2016 Western M&A/Private Equity Forum Public/Public Deal Developments September 15, 2016

Public/Public Deal Developments Corwin v. KKR Financial Holdings LLC: Decision and Impact Engaging Target Financial Advisors Disclosure-Only Settlements and Appraisal Actions Trends in Chinese Outbound M&A 2

Corwin v. KKR Financial Holdings LLC: Decision & Impact 3

Corwin v. KKR Financial Holdings LLC Plaintiffs, stockholders of KKR Financial Holdings LLC, challenged a stock-for-stock merger between KFH Financial Holdings and KKR & Co. L.P. in which KKR acquired KFH Financial Holdings. The Delaware Supreme Court affirmed the Delaware Chancery Court’s dismissal of Plaintiffs’ claims ruling that the “business judgment rule” is the appropriate standard of review in a suit for post-closing damages involving a merger that is not subject to the entire fairness standard and that has been approved by a fully informed, uncoerced majority of disinterested stockholders. Plaintiffs had argued before the Delaware Chancery Court that that Delaware’s more onerous “entire fairness” standard of review, not the business judgment rule, should be applied to the merger because KKR was a controlling stockholder of KFH Financial. Delaware Court of Chancery disagreed with the Plaintiffs and instead found that KKR was not a controlling stockholder because: – KKR owned less than 1% of the equity of KFH Financial in the aggregate – KKR had no authority to appoint directors of KFH Financial – KKR otherwise had no authority to veto any corporate actions of the board of KFH Financial. Plaintiffs argued that even if KKR was not a controlling stockholder, the Delaware Chancery Court should reviewed the actions of the directors of KFH Financial under Revlon’s “enhanced scrutiny” standard. 4

The Delaware Supreme Court ruled that the court did not have to determine whether Revlon applied to the merger concluding that, even if the Revlon enhanced scrutiny standard of review applied to the merger, the approval of the merger by a fully informed, uncoerced majority of disinterested stockholders was “outcome determinative” and effectively restored the business judgment rule as the appropriate standard of judicial review. In reaching its decision, the Delaware Supreme Court clarified that Revlon’s primary purpose is to give stockholders the ability to prevent irreparable harm in real-time (by way of injunctive relief) before completion of a merger, not for bringing suit for money damages post-closing. In the Corwin opinion, the Delaware Supreme Court warned that business judgment rule was applicable to the merger only because the merger was approved by a fully informed, uncoerced majority of disinterested stockholders and that the business judgment rule would not have been applicable if “troubling” material facts about director behavior existed and were not fully disclosed to stockholders. The Delaware Supreme Court articulated that the Corwin decision was logically consistent with the policy behind the business judgment rule: Unless a merger is subject to an entire fairness review, Delaware courts should not second-guess the impartial business judgment of the directors especially when, as in Corwin, “the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves”. Corwin v. KKR Financial Holdings LLC 5

Post-Closing Damages Cases More Difficult to Bring: Corwin will make post-closing damages cases more difficult for plaintiffs to bring in instances where a majority of fully-informed disinterested stockholders have duly voted to approve the merger. Heightened Importance of Disclosure: Since a fully-informed and disinterested stockholder vote affords directors the presumption of deferential business judgment review (a standard by which director-defendants virtually never lose), Corwin places further pressure on disclosures to stockholders and requires that merger parties fully disclose all material facts regarding the merger including: – the economic interests of all parties to the merger – whether the target’s board of directors has any interest in the merger (not shared by other stockholders) – the merger negotiation process generally. Reduces Risk of Liability to Third-Party Advisors: Even when a stockholder vote is statutorily required (i.e., to approve a merger or a sale of all or substantially all of the assets of a company), the sanitizing effects of a fully-informed stockholder vote persist, and such protection can extend to advisors who are subjected to related “aiding and abetting” breach of fiduciary duty of care claims. Why is this decision important? 6

