Exhibit 10.4

 

Portions of this exhibit have been omitted and filed separately pursuant to a
request for confidential treatment filed with the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.  Omissions are designated as [***].

 

Execution Copy

 

Deerfield Capital Corp.

Deerfield Capital Management LLC

 

April 9, 2009

 

Pegasus Deerfield (AIV), LLC

 

Ladies and Gentlemen:

 

This letter agreement (this “Letter Agreement”) between Pegasus Deerfield (AIV),
LLC  (“Investor”), Deerfield Capital Corp. (“DFR”) and Deerfield Capital
Management LLC (“DCM” and, together with Investor and DFR, the “Parties”)
records the understanding among the Parties regarding the Board of Managers of
DCM (the “DCM Board”), the Board of Directors of DFR (the “DFR Board”), that
certain Rights Agreement dated as of March 11, 2009 between DFR and the rights
agent listed therein (the “Rights Agreement”), the restrictions on transfer and
ownership contained in DFR’s charter (the “Charter”) and the proposed amendment
to the Charter referenced below.  This Letter Agreement is being entered into in
connection with and in consideration of certain other transactions being entered
into simultaneously by the Parties and their respective Affiliates, including
the acquisition by Investor of a limited partner interest in Deerfield Pegasus
Loan Capital LP, a Delaware limited partnership (“Fund I”).  Capitalized terms
used but not defined herein shall have the respective meanings assigned to such
terms in that certain side letter agreement dated of even date herewith between
Fund I, DPLC General Partner LLC, DFR, DCM and Investor (the “Side Letter
Agreement”).

 

1.                                       DCM Board.  DCM, DFR and Investor agree
that until the complete liquidation of Fund I (at which time the rights set
forth in this Section 1 will terminate):

 

(a)                                  The DCM Board shall consist of 5 (five)
managers (each individually, a “Manager” and, collectively, the “Managers”).

 

(b)                                 Two (2) Managers, which shall initially be
Jeffrey B. Scott and Cary Meadow, shall be designated by Investor (each, an
“Investor Designee”).

 

(c)                                  Investor shall have the right to direct the
removal, for any reason and at any time, of any Investor Designee.  No Investor
Designee may be removed without the consent of Investor except in the case of
conduct by such Investor Designee constituting fraud, willful misconduct or
gross negligence.

 

(d)                                 If an Investor Designee ceases to serve as a
Manager (whether by reason of death, resignation, removal (including removal for
fraud, willful misconduct or gross negligence), expiration of term or
otherwise), only Investor shall be entitled to designate a successor Manager to
fill the vacancy created thereby.

 

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(e)                                  Each of DCM and DFR shall (i) take all
necessary action to ensure that the provisions of the Certificate of Formation
and the Third Amended and Restated Operating Agreement of DCM, effective as of
December 21, 2007 (the “Operating Agreement”) are not inconsistent with the
provisions of this Letter Agreement, and (ii) not take any action to amend,
change or otherwise modify (A) Article V or Article VI of the Operating
Agreement, or (B) any other provision of the Operating Agreement or any
provision of the Certificate of Formation of DCM, which amendment, change or
modification (in the case of this subclause (B)) could subvert, nullify or
adversely affect the agreement and intent of the parties as set forth in this
Letter Agreement.  DFR shall cause the applicable DFR Affiliates to vote all of
the voting interests in DCM beneficially owned or held of record by DFR or such
DFR Affiliates in accordance with this Letter Agreement (including, without
limitation, the election of the Investor Designees and any successors thereto to
the DCM Board).  Further, DCM shall take, and DFR shall cause the applicable DFR
Affiliates to cause DCM to take, all necessary measures to carry out the
agreements of the parties set forth in this Letter Agreement.

 

(f)                                    DCM shall reimburse each Investor
Designee for all reasonably necessary and proper out-of-pocket costs and
expenses (including, without limitation, reasonable travel, lodging and meal
expenses) incurred in connection with each Investor Designee’s attendance and
participation at meetings of the DCM Board or any committees thereof.  Further,
except as otherwise agreed by each Investor Designee and DCM, each Investor
Designee shall receive the compensation and benefits as a Manager that are set
forth on Schedule A hereto.

 

2.                                       IRS Clarification. DFR and Investor
agree that, upon the agreement by both parties that it is necessary and/or
advisable to do so (taking into account the totality of the circumstances,
including, without limitation, the costs associated with doing so), they shall
cooperate and act in good faith together (including, without limitation, with
respect to the timing, content and form of any submission and the costs
pertaining thereto) to seek clarification from the Internal Revenue Service
(“IRS”) that the granting of observer rights to the DFR Board by DFR to Investor
will not cause the Warrants to be treated as exercised for purposes of
determining whether DFR has had an “ownership change” as defined in Section 382
of the Internal Revenue Code of 1986, as amended (the “Code”).

