Download slides for the second part of our four-part webinar series on "Boards of Directors and Corporate Governance." Featured topics include: Fiduciary Duties of Directors, Officers, and Controlling Shareholders Zone of Insolvency Strategies to Limit D&O Liability Special Committees Practical Advice Under Controlling Law For questions, please contact Partner Trent Rosenthal at trosenthal@burlesonllp.com.

1. Drilling Down on
Strategic Alternatives
in the Current Energy Crisis
Part II: Boards of Directors and Corporate Governance
April 22, 2015
12:00-1:00 pm Central
WEBINAR SERIES

2. Housekeeping Items
• This Webinar is Being Recorded
̶ A recording of today’s webinar will be emailed to
attendees after the webinar. We will also have the
recording on our website (www.burlesonllp.com)
̶ We Welcome Questions
̶ Enter questions into the Questions Pane and we will
respond in the Q&A session at the end
• Think of Something Later?
̶ Email marketing@burlesonllp.com
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DISCLAIMER: The viewing of online seminars and the use of the Internet for communications with Burleson LLP, Gibson, Dunn & Crutcher LLP, and OFSCap will not establish an
attorney-client or other relationship and messages containing confidential or time-sensitive information should not be sent. In order to protect past, present or potential clients, we
cannot treat unsolicited e-mails as confidences or secrets. Nothing contained herein shall constitute legal or other professional advice from, or to create an attorney-client or other
relationship with, any of Burleson LLP, Gibson, Dunn & Crutcher LLP or OFSCap. Parties are urged to consult their own advisors for such advice.

3. Speakers
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Trent Rosenthal | Restructuring & Reorganization Partner – Burleson LLP
● Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization
● Over 3 decades of experience in restructuring and bankruptcy law
● Handled numerous oil & gas restructurings and workouts
James (“Jim”) C. Row, CFA | Managing Director & Founder – OFSCap, LLC
● Background in energy investment banking (international/domestic)
● Securities and valuation expert
● Former E&P operator and CFO
Michael Rosenthal | Restructuring & Reorganization Partner – Gibson, Dunn & Crutcher LLP
● Co-Chair , Gibson Dunn Global Restructuring and Reorganization Practice Group
● Represents debtors/creditors in complex, high profile national & cross-border restructurings and chapter 11 cases
● Provides insolvency-related board advice to large public and privately held companies
● Experience with corporate separateness and successor strategies and defenses
Rick Burleson (moderator) | Firm Managing Partner – Burleson LLP
● Over 30 years experience in the oil & gas industry
● Founded Burleson LLP in 2005 with a handful of seasoned energy lawyers.
● Burleson LLP has established a reputation for depth of knowledge and expertise in oil & gas law, and has built
comprehensive capabilities in a range of corporate practice areas

4. Agenda
• Fiduciary Duties of Directors, Officers, and
Controlling Shareholders
• Zone of Insolvency
• Strategies to Limit D&O Liability
• Special Committees
• Practical Advice Under Controlling Law
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5. Goals
• Give you a better understanding of corporate
governance issue facing Officers and Directors
today
• Highlight specific action items and concerns
• Provide practical advice that Officers and Directors
can use every day
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6. Initial Legal Considerations for Board of Directors
• Hire competent restructuring team
• Review organizational and financial documents, including
loan agreements
• Review historical operations and expense reduction options
• Consider current and near term liquidity requirements
• Consider points of leverage with lenders, including leverage
Chapter 11 provides
• Obtain debtor in possession financing (if Chapter 11 filing is
a possibility)
• Conduct and keep records of board meetings, discussions
and decisions
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7. Fiduciary Duty - Duty of Care & Duty of Loyalty
• Duty of Care
̶ Directors and Officers must be diligent and informed,
and exercise prudent & unbiased business judgment
̶ Directors are entitled to rely in good faith and with
ordinary care on reports prepared by Officers of the
company or outside experts within the area of their
expertise
• Duty of Loyalty
̶ Obligates Directors and Officers to act in good faith and
in the best interests of the company, and to deal fairly
with the company
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8. Business Judgment Rule Protection
• Business Judgment Rule
̶ A presumption that in making a business decision the
Directors and Officers of a corporation acted on an informed
basis, in good faith and in the honest belief that the action
was taken in the best interests of the company
̶ Focused on process, not result
̶ To circumvent the protection of the business judgment rule, a
plaintiff must show that the Directors or Officers breached
the duty of care or loyalty, or acted in bad faith
̶ Only protection for the duty of care
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9. Business Judgment Standard of Review
• Deference is given to the Directors and Officers if they:
̶ Are interested and independent
̶ Are informed of all material information reasonably available
̶ Act in good faith
̶ Have a reasonable belief their acts are in the company’s best interests
• In Delaware, a court will not substitute its judgment for that of
the Board if the Board’s decision can be attributed to any rational
business purpose
̶ Delaware courts have held that action (or inaction) will constitute a
breach of the Director’s or Officer’s fiduciary duty of care only if the
conduct rises to the level of gross negligence
• In Texas, the business judgment rule precludes judicial
interference with the business judgment of Directors and Officers
absent a showing of fraud or an ultra vires act.
