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ARTHUR B. CROZIER FEBRUARY 5, 2008

ARTHUR B. CROZIER FEBRUARY 5, 2008. ARE YOU PREPARED FOR THE NEW AGE OF HOSTILE AND ACTIVIST SHAREHOLDERS?. HEDGE FUND ACTIVISM & THE 2008 PROXY SEASON. Hedge Fund Activism. Background.

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ARTHUR B. CROZIER FEBRUARY 5, 2008

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  1. ARTHUR B. CROZIER FEBRUARY 5, 2008 ARE YOU PREPARED FOR THE NEW AGE OF HOSTILE AND ACTIVIST SHAREHOLDERS? HEDGE FUND ACTIVISM & THE 2008 PROXY SEASON

  2. Hedge Fund Activism Background • In 2007, approximately 9,000 hedge funds held assets estimated at $1.7 – $2.0 trillion worldwide - up from $186 billion in 1995 • Hedge funds continue to have no registration requirements • SEC rule vacated by Court of Appeals for the DC Circuit in June 2006 • Hedge funds have been the most active activist shareholders over the past 2-3 years H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  3. Hedge Fund Activism ISS (RiskMetrics Group) • Significant increase in clientele following 2003 voting disclosure regulations promulgated by SEC for mutual funds and money managers. Currently approximately 1,700 clients with approximately $25.5 trillion in equity assets under management • ISS clients typically hold 20%-30% of a public company’s voting power • Many public pension funds, who are in turn ISS clients, are investors in activist hedge funds: • CalPERS • PSERS (Pennsylvania) • New Jersey PERS • TIAA-CREF • CalSTRS H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  4. Hedge Fund Activism ISS & Hedge Funds: “Wolf Pack” Behavior of Hedge Funds + ISS Support = An Irresistible Force for Change H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  5. Hedge Fund Activism ISS recommendations in recent merger transactions with hedge fund opposition: H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  6. Hedge Fund Activism ISS Recommendations in ProxyContests (Market Cap $100 Million+): H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  7. Hedge Fund Activism ISS Continues to Support Hedge Fund Activism • ISS recommendation is frequently outcome determinative. • In 32 proxy contests waged by hedge funds, ISS has supported dissidents in 25 (or 78.1%) of cases. • In the 25 proxy contests waged by hedge funds in which ISS supported dissidents, at least one dissident was elected in 19 of them (or 76.0%). • In 23 mergers opposed by hedge funds, ISS’s initial recommendation has been “Against” 15 times (or 65.2%). • In the 15 mergers in which ISS recommended “Against”, shareholders received a “bump” in 10 of them (or 66.7%). H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  8. Hedge Fund Activism Recommendations for Issuers • Understand the shareholder base • Monitor changes in ownership • Maintain a dialogue with long-term holders • Assemble the advisory team: outside counsel, investment bankers, financial public relations, proxy solicitor • Maximize communication opportunities with ISS • Be alert to communications from hedge funds • Be ready to “turn on a dime” H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  9. 2006 & 2007 Shareholder Proposals Executive Compensation H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N • Fixed Date Option Grants: Longview Funds withdrew most of proposals after discussions with management • AFSCME is leading a coalition of 70 institutions and individuals who are sponsoring 90 “Say on Pay” proposals in 2008

  10. 2006 & 2007 Shareholder Proposals Majority Voting • 90 shareholder proposals were withdrawn in 2007 after companies voluntary adopted majority voting • ISS estimates there will be 200 shareholder proposals in 2008, with a high rate of withdrawals • 66% of S&P 500 companies have adopted majority voting policies • Approximately 53% of those companies have adopted an Intel-type bylaw, including Pfizer H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  11. 2006 & 2007 Shareholder Proposals Shareholder Right to Call a Special Meeting H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  12. 2006 & 2007 Shareholder Proposals Proxy Access • 3 proposals in 2007 • Hewlett-Packard: 43.0% • United Health 45.3% • Cyro-Cell International 53.4% • SEC recently changed course and now permits exclusion of proxy access proposals under Rule 14a-8 • Will re-examine all alternatives in 2008 Support H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  13. 2006 & 2007 Shareholder Proposals (Cont’d.) Proxy Access • AFSCME has filed proxy access proposals at JPMorgan Chase, Bear Stearns, Countrywide Financial and E*TRADE. AFSCME also filed a proposal to reimburse shareholder expenses related to running a slate of directors if at least one nominee is elected • Prepared to litigate if SEC issues no-action letters • Comverse Technology recently adopted a proxy access bylaw permitting a holder of 5% or more for at least two years to nominate one candidate in management’s proxy materials H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  14. 2006 & 2007 Shareholder Proposals Takeover Defenses H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N • Rescind Poison Pill: • Bebchuk proposal at Disney requiring 75% vote by independent Directors received 57.3% vote • Disney recently voluntarily adopted a poison pill bylaw