Recent Cases Applying Corwin In Singh v. Attenborough (Del. 2016), the Delaware Supreme Court affirmed the Delaware Chancery Court’s dismissal of aiding and abetting claims against a financial advisor to Zale in connection with the company’s sale to Signet Jewelers because of the cleansing effect of a fully informed, uncoerced vote of Zale’s disinterested stockholders. The Court held that the stockholder vote approving Zale’s sale to Signet entitled the Zale directors to the deference of business judgment review under Corwin and that since there was no viable claim against the directors for breach of fiduciary duty under the business judgment standard of review, there could be no aiding and abetting claim against the financial advisor. In re Volcano Corp. Shareholder Litigation (Del. Ch. 2016), the Delaware Chancery Court ruled that the business judgment rule irrebuttably applies to a judicial review of a two-step merger under DGCL 251(h), effected through a tender of shares into a front-end tender offer, in the same way as it applies in a one-step merger under Corwin, after a majority of fully- informed, uncoerced, disinterested stockholders tender their shares, extinguishing all other claims other than waste. The decision is on appeal to the Delaware Supreme Court. 7

Recent Cases Applying Corwin (cont’d) In Larkin v. Shah (Del. Ch. 2016), the Delaware Chancery Court dismissed a stockholder challenge to a merger, concluding that other than transactions where the entire fairness standard applies ab initio (i.e., a transaction involving a controlling stockholder on both sides of the transaction), a fully-informed, uncoerced stockholder approval “cleanses” board level conflict and invokes the business judgment rule irrevocably. The decision is on appeal to the Delaware Supreme Court. 8

Engaging Target Financial Advisors 9

Recent cases examine duties of directors with respect to engaging, and relying on advice of, financial advisors: – Must “act reasonably to identify and consider the implications of [financial advisor] compensation structure, relationships and potential conflicts” – May violate fiduciary duties if they fail to provide “active and direct oversight” of financial advisors – Must provide proper disclosure to stockholders of financial advisor conflicts Cases also examine potential liability of financial advisors for aiding and abetting breaches of directors’ duties – Advisors (with requisite scienter) can be liable even when directors have been exculpated 10

Engaging Target Financial Advisors (cont’d) Most (in)famous recent case charged financial advisor $76M after finding directors breached their fiduciary duties, and financial advisor A&A’d by misleading directors by (as found by the court): – Not disclosing conflicts, particularly as to interest and actions relating to commencement of transaction and efforts to provide financing in this and related deal, and creating an “informational vacuum” – Providing misleading valuation materials, just prior to board meeting (Rural Metro (Del. Ch. 2014, aff’d Del. 2015)) – In same deal, directors settled for $6.6M But bar for A&A is pretty high: financial advisor must act with scienter, with knowledge that their conduct is legally improper Other cases have criticized boards for not sufficiently investigating potential financial advisor conflicts (e.g., PLX, Del. Ch. 2015) – Though directors may be exculpated per 102(b)(7) even if the A&A’rs are not 11

Engaging Target Financial Advisors (cont’d) Complexities: – What to cover Prior pitches, meetings? Shareholdings? Prior engagements (including what kinds of engagements, and how far back)? Expected engagements? ….? – Who to cover At the financial advisor: Deal team? Service silo? Everybody? In the world: Existing known bidder? All potential bidders? Final bidders? – When to cover/deliver Rep v. covenant? Banker presentations? What to do about late-breaking disclosure items/conflicts? – When is staple financing good for you? (see Morton’s) – Practical constraints 12

Engaging Target Financial Advisors (cont’d) What are Boards supposed to do? – Act reasonably to identify, investigate and monitor potential conflicts – You can’t (and don’t want to) eliminate all conflicts – Be in position to make appropriate disclosure to stockholders What are Boards doing? – Nothing – Ask questions of bankers – Ask for/receive financial advisor presentations (orally or slide deck) – Consider reflecting concerns in engagement letters: Representations as to current state of affairs Covenants to provide future representation/disclosure Covenants to refrain from certain future actions – Hire a second banker? 13

Engaging Target Financial Advisors (cont’d) Corwin can help – But focused on post-closing -- pre-closing (injunctions) still another issue – And premised on full disclosure 14

