Exhibit 10.3

 

Opening Transaction

 

To:                            Anacor Pharmaceuticals, Inc.

1020 East Meadow Circle
Palo Alto, CA 94303

 

From:            Citigroup Global Markets Inc.

 

Re:                             Additional Capped Call Transaction

 

Date:                  April 1, 2016

 

Dear Ladies and Gentlemen:

 

The purpose of this communication (this “Confirmation”) is to set forth the
terms and conditions of the above-referenced transaction entered into on the
Trade Date specified below (the “Transaction”) between Citigroup Global Markets
Inc. (“Dealer”) and Anacor Pharmaceuticals, Inc. (“Counterparty”).  This
communication constitutes a “Confirmation” as referred to in the ISDA Master
Agreement specified below.

 

1.     This Confirmation is subject to, and incorporates, the definitions and
provisions of the 2002 ISDA Equity Derivatives Definitions (the “Equity
Definitions”), as published by the International Swaps and Derivatives
Association, Inc. (“ISDA”).  Certain defined terms used herein have the meanings
assigned to them in the Indenture to be dated as of April 6, 2016 between
Counterparty and Wells Fargo Bank, National Association, as trustee (the
“Indenture”), relating to the USD 250,000,000 principal amount of 2.00%
Convertible Senior Notes due 2023 and the additional USD 37,500,000 principal
amount of 2.00% Convertible Senior Notes due 2023 issued pursuant to the
over-allotment option to purchase additional convertible securities exercised on
the date hereof (the “Convertible Securities”).  In the event of any
inconsistency between the terms defined in the Indenture and this Confirmation,
this Confirmation shall govern.  For the avoidance of doubt, references herein
to sections of the Indenture are based on the draft of the Indenture most
recently reviewed by the parties at the time of execution of this Confirmation. 
If any relevant sections of the Indenture are changed, added or renumbered
between the execution of this Confirmation and the execution of the Indenture,
the parties will amend this Confirmation in good faith to preserve the economic
intent of the parties, as evidenced by such draft of the Indenture. Subject to
the foregoing, the parties further acknowledge that references to the Indenture
herein are references to the Indenture as in effect on the date of its execution
and if the Indenture is amended, modified or supplemented following its
execution, any such amendment, modification or supplement (other than any
amendment, modification or supplement (x) pursuant to Section 8.01(b) of the
Indenture that conforms the Indenture to the description of Convertible
Securities in the Preliminary Offering Circular dated March 30, 2016, as
supplemented by the related pricing term sheet or (y) pursuant to Section 4.07
of the Indenture) will be disregarded for purposes of this Confirmation (other
than for purposes of Section 8(b)(i) below) unless the parties agree otherwise
in writing.  The Transaction is subject to early unwind if the closing of the
Convertible Securities is not consummated for any reason, as set forth below in
Section 8(k).

 

Each party is hereby advised, and each such party acknowledges, that the other
party has engaged in, or refrained from engaging in, substantial financial
transactions and has taken other material actions in reliance upon the parties’
entry into the Transaction to which this Confirmation relates on the terms and
conditions set forth below.

 

This Confirmation evidences a complete and binding agreement between Dealer and
Counterparty as to the terms of the Transaction to which this Confirmation
relates.  This Confirmation shall be subject to an agreement (the “Agreement”)
in the form of the 2002 ISDA Master Agreement as if Dealer and

 

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Counterparty had executed an agreement in such form on the date hereof (but
without any Schedule except for, in respect of Section 5(a)(vi) of the Agreement
(a) the election that the “Cross Default” provisions shall apply to Dealer with
a “Threshold Amount” equal to 3% of the shareholders’ equity of Dealer’s
ultimate parent company (“Dealer Parent”) as of the Trade Date, (b) the deletion
of the phrase “, or becoming capable at such time of being declared,” from
clause (1) thereof, (c) the following language added to the end thereof:
“Notwithstanding the foregoing, a default under subsection (2) hereof shall not
constitute an Event of Default if (x) the default was caused solely by error or
omission of an administrative or operational nature; (y) funds were available to
enable the party to make the payment when due; and (z) the payment is made
within two Local Business Days of such party’s receipt of written notice of its
failure to pay.” and (d) the term “Specified Indebtedness” shall have the
meaning specified in Section 14 of the Agreement, except that such term shall
not include obligations in respect of deposits received in the ordinary course
of a party’s banking business).

 

All provisions contained in, or incorporated by reference to, the Agreement will
govern this Confirmation except as expressly modified herein.  In the event of
any inconsistency between this Confirmation and either the Equity Definitions or
the Agreement, this Confirmation shall govern.

 

The Transaction hereunder shall be the sole Transaction under the Agreement.  If
there exists any ISDA Master Agreement between Dealer and Counterparty or any
confirmation or other agreement between Dealer and Counterparty pursuant to
which an ISDA Master Agreement is deemed to exist between Dealer and
Counterparty, then notwithstanding anything to the contrary in such ISDA Master
Agreement, such confirmation or agreement or any other agreement to which Dealer
and Counterparty are parties, the Transaction shall not be considered a
Transaction under, or otherwise governed by, such existing or deemed ISDA Master
Agreement.

 

2.     The Transaction constitutes a Share Option Transaction for purposes of
the Equity Definitions.  The terms of the particular Transaction to which this
Confirmation relates are as follows:

 

General Terms:

 

Trade Date:

April 1, 2016

 

 

Effective Date:

The closing date of the issuance of the Convertible Securities issued pursuant
to the over-allotment option to purchase additional Convertible Securities
exercised on the date hereof.

 

 

Option Style:

Modified American, as described under “Procedures for Exercise” below.

 

 

Option Type:

Call

 

 

Seller:

Dealer

 

 

Buyer:

Counterparty

 

 

Shares:

The Common Stock of Counterparty, par value USD0.001 (Ticker Symbol: “ANAC”).

 

 

Applicable Percentage:

60.0%

 

 

Number of Options:

The number of Optional Securities (as defined in the Purchase Agreement, dated
as of March 31, 2016, between Goldman, Sachs & Co., as the representative of the
purchasers named therein, and Counterparty (the “Purchase Agreement”)) in
denominations of USD1,000 principal amount purchased pursuant to the exercise by
Goldman, Sachs & Co., as representative of the Purchasers (as defined in the

 

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Purchase Agreement), of their over-allotment option to purchase additional
Convertible Securities pursuant to Section 2 of the Purchase Agreement. For the
avoidance of doubt, the Number of Options outstanding shall be reduced by each
exercise of Options hereunder.

 

 

Option Entitlement:

As of any date, a number of Shares per Option equal to the “Conversion Rate” (as
defined in the Indenture, but without regard to any adjustments to the
Conversion Rate pursuant to a Fundamental Change Adjustment or a Discretionary
Adjustment).

 

 

Fundamental Change Adjustment:

Any adjustment to the Conversion Rate pursuant to Section 4.06 of the Indenture.

 

 

Discretionary Adjustment:

Any adjustment to the Conversion Rate pursuant to Section 4.05(b) of the
Indenture.

 

 

Strike Price:

As of any date, an amount in USD equal to USD1,000 divided by the Option
Entitlement as of such date. The Strike Price shall be rounded by the
Calculation Agent in a commercially reasonable manner.

 

 

Cap Price:

USD80.1750. For the avoidance of doubt, and notwithstanding anything to the
contrary herein or in the Agreement or the Equity Definitions, in no
circumstance shall the Cap Price be adjusted to be less than the Strike Price.

 

 

Number of Shares:

As of any date, a number of Shares equal to the product of (i) the Applicable
Percentage, (ii) the Number of Options and (iii) the Option Entitlement.

 

 

Premium:

USD1,260,000.00.

 

 

Premium Payment Date:

The Effective Date

 

 

Exchange:

The NASDAQ Global Market

 

 

Related Exchange:

All Exchanges

 

Procedures for Exercise:

 

Exercise Dates:

Each Conversion Date.

 

 

Conversion Date:

Each “Conversion Date” (as defined in the Indenture) occurring during the
Exercise Period for Convertible Securities each in denominations of USD1,000
principal amount that are not “Relevant Convertible Securities” under (and as
defined in) the confirmation between the parties hereto regarding the Base
Capped Call Transaction dated March 31, 2016 (the “Base Capped Call Transaction
Confirmation”); provided that, no Conversion Date shall be deemed to have
occurred with respect to Exchanged Securities, Excluded Convertible Securities
or “Excluded Convertible Securities” under (and as defined in) the Base Capped
Call Transaction Confirmation (such Convertible Securities, other than Exchanged

 

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Securities, Excluded Convertible Securities and such “Excluded Convertible
Securities” under the Base Capped Call Transaction Confirmation, the “Relevant
Convertible Securities” for such Conversion Date). For the purposes of
determining whether any Convertible Securities will be Relevant Convertible
Securities or Excluded Convertible Securities hereunder or “Relevant Convertible
Securities” or “Excluded Convertible Securities” under, and as defined in, the
Base Capped Call Transaction Confirmation, Convertible Securities that are
converted pursuant to the Indenture shall be allocated first to the Base Capped
Call Transaction Confirmation until all Options thereunder are exercised or
terminated.

 

 

Exchanged Securities:

With respect to any Conversion Date, any Convertible Securities with respect to
which Counterparty makes the election described in Section 4.12 of the Indenture
and the financial institution designated by Counterparty accepts such
Convertible Securities in accordance with Section 4.12 of the Indenture. For the
avoidance of doubt, (i) Convertible Securities are “accepted” for purposes of
the foregoing upon the earlier of the declaration of the designated financial
institution’s agreement to exchange such Convertible Securities or delivery of
such Convertible Securities to such financial institution for purposes of such
exchange and (ii) any Exchanged Securities will be treated as Relevant
Convertible Securities on any subsequent Conversion Date with respect to such
securities (for the avoidance of doubt, subject to the exclusions for Exchanged
Securities and Excluded Securities set forth under “Conversion Date” above).

 

 

Excluded Convertible Securities:

Convertible Securities subject to the occurrence of an Excluded Conversion
Event, as described in Section 8(b)(i).

 

 

Exercise Period:

The period from and excluding the Effective Date to and including the Expiration
Date.

 

 

Expiration Date:

The second “Business Day” (as defined in the Indenture) immediately preceding
the “Maturity Date” (as defined in the Indenture).

 

 

Automatic Exercise during Final Conversion Period:

Applicable and means that (unless Counterparty notifies Dealer in writing prior
to 5:00 p.m., New York City time, on the Expiration Date that it does not wish
Automatic Exercise to occur) all Options then outstanding as of 5:00 p.m., New
York City time, on the Expiration Date will be deemed to be automatically
exercised as if (i) a number of Convertible Securities (in denominations of
USD1,000 principal amount) equal to such number of

 

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then-outstanding Options were converted with a “Conversion Date” (as defined in
the Indenture) occurring during the Final Conversion Period, (ii) the
Convertible Security Settlement Method applied to such Convertible Securities
and (iii) the “Observation Period” (as such term is defined in the Indenture)
were the Cash Settlement Averaging Period; provided that, no such automatic
exercise pursuant to this paragraph will occur if the “Daily VWAP” (as defined
in the Indenture) for each “VWAP Trading Day” (as defined in the Indenture)
during the Cash Settlement Averaging Period is less than or equal to the Strike
Price.

 

 

Final Conversion Period:

The period from, and including, January 15, 2023 to, and including, the
Expiration Date.

 

 

Cash Settlement Averaging Period:

The 40 consecutive “VWAP Trading Days” (as defined in the Indenture) commencing
on, and including, the 42nd “Scheduled Trading Day” (as defined in the
Indenture) immediately preceding the “Maturity Date” (as defined in the
Indenture).