̶ In Texas, gross negligence on the part of Directors is not protected by
the business judgment rule
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10. Entire Fairness Test
• Standard for assessing transactions where the
business judgment rule is inapplicable
• Fair dealing and fair price
• Factors considered in assessing entire fairness and
good faith of a transaction:
̶ Adequacy of consideration
̶ Degree to which the Director represented the
corporation
̶ Disclosure to and knowledge of the full board of
directors or shareholders
̶ Necessity of the transaction to the corporation
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11. Standard of Officers’ Fiduciary Duties
• Could be argued that standard for Officers is more
stringent than standard for Directors
• Theory grounded in Officers’ intimate involvement
in function and operations of corporation, and first-
hand knowledge of business decisions
• Officers must exhibit greater care in making a
business decision
• Unlike Directors, Officer not entitled to rely on
advice of experts within the sphere of their
expertise
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12. Liability of Controlling Shareholders
• Serving on board of portfolio company presents two sets of
constituents to which fiduciary duties are owed – conflicts of interest
arise in numerous contexts – at a minimum, entire fairness applies
• Delaware LLCs can limit fiduciary duty
• Abstain from certain votes and create special board committees to
evaluate potential conflict transactions
• If director breaches duty of loyalty at direction of the controlling
shareholder or sponsor, the shareholder or sponsor may have
liability for aiding and abetting the breach
• Controlling shareholders cannot usurp corporate opportunities, ie,
proposed activities, in which corporation has ability to engage,
related to corporation’s present or prospective business
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13. Practical Advice for Directors and Officers
• Process used by Directors is important
• Directors must spend more time and effort than in
normal times
• Events unfold quickly in major restructurings
• Opportunities can pass quickly if not acted upon
promptly
• Special Board Committees are common and
generally wise
• Focus on cash flows and process
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14. Practical Advice for Directors and Officers
Today vs. 2014
• Given current oil and gas prices, does the corporation have
the ability to meet maturing obligations as they come due?
• Cash flow is king
• The company may not have ability to meet maturing
obligations beyond the immediate time period
• Fair Market Value (FMV)
̶ The FMV of assets today is different
̶ Challenge of FMV
̶ Caution: FMV “Look Back”
• Directors are entitled to rely on advice of experts
Don’t Run Out of Cash!
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15. How Do Duties Change When Company is
Insolvent?