  15. ISS (RMG) 2008 Key Policy Updates Note: Applies to all shareholder meetings on or after February 1, 2008 • Withold/Against Votes: Classified Boards • At companies with classified boards, if a continuing director is responsible for a problematic governance issue that would warrant a withhold/against vote, ISS may recommend withhold/against from any or all of the nominees up for election, except new nominees. • Poison Pills Adopted prior to IPO’s • ISS will recommend withhold/against on entire boards where: H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N “The board adopts or renews a poison pill without shareholder approval, does not commit to putting it to shareholder vote within 12 months of adoption (or in the case of an newly public company, does not commit to put the pill to a shareholder vote within 12 months following the IPO), or reneges on a commitment to put the pill to a vote, and has not yet received a withhold recommendation for this issue.”

  16. ISS (RMG) 2008 Key Policy Updates Continued… • Independent Chair • ISS has generally recommended FOR shareholder proposals to require that an independent director fill the position of Chairman, unless a counterbalancing governance structure with specific features is in place. For 2008, ISS will additionally require that the company provide disclosure of a comparison of the duties of the lead director and the Chairman; and disclosure of a rationale for choosing the combined CEO/Chair structure as opposed to appointing an independent Chair. • Compensation Model • May carve out on-the-money options that have been outstanding for more than six years. H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  17. The E-Proxy Rules Overview • The SEC recently adopted final rules that provide companies with an alternative to printing and mailing proxy materials and annual reports in connection with meetings of shareholders • The final rules permit (but do not require) proxy materials and annual reports to be disseminated through a “notice and access” method, whereby companies would post their proxy materials on a publicly accessible website and send shareholders a notice of the posting • This alternative method will reduce companies’ costs of proxy solicitations, but may not be used in connection with business combination transactions H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  18. The E-Proxy Rules (Cont’d.) Overview • The notice and access method may be used on or after July 1, 2007, for shareholders’ meetings to be held on or after August 10, 2007 • The new rules do not affect the ability of companies to utilize existing methods of proxy material distribution H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  19. The E-Proxy Rules Company Solicitations • A company utilizing the notice and access alternative would be required to send a “Notice of Internet Availability of Proxy Materials” to all shareholders no later than 40 calendar days in advance of a meeting date • The notice would be required to contain certain information about the solicitation, and would set forth the website on which the proxy materials could be accessed and proxies could be executed • The notice would also provide shareholders with the option to request paper or e-mail copies of proxy materials in lieu of visiting the designated website H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  20. The E-Proxy Rules (Cont’d.) Company Solicitations • The new SEC rules also allow companies to require intermediaries (i.e. banks, brokers, or other nominees who hold shares in “of record” which are beneficially owned by other shareholders) to utilize this notice and access method • Participation by broker retail customers on non-routine proposals has been very low H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  21. The E-Proxy Rules Third Party Solicitations • The final rules provide a mechanism for persons soliciting proxies in opposition to a company to utilize the “notice and access” alternative in generally the same manner as is available to the company • As a result, the printing and mailing costs of waging a proxy contest against a company would be substantially reduced, creating the potential for an increase in the number of proxy contests • However, persons soliciting proxies in opposition to a company cannot utilize the new rules in connection with business combination transactions H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  22. Broker Routine Vote • NYSE Rule 452 allows brokers to vote uninstructed shares on behalf of customers on “routine propsals”, such as the uncontested election of Directors. • NYSE is seeking to eliminate routine voting for Director elections • CVS/Caremark • Disney • NYSE Proxy Working Group Report in 2004: withheld votes at 32 companies would have been greater than 50% • Issuer concerns – additional expense to ensure quorum levels • Significant impact at companies with majority voting standards for the election of directors • Routine vote will still be in place for 2008 proxy season H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

  23. 2008 Proxy Season • Majority Vote Standard and Withhold Campaigns • Subprime lending fallout • Enhanced compensation disclosure • “Say on Pay” proposals – the new Majority Vote proposal? • “Pay for Performance” proposals – the new “Say on Pay” proposal? • Electronic Shareholder Forums • Record number of proxy fights H E D G E F U N D A C T I V I S M & T H E 2 0 0 8 P R O X Y S E A S O N

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