Section 4- Rules & Regulations Chapter 16: Corporate Finance Rules 16.

1 Fairness Opinions: An objective and independent analysis performed by an investment bank for the board of directors of a company involved in a transaction. Not required by law and do not allow the BODs to delegate their fiduciary responsibilities to the shareholders. Provide an objective basis for believing whether a transaction is fair to the shareholders from a financial perspective. Board often chooses to make the fairness opinion available to the shareholders through proxy materials, as part of change-of-control transaction. In this case, the investment bank (who rendered fairness opinion) must include specific disclosures relating to conflicts of interest with the company as well as written procedures for approval of fairness opinions. 16.1.1 When Is a Fairness Opinion Necessary? If TargetCo is a privately held company of undetermined value If AcquirerCo bids far in excess of TargetCos current market value If AcquirerCo is bidding for specific divisions or properties of TargetCo IF TargetCo is involved in litigation, controversies, etc When a transaction involves potential or perceived conflicts of interest Expectation of intangibles or hard to value assets Complex or unorthodox transaction terms Large payment of executive terminations (golden parachute) Dissenting shareholders and mintority shareholders who are entitled to appraisal rights under state laws

16.1.2 Factors to Consider in Preparing Fairness Opinions Under civil case law and FINRA regulation, it is essential for investment bankers to establish clear procedures for rendering fairness opinions. The entities or securities to be valued The time period covered by the opinion Reliance on information provided by company management Valuation Methodologies Public Disclosures whether the opinion is for BODs or for public shareholders as well

Fairness Committees- Fairness opinion must be reviewed and approved by a fairness committee of the investment banking firm, before they are forwarded to client companies

16.1.3 Preparing the Fairness Opinion Letter The fairness opinion letter typically includes

Background of the proposed transaction Includes the proposed terms of the transaction, the scope of the assignment, summary conclusion as to whether the proposed terms are fair for the client company and its shareholders. DOES NOT advise shareholders to vote to accept the transaction Basis of the opinion Defines the facts and methodology upon which the opinion is based, financial data and valuation methods Disclosures and Limitations- provides disclosures and includes any limitations on the advisors work, such as reliance on information provided by companys management, potential conflicts of interest Responsibility Here the investment bank and its managing directors accept responsibility for making the opinion within the parameters of the assignment disclosed Details of the transaction

16.1.4 FINRA rule 5150 2007 NASD approved rule 2290 regarding fairness opinion Rule 2290 subsequently incorporated in the FINRA rulebook as Rule 5150 The rule provides for specific disclosures that must be made when fairness opinions are rendered REQUIRED DISCLOSURESo Contingent Fees Any fees or other significant payments the advisor will receive contingent on successful completion of the transaction. The receipt of de minimis fees need not be disclosed Material relationship for compensation must be disclosed that the member firms have had with any part to the transaction during the past two years that involved payment or compensation Independent Verification Whether the member firm independently verified the information received from the companys management through other sources or methods Fairness Committee- Whether or not the opinion was approved/ issued by a fairness committee Insider Compensation Whether the fairness opinion evaluates the fairness of amount or nature of compensation to any insider(officers, directors or employees) of the client company, relative to compensation to public shareholders.

16.1.4.2 Fairness Committee Requirements FINRA Rule 5150 requires any member firm that issues any fairness opinion to have written procedures in place. Types of transactions in which a fairness committee issues or approves a fairness opinion must be in writing. In transactions using a fairness committess, the procedures must state: 1) the process for selecting committee members, 2) necessary qualification of committee members, and 3) how a balanced review is obtained among committee members, including a review or approval by persons who are not part of the transaction deal team Procedures must describe the process to determine whether valuation methods or analyses used in the opinion are appropriate

16.1.4.3 Fairness Committee Composition FINRA requires that the procedures promote a balanced reviews that includes persons who are not part of the transaction deal team. For compliance, the reviews must be from at least two independent people who have no connection or contact with the deal at all, and that these independent people must review and approve the process to promote a balanced review by the fairness committee. 16.2 Registration of Business Combinations (SEC RULE 145) Specific types of business combinations that should be considered offers to sell securities, subject to registration requirements of the 33 Act, whether or not a security holder takes action to buy, sell or exchange securities. Reclassification: Such as stock split, reverse stock split, change in par value Merger, acquisition or consolidation Transfer: exchange of assets involving the issuance of securities under a dissolution, pro rate distribution of securities, adoption of a board resolution within one year of board vote or pre-existing plan for distribution of securities