• Directors owe fiduciary duty to the entire corporate
enterprise
• Directors should act in manner to preserve and
maximize the value of the corporation
• When company is insolvent (or, in some states, in
zone of insolvency), creditors as well as
shareholders can derivatively (not directly) enforce
breaches
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16. Gheewalla Case: Insolvency is the Test
• Delaware Supreme Court: zone of insolvency is
irrelevant
• Creditors do not have the right to enforce a board’s
fiduciary duties unless the company is insolvent,
not just in the zone of insolvency
̶ North American Catholic Educational Programming
Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007)
• Practice tip: Always prudent to assume when
making decisions that court might find the
corporation was insolvent because insolvency is
determined in hindsight
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17. Assessing Insolvency
• Equitable Insolvency
̶ Do debt obligations create a foreseeable danger to the
company’s ability to pay those debts as they mature in
the ordinary course of business
• Balance Sheet Insolvency
̶ Do liabilities exceed Fair Market Value of Assets
Courts View Insolvency in Hindsight
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18. Equitable Insolvency – Cash Flow Test
• Reasonable projection of all debt obligations coming
due
• Reasonable projections of revenue, operating expense,
and capital expenditures
• Contingent items like lawsuits
• Accounts receivable analysis, write-offs, reputation of
counterparties
• Ability to sell assets at what price
• Ability to generate additional liquidity through private
investors, public investors, renegotiated debt covenants
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19. Balance Sheet Test for Insolvency
• All known liabilities according to GAAP as well as
probable liabilities
• The value of assets determined by:
̶ Discounted cash flow approach
̶ Value based on comparison with other transactions
̶ The replacement cost approach minus depreciation
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20. Strategies to Avoid and Defend
• Do not engage in actions that could cause loss of the business
judgment rule; if entire fairness applies, Directors have
affirmative obligation to demonstrate compliance with fiduciary
duties
• Special Committees should be used to evaluate and approve
potentially interested/conflicted transactions
• Assume all actions will be scrutinized and second guessed
• Focus on process and documentation
̶ Regular board meetings and updates are essential
̶ Keep minutes
̶ Have active discussion about relevant issues
̶ Receive full reports from management
̶ Assess all potential risks and options
• Establish an early warning system to detect the first signs of
financial distress
• Disclose all material facts
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21. Strategies to Avoid and Defend
• Be sensitive to impact of decisions on creditors and
shareholders
• Treat similarly situated creditors alike
• Pay close attention to transactions with
management and other insiders
• Do not unduly delay engaging workout advisors
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22. Directors - Indemnification and Insurance
• Evaluate applicable state law
̶ Indemnification governed by law of state of incorporation
• Corporation can indemnify for certain acts
̶ Limitations
• Not for breach of the duty of loyalty
• Not for the acts or omissions not in good faith, involving
intentional misconduct, or a knowing violation of law
• Not for willful or negligent conduct in paying dividends or
repurchasing stock
• Not for the improper personal benefit or self-dealing
• Not for an act or omission for which the liability of a director is
expressly provided by an applicable statute
• Protection through D&O Insurance
̶ Side A coverage is critical
• Contractual indemnity provides additional protection
for Officers and Directors
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23. Take Aways
• Directors should not “swing for the fences” or engage in
courses of action that deepen corporate insolvency
• Focus is on “enterprise value” which can only be determined
with “input” of realistic forecast
• Fairness Opinions should not rely purely on management
projections
• Even wholly-owned subsidiary may require independent
financial and legal advisors
• Different and well qualified financial experts may come to
widely different valuation opinions
• Remember, financial advisors may need to testify in court
• Maintain D&O liability insurance
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24. Q&A Session
• Please Submit Questions via Questions Pane on
Your Screen
• Please Be Patient As We Try to Answer All
Questions
• Thank You For Attending!
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25. Join Us For Our Next Webinar…
• Part III: Finding Hidden Value
• Wednesday, May 13, 2015
• 12:00-1:00 p.m. Central Time
• Registration Link:
̶ https://attendee.gotowebinar.com/register/1706497387
608630529
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26. Contact Information
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Rick Burleson [Online Bio]
Firm Managing Partner – Burleson LLP
Phone: 713.358.1701
Email: rburleson@burlesonllp.com
Trent Rosenthal [Online Bio]
Restructuring & Bankruptcy Partner – Burleson LLP
Phone: 713.358.1724
Email: trosenthal@burlesonllp.com
James (“Jim”) C. Row, CFA [Online Bio]
Managing Director & Founder – OFSCap, LLC
Phone: 713.823.2900
Email: jrow@ofscap.com
Michael Rosenthal [Online Bio]
Restructuring & Reorganization Partner – Gibson, Dunn & Crutcher
Phone: 212.351.3969
Email: mrosenthal@gibsondunn.com