funding – 50 to 100%. • Much lower leverage levels, frequently below 4x. • Strategic transactions will dominate. • Increased and more stringent financial covenants and ratings or performance based conditions. • Financing terms more lender friendly. • Non-traditional financing will be an important source of financing (e.g., seller financing).

4. A. Transactions – Distressed Plays • In re Charter Communications, Inc. • JP Morgan Chase & Co. filed a complaint with respect to Charter’s chapter 11 prepackaged bankruptcy which sought to keep existing terms on its credit facilities. Chase asserted that Charter had defaulted on its debt because a change of control had occurred. • JPM debt in current market would likely be 1,000 basis points higher. • Under the reorganization plan, a large portion of majority holder Paul Allen’s pre-bankruptcy economic stake would be passed to four noteholders. JP Morgan argued that the four noteholders had acted collectively and as a group would own more than 35% of Charter’s stock, thus a technical change of control had occurred and Charter had breached a covenant. • However, the restructuring allowed Allen to maintain a minimum 35% voting stake. The bankruptcy court ruled that the plan did not trigger a change in control as the noteholders did not act collectively as a group and Allen would retain sufficient voting power.

5. A. Transactions - PIPES • Due to current market conditions we expect to see an increase in the use of PIPEs (private investments in public equity) as a capital raising tool and source of liquidity. • These PIPEs are not expected to be like the last generation of PIPEs which were very pro-investor (e.g., “death spiral” conversion rates). • PIPEs allow for quick access to capital when access to public equity markets is not available and can be an attractive way to purchase minority interests in public companies. • PIPEs allow issuers to avoid committing publicly to a financing transaction and allow for less transaction costs and regulatory hurdles. • Private equity more likely to engage in less leveraged investments such as PIPEs.

6. B. Capital Markets – Return of IPOs • 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. • On a quarter-to-quarter basis there were sizable improvements. • 2 deals in first quarter that raised $720 million. • 12 deals in the second quarter that raised $1.6 billion. • 20 deals in the third quarter that raised $5.8 billion. • High profile IPOs during 2009 include Verisk Analytics ($1.875 billion), A123 Systems ($380 million) and Talecris Biotherapeutics ($950 million). • Although a long way from its prior peak (IPOs proceeds are barely 25% of proceeds in 2006-2007) the IPO markets seems to be showing a positive trend toward renewed activity. • Private equity may be an important source of 2010 IPOs.

7. B. Capital Markets - Debt Exchange Offers • In response to the credit crisis, companies have turned to debt exchange offers in order to address liquidity issues. • GMAC, CIT Group, Harrah’s Entertainment, Realogy and Merrill Lynch. • As more corporate debt becomes due in 2010, exchange offers will likely be a restructuring option. • Not all exchange offers are successful. • Energy Future Holdings • Debt exchange offer was unsuccessful with noteholders. • Energy Future Holdings sought an exchange of up to $6 billion. • 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 issued in the exchange.

8. B. Capital Markets – Covenant Lite Hangover • Prior to the credit crisis and market collapse, “covenant lite” agreements were standard. • As a consequence of the restrictive credit landscape, covenant lite deals no longer exist. • Financial ratios and maintenance covenants are highly negotiated and will be strictly enforced. • Existing covenant lite debt has delayed day of reckoning.

9. C. Capital Markets – Less Earnings Guidance • Current trend in 2009 and going forward is less or no quarterly earnings and revenue guidance. • Examples include: Unilever, Ford, Berkshire Hathaway, General Electric, Intel, Microsoft, Texas Instruments. • Due to the current economic environment, companies are avoiding providing specific targets citing reasons such as impracticality or irresponsibility. • Less emphasis on quarter-to-quarter results, but also less transparency.

10. B. Capital Markets - Rating Agency Reforms • Financial crisis called into question the viability of the Rating Agencies. • New SEC rules and proposals designed to strengthen SEC oversight, enhance disclosure and improve the quality of credit ratings. • New Rules • Nationally recognized statistical rating organizations (NRSROs) are prohibited from providing structuring advice relating to the securities they rate. • Prohibit one person participating in a rating decision and negotiating the fee for the same rating. • Prohibit rating personnel from receiving gifts over $25. • Expand recordkeeping time records. • Increase NRSRO required disclosures and require NRSROs to report to the SEC annually on the number of ratings actions in each ratings class. • References to credit ratings removed from certain SEC rules and forms.

11. B. Capital Markets - Rating Agency Reforms • Proposed Rules • Require NRSROs to disclose their history of ratings actions. • Encourage more competition. • Report on Compliance Reviews. • Provide more information on conflicts of interest and the magnitude of conflicts. • Highlight rating shopping and other key information.

12. C. Corporate Governance - Shareholder Rights/Proxy Access • In 2009, the SEC responded to the market crisis and corporate governance scandals by adopting new rules and submitting proposals that not only mandate heightened disclosure, but also require that companies respond more directly to their shareholders’ interests. This represents a recognition that the disclosure-oriented policies of the SEC did not prevent post-Enron debacles. • Corporate Governance • Amendment to Item 401 of Regulation S-K - Would expand disclosure for background and qualifications of directors and nominees. • Amendment to Item 407 of Regulation S-K - Would require a new disclosure with respect to a company’s leadership structure including requiring the company to disclose why their structure is the best structure.