Registration is made through Form S-4 for domestic companies and F-4 for foreign companies If business combination involves only a cash payment, there is no requirement for registering the securities. Unless the payment is contingent on shareholder vote, a proxy statement must be filed. 16.2.1 Form S-4 Requirements Form S-4 used to register offerings involving business combinations and exchange offerings: Business combination under Rule 145 Mergers that require the solicitation or consent of all security holders of the acquiring company Exchange offers for securities of the issuer or another entity Public re-offerings of securities acquired through a business combination

16.2.2 Exemption for Business Combination Offers SEC Rule 165 provides exemptions for certain communications made in regard to business combinations. The exemption covers communications made before a registration statement is filed. Any written communication, other than non public communications among offering participants, meet specific conditions: Offering communications are prospectuses files with the SEC on the date of first use Communication is limited to a basic announcement of the offering. It must be filed with the SEC prior to first use

If a prospectus has been previously filed, written communications made after registration may be distributed, provided that it is included in a prospectus supplement. To fall under the exemption for written communication made either before or after registration, the prospectus must contain a legend urging investors to read SEC documents and filings and stating that documents may be obtained for free at the SECs website. 16.2.3 Proxy Information SEC Rule 14A specifies that following must be included in the proxy statement: Identity of registrant and person filing the proxy statement Aggregate number of securities to which the transaction applies Price or value of the transaction to shareholders and the proposed maximum aggregate transaction value Date, time and place of the meeting of security holders; or if action is taken by awritten consent, the date by which consents must be submitted Rights and limits on shareholders ability to revoke proxies Information about entities making the solicitation, the cost of solicitation and how those costs are paid Infomration on any directors or executive officers who are to be elected by vote of security holders and their current compensation Information on registrants relationship with its independent public accountatnt Information on any non-cash compensation plans that may be voted on Information about the acquiring and acrquired company from S04, financial statements for the latest two fiscal years Description of any property to be acquired or sold, or accounts to be restated, resulting from the transaction Type of proxy being filed: preliminary proxy, confidential proxy (for SEC use only)), definitive proxy, definitive proxy with additional materials or soliciting material filed under Rule 14A-12

16.2.3.1 Preliminary Proxy (PREM14A): first copy filed with SEC, 10 calendar days before the date definitive copies are sent to security holders. 16.2.3.2 Confidential Proxy: a preliminary proxy that is entitled to be kept confidential until the definitive proxy is filed. 16.2.3.3 Definitive Proxy (DEF14A): must be filed no later than the date proxies are sent to the security holders. Soliciting materials consist of any written communication distributed to security holders before providing those holders with a valid proxy statement. Must be filed with SEC no later than the date of first publication. 16.2.3.4 Proxy information required in business combinations Rule 14A specifies additional proxy filing information on each party to the transaction, including: Summary term sheet Contact information for principal executive officers Detailed description of transaction terms A statement of any federal or state regulatory requirements that must be obtained for the transaction, and a status report on compliance approvals Any reports, opinions or appraisals obtained from outside parties and referred to in the proxy statement Past contacts, transaction or negotiations between parties to the proposed transaction, during the periods for which financial statements are presented Selected financial data for last five years Pro forma selected financial data for the acquiring company, showing the pro forma effect of the transaction.

Exceptions: If the transaction consists solely of securities offered to existing securities holders, it is sufficient to file the applicable registration form (S-4 or F-4) If the transaction consists solely of cash offers to securities holders, information is not required on target (acquired) company, unless the information is material to an informed voting decision

Chapter 17: Liquidation and Restructuring 17.1 Types of Bankruptcy Filings: 17.1.1. Chapter 7 Bankruptcy: result in liquidation of the insolvent firm, with its assets distributed to creditors. Companies must file schedule of assets, liabilities,current income and expenses. Debt must be detailed as to creditors and the amount of their claims. While it allows individual debtors to obtain a fresh start, corporate and partnership filers are not always allowed to discharge debts through this process.