 

 

Notice of Convertible Security Settlement Method:

Prior to 4:00 p.m., New York City time, on the earlier to occur of (x) the date
on which it makes the irrevocable election of a settlement method in accordance
with Section 8.01(l) of the Indenture and (y) January 15, 2023, Counterparty
shall notify Dealer in writing of the “Settlement Method” (as defined in the
Indenture) (and, if applicable, the “Specified Dollar Amount” (as defined in the
Indenture)) elected (or deemed to be elected) with respect to the Convertible
Securities for which the relevant “Conversion Date” (as such term is defined in
the Indenture) occurs on or after January 15, 2023.

 

 

Dealer’s Telephone Number and Facsimile Number and Contact Details for purpose
of Giving Notice:

As specified in Section 6(b) below.

 

Settlement Terms:

 

Settlement Date:

For any Exercise Date, the settlement date for the cash (if any) and/or Shares
(if any) to be delivered in respect of the Relevant Convertible Securities for
the relevant Conversion Date under the terms of the Indenture; provided that the
Settlement Date shall not be prior to the date one Settlement Cycle following
the final day of the Cash Settlement Averaging Period.

 

 

Delivery Obligation:

In lieu of the obligations set forth in Sections 8.1 and 9.1 of the Equity
Definitions, in respect of an Exercise Date, Dealer will deliver to Counterparty
on the related Settlement Date (the “Delivery Obligation”):

 

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(i) (I) a number of Shares equal to the product of the Applicable Percentage and
the aggregate number of Shares, if any, that Counterparty would be obligated to
deliver to the holder(s) of the Relevant Convertible Securities for such
Conversion Date pursuant to Section 4.03(a)(ii)(C) of the Indenture (except that
such number of Shares shall be determined without taking into consideration any
rounding pursuant to Section 4.03(b) of the Indenture and shall be rounded down
to the nearest whole number) and (II) cash in lieu of any fractional Share
resulting from such rounding; and/or

 

 

 

(ii) cash equal to the product of the Applicable Percentage and the excess of
(I) the “Daily Principal Portion” (as defined in the Indenture) over
(II) USD25.00, for each “VWAP Trading Day” (as defined in the Indenture) during
the Cash Settlement Averaging Period per Convertible Security (in denominations
of USD1,000) that Counterparty would be obligated to deliver to holder(s) of the
Relevant Convertible Securities for such Conversion Date pursuant to
Section 4.03(a)(ii)(B) or 4.03(a)(ii)(C), of the Indenture, as applicable;

 

 

 

for each of clauses (i) and (ii), determined as if Counterparty had elected to
satisfy its conversion obligation in respect of such Relevant Convertible
Securities by the Convertible Security Settlement Method, notwithstanding any
different actual election by Counterparty with respect to the settlement of such
Relevant Convertible Securities (collectively, the “Convertible Obligation”);
provided that (i) if the “Daily VWAP” (as defined in the Indenture) for any
“VWAP Trading Day” (as defined in the Indenture) during the Cash Settlement
Averaging Period is equal to or greater than the Cap Price, then clause (ii) of
the relevant “Daily Conversion Value” (as defined in the Indenture) for such
“VWAP Trading Day” shall be determined as if such “Daily VWAP” for such “VWAP
Trading Day” were deemed to equal the Cap Price and (ii) the Delivery Obligation
shall be determined excluding any Shares and/or cash that Counterparty is
obligated to deliver to holder(s) of the Relevant Convertible Securities as a
direct or indirect result of any adjustments to the Conversion Rate pursuant to
a Fundamental Change Adjustment or a Discretionary Adjustment and any interest
payment that Counterparty is (or would have been) obligated to deliver to
holder(s) of the Relevant Convertible Securities for such Conversion Date. For
the avoidance of doubt, if the “Daily Conversion Value” (as defined in the
Indenture) for any “VWAP Trading Day” (as defined in the Indenture) occurring

 

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in the Cash Settlement Averaging Period is less than or equal to USD25.00,
Dealer will have no delivery obligation hereunder in respect of such “VWAP
Trading Day.”

 

 

Convertible Security Settlement Method:

For any Relevant Convertible Securities, if (i) Counterparty has notified Dealer
in the Notice of Convertible Security Settlement Method that it has elected to
satisfy its conversion obligation in respect of such Relevant Convertible
Securities in cash or in a combination of cash and Shares in accordance with
Section 4.03(a)(i) of the Indenture with a “Specified Dollar Amount” (as defined
in the Indenture) of at least USD1,000 (a “Cash Election”) and (ii) such Notice
of Convertible Security Settlement Method contains all of the Settlement Method
Election Provisions, the Convertible Security Settlement Method shall be the
settlement method actually so elected by Counterparty in respect of such
Relevant Convertible Securities; otherwise, the Convertible Security Settlement
Method shall assume Counterparty had made a Cash Election with respect to such
Relevant Convertible Securities with a “Specified Dollar Amount” (as defined in
the Indenture) of USD1,000 per Relevant Convertible Security. Counterparty
acknowledges its responsibilities under applicable securities laws, and in
particular Section 9 and Section 10(b) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) and the rules and regulations thereunder, in
respect of any election of a settlement method with respect to the Convertible
Securities.

 

 

Settlement Method Election Provisions:

In order for the Convertible Security Settlement Method to be the settlement
method actually elected by Counterparty under the Indenture in respect of the
applicable Relevant Convertible Securities in accordance with “Convertible
Security Settlement Method” above, the Notice of Convertible Security Settlement
Method must contain in writing the following representations, warranties and
acknowledgments from Counterparty to Dealer as of such notice delivery date:

 

 

 

(i)             Counterparty is electing the Convertible Security Settlement
Method in good faith and not as part of a plan or scheme to evade compliance
with the U.S. federal securities laws; Counterparty is not electing the
settlement method under the Indenture for the Relevant Convertible Securities or
the Convertible Security Settlement Method to create actual or apparent trading
activity in the Shares (or any security convertible into or exchangeable for
Shares) or to raise or

 

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depress or otherwise manipulate the price of the Shares (or any security
convertible into or exchangeable for Shares) or otherwise in violation of the
Exchange Act;

 

 

 

(ii)   Counterparty has not entered into or altered any hedging transaction
relating to the Shares corresponding to or offsetting the Transaction; and

 

 

 

(iii)  any transaction that Dealer makes with respect to the Shares during the
period beginning at the time that Counterparty delivers such notice and ending
at the close of business on the final day of the Cash Settlement Averaging
Period shall be made by Dealer at Dealer’s sole discretion for Dealer’s own
account and Counterparty shall not have, and shall not attempt to exercise, any
influence over how, when, whether or at what price Dealer effects such
transactions, including, without limitation, the prices paid or received by
Dealer per Share pursuant to such transactions, or whether such transactions are
made on any securities exchange or privately.

 

 

Other Applicable Provisions:

To the extent Dealer is obligated to deliver Shares hereunder, the provisions of
Sections 9.8, 9.9, 9.10 and 9.11 of the Equity Definitions will be applicable as
if “Physical Settlement” applied to the Transaction; provided that the
Representation and Agreement contained in Section 9.11 of the Equity Definitions
shall be modified by excluding any representations therein relating to
restrictions, obligations, limitations or requirements under applicable
securities laws that exist as a result of the fact that Counterparty is the
issuer of the Shares.

 

 

Certificated Shares:

Notwithstanding anything to the contrary in the Equity Definitions, Dealer may,
in whole or in part, deliver Shares required to be delivered to Counterparty
hereunder in certificated form in lieu of delivery through the Clearance System.
With respect to such certificated Shares, the Representation and Agreement
contained in Section 9.11 of the Equity Definitions shall be modified by
deleting the remainder of the provision after the word “encumbrance” in the
fourth line thereof.

 

Adjustments:

 

Method of Adjustment:

Notwithstanding Section 11.2 of the Equity Definitions, upon the occurrence of
any event or condition set forth in Section 4.04(a) through (e) of the Indenture
or Section 4.05(a) of the Indenture that

 

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would result in an adjustment under the Indenture (it being understood that for
purposes of such an event or condition under Section 4.05(a) of the Indenture,
Calculation Agent may assume that the Cash Settlement Averaging Period or, in
the case of an Excluded Conversion Event, the commercially reasonable hedge
unwind period determined by Calculation Agent, applied to the relevant
Convertible Securities) (an “Adjustment Event”), the Calculation Agent shall
make the corresponding adjustment in respect of any one or more of the Strike
Price, the Number of Options and the Option Entitlement, subject to
“Discretionary Adjustments” below, to the extent an analogous adjustment would
be made under the Indenture, and (ii) upon the occurrence of any Potential
Adjustment Event, the Calculation Agent shall determine the economic effect of
such Potential Adjustment Event and, if the Calculation Agent, acting in good
faith and in a commercially reasonable manner, determines that such economic
effect is material, shall, but without duplication of any adjustment hereunder,
make any adjustment to the Cap Price consistent with “Calculation Agent
Adjustment” set forth in Section 11.2(c) of the Equity Definitions (as modified
hereby) to preserve the fair value of the Transaction after taking into account
such Potential Adjustment Event. Promptly following the occurrence of any
Adjustment Event, Counterparty shall notify the Calculation Agent of such
Adjustment Event; and once the adjustments to be made to the terms of the
Indenture and the Convertible Securities in respect of such Adjustment Event
have been determined, Counterparty shall promptly notify the Calculation Agent
in writing of the details of such adjustments.

 

 

 

For the avoidance of doubt, Dealer shall not have any delivery obligation
hereunder in respect of any “Distributed Property” delivered by Counterparty
pursuant to the second sentence of Section 4.04(c) of the Indenture or any
payment obligation in respect of any cash paid by Counterparty pursuant to the
second sentence of Section 4.04(d) of the Indenture (collectively, the “Dilution
Adjustment Fallback Provisions”), and no adjustment shall be made to the terms
of the Transaction (other than, if applicable pursuant to the preceding
paragraph, the Cap Price) on account of any event or condition described in the
Dilution Adjustment Fallback Provisions.

 

 

Discretionary Adjustments:

Notwithstanding anything to the contrary herein or in the Equity Definitions, if
the Calculation Agent in good faith and while exercising commercially reasonable
discretion disagrees with any adjustment under the Indenture that involves an
exercise of

 

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discretion by Counterparty or its board of directors (including, without
limitation, pursuant to Section 4.05(a) of the Indenture or pursuant to
Section 4.07(a) of the Indenture or any supplemental indenture entered into
thereunder or in connection with the determination of the fair value of any
securities, property, rights or other assets), then the Calculation Agent will
determine the adjustment to be made to any one or more of the Strike Price,
Number of Options, Option Entitlement and any other variable relevant to the
exercise, settlement or payment of or under the Transaction in a commercially
reasonable manner and based on a commercially reasonable Hedge Position and, for
the avoidance of doubt, the Delivery Obligation shall be calculated on the basis
of such adjustments by the Calculation Agent.

 

Extraordinary Events:

 

Merger Events:

Notwithstanding Section 12.1(b) of the Equity Definitions, except to the extent
set forth under the provisions set forth under “Consequences of Announcement
Event” and “Announcement Event” below, a “Merger Event” means the occurrence of
any event or condition set forth in Section 4.07(a) of the Indenture.