Disclosure-Only Settlements and Appraisal Actions 15

Disclosure-Only Settlements Pre-Trulia Landscape In re Trulia, Inc. Stockholder Litigation (January 2016) Evolving Landscape Post-Trulia – Lower filing rates in Delaware – But search is on for alternative fora Other states’ courts Federal courts – Mootness Fees 16

Appraisal Actions DGCL § 262 – Recent legislative amendments – Share-tracing under Dell Appraisal as a possible alternative for would-be disclosure plaintiffs – No impact from Trulia – No need to allege breach of fiduciary duties – Less deference to deal price in recent decisions 17

Trends in Chinese Outbound M&A 18

Trends in Chinese Outbound M&A Chinese companies pursuing firms based in the United States is a growing trend. – In the first three months of 2016, 17 transactions were announced in which a Chinese acquirer purchased a U.S. target, with an aggregate transaction value of $28.8 billion, which surpassed the previous high of $5.7 billion for all of Semiconductor industry has been one of the most active spaces for Chinese outbound M&A. – Since 2014, there have been seven transactions in which a Chinese company purchased a U.S.-based semiconductor firm, with an aggregate transaction value of nearly $4 billion. Trend driven by Chinese firms’ demand for global brands for domestic consumption, cutting edge technology, growth in a slowing domestic economy, geographic diversity, as well as recent changes to PRC government policy explicitly supporting outbound investments and the relaxation of outbound regulation Notwithstanding the trend, there are specific challenges & issues associated with PRC bidders for U.S. public targets – Regulatory concerns, particularly CFIUS and PRC approvals (including SAFE) – Effect of political climate, public perception and media attention – Perceived lack of transparency of Chinese regulatory bodies – Different cultural approaches to negotiation and deal making 19

CFIUS casts a long shadow over Chinese buyers, even if the risk is only speculative – Sensitivities include proximity to government facilities, involvement in communications infrastructure, significant U.S. government contracts, export-controlled technology or strategic resources, PRC government interest / involvement – Facilitating clearance may require mitigation measures such as restricted access to specific technologies, establishment of a corporate security committee, special procedures for handling government contracts, obligations to notify government of material changes in products or services, hold-separate or divestiture of sensitive businesses or assets PRC outbound regulators that may be required to approve a transaction include NDRC (all PRC M&A), MOFCOM (antitrust approval), SAFE (oversight of foreign exchange and offshore remittances), and stock exchange approvals (if the PRC acquiror is listed on a PRC exchange) – Typically the NDRC has given a “road pass” to its preferred bidder for foreign assets of any significant size, in order to avoid competition among Chinese bidders; those without a pass were expected to sit out – PRC regulatory hurdles are often perceived by U.S. targets as a “black box” CFIUS and PRC Regulation Risk Allocation 20

Reverse Termination Fees tied to CFIUS and PRC approvals – Increasingly common to tie reverse termination fees to CFIUS review in situations with meaningful CFIUS risk (though not in all cases, e.g. ChemChina / Sygenta) – Recent reverse break-up fees accepted by PRC buyers have ranged in magnitude from approximately 3% to 9% of the enterprise value of the transaction (and in certain cases involving non-U.S. targets, more than 10%). U.S. targets are also requiring security due to concerns regarding the ability to enforce a judgment against a PRC entity, which increasingly takes the form of depositing in escrow the full amount of the highest possible reverse termination fee (but sometimes takes the form of a letter of credit). – Required timing for the deposit of the escrows ranges from depositing the full amount concurrently with signing of (can be difficult given the processes required for PRC entities to obtain currency) to phased deposits over several months after the initial signing. – The deposits are typically in U.S. currency and held by a Western bank, although in some situations where portions of the deposits are made be in renminbi and/or placed on deposit in banks in the mainland PRC or with the branch of a PRC bank in a Western jurisdiction. In one instance, the PRC acquiror was required to deposit in escrow the entire aggregate merger consideration three business days before the U.S. public target’s shareholder meeting. CFIUS and PRC Regulation Risk Allocation 21