17.1.2. Chapter 11 Bankruptcy: most common choice. Provide a plan for reorganizing or rehabilitating the business and maintaining continuity. In addition to disclosures under Chapter 7, debt must disclose enough details to enable creditors to make an informed judgment as to the companys status and a plan of reorganization. Chap 11 provides an automatic stay of creditor claims when the petition is filed. Creditors can form a committee of the largest unsecured creditors and provide input on the restructuring plan. The final plan is submitted to a vote of the first class of impaired creditors, this vote is reviewed by the court to confirm or deny the plan. An affirmative vote of creditors holding at least two thirds of the dollar amount of these claims and at least one half of the number of these claims is required to a plan to be approved. Cram down once the first class of impaired creditors approves the plan and the judge sign off, the remaining creditors are forced to accept the plan Equity holders can file a proof of interest with the court and can be treated as a creditor and vote on the restructuring plan. 17.1.2.1 Chapter 11 Debtor in Possession (DIP) Chapter 11 allows the debtor filing the bankruptcy petition to retain possession of property against which creditors have claims or liens. The debtor then acts in a fiduciary capacity called Debtor in possession (DIP), and has trustee powers granted by the bankruptcy code. The DIP is obligated to pay all debts incurred after the filing and avoid paying debts incurred before the filing. DIP must not sell or transfer assets except with court approval. Chapter 11 allows DIP financing- which is typically new loans advanced after the bankruptcy filing to help the company maintain operations and rebuild working capital. 17.1.2.2 Conferences and Creditor Committees The debtor must attend an initial Debtor conference with the US Trustee within seven working days of the petition filing. Here, the trustee will verify that pre-filing bank accounts have been closed, tax returns and financial statements are available and adequate insurance exists to protect creditor claims. The Bankruptcy code requires at least one meeting of creditors, which the debtor is required to attend, with legal counsel, called Sector 341 meeting. Here creditors have the right to examine records of the debtors compliance with DIP requirements. 17.1.2.3 Section 363 Acquisitions A section 363 merger or acquisition essentially means that a prospective acquirer buys the distressed companys debt instruments in an attempt to acquire it. Rather than developing a full reorganization plan subject to creditor committee input and voting, the debtor (acting as DIP) signs an agreement with the prospective acquirer. Sometimes, an acquirer may negotiate an Asset Purchase Agreement (APA) with the DIP to make a pre-emptive bid on favorable terms. This might include a stalking horse provision to clarify terms the acquirer will receive in reorganization, including a breakup fee, accelerating deadlines for submitting bids, reimbursement of due diligence expenses, and additional requirements / requirements on outside bidders. 171.2.4 Fiduciary Responsibilities Chapter 11 imposes significant fiduciary responsibilities on debtor companies and their directors and executive officers. 17.2 The Corporate Capital Structure

Senior Secured Lenders hard asset lenders. Paid back in a bankruptcy to the extent that the collateral supporting their claims has value. Any additional claims then become an unsecured claim. For all unsecured claims, the United States Bankruptcy code specifies the priority of claims to be paid in a bankruptcy filing in a specific order: 1. Domestic support obligations of the debtor, payable to a govt entity 2. Administrative expenses, including trustee and attorney costs 3. Unsec claims created after filing of Chap 7 and Chap 11 petition but prior to a court order or relief 4. Upto $11,725 per employee for wages or commission earned within 180 day period prior to the filing 5. Unmet claims for contributions to an employee benefit plan within the 180-day period prior to the filing 6. Claims for upto $2600 per person for deposits made toward purchase, lease or rental of property for personal or household use 7. Taxes or penalties owed to governments 8. Claims for death or person injury from a motor vehicle accident

After that, company assets are distributed as follows: 1. Senior Debts 2. Junior (subordinated ) Debts 3. Mezzanine Debt 4. Prefs 5. Common stock and warrants 17.3 Terms of Loan Documents Prepayment and early refinancing: Default events: Restrictive Covenants Ability to assume or guarantee additional indebtedness Right to redeem junior debt Corporate transactions 17.3.1 Financial Covenants and Key Ratios

Several different types, few mentioned in the book are: Debt Service Coverage Ratio (DSCR): Compares cash flow available to service debt with companys annual obligations to pay debt service payments (principal and interest), as well as other financing obligations such as mortgage and lease payments Tangible Net Worth: subtracts intangible assets such as goodwill from book value. Key measure of the companys value and financial strength Current Ratio Funded Debt to EBITDA: Funded debt includes borrowed money, notes and bonds, deferred purchases and capitalized leases