 

 

Consequences of Merger Events/ Tender Offers:

Notwithstanding Section 12.2 of the Equity Definitions, (i) upon the occurrence
of a Merger Event that would result in an adjustment under the Indenture, the
Calculation Agent shall make a corresponding adjustment in respect of the nature
or composition of the Shares to the extent an analogous adjustment would be made
under the Indenture; provided that, for the avoidance of doubt, such adjustment
shall be made without regard to any adjustment to the Conversion Rate pursuant
to a Fundamental Change Adjustment or a Discretionary Adjustment; and provided
further that if, with respect to a Merger Event (other than a Non-US Merger
Transaction), the Counterparty to the Transaction following such Merger Event
will not be either (x) the Issuer or (y) a subsidiary of Issuer whose
obligations hereunder (including, without limitation, under Sections 8(d) and
8(e)) are fully and unconditionally guaranteed by Issuer, Dealer may elect (in
its sole discretion) for Cancellation and Payment (Calculation Agent
Determination) to apply; and (ii) upon the occurrence of a “Merger Event” (as
defined in the Equity Definitions) and/or a Tender Offer, the Calculation Agent
shall determine the economic effect of such Merger Event and/or Tender Offer
and, if the Calculation Agent, acting in good faith and in a commercially
reasonable manner, determines that such economic effect is material,

 

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shall, but without duplication of any adjustment hereunder, make an adjustment
to the Cap Price consistent with “Modified Calculation Agent Adjustment” set
forth in Section 12.2(e) or 12.3(d) of the Equity Definitions, as applicable;
provided that, in respect of a “Merger Event” (as defined in the Equity
Definitions), Section 12.2(e)(i)(A) of the Equity Definitions shall be amended
by replacing the words “exercise, settlement, payment or any other terms of the
Transaction (including, without limitation, the spread)” with “Cap Price”;
provided further that, in respect of a Tender Offer, Section 12.3(d)(i)(A) of
the Equity Definitions shall be amended by replacing the words “exercise,
settlement, payment or any other terms of the Transaction (including, without
limitation, the spread)” with “Cap Price”.

 

 

Notice of Merger Consideration and Consequences:

Upon the occurrence of a Merger Event that causes the Shares to be converted
into, or exchanged for, or represent solely the right to receive, more than a
single type of consideration (determined based in part upon any form of
stockholder election), Counterparty shall reasonably promptly (but in any event
prior to the relevant merger date) notify the Calculation Agent of (i) the
weighted average per Share of the types and amounts of consideration received by
the holders of Shares that affirmatively make such an election (or, if no
holders of Shares make such an election, the types and amounts of consideration
actually received by holders of Shares), and (ii) the details of the adjustment
to be made under the Indenture in respect of such Merger Event.

 

 

Tender Offer:

Applicable with respect to the Cap Price as set forth herein; provided that
Section 12.1(d) of the Equity Definitions is hereby amended by (x) replacing
“10%” with “25%” in the third line thereof and (y) replacing the words “voting
shares of the Issuer” in the fourth line thereof with the word “Shares”.

 

 

Consequences of Announcement Event:

Modified Calculation Agent Adjustment as set forth in Section 12.3(d) of the
Equity Definitions; provided that, in respect of an Announcement Event,
references to “Tender Offer” shall be replaced by references to “Announcement
Event” and references to “Tender Offer Date” shall be replaced by references to
“date of such Announcement Event”; provided further that, in respect of an
Announcement Event, Section 12.3(d)(i)(A) shall be amended by replacing the
words “exercise, settlement, payment or any other terms of the Transaction
(including, without limitation, the spread)” with “Cap Price”. An Announcement
Event shall be an “Extraordinary Event” for purposes of the Equity Definitions,
to

 

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which Article 12 of the Equity Definitions is applicable.

 

 

Announcement Event:

(i) The public announcement (x) by Issuer or any of its affiliates of any
“Merger Event” (as defined in the Equity Definitions) or Tender Offer, the
intention to enter into a “Merger Event” (as defined in the Equity Definitions)
or Tender Offer or any transaction or event that, if completed, would constitute
a “Merger Event” (as defined in the Equity Definitions) or Tender Offer
or (y) by a party to the relevant proposed transaction or its affiliate of any
“Merger Event” (as defined in the Equity Definitions) or Tender Offer, the
intention to enter into a “Merger Event” (as defined in the Equity Definitions)
or Tender Offer or any transaction or event that in the commercially reasonable
determination of the Calculation Agent is likely to lead to a “Merger Event” (as
defined in the Equity Definitions) or Tender Offer (it being understood that the
Calculation Agent may make such determination by reference to the impact of such
announcement on the market for the Shares or options relating to the Shares and
such other factors as the Calculation Agent deems relevant in its commercially
reasonable determination), (ii) the public announcement by Issuer or any of its
subsidiaries of any acquisition where the aggregate consideration exceeds 25% of
the market capitalization of Issuer as of the date of such announcement (an
“Acquisition Transaction”), (iii) the public announcement by Issuer of an
intention to solicit or enter into, or to explore strategic alternatives or
other similar undertaking that may include, a “Merger Event” (as defined in the
Equity Definitions), Tender Offer and/or Acquisition Transaction or (iv) any
subsequent public announcement by the Issuer, a party to the relevant proposed
transaction or any of their respective affiliates of a change to a transaction
or intention that is the subject of an announcement of the type described in
clause (i), (ii) or (iii) of this sentence (including, without limitation, a new
announcement, whether by Issuer, such a party or any of their respective
affiliates, relating to such a transaction or intention or the announcement of a
withdrawal from, or the abandonment or discontinuation of, such a transaction or
intention); provided that, for the avoidance of doubt, the occurrence of an
Announcement Event with respect to any transaction or intention shall not
preclude the occurrence of a later Announcement Event with respect to such
transaction or intention.

 

 

Nationalization, Insolvency or Delisting:

Cancellation and Payment (Calculation Agent Determination); provided that in
addition to the

 

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provisions of Section 12.6(a)(iii) of the Equity Definitions, it will also
constitute a Delisting if the Shares are not immediately re-listed, re-traded or
re-quoted on any of the New York Stock Exchange, The NASDAQ Global Select Market
or The NASDAQ Global Market (or their respective successors); if the Shares are
immediately re-listed, re-traded or re-quoted on any such exchange or quotation
system, such exchange or quotation system shall thereafter be deemed to be the
Exchange.

 

 

Additional Termination Event(s):

Notwithstanding anything to the contrary in the Equity Definitions, if, as a
result of an Extraordinary Event, the Transaction would be cancelled or
terminated (whether in whole or in part) pursuant to Article 12 of the Equity
Definitions, an Additional Termination Event (with the terminated Transaction
(or portion thereof) being the Affected Transaction and Counterparty being the
sole Affected Party) shall be deemed to occur, and, in lieu of Sections 12.7,
12.8 and 12.9 of the Equity Definitions, Section 6 of the Agreement shall apply
to the Affected Transaction.

 

 

Additional Disruption Events:

 

 

 

(a)   Change in Law:

Applicable; provided that Section 12.9(a)(ii) of the Equity Definitions is
hereby amended by (i) replacing the phrase “the interpretation” in the third
line thereof with the phrase “, or public announcement of, the formal or
informal interpretation”, (ii) adding the phrase “and/or Hedge Position” after
the word “Shares” in clause (X) thereof and (iii) immediately following the word
“Transaction” in clause (X) thereof, adding the phrase “in the manner
contemplated by the Hedging Party on the Trade Date”; provided, further that
(i) any determination as to whether (A) the adoption of or any change in any
applicable law or regulation (including, for the avoidance of doubt and without
limitation, (x) any tax law or (y) adoption or promulgation of new regulations
authorized or mandated by existing statute) or (B) the promulgation of or any
change in the interpretation by any court, tribunal or regulatory authority with
competent jurisdiction of any applicable law or regulation (including any action
taken by a taxing authority), in each case, constitutes a “Change in Law” shall
be made without regard to Section 739 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 or any similar legal certainty provision in any
legislation enacted, or rule or regulation promulgated, on or after the Trade
Date, and (ii) Section 12.9(a)(ii) of the Equity Definitions is hereby amended
by replacing the parenthetical beginning after the word “regulation” in the
second line thereof with the words “(including,

 

13

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for the avoidance of doubt and without limitation, (x) any tax law or
(y) adoption or promulgation of new regulations authorized or mandated by
existing statute)”. Notwithstanding anything to the contrary in the Equity
Definitions, a Change in Law described in clause (Y) of Section 12.9(a)(ii) of
the Equity Definitions shall not constitute a Change in Law and instead shall
constitute an Increased Cost of Hedging as described in Section 12.9(a)(vi) of
the Equity Definitions.

 

 

(b)   Failure to Deliver:

Applicable

 

 

(c)   Insolvency Filing:

Applicable

 

 

(d)   Hedging Disruption:

Applicable; provided that:

 

 

 

(i)    Section 12.9(a)(v) of the Equity Definitions is hereby modified by
inserting the following words at the end of clause (A) thereof: “in the manner
contemplated by the Hedging Party on the Trade Date”; and

 

 

 

(ii)   Section 12.9(b)(iii) of the Equity Definitions is hereby amended by
inserting in the third line thereof, after the words “to terminate the
Transaction”, the words “or a portion of the Transaction affected by such
Hedging Disruption”.

 

 

(e)   Increased Cost of Hedging:

Applicable solely with respect to a “Change in Law” described in clause (Y) of
Section 12.9(a)(ii) of the Equity Definitions as set forth in the last sentence
opposite the caption “Change in Law” above.

 

 

Hedging Party:

Dealer; provided that, upon request from Counterparty, Dealer shall promptly
provide Counterparty with a written report (in a commonly used file format for
the storage and manipulation of financial data) describing in reasonable detail
any calculation made by Dealer as Hedging Party (but without disclosing Dealer’s
confidential or proprietary models or other information that is subject to
contractual, legal or regulatory obligations to not disclose such information).

 

 

Determining Party:

Dealer; provided that, upon request from Counterparty, Dealer shall promptly
provide Counterparty with a written report (in a commonly used file format for
the storage and manipulation of financial data) describing in reasonable detail
any calculation made by Dealer as Determining Party (but without disclosing
Dealer’s confidential or proprietary models or other information that is subject
to contractual, legal or regulatory obligations to not disclose such
information).

 

14

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Non-Reliance:

Applicable

 

 

Agreements and Acknowledgments Regarding Hedging Activities:

Applicable

 

 

Additional Acknowledgments:

Applicable

 

 

3.     Calculation Agent:

Dealer; provided that following the occurrence and during the continuation of an
Event of Default pursuant to Section 5(a)(vii) of the Agreement with respect to
which Dealer is the sole Defaulting Party, if the Calculation Agent fails to
timely make any calculation, adjustment or determination required to be made by
the Calculation Agent hereunder or to perform any obligation of the Calculation
Agent hereunder and such failure continues for five (5) Exchange Business Days
following notice to the Calculation Agent by Counterparty of such failure,
Counterparty shall have the right to designate an independent, nationally
recognized equity derivatives dealer to replace Dealer as Calculation Agent over
the period during which such Event of Default has occurred and is continuing,
and the parties hereto shall work in good faith to execute any appropriate
documentation required by such replacement Calculation Agent.

 

 

 

Following any determination, adjustment or calculation by the Calculation Agent,
the Calculation Agent shall, upon request from Counterparty, promptly provide
Counterparty with a written report (in a commonly used file format for the
storage and manipulation of financial data) describing in reasonable detail such
determination, adjustment or calculation (but without disclosing Dealer’s
confidential or proprietary models or other information that is subject to
contractual, legal or regulatory obligations to not disclose such information).

 

4.     Account Details:

 

Dealer Payment Instructions:

 

[     ]

 

Counterparty Payment Instructions:

 

To be provided by Counterparty.

 

5.     Offices:

 

The Office of Dealer for the Transaction is:

 

390 Greenwich Street, New York, New York 10013

 

The Office of Counterparty for the Transaction is:

 

1020 East Meadow Circle, Palo Alto, California 94303

 

15

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6.     Notices: For purposes of this Confirmation:

 

(a)           Address for notices or communications to Counterparty:

 

To:                          Anacor Pharmaceuticals, Inc.

1020 East Meadow Circle

Palo Alto, California 94303

Attn:                       Graeme Bell

 

With a copy to:

 

Attn:                       Ryan Sullivan

 

(b)           Address for notices or communications to Dealer:

 

To:                          Citigroup Global Markets Inc.