13. C. Corporate Governance - Shareholder Rights/Proxy Access • New Item to Form 8K – Would require more timely disclosure of annual meeting results. Companies would have to disclose voting results from shareholder meetings within four business days of the meeting. • Companies would be required to provide further disclosure on potential conflicts of interest of compensation consultants that advise the board regarding executive compensation. • Shareholder Access/Proxy Solicitation Rules • Proposed changes to federal proxy rules would remove impediments to the exercise of shareholders’ rights to nominate and elect directors to company boards of directors. • Rule 14a-11 of the Securities Exchange Act of 1934 - Proposed rule would create a direct right of access for shareholders to the company’s proxy materials for nominating board members. • Rule 14a-8 of the Securities Exchange Act of 1934 - Proposal would allow shareholders to include in the company’s proxy materials a proposal to amend the company’s bylaws to provide for a shareholder access regime. • Changes will not be in effect by 2010 proxy season for year-end companies.

14. C. Corporate Governance - Shareholder Rights/Proxy Access • SEC approved changes to NYSE Rule 452 that removes brokers’ discretionary voting in director elections. • Under the prior Rule 452, brokers were permitted to vote upon uncontested director elections if the shareholder had not provided specific voting instructions to the broker. • Under the change to Rule 452, the election of directors is a “non-routine” matter. Brokers are prohibited from voting upon such matters without specific instructions from their clients.

15. C. Corporate Governance – Proxy Fights • A byproduct of the current economic climate and recent financial crisis is an increase in shareholder activism. • Texas Industries, Inc. Proxy Fight • Three incumbent directors on Texas Industries’ nine member board were replaced by directors nominated by Shamrock Holdings, Inc., a 10% stakeholder. • Shamrock’s nominees were elected by an overwhelming 4-1 margin.

16. C. Corporate Governance - Executive Compensation Initiatives • Focus of many regulations and rules in 2009 – New rules and proposals are more aligned with long-term results. • Frequent topic of shareholder proposals in 2009 are including numerous “say-on-pay” proposals. • Some U.S. companies have already voluntarily adopted “say-on-pay.” • The shareholder votes are non-binding and advisory in nature but provide shareholders with an opportunity to provide feedback with respect to executive compensation. • Examples of companies that have adopted “say-on-pay” include Verizon and Aflac. • New corporate governance initiatives create concern that the federal government is imposing on state regulatory power.

17. C. Corporate Governance - Executive Compensation Initiatives • Legislative Developments: • Shareholder Bill of Rights Act of 2009 was introduced in the Senate on May 19, 2009. • Would provide shareholders with new rights with respect to corporate governance and enhanced authority over the nomination, election and compensation of public company executives. • Corporate and Financial Institution Compensation Fairness Act of 2009 was passed by the House on July 31, 2009. • Requires advisory notes on executive compensation for public companies subject to the proxy rules as well as enhanced compensation committee independence for listed companies.

18. C. Corporate Governance - Executive Compensation Initiatives • SEC Proposals: • Proposals made on November 23, 2009 to amend Items 402 and 407 of Regulation S-K. • Would require companies to provide information on how compensation policies create incentives that affect the company’s risk-taking initiative and risk management policies. This section would apply to employees generally including non-executive officers. • Would require companies to report stock and option awards in the summary compensation table and directors compensation table using fair value rather then the dollar amount required to be reported for GAAP purposes. • Would require expanded disclosure with respect to potential conflicts of interest involving compensation consultants.

19. A. Litigation on the Rise • The number of cases relating to the mortgage meltdown and credit crisis exploded in 2008 and 2009. • In 2008 alone, 576 new cases involving financial institutions were filed, exceeding the 559 cases filed over a six year period from the U.S. savings and loan crisis. • Scapegoats for the ’08 crisis have yet to be fully identified and investors will seek to recoup whatever they can from whatever sources they can find. • No slow-down in litigation is expected for 2010.

20. A. Litigation on the Rise • Litigation continues to be dominated by contract, labor/ employment, mortgage-related and auction-rate securities, and personal injury disputes. • Approximately 40% of securities cases filed in 2008-2009 related to the credit crisis and economic meltdown were securities fraud class actions. • Fortune 1000 companies, or their subsidiaries, have been named in about 60% of cases filed. • Most based on allegations of temporary inflation in a company’s stock price due to inaccurate or incomplete disclosures to shareholders. Directors and officers were named as defendants in 95% of these class actions. • Directors and officers were name in 70% of all securities class actions.

21. A. Litigation on the Rise • More discovery of fraud as government authorities tighten rules and regulations – more government enforcement actions – especially by SEC and CFTC, as these organizations were the most embarrassed by the ’08 crisis. • During 1978-2004, SEC brought about 700 enforcement actions; almost half were accompanied by private class actions; this percentage is expected to increase. • The task of working through the backlog of cases is likely to extend years into the future. • Only area of litigation that seemed to cool in 2009 was patent infringement, but this area is expected to begin increasing in 2010 as economy stabilizes.

22. B. Major Categories of Cases • Securities cases; • Class actions; • Commercial contract disputes; • Labor/Employment class actions; • Bankruptcy-related adversary proceedings, particularly fraudulent transfer actions.

23. C. What 2010 Will Bring? • Class action suits should increase – investors banning together to save litigation costs, but not wanting to just walk away. • Shareholders will be quicker to attack companies when shareholder value is at risk or declining – probably a function of the increasing demand for transparency. • Possible federal and state attacks on any program ultimately passed by Congress relating to healthcare, the environment or the derivatives markets. • Increasing focus on the lawyers involved in financial sector.