390 Greenwich Street

New York, NY 10013

Attn:                       Attn: Adam Muchnick

 

7.     Representations, Warranties and Agreements:

 

(a)           In addition to the representations and warranties in the Agreement
and those contained elsewhere herein, Counterparty represents and warrants to
and for the benefit of, and agrees with, Dealer as follows:

 

(i)           On the Trade Date (A) none of Counterparty and its officers and
directors is aware of any material nonpublic information regarding Counterparty
or the Shares and (B) all reports and other documents filed by Counterparty with
the Securities and Exchange Commission pursuant to the Exchange Act, when
considered as a whole (with the more recent such reports and documents deemed to
amend inconsistent statements contained in any earlier such reports and
documents), do not contain any untrue statement of a material fact or any
omission of a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances in which they were
made, not misleading.

 

(ii)           On the Trade Date, Counterparty is not engaged in a
“distribution,” as such term is defined in Regulation M under the Exchange Act
(“Regulation M”), of any securities of Counterparty, other than a distribution
meeting the requirements of the exceptions set forth in sections 101(b)(10) and
102(b)(7) of Regulation M. Counterparty shall not engage in any such
distribution until the second Exchange Business Day immediately following the
Trade Date.

 

(iii)         Without limiting the generality of Section 13.1 of the Equity
Definitions, Counterparty acknowledges that neither Dealer nor any of its
affiliates is making any representations or warranties or taking any position or
expressing any view with respect to the treatment of the Transaction under any
accounting standards including ASC Topic 260, Earnings Per Share, ASC Topic 815,
Derivatives and Hedging, or ASC Topic 480, Distinguishing Liabilities from
Equity and ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own
Equity (or any successor issue statements).

 

(iv)          [Reserved].

 

(v)          Prior to the Trade Date, Counterparty shall deliver to Dealer a
resolution of Counterparty’s board of directors authorizing the Transaction and
such other certificate or certificates as Dealer shall reasonably request. Based
on such resolutions, neither Dealer nor any of its affiliates shall be subject
to the restrictions under Section 203 of the Delaware General Corporation Law as
an “interested stockholder” of Counterparty by virtue of (A) its role as initial
purchaser of, or market-maker in, the Convertible Securities, (B) its entry into
the Transaction and/or (C) any hedging transactions in Counterparty’s securities
in connection with the Transaction.

 

16

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(vi)          Counterparty is not entering into this Confirmation to create
actual or apparent trading activity in the Shares (or any security convertible
into or exchangeable for Shares) or to raise or depress or otherwise manipulate
the price of the Shares (or any security convertible into or exchangeable for
Shares) in violation of the Exchange Act.

 

(vii)         Counterparty is not, and after giving effect to the transactions
contemplated hereby will not be, required to register as an “investment company”
as such term is defined in the Investment Company Act of 1940, as amended.

 

(viii)        On each of the Trade Date and the Premium Payment Date,
Counterparty is not “insolvent” (as such term is defined under Section 101(32)
of the U.S. Bankruptcy Code (Title 11 of the United States Code) (the
“Bankruptcy Code”)) and Counterparty would be able to purchase the Number of
Shares in compliance with the laws of the jurisdiction of Counterparty’s
incorporation.

 

(ix)          [Reserved].

 

(x)           To Counterparty’s knowledge, no state or local (including non-U.S.
jurisdictions) law, rule, regulation or regulatory order applicable to the
Shares would give rise to any reporting, consent, registration or other
requirement (including without limitation a requirement to obtain prior approval
from any person or entity) as a result of Dealer or its affiliates owning or
holding (however defined) Shares.

 

(xi)          Counterparty (A) is capable of evaluating investment risks
independently, both in general and with regard to all transactions and
investment strategies involving a security or securities, including, without
limitation, the transaction that is the subject of this confirmation and any
transactions related hereto or contemplated hereby; (B) will exercise
independent judgment in evaluating the recommendations of Dealer and its
affiliates or associated persons with regard to any such securities transactions
or strategies unless it has otherwise notified Dealer in writing; and (C) has
total assets of at least USD50 million. Counterparty will notify Dealer if the
immediately preceding statement contained in this Section 7(a)(xi) ceases to be
true.

 

(xii)         Without limiting the generality of Section 3(a) of the Agreement,
neither the execution and delivery of this Confirmation nor the incurrence or
performance of obligations of Counterparty hereunder will conflict with or
result in a breach of the certificate of incorporation or by-laws (or any
equivalent documents) of Counterparty, or any applicable law or regulation, or
any order, writ, injunction or decree of any court or governmental authority or
agency, or any agreement or instrument filed as an exhibit to Counterparty’s
Annual Report on Form 10-K for the year ended December 31, 2015, as updated by
any subsequent filings, to which Counterparty or any of its subsidiaries is a
party or by which Counterparty or any of its subsidiaries is bound, or
constitute a default under, or result in the creation of any lien under, any
such agreement or instrument.

 

(b)           Each of Dealer and Counterparty agrees and represents that it is
an “eligible contract participant” as defined in the U.S. Commodity Exchange
Act, as amended, and is entering into the Transaction as principal (and not as
agent or in any other capacity, fiduciary or otherwise) and not for the benefit
of any third party.

 

(c)           Each of Dealer and Counterparty acknowledges that the offer and
sale of the Transaction to it is intended to be exempt from registration under
the Securities Act of 1933, as amended (the “Securities Act”), by virtue of
Section 4(a)(2) thereof.  Accordingly, Counterparty represents and warrants to
Dealer that (i) it has the financial ability to bear the economic risk of its
investment in the Transaction and is able to bear a total loss of its investment
and its investments in and liabilities in respect of the Transaction, which it
understands are not readily marketable, are not disproportionate to its net
worth, and it is able to bear any loss in connection with the Transaction,
including the loss of its entire investment in the Transaction, (ii) it is an
“accredited investor” as that term is defined in Regulation D as promulgated
under the Securities Act, (iii) it is entering into the Transaction for its own
account and without a view to the distribution or resale thereof, (iv) the
assignment, transfer or other disposition of the Transaction has not been and
will not be registered under the Securities Act and is restricted under this
Confirmation, the

 

17

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Securities Act and state securities laws, and (v) its financial condition is
such that it has no need for liquidity with respect to its investment in the
Transaction and no need to dispose of any portion thereof to satisfy any
existing or contemplated undertaking or indebtedness and is capable of assessing
the merits of and understanding (on its own behalf or through independent
professional advice), and understands and accepts, the terms, conditions and
risks of the Transaction.

 

(d)           Each of Dealer and Counterparty agrees and acknowledges that
Dealer is a “financial institution,” “swap participant” and “financial
participant” within the meaning of Sections 101(22), 101(53C) and 101(22A) of
the Bankruptcy Code.  The parties hereto further agree and acknowledge (A) that
this Confirmation is (i) a “securities contract,” as such term is defined in
Section 741(7) of the Bankruptcy Code, with respect to which each payment and
delivery hereunder or in connection herewith is a “termination value,” “payment
amount” or “other transfer obligation” within the meaning of Section 362 of the
Bankruptcy Code and a “settlement payment” within the meaning of Section 546 of
the Bankruptcy Code, and (ii) a “swap agreement,” as such term is defined in
Section 101(53B) of the Bankruptcy Code, with respect to which each payment and
delivery hereunder or in connection herewith is a “termination value,” “payment
amount” or “other transfer obligation” within the meaning of Section 362 of the
Bankruptcy Code and a “transfer” within the meaning of Section 546 of the
Bankruptcy Code, and (B) that Dealer is entitled to the protections afforded by,
among other sections, Sections 362(b)(6), 362(b)(17), 362(b)(27), 362(o),
546(e), 546(g), 546(j), 548(d)(2), 555, 560 and 561 of the Bankruptcy Code.

 

(e)           Counterparty shall deliver to Dealer (i) an incumbency
certificate, dated as of the Effective Date, of Counterparty in customary form
and (ii) an opinion of counsel (subject to customary qualifications, assumptions
and exceptions), dated as of the Effective Date and reasonably acceptable to
Dealer in form and substance, with respect to the matters set forth in Sections
3(a)(i), 3(a)(ii) and 3(a)(iv) of the Agreement and Sections 7(a)(vii) and
7(a)(xii) hereof. In addition, in connection with the entry into or consummation
of any Non-US Merger Transaction (as defined below), Counterparty shall deliver
to Dealer an opinion of counsel (subject to customary qualifications,
assumptions and exceptions), dated as of the date of such Non-US Merger
Transaction, with respect to the matters set forth in Sections 3(a)(i),
3(a)(ii), 3(a)(iv) and 3(a)(v) of the Agreement and Sections 7(a)(vii) and
7(a)(xii) of this Confirmation (as if references to (x) “execute” and “deliver”
were each replaced with “assume” and (y) “execution, delivery” and “execution
and delivery” were each replaced with “assumption”).  “Non-US Merger
Transaction” means any Merger Event, reincorporation of Issuer, corporate
inversion of Issuer or similar transaction pursuant to which (x) the
consideration for the Shares includes (or, at the option of a holder of Shares,
may include) shares of an entity or person that is not a corporation or is not
organized under the laws of the United States, any State thereof or the District
of Columbia, (y) the Issuer following such Merger Event, reincorporation of
Issuer or corporate inversion of Issuer is organized in a jurisdiction other
than the United States, any State thereof or the District of Columbia or (z) the
Issuer following such Merger Event, reincorporation of Issuer, corporate
inversion of Issuer or similar transaction will not be a corporation.

 

(f)            Counterparty understands that notwithstanding any other
relationship between Counterparty and Dealer and its affiliates, in connection
with this Transaction and any other over-the-counter derivative transactions
between Counterparty and Dealer or its affiliates, Dealer or its affiliates is
acting as principal and is not a fiduciary or advisor in respect of any such
transaction, including any entry, exercise, amendment, unwind or termination
thereof.

 

(g)           Counterparty represents and warrants that it has received, read
and understands the OTC Options Risk Disclosure Statement and a copy of the most
recent disclosure pamphlet prepared by The Options Clearing Corporation entitled
“Characteristics and Risks of Standardized Options”.

 

(h)           Each party acknowledges and agrees to be bound by the Conduct
Rules of the Financial Industry Regulatory Authority, Inc. applicable to
transactions in options, and further agrees not to violate the position and
exercise limits set forth therein.

 

(i)            Counterparty represents and warrants that the assets used in the
Transaction (i) are not assets of any “plan” (as such term is defined in
Section 4975 of the U.S. Internal Revenue Code (the “Code”)) subject to
Section 4975 of the Code or any “employee benefit plan” (as such term is defined
in Section 3(3) of the U.S. Employee Retirement Income Security Act of 1974, as
amended (“ERISA”))

 

18

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subject to Title I of ERISA, and (ii) do not constitute “plan assets” within the
meaning of Department of Labor Regulation 2510.3-101, 29 CFR Section 2510-3-101.

 

8.  Other Provisions:

 

(a)           Right to Extend.  Dealer may postpone or add, in whole or in part,
any Exercise Date or Settlement Date or any other date of valuation or delivery
by Dealer, with respect to some or all of the relevant Options (in which event
the Calculation Agent shall make appropriate adjustments to the Delivery
Obligation), if Dealer determines, in its reasonable discretion, based on the
advice of counsel in the case of clause (ii) below, that such extension or
addition is reasonably necessary or appropriate (i) to maintain or unwind a
commercially reasonable Hedge Position in light of existing liquidity conditions
in the cash market, the stock borrow market or other relevant market (but only
if the Calculation Agent determines that there is a material decrease in
liquidity relative to Dealer’s expectations as of the Trade Date) or (ii) to
enable Dealer to effect transactions with respect to Shares or Share Termination
Delivery Units in connection with maintaining or unwinding a commercially
reasonable Hedge Position in a manner that would, if Dealer were Counterparty or
an affiliated purchaser of Counterparty, be in compliance with applicable legal,
regulatory or self-regulatory requirements, or with related policies and
procedures applicable to Dealer (whether or not such requirements, policies or
procedures are imposed by law or have been voluntarily adopted by Dealer);
provided that such policies and procedures have been adopted by Dealer in good
faith and are generally applicable in similar situations and applied in a
non-discriminatory manner; provided further that solely with respect to a
postponement pursuant to clause (i) above, no such Exercise Date or Settlement
Date or any other date of valuation or delivery may be postponed or added more
than 40 Exchange Business Days after the original Exercise Date or Settlement
Date or other date of valuation or delivery, as the case may be.

 

(b)           Additional Termination Events.

 

(i)            The occurrence of (A) an event of default with respect to
Counterparty under the terms of the Convertible Securities as set forth in
Section 6.01 of the Indenture that results in the Convertible Securities
becoming or being declared due and payable pursuant to the terms of the
Indenture, (B) an Amendment Event, or (C) Dealer’s receipt of notice from
Counterparty of an Excluded Conversion Event, in each case, shall constitute an
Additional Termination Event with respect to which the Transaction is the sole
Affected Transaction and Counterparty is the sole Affected Party, and Dealer
shall promptly designate an Early Termination Date pursuant to Section 6(b) of
the Agreement in respect of such Additional Termination Event and determine the
amount payable pursuant to Section 6(e) of the Agreement; provided that in the
case of an Excluded Conversion Event, the Transaction shall be subject to
termination only in respect of a number of Options (the “Affected Number of
Options”), equal to the lesser of (1) the number of Convertible Securities that
cease to be outstanding in connection with or as a result of such Excluded
Conversion Event minus the “Affected Number of Options” (as defined in the Base
Capped Call Transaction Confirmation), if any, that relate to such Excluded
Conversion Event (and, for the purposes of determining whether any Options under
this Confirmation or under the Base Capped Call Transaction Confirmation will be
among the Affected Number of Options hereunder or among the “Affected Number of
Options” under, and as defined in, the Base Capped Call Transaction
Confirmation, the Affected Number of Options shall be allocated first to the
Base Capped Call Transaction Confirmation until all Options thereunder are
exercised or terminated), and (2) the number of Options then outstanding.  For
the avoidance of doubt, in determining the amount payable in respect of such
Affected Transaction pursuant to Section 6 of the Agreement in connection with
an Excluded Conversion Event (such amount, the “Excluded Conversion Unwind
Payment”), the Calculation Agent shall assume (x) that the relevant Excluded
Convertible Securities shall not have been converted and remain outstanding,
(y) in the case of an Induced Conversion, that any adjustments, agreements,
additional payments, deliveries or acquisitions by or on behalf of Counterparty
or any affiliate of Counterparty in connection therewith had not occurred and
(z) that no holders of Convertible Securities were entitled to receive any
additional Shares pursuant to a Fundamental Change Adjustment, if any. Promptly
following the occurrence of an Excluded Conversion Event, Counterparty shall
notify Dealer of (x) such occurrence and (y) the “Settlement Method” (as defined
in the Indenture) (and, if

 

19

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applicable, the “Specified Dollar Amount” (as defined in the Indenture)) elected
(or deemed to be elected) with respect to the relevant Excluded Convertible
Securities (which notice shall include the representations, warranties and
acknowledgments set forth in Section 2 opposite the caption “Settlement Method
Election Provisions”) (such notice, an “Excluded Conversion Event Notice”).
Counterparty shall use commercially reasonable efforts to provide an Excluded
Conversion Event Notice within five Scheduled Trading Days of the occurrence of
an Excluded Conversion Event and, if such Excluded Conversion Event Notice is
made after such five Scheduled Trading Day period, such Excluded Conversion
Event Notice will contain the following representations, warranties and
acknowledgments of Counterparty each made as of the date of such Excluded
Conversion Event Notice:  (1) the representation and warranty set forth in
Section 7(a)(i)(A) of this Confirmation (as if the reference to the “Trade Date”
therein were replaced with a reference to the date of such Excluded Conversion
Event Notice); (2) Counterparty acknowledges its responsibilities under
applicable securities laws, and in particular Section 9 and Section 10(b) of the
Exchange Act and the rules and regulations thereunder, in respect of the
delivery of such Excluded Conversion Event Notice; (3) Counterparty is
delivering such Excluded Conversion Event Notice in good faith and not as part
of a plan or scheme to evade compliance with the U.S. federal securities laws;
(4) Counterparty is not delivering such Excluded Conversion Event Notice to
create actual or apparent trading activity in the Shares (or any security
convertible into or exchangeable for Shares) or to raise or depress or otherwise
manipulate the price of the Shares (or any security convertible into or
exchangeable for Shares) in violation of the Exchange Act; (5) Counterparty has
not entered into or altered any hedging transaction relating to the Shares
corresponding to or offsetting the Transaction; and (6) Counterparty
acknowledges that any transaction that Dealer makes with respect to the Shares
during the commercially reasonable period of time over which the Market Price
(as defined below) is determined shall be made by Dealer at Dealer’s sole
discretion for Dealer’s own account and Counterparty shall not have, and shall
not attempt to exercise, any influence over how, when, whether or at what price
Dealer effects such transactions, including, without limitation, the prices paid
or received by Dealer per Share pursuant to such transactions, or whether such
transactions are made on any securities exchange or privately.

 

If Counterparty has notified Dealer in the applicable notice of an Excluded
Conversion Event that it has elected to satisfy its conversion obligation in
respect of the related Excluded Convertible Securities entirely in Shares or in
a combination of cash and Shares, then in lieu of paying the Excluded Conversion
Unwind Payment entirely in cash, Dealer shall pay and/or deliver to
Counterparty, on the date such Excluded Conversion Unwind Payment would
otherwise be due (or within a commercially reasonable period of time thereafter,
as determined by Dealer taking into account existing liquidity conditions and
commercially reasonable hedging and hedge unwind activity or settlement activity
in connection with delivery) (A) in the case where Counterparty has elected to
satisfy its conversion obligation in respect of the related Excluded Convertible
Securities entirely in Shares or in a combination of cash and Shares with a
“Specified Dollar Amount” (as defined in the Indenture) equal to or less than
USD1,000, a number of Shares equal to the quotient of (x) the amount of such
Excluded Conversion Unwind Payment divided by (y) a market price per Share
(which market price per Share may, but is not required to, correspond to the
“Daily VWAP” over the “Observation Period” (each as defined in the Indenture),
if applicable, with respect to the Excluded Convertible Securities) (the “Market
Price”) determined by the Calculation Agent over a commercially reasonable
period of time to unwind a commercially reasonable Hedge Position or (B) in the
case where Counterparty has elected to satisfy its conversion obligation in
respect of the related Excluded Convertible Securities in a combination of cash
and Shares with a “Specified Dollar Amount” (as defined in the Indenture)
greater than USD1,000, (x) an amount of cash equal to the lesser of (1) the
amount of such Excluded Conversion Unwind Payment and (2) the product of (I) the
product of the Applicable Percentage and the excess of such “Specified Dollar
Amount” (as defined in the Indenture) over USD1,000 and (II) the Affected Number
of Options and (y) if the amount of such Excluded Conversion Unwind Payment
exceeds the amount of cash calculated pursuant to the immediately preceding
clause (B)(x)(2), a number of Shares equal to the quotient of (x) the amount of
such excess divided by (y) the Market Price determined by the Calculation Agent
over a commercially reasonable

 

20

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period of time to unwind a commercially reasonable Hedge Position.
Notwithstanding anything to the contrary herein, any payment calculated pursuant
to this Section 8(b)(i) in respect of an Excluded Conversion Event shall be a
“Payment Obligation” to which the Share Termination Alternative provisions of
Section 8(c) below apply; provided that, for the avoidance of doubt, in the case
of a payment or delivery pursuant to this Section 8(b)(i) following an
Extraordinary Event, the Calculation Agent shall adjust the composition of the
Shares as appropriate to reflect the composition of consideration received by
holders of Shares in such Extraordinary Event (as determined in a manner
consistent with the provisions opposite the caption “Share Termination Delivery
Unit” below) and the provisions opposite the caption “Other Applicable
Provisions” below shall apply.

 

“Amendment Event” means that Counterparty amends, modifies, supplements or
obtains a waiver in respect of any term of the Indenture or the Convertible
Securities governing the principal amount, coupon, maturity, repurchase
obligation of Counterparty, absence of a redemption right of Counterparty, any
term relating to conversion of the Convertible Securities (including changes to
the conversion rate, conversion rate adjustment provisions, conversion
settlement dates or conversion conditions), or any term that would require
consent of the holders of not less than 100% of the principal amount of the
Convertible Securities to amend (but excluding, for the avoidance of doubt, any
amendment, modification or supplement described in clause (x) or (y) of the
first paragraph of Section 1), in each case without the prior consent of Dealer.

 

“Excluded Conversion Event” means any conversion of Convertible Securities
(other than Convertible Securities that are Exchanged Securities) with a
“Conversion Date” (as defined in the Indenture) occurring prior to January 15,
2023.

 

“Induced Conversion” means a conversion of any Excluded Convertible Securities
(A) in connection with (x) an adjustment to the Conversion Rate effected by
Counterparty (whether any Discretionary Adjustment or otherwise) that is not
required under the terms of the Indenture or (y) an agreement by Counterparty
with the holder(s) of such Convertible Securities whereby, in the case of either
(x) or (y), the holder(s) of such Convertible Securities receive upon conversion
or pursuant to such agreement, as the case may be, a payment of cash or delivery
of Shares or any other property or item of value that was not required under the
terms of the Indenture or (B) after having been acquired from a holder of
Convertible Securities by or on behalf of Counterparty or any of its affiliates
other than pursuant to a conversion by such Holder and thereafter converted by
or on behalf of Counterparty or any affiliate of Counterparty.

 

(ii) (1)     Promptly following any Repayment Event (as defined below) (but, in
any event, within 5 Scheduled Trading Days following settlement thereof),
Counterparty may notify Dealer of such Repayment Event and the aggregate
principal amount of Convertible Securities subject to such Repayment Event (the
“Repayment Convertible Securities”) (any such notice, a “Repayment Notice”);
provided that any “Repayment Notice” delivered to Dealer pursuant to the Base
Capped Call Transaction Confirmation shall be deemed to be a Repayment Notice
pursuant to this Confirmation and the terms of such Repayment Notice shall
apply, mutatis mutandis, to this Confirmation. The receipt by Dealer from
Counterparty of any Repayment Notice shall constitute an Additional Termination
Event as provided in this Section 8(b)(ii).

 

(2)           Upon receipt of any such Repayment Notice, Dealer shall designate
an Exchange Business Day following receipt of such Repayment Notice (which
Exchange Business Day shall be on or as promptly as reasonably practicable after
the related settlement date for the relevant Repayment Event) as an Early
Termination Date with respect to a portion (the “Repayment Terminated Portion”)
of the Transaction consisting of a number of Options (the “Repayment Options”)
equal to the lesser of (A) the number of Repayment Convertible Securities in
denominations of USD1,000 that are subject to the relevant Repayment Event (and
for the purposes of determining whether any Convertible Securities will be
Repayment Convertible Securities hereunder or under, and as defined in, the Base
Capped Call Transaction Confirmation, Convertible Securities that are subject to
a Repayment Event shall be allocated first

 

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to the Base Capped Call Transaction Confirmation until all Options thereunder
are exercised or terminated) and (B) the Number of Options as of the date Dealer
designates such Early Termination Date, and as of such date, the Number of
Options shall be reduced by the number of Repayment Options.

 

(3)           Any payment or delivery in respect of such termination of the
Repayment Terminated Portion of the Transaction shall be made pursuant to
Section 6 of the Agreement and, if applicable, Section 8(c) of this
Confirmation.  Counterparty shall be the sole Affected Party with respect to
such Additional Termination Event and the Repayment Terminated Portion of the
Transaction shall be the sole Affected Transaction. “Repayment Event” means that
(i) any Convertible Securities are repurchased by Counterparty or any of its
subsidiaries, (ii) any Convertible Securities are delivered to Counterparty in
exchange for delivery of any property or assets of Counterparty or any of its
subsidiaries (howsoever described), (iii) any principal of any of the
Convertible Securities is repaid prior to the final maturity date of the
Convertible Securities (other than upon acceleration of the Convertible
Securities described in Section 8(b)(i) of the Confirmation), or (iv) any
Convertible Securities are exchanged by or for the benefit of the “Holders” (as
defined in the Indenture) thereof for any other securities of Counterparty or
any of its “Affiliates” (as defined in the Indenture) (or any other property, or
any combination thereof) pursuant to any exchange offer or similar transaction;
provided that no conversion of Convertible Securities pursuant to the terms of
the Indenture shall constitute a Repayment Event.  Counterparty acknowledges its
responsibilities under applicable securities laws, and in particular Section 9
and Section 10(b) of the Exchange Act and the rules and regulations thereunder,
in respect of any action taken by Counterparty in respect of a Repayment Event,
including, without limitation, the delivery of a Repayment Notice.

 

(4)           Counterparty acknowledges and agrees that, except to the extent
provided above in this Section 8(b)(ii), all such Convertible Securities subject
to a Repayment Event will be deemed for all purposes under the Transaction to be
permanently extinguished and no longer outstanding.

 

(c)           Alternative Calculations and Payment on Early Termination and on
Certain Extraordinary Events.  If Dealer shall owe Counterparty any amount
pursuant to Section 12.2 of the Equity Definitions or “Consequences of Merger
Events/Tender Offers” above, or Section 12.6, 12.7 or 12.9 of the Equity
Definitions or pursuant to Section 6(d)(ii) of the Agreement (a “Payment
Obligation”), Counterparty shall have the right, in its sole discretion, to
require Dealer to satisfy any such Payment Obligation by the Share Termination
Alternative (as defined below) by giving irrevocable telephonic notice to
Dealer, confirmed in writing within one Scheduled Trading Day, no later than
12:00 noon, New York City time (it being understood and agreed that if such
notice is given after 9:30 a.m., New York City time, the Calculation Agent may
adjust such Payment Obligation in a commercially reasonable manner to reflect
the additional costs and expenses incurred in connection with maintaining or
unwinding a commercially reasonable hedge position as a result of such
notification being given after such time), on the relevant merger date,
Announcement Date, Early Termination Date or date of cancellation or termination
in respect of an Extraordinary Event, as applicable (“Notice of Share
Termination”); provided that Counterparty shall not have the right to so elect
in the event (i) of an Insolvency, a Nationalization or a Merger Event, in each
case, in which the consideration or proceeds to be paid to holders of Shares
consists solely of cash, (ii) of an Event of Default in which Counterparty is
the Defaulting Party or a Termination Event in which Counterparty is the
Affected Party or an Extraordinary Event, which Event of Default, Termination
Event or Extraordinary Event resulted from an event or events within
Counterparty’s control or (iii) that Counterparty fails to remake the
representation set forth in Section 7(a)(i)(A) of this Confirmation (as if the
reference to “Trade Date” therein were replaced with a reference to the date of
such election).  Upon such Notice of Share Termination, the following provisions
shall apply on the Scheduled Trading Day immediately following the relevant
merger date, Announcement Date, Early Termination Date or date of cancellation
or termination in respect of an Extraordinary Event, as applicable:

 

Share Termination Alternative:

 

If applicable, means that Dealer shall deliver to Counterparty the Share
Termination Delivery Property on the date on which the Payment Obligation would
otherwise be due pursuant to “Consequences of

 

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Merger Events/Tender Offers” above or Section 12.2, 12.6, 12.7 or 12.9 of the
Equity Definitions or Section 6(d)(ii) of the Agreement, as applicable, or such
later date or dates as the Calculation Agent may reasonably determine (the
“Share Termination Payment Date”), in satisfaction of the Payment Obligation.

 

 

 

Share Termination Delivery Property:

 

A number of Share Termination Delivery Units, as calculated by the Calculation
Agent, equal to the Payment Obligation divided by the Share Termination Unit
Price. The Calculation Agent shall adjust the Share Termination Delivery
Property by replacing any fractional portion of the aggregate amount of a
security therein with an amount of cash equal to the value of such fractional
security based on the values used to calculate the Share Termination Unit Price.

 

 

 

Share Termination Unit Price:

 

The value of property contained in one Share Termination Delivery Unit on the
date such Share Termination Delivery Units are to be delivered as Share
Termination Delivery Property, as determined by the Calculation Agent by
commercially reasonable means and notified by the Calculation Agent to Dealer at
the time of notification of the Payment Obligation.

 

 

 

Share Termination Delivery Unit:

 

In the case of a Termination Event, Event of Default, Delisting or Additional
Disruption Event, one Share or, in the case of an Insolvency, Nationalization or
Merger Event, one Share or a unit consisting of the number or amount of each
type of property received by holders of all or substantially all Shares
(determined on a per Share basis and without consideration of any requirement to
pay cash or other consideration in lieu of fractional amounts of any securities)
in such Insolvency, Nationalization or Merger Event, as applicable. If such
Insolvency, Nationalization or Merger Event involves a choice of consideration
to be received by holders, such holder shall be deemed to have elected to
receive the maximum possible amount of cash.

 

 

 

Failure to Deliver:

 

Applicable

 

 

 

Other Applicable Provisions:

 

If Share Termination Alternative is applicable, the provisions of Sections 9.8,
9.9, 9.10 and 9.11 of the Equity Definitions will be applicable as if “Physical
Settlement” applied to the Transaction, except that all references to “Shares”
shall be read as references to “Share Termination Delivery Units”; provided that
the Representation and Agreement contained in Section 9.11 of the Equity
Definitions shall be modified by excluding any representations therein relating
to restrictions, obligations, limitations or requirements under applicable
securities laws as a result of the fact that Counterparty is the issuer of any
Share Termination Delivery Units (or any part thereof).

 

(d)           Disposition of Hedge Shares.  Counterparty hereby agrees that if,
in the good faith reasonable judgment of Dealer based on the advice of counsel,
the Shares (the “Hedge Shares”) acquired by Dealer for the purpose of hedging
its obligations pursuant to the Transaction cannot be sold in the U.S. public
market by Dealer without registration under the Securities Act, Counterparty
shall, at its election: (i) in order to allow Dealer to sell the Hedge Shares in
a registered offering, make available to Dealer an effective registration
statement under the Securities Act to cover the resale of such Hedge Shares and
(A) enter into an agreement, in form and substance satisfactory to Dealer,
substantially in the form of an underwriting agreement for a registered
offering, (B) provide accountant’s “comfort” letters in customary form for
registered offerings of equity securities, (C) provide disclosure opinions of
nationally recognized outside counsel to Counterparty reasonably acceptable to
Dealer, (D) provide other customary opinions, certificates and closing documents
customary in form for registered offerings of equity securities and (E)

 

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afford Dealer a reasonable opportunity to conduct a “due diligence”
investigation with respect to Counterparty customary in scope for underwritten
offerings of equity securities; provided, however, that if Counterparty elects
clause (i) above but the items referred to therein are not completed in a timely
manner, or if Dealer, in its sole commercially reasonable discretion, is not
satisfied with access to due diligence materials, the results of its due
diligence investigation, or the procedures and documentation for the registered
offering referred to above, then clause (ii) or clause (iii) of this
Section 8(d) shall apply at the election of Counterparty; (ii) in order to allow
Dealer to sell the Hedge Shares in a private placement, enter into a private
placement agreement substantially similar to private placement purchase
agreements customary for private placements of equity securities of similar size
and type, in form and substance satisfactory to Dealer, including customary
representations, covenants, blue sky and other governmental filings and/or
registrations, indemnities to Dealer, due diligence rights (for Dealer or any
designated buyer of the Hedge Shares from Dealer), opinions and certificates and
such other documentation as is customary for private placements agreements, all
reasonably acceptable to Dealer (in which case, the Calculation Agent shall make
any adjustments to the terms of the Transaction that are necessary, in its
reasonable judgment, to compensate Dealer for any discount from the public
market price of the Shares incurred on the sale of Hedge Shares in a private
placement of similar size and type); or (iii) purchase the Hedge Shares from
Dealer at the “Daily VWAP” (as defined in the Indenture) on such Exchange
Business Days, and in the amounts, requested by Dealer.  This Section 8(d) shall
survive the termination, expiration or early unwind of the Transaction.

 

(e)           Repurchase and Conversion Rate Adjustment Notices.  Counterparty
shall, on any day on which Counterparty effects any repurchase of Shares or
consummates or otherwise engages in any transaction or event that could
reasonably be expected to lead to an increase in the Conversion Rate (a
“Conversion Rate Adjustment Event”), give Dealer a written notice of such
repurchase or Conversion Rate Adjustment Event (a “Repurchase Notice”) on such
day if, following such repurchase or Conversion Rate Adjustment Event, the
Notice Percentage would reasonably be expected to be (i) greater than 5.9% or
(ii) greater by 0.5% than the Notice Percentage included in the immediately
preceding Repurchase Notice, and, if such repurchase or Conversion Rate
Adjustment Event, or the intention to effect the same, would constitute material
nonpublic information with respect to Counterparty or the Shares, Counterparty
shall make public disclosure thereof at or prior to delivery of such Repurchase
Notice.  The “Notice Percentage” as of any day is the fraction, expressed as a
percentage, the numerator of which is the Number of Shares plus the number of
Shares underlying any other call options sold by Dealer to Counterparty and the
denominator of which is the number of Shares outstanding on such day.  In the
event that Counterparty fails to provide Dealer with a Repurchase Notice on the
day and in the manner specified in this Section 8(e) then Counterparty agrees to
indemnify and hold harmless Dealer, its affiliates and their respective
directors, officers, employees, agents and controlling persons (Dealer and each
such person being an “Indemnified Party”) from and against any and all losses
(including losses relating to the Dealer’s commercially reasonable hedging
activities as a consequence of becoming, or of the risk of becoming, a
Section 16 “insider”, including without limitation, any forbearance from hedging
activities or cessation of hedging activities and any losses in connection
therewith with respect to this Transaction), claims, damages and liabilities (or
actions in respect thereof), joint or several, to which such Indemnified Party
may become subject under applicable securities laws, including without
limitation, Section 16 of the Exchange Act or under any state or federal law,
regulation or regulatory order, relating to or arising out of such failure.  If
for any reason the foregoing indemnification is unavailable to any Indemnified
Party or insufficient to hold harmless any Indemnified Party, then Counterparty
shall contribute, to the maximum extent permitted by law, to the amount paid or
payable by the Indemnified Party as a result of such loss, claim, damage or
liability.  In addition, Counterparty will reimburse any Indemnified Party for
all reasonable, out-of-pocket expenses (including reasonable, out-of-pocket
counsel fees and expenses) as they are incurred (after notice to Counterparty)
in connection with the investigation of, preparation for or defense or
settlement of any pending or threatened claim or any action, suit or proceeding
arising therefrom, whether or not such Indemnified Party is a party thereto and
whether or not such claim, action, suit or proceeding is initiated or brought by
or on behalf of Counterparty.  This indemnity shall survive the completion of
the Transaction contemplated by this Confirmation and any assignment and
delegation of the Transaction made pursuant to this Confirmation or the
Agreement shall inure to the benefit of any permitted assignee of Dealer.

 

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(f)            Transfer and Assignment.  Either party may transfer or assign any
of its rights or obligations under the Transaction with the prior written
consent of the non-transferring party, such consent not to be unreasonably
withheld or delayed; provided that Dealer may transfer or assign without any
consent of Counterparty its rights and obligations hereunder, in whole or in
part, to any affiliate of Dealer (1) that has a long-term issuer rating that is
equal to or better than Dealer’s credit rating at the time of such transfer or
assignment or (2) whose obligations hereunder will be guaranteed, pursuant to
the terms of a customary guarantee in a form used by Dealer or Dealer’s ultimate
parent, as applicable, generally for similar transactions, by Dealer or Dealer’s
ultimate parent; provided further that it shall be a condition to a transfer or
assignment by Dealer without Counterparty’s consent that (x) as of the date of
such transfer or assignment, and giving effect thereto, Counterparty will not be
required (or, as determined by Dealer in good faith, reasonably expected) to pay
the transferee, assignee or Dealer on any payment date an amount under
Section 2(d)(i)(4) of the Agreement greater than an amount that Counterparty
would have been required to pay to Dealer in the absence of such transfer or
assignment and (y) as of the date of such transfer or assignment, and giving
effect thereto, the transferee or assignee will not be required to withhold or
deduct on account of Tax from any payments under the Agreement or will be
required to gross up for such Tax under Section 2(d)(i)(4) of the Agreement. If
at any time at which (1) the Equity Percentage exceeds 8.0% or (2) Dealer,
Dealer Group (as defined below) or any person whose ownership position would be
aggregated with that of Dealer or Dealer Group (Dealer, Dealer Group or any such
person, a “Dealer Person”) under Section 203 of the Delaware General Corporation
Law or other federal, state or local law, rule, regulation or regulatory order
or organizational documents or contracts of Counterparty applicable to ownership
of Shares (“Applicable Restrictions”), owns, beneficially owns, constructively
owns, controls, holds the power to vote or otherwise meets a relevant definition
of ownership in excess of a number of Shares equal to (x) the minimum number of
Shares that would give rise to reporting, registration, filing or notification
obligations (except for any filings of Form 13F, Schedule 13D or Schedule 13G
under the Exchange Act) or other requirements (including obtaining prior
approval by a state or federal regulator) of a Dealer Person under Applicable
Restrictions and with respect to which such requirements have not been met or
the relevant approval has not been received minus (y) 1% of the number of Shares
outstanding on the date of determination (either such condition described in
clause (1) or (2), an “Excess Ownership Position”), Dealer, in its discretion,
is unable to effect a transfer or assignment to a third party after its
commercially reasonable efforts on pricing and terms and within a time period
reasonably acceptable to Dealer such that an Excess Ownership Position no longer
exists, Dealer may designate any Scheduled Trading Day as an Early Termination
Date with respect to a portion (the “Terminated Portion”) of the Transaction,
such that an Excess Ownership Position no longer exists following such partial
termination.  In the event that Dealer so designates an Early Termination Date
with respect to a portion of the Transaction, a payment or delivery shall be
made pursuant to Section 6 of the Agreement and Section 8(c) of this
Confirmation as if (i) an Early Termination Date had been designated in respect
of a Transaction having terms identical to the Terminated Portion of the
Transaction, (ii) Counterparty were the sole Affected Party with respect to such
partial termination, (iii) such portion of the Transaction were the only
Terminated Transaction and (iv) Dealer were the party entitled to designate an
Early Termination Date pursuant to Section 6(b) of the Agreement and to
determine the amount payable pursuant to Section 6(e) of the Agreement. The
“Equity Percentage” as of any day is the fraction, expressed as a percentage,
(A) the numerator of which is the number of Shares that Dealer and any of its
affiliates subject to aggregation with Dealer for purposes of the “beneficial
ownership” test under Section 13 of the Exchange Act and all persons who may
form a “group” (within the meaning of Rule 13d-5(b)(1) under the Exchange Act)
with Dealer (collectively, “Dealer Group”) “beneficially own” (within the
meaning of Section 13 of the Exchange Act) without duplication on such day and
(B) the denominator of which is the number of Shares outstanding on such day. 
In the case of a transfer or assignment by Counterparty of its rights and
obligations hereunder and under the Agreement, in whole or in part (any such
Options so transferred or assigned, the “Transfer Options”), to any party,
withholding of such consent by Dealer shall not be considered unreasonable if
such transfer or assignment does not meet the reasonable conditions that Dealer
may impose including, but not limited, to the following conditions:

 

(A)         With respect to any Transfer Options, Counterparty shall not be
released from its notice and indemnification obligations pursuant to
Section 8(e) or any obligations under Section 2 (regarding Extraordinary Events)
or 8(d) of this Confirmation;

 

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(B)         Prior to the occurrence of a Non-US Merger Transaction, any Transfer
Options shall only be transferred or assigned to a third party that is a U.S.
person (as defined in the Internal Revenue Code of 1986, as amended);

 

(C)         Such transfer or assignment shall be effected on terms, including
any reasonable undertakings by such third party (including, but not limited to,
undertakings with respect to compliance with applicable securities laws in a
manner that, in the reasonable judgment of Dealer, will not expose Dealer to
material risks under applicable securities laws) and execution of any
documentation and delivery of legal opinions with respect to securities laws and
other matters by such third party and Counterparty as are requested and
reasonably satisfactory to Dealer;

 

(D)         Dealer will not, as a result of such transfer and assignment, be
required to pay the transferee on any payment date an amount under
Section 2(d)(i)(4) of the Agreement greater than an amount that Dealer would
have been required to pay to Counterparty in the absence of such transfer and
assignment;

 

(E)         An Event of Default, Potential Event of Default or Termination Event
will not occur as a result of such transfer and assignment;

 

(F)          Without limiting the generality of clause (B), Counterparty shall
have caused the transferee to make such Payee Tax Representations and to provide
such tax or other documentation as may be reasonably requested by Dealer to
permit Dealer to determine that results described in clauses (D) and (E) will
not occur upon or after such transfer and assignment; and

 

(G)         Counterparty shall be responsible for all reasonable, out-of-pocket
costs and expenses, including reasonable counsel fees, incurred by Dealer in
connection with such transfer or assignment.

 

(g)           Staggered Settlement. Dealer may, by notice to Counterparty prior
to any Settlement Date (a “Nominal Settlement Date”), elect to deliver the
Shares on one or more dates (each, a “Staggered Settlement Date”) or at two or
more times on the Nominal Settlement Date as follows:

 

(i)            in such notice, Dealer will specify to Counterparty the related
Staggered Settlement Dates (each of which will be on or prior to the Nominal
Settlement Date, but not prior to the earlier of the Conversion Date and the
first day of the relevant Cash Settlement Averaging Period) or delivery times
and how it will allocate the Shares it is required to deliver under “Delivery
Obligation” (above) among the Staggered Settlement Dates or delivery times; and

 

(ii)           the aggregate number of Shares that Dealer will deliver to
Counterparty hereunder on all such Staggered Settlement Dates and delivery times
will equal the number of Shares that Dealer would otherwise be required to
deliver on such Nominal Settlement Date.

 

(h)           Disclosure.  Effective from the date of commencement of
discussions concerning the Transaction, Counterparty and each of its employees,
representatives, or other agents may disclose to any and all persons, without
limitation of any kind, the tax treatment and tax structure of the Transaction
and all materials of any kind (including opinions or other tax analyses) that
are provided to Counterparty relating to such tax treatment and tax structure.

 

(i)     No Netting or Set-off.  The provisions of Section 2(c) of the Agreement
shall not apply to the Transaction. Each party waives any and all rights it may
have to set-off delivery or payment obligations it owes to the other party under
the Transaction against any delivery or payment obligations owed to it by the
other party under any other agreement between the parties hereto, by operation
of law or otherwise.

 

(j)    Equity Rights.  Dealer acknowledges and agrees that this Confirmation is
not intended to convey to it rights with respect to the Transaction that are
senior to the claims of common stockholders in the event of Counterparty’s
bankruptcy.  For the avoidance of doubt, the parties agree that the preceding
sentence shall not apply at any time other than during Counterparty’s bankruptcy
to any claim arising as a result of a breach by Counterparty of any of its
obligations under this Confirmation or the Agreement.  For

 

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the avoidance of doubt, the parties acknowledge that the obligations of
Counterparty under this Confirmation are not secured by any collateral that
would otherwise secure the obligations of Counterparty herein under or pursuant
to any other agreement.

 

(k)   Early Unwind.  In the event the sale by Counterparty of the Optional
Securities (as defined in the Purchase Agreement) is not consummated pursuant to
the Purchase Agreement for any reason, or Counterparty fails to deliver to
Dealer opinions of counsel as required pursuant to the first sentence of
Section 7(e), in each case by the close of business in New York on the Premium
Payment Date (or such later date as agreed upon by the parties) (the Premium
Payment Date or such later date being the “Early Unwind Date”), the Transaction
shall automatically terminate (the “Early Unwind”) on the Early Unwind Date and
the Transaction and all of the respective rights and obligations of Dealer and
Counterparty hereunder shall be cancelled and terminated.  Following such
cancellation and termination, each party shall be released and discharged by the
other party from, and agrees not to make any claim against the other party with
respect to, any obligations or liabilities of either party arising out of, and
to be performed in connection with, the Transaction either prior to or after the
Early Unwind Date.  Dealer and Counterparty represent and acknowledge to the
other that upon an Early Unwind, all obligations with respect to the Transaction
shall be deemed fully and finally discharged.

 

(l)   Wall Street Transparency and Accountability Act of 2010.  The parties
hereby agree that none of (v) Section 739 of the Wall Street Transparency and
Accountability Act of 2010 (“WSTAA”), (w) any similar legal certainty provision
in any legislation enacted, or rule or regulation promulgated, on or after the
Trade Date, (x) the enactment of WSTAA or any regulation under the WSTAA,
(y) any requirement under WSTAA nor (z) an amendment made by WSTAA, shall limit
or otherwise impair either party’s rights to terminate, renegotiate, modify,
amend or supplement this Confirmation or the Agreement, as applicable, arising
from a termination event, force majeure, illegality, increased costs, regulatory
change or similar event under this Confirmation, the Equity Definitions
incorporated herein or the Agreement (including, but not limited to, rights
arising from a Change in Law, a Failure to Deliver, a Hedging Disruption, an
Increased Cost of Hedging, an Excess Ownership Position or Illegality (as
defined in the Agreement)).

 

(m) Payment by Counterparty. In the event that, following the payment of the
Premium hereunder by counterparty, an Early Termination Date occurs or is
designated with respect to the Transaction as a result of a Termination Event or
an Event of Default and, as a result, Counterparty owes to Dealer an amount
calculated under Section 6(e) of the Agreement, such amount shall be deemed to
be zero.  For the avoidance of doubt, this Section 8(m) shall not preclude
Dealer from bringing any legal action, suit or proceeding against Counterparty
seeking monetary damages for a breach of this Confirmation or the Agreement or a
misrepresentation made by Counterparty hereunder or thereunder.

 

(n)  Governing Law.  THE AGREEMENT, THIS CONFIRMATION AND ALL MATTERS ARISING IN
CONNECTION WITH THE AGREEMENT AND THIS CONFIRMATION SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
(WITHOUT REFERENCE TO ITS CHOICE OF LAW DOCTRINE, OTHER THAN TITLE 14 OF THE NEW
YORK GENERAL OBLIGATIONS LAW).

 

(o)  Amendment.  This Confirmation and the Agreement may not be modified,
amended or supplemented, except in a written instrument signed by Counterparty
and Dealer.

 

(p)  Counterparts.  This Confirmation may be executed in several counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.

 

(q)  Designation by Dealer. Notwithstanding any other provision in this
Confirmation to the contrary requiring or allowing Dealer to purchase, sell,
receive or deliver any Shares or other securities to or from Counterparty,
Dealer may designate any of its affiliates to purchase, sell, receive or deliver
such shares or other securities and otherwise to perform Dealer obligations in
respect of the Transaction and any such designee may assume such obligations. 
Dealer shall be discharged of its obligations to Counterparty to the extent of
any such performance.

 

(r)   Tax Matters.

 

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(i)            Withholding Tax imposed on payments to non-US counterparties
under the United States Foreign Account Tax Compliance Act.  “Tax” and
“Indemnifiable Tax”, each as defined in Section 14 of the Agreement, shall not
include any withholding tax imposed or collected pursuant to Sections 1471
through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”),
any current or future regulations or official interpretations thereof, any
agreement entered into pursuant to Section 1471(b) of the Code, or any fiscal or
regulatory legislation, rules or practices adopted pursuant to any
intergovernmental agreement entered into in connection with the implementation
of such Sections of the Code (a “FATCA Withholding Tax”). For the avoidance of
doubt, a FATCA Withholding Tax is a Tax the deduction or withholding of which is
required by applicable law for the purposes of Section 2(d) of the Agreement.

 

(ii)           HIRE Act.  “Tax” and “Indemnifiable Tax”, each as defined in
Section 14 of the Agreement, shall not include any tax imposed on payments
treated as dividends from sources within the United States under
Section 871(m) of the Code or any regulations issued thereunder.

 

(iii)         Tax Documentation. Counterparty shall provide to Dealer a valid
U.S. Internal Revenue Service Form W-9 or applicable W-8, or any successor
thereto, (i) on or before the date of execution of this Confirmation, (ii) upon
reasonable request of Dealer and (iii) promptly upon learning that any such tax
form previously provided by Counterparty has become obsolete or incorrect. 
Additionally, Counterparty shall, promptly upon request by Dealer, provide such
other tax forms and documents reasonably requested by Dealer.  Dealer shall
provide to Counterparty a valid U.S. Internal Revenue Service Form W-9, or any
successor thereto, (i) on or before the date of execution of this Confirmation,
(ii) upon reasonable request of Counterparty and (iii) promptly upon learning
that any such tax form previously provided by Dealer has become obsolete or
incorrect.  Additionally, Dealer shall, promptly upon request by Counterparty,
provide such other tax forms and documents reasonably requested by Counterparty.

 

(s)    Amendments to Equity Definitions.  The following amendments shall be made
to the Equity Definitions:

 

(i)            Section 12.6(a)(ii) of the Equity Definitions is hereby amended
by (1) deleting from the fourth line thereof the word “or” after the word
“official” and inserting a comma therefor, and (2) deleting the semi-colon at
the end of subsection (B) thereof and inserting the following words therefor “or
(C) at Dealer’s option, the occurrence of any of the events specified in
Section 5(a)(vii) (1) through (9) of the ISDA Master Agreement with respect to
that Issuer.”;

 

(ii)           Solely in respect of adjustments to the Cap Price, and other than
in respect of a Potential Adjustment Event resulting from any Share combination
or consolidation, or subdivision, dividend or distribution of the relevant
Shares, in each case, of the type described in Section 11.2(e)(i) of the Equity
Definitions:  the first sentence of Section 11.2(c) of the Equity Definitions,
prior to clause (A) thereof, is hereby amended to read as follows: ‘(c) If
“Calculation Agent Adjustment” is specified as the Method of Adjustment in the
related Confirmation of a Share Option Transaction, then following the
announcement or occurrence of any Potential Adjustment Event, the Calculation
Agent will determine whether such Potential Adjustment Event has a material
effect on the theoretical value of the relevant Shares or options on the Shares
and, if so, will (i) make appropriate adjustment(s), if any, to any one or more
of:’ and, the portion of such sentence immediately preceding clause (ii) thereof
is hereby amended by deleting the words “diluting or concentrative” and the
words “(provided that no adjustments will be made to account solely for changes
in volatility, expected dividends, stock loan rate or liquidity relative to the
relevant Shares)” and replacing such latter phrase with the words “(and, for the
avoidance of doubt, adjustments may be made to account solely for changes in
volatility, expected dividends, stock loan rate or liquidity relative to the
relevant Shares)”;

 

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(iii)          solely in respect of adjustments to the Cap Price,
Section 11.2(a) of the Equity Definitions is hereby amended by deleting the
words “diluting or concentrative” and replacing them with “material” and adding
the phrase “or options on the Shares” at the end of the sentence; and

 

(iv)          solely in respect of adjustments to the Cap Price,
Section 11.2(e)(vii) of the Equity Definitions is hereby amended by (x) deleting
the words “that may have” and replacing them with “that is within the control of
Issuer or its affiliates or agents and has”, (y) deleting the words “diluting or
concentrative” and replacing them with “material” and (z) adding the phrase “or
options on the Shares” at the end of the sentence.

 

(t)            Waiver of Trial by Jury. EACH OF COUNTERPARTY AND DEALER HEREBY
IRREVOCABLY WAIVES (ON ITS OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, ON BEHALF OF ITS STOCKHOLDERS) ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATING TO THE TRANSACTION OR THE ACTIONS OF DEALER OR ITS
AFFILIATES IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT HEREOF.

 

(u)           Jurisdiction.  THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED
STATES COURT FOR THE SOUTHERN DISTRICT OF NEW YORK IN CONNECTION WITH ALL
MATTERS RELATING HERETO AND WAIVE ANY OBJECTION TO THE LAYING OF VENUE IN, AND
ANY CLAIM OF INCONVENIENT FORUM WITH RESPECT TO, THESE COURTS.

 

(v)           Non-US Merger Transactions.          If (a) Issuer enters into or
consummates any Non-US Merger Transaction pursuant to which Issuer following
such Non-US Merger Transaction is organized under the laws of a jurisdiction
other than the Islands of Bermuda, the Cayman Islands, Canada, Guernsey, Jersey,
the Republic of Ireland, Luxembourg, the Netherlands, Switzerland, France,
Germany or the United Kingdom or (b) immediately following entry into or
consummation of any Non-US Merger Transaction, either the successor Issuer fails
to assume from Counterparty all of the rights and obligations of Counterparty
hereunder and/or the successor Counterparty following such Non-US Merger
Transaction fails to either (1) repeat in writing to Dealer the representations
and warranties set forth in Sections 3(a)(i), 3(a)(ii), 3(a)(iv) and 3(a)(v) of
the Agreement and Sections 7(a)(vii) and 7(a)(xii) of this Confirmation (as if
references to (i) “execute” and “deliver” were each replaced with “assume” and
(ii) “execution, delivery” and “execution and delivery” were replaced with
“assumption”) or (2) deliver the opinion required by the second sentence of
Section 7(e) of this Confirmation in connection with such Non-US Merger
Transaction, in each case, then such transaction or failure shall constitute an
Additional Termination Event applicable to the Transaction and, with respect to
such Additional Termination Event, (A) Counterparty shall be deemed to be the
sole Affected Party, (B) the Transaction shall be the sole Affected Transaction
and (C) Dealer shall promptly designate an Early Termination Date pursuant to
Section 6(b) of the Agreement in respect of such Additional Termination Event.
If, at any time following the occurrence of any Non-US Merger Transaction,
Dealer reasonably determines in its good faith judgment that (x)(1) such Non-US
Merger Transaction, (2) treating the relevant shares deliverable under such
Non-US Merger Transaction as “Reference Property” (as defined in the Indenture)
and/or (3) Cancellation and Payment not applying to the Transaction with respect
to such Non-US Merger Transaction, in each case of clause (1), (2) or (3), has
had an adverse effect on Dealer’s rights and obligations in respect of the
Transaction and/or its hedging activities in respect of the Transaction or
(y) Dealer would incur an increased (as compared with circumstances existing on
the Trade Date) amount of tax, duty, expense or fee (other than brokerage
commissions with respect to transactions effected on the Exchange and excluding
(I) any de minimis (as determined by the Calculation Agent) increased amount of
tax, duty, expense or fee (it being understood, for the avoidance of doubt, that
any such increased amount that, in the aggregate with all such taxes, duties,
expenses or fees that would be incurred by Dealer, is equal to or greater than
USD50,000 shall not be considered to be de minimis) and (II) any such increased
amount that is incurred solely due to the deterioration of the creditworthiness
of Dealer), to (1) acquire, establish, re-establish, substitute, maintain,

 

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unwind or dispose of any transaction(s) or asset(s) it deems necessary to hedge
the economic risk of entering into and performing its obligations with respect
to the Transaction, or (2) realize, recover or remit the proceeds of any such
transaction(s) or asset(s) (each of the events described in clause (x) and
clause (y) above, a “Non-US Merger Event”), then, in either case, Dealer shall
give prompt notice to Counterparty of such Non-US Merger Event. Concurrently
with delivering such notice, Dealer shall give notice to Counterparty of a
commercially reasonable Price Adjustment that Dealer determines, in its good
faith, commercially reasonable judgment, appropriate to account for the economic
effect on the Transaction of such Non-US Merger Event and provide Counterparty
with supporting documentation for such Price Adjustment (for the avoidance of
doubt, as if Dealer for such purpose were Hedging Party and such supporting
documentation were subject to the provisions set forth under “Hedging Party”
above) (unless Dealer determines in its good faith, commercially reasonable
judgment that no Price Adjustment will produce a commercially reasonably result,
in which case Dealer shall so notify Counterparty). Unless Dealer determines in
its good faith, commercially reasonable judgment that no Price Adjustment will
produce a commercially reasonably result, within five Scheduled Trading Days of
receipt of such notice, Counterparty shall notify Dealer that it elects to
(A) agree to otherwise amend the Transaction to take into account the economic
effect of such Non-US Merger Event or (B) pay Dealer an amount determined by
Dealer (and in respect of which Dealer has provided to Counterparty supporting
documentation (for the avoidance of doubt, as if Dealer for such purpose were
Hedging Party and such supporting documentation were subject to the provisions
set forth under “Hedging Party” above)) that corresponds to such Price
Adjustment (and, in each case, Issuer shall be deemed to have repeated the
representation set forth in Section 7(a)(i)(A) of this Confirmation (as if the
reference to “Trade Date” therein were replaced with a reference to the date of
such election)). If Counterparty fails to give such notice to Dealer of its
election by the end of that fifth Scheduled Trading Day, or if Dealer determines
in its good faith, commercially reasonable judgment that no Price Adjustment
will produce a commercially reasonably result, then such failure or such
determination, as the case may be, shall constitute an Additional Termination
Event applicable to the Transaction and, with respect to such Additional
Termination Event, (1) Counterparty shall be deemed to be the sole Affected
Party, (2) the Transaction shall be the sole Affected Transaction and (3) Dealer
shall promptly designate an Early Termination Date pursuant to Section 6(b) of
the Agreement in respect of such Additional Termination Event. For the avoidance
of doubt, the parties hereto agree and acknowledge that (I) the occurrence of a
Non-US Merger Event shall not preclude the occurrence of one or more additional,
subsequent Non-US Merger Events and (II) if a Non-US Merger Event occurs, Dealer
will determine, in its sole discretion, whether to exercise its rights under the
provisions of this Section 8(v) (which provisions, for the avoidance of doubt,
will not limit the rights and remedies of Dealer and its affiliates under any
other provision of this Confirmation, the Equity Definitions and the Agreement),
it being understood and agreed that any Price Adjustment described in clause
(A) above and/or any payment described in clause (B) above shall be calculated
without duplication in respect of any prior such Price Adjustment and/or
payment.

 

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Counterparty hereby agrees (a) to check this Confirmation carefully and
immediately upon receipt so that errors or discrepancies can be promptly
identified and rectified and (b) to confirm that the foregoing (in the exact
form provided by Dealer) correctly sets forth the terms of the agreement between
Dealer and Counterparty with respect to the Transaction, by manually signing
this Confirmation or this page hereof as evidence of agreement to such terms and
providing the other information requested herein and immediately returning an
executed copy to Dealer.

 

 

 

 

Yours faithfully,

 

 

 

 

 

 

 

 

CITIGROUP GLOBAL MARKETS INC.

 

 

 

 

 

 

 

 

By:

/s/ Stephen L. Roti

 

 

 

Name:

Stephen L. Roti

 

 

 

Title:

Authorized Signatory

 

 

 

 

 

 

 

Agreed and Accepted By:

 

 

 

 

 

ANACOR PHARMACEUTICALS, INC.

 

 

 

 

 

 

 

 

By:

/s/ Graeme Bell

 

 

 

Name:

Graeme Bell

 

 

 

Title:

Executive Vice President

 

 

 

 

and Chief Financial Officer

 

 

 

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