 

3.                                       Rights Agreement and Charter
Restrictions.  (a)                                    None of Investor or its
Affiliates (as defined in the Rights Agreement) or Associates (as defined in the
Rights Agreement) and no direct or indirect transferee or any subsequent
transferee of the Warrants or the shares of common stock of DFR (“Common Stock”)
issuable upon exercise of such Warrants (the “Warrant Shares”) from any source
(Investor, its Affiliates and Associates and such transferees collectively, the
“Investor Warrant Parties”) shall be deemed to be an Acquiring Person under the
Rights Agreement by reason of being or becoming a Beneficial Owner (as defined
in the Rights Agreement) of the Warrants or any Warrant Shares.  The DFR Board
has the authority pursuant to Section 29 of the Rights Agreement to determine
that a person is an Exempt Person (as defined in the Rights Agreement).  DFR
agrees that as soon as is reasonably practicable following the date of this
Letter Agreement, the DFR Board shall consider and vote upon a proposal to
declare that, from and after January 1, 2011, each Investor Warrant Party shall
be an Exempt Person with respect to such Investor Warrant Party’s being or
becoming a Beneficial Owner of any securities of DFR other than Warrants or
Warrant Shares (“Other DFR Securities”) and the application of all restrictions
applicable to Acquiring Persons under the Rights Agreement shall be waived.  The
management of DFR shall recommend to the DFR Board that the DFR Board adopt and
approve such proposal.  The DFR Board shall set no other terms, conditions
or limitations to the treatment of any Investor Warrant Party as an Exempt
Person under the Rights Agreement.  DFR hereby acknowledges and agrees that any
and all conditions to the determination that each Investor Warrant Party is an
Exempt Person under the Rights Agreement have been satisfied or are hereby
waived, except as expressly set forth in this Section 3(a).

 

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(b)                                 The DFR Board has determined pursuant to
Section 4.7 of the Charter that that it is no longer in the best interests of
DFR to continue to be qualified as a real estate investment trust under Sections
856 through 860 of the Code (“REIT”), and therefore, the DFR Board has revoked
or otherwise terminated DFR’s REIT election pursuant to Section 856(g) of the
Code.  As a consequence, the Restriction Termination Date (as defined in the
Charter) has occurred, and the restrictions and limitations on Beneficial
Ownership, Constructive Ownership and Transfers of shares of Capital Stock (each
as defined in the Charter) set forth in Article VI of the Charter no longer
apply, including, without limitation, to any Investor Warrant Party.

 

(c)                                  The DFR Board has submitted to the
stockholders of DFR for their consideration and approval an amendment to the
Charter in the form attached hereto as Exhibit A (the “Charter Amendment”) at
the Annual Meeting of Stockholders of DFR scheduled for May 19, 2009 and has
recommended that the stockholders approve such Charter Amendment.  The issuance
of the Warrants and any Warrant Shares and each other Transfer (as defined in
the Charter Amendment) or acquisition of the Warrants or any Warrant Shares, in
each case by or to any Investor Warrant Party, shall be deemed to be a Permitted
Transfer (as defined in the Charter Amendment) under Article IX of the Charter
Amendment.  The DFR Board will, following stockholder approval of the Charter
Amendment, have the authority pursuant to Section 9.4 of the Charter Amendment
to except a Transfer that is otherwise a 5% Transaction (as defined in the
Charter Amendment) from being a Prohibited Transfer (as defined in the Charter
Amendment) and thereby subject to the transfer restrictions set forth in
Section 9.3 of the Charter Amendment.  Further, as set forth in
Section 9.2(m) of the Charter Amendment, no Permitted Transfer shall be a
Prohibited Transfer.   DFR agrees that as soon as is reasonably practicable
following the later of the date of this Letter Agreement and the date on which
the stockholders of DFR approve the Charter Amendment, the DFR Board shall
consider and vote upon a proposal to declare that, from and after January 1,
2011, if any of the Investor Warrant Parties Transfers or acquires any Other DFR
Securities, then such Transfer or acquisition of Other DFR Securities shall be
approved by the DFR Board pursuant to Section 9.4 of the Charter Amendment and
the application of the restrictions contained in Article IX with respect thereto
shall be waived.  The management of DFR shall recommend to the DFR Board that
the DFR Board adopt and approve such proposal.  The parties hereby acknowledge
and agree that any and all conditions to the determination as to a transaction
involving an Investor Warrant Party being a Permitted Transfer as set forth
above and the waiver of the restrictions applicable to any transaction involving
an Investor Warrant Party that may otherwise be a Prohibited Transaction under
Article IX of the Charter Amendment have been satisfied or are hereby waived,
except as expressly set forth in this Section 3(c).

 

(d)                                 The DFR Board has taken all necessary
actions to grant and approve, as applicable, the designations, determinations
and/or actions contained in subsections (a), (b) and (c) of this Section 3 with
respect to each Investor Warrant Party, except as is otherwise expressly set
forth herein.

 

(e)                                  DFR shall not adopt, recommend or
effectuate or assist in the adoption, recommendation or effectuation of any
other plan, program or other policy (regardless of the form of any such plan,
program or policy) that is similar to or has similar restrictions on the
acquisition or transfer of securities or other interests in DFR, without also
providing for exceptions to such restrictions for each Investor Warrant Party
that are consistent with the exceptions, each as set forth in this Section 3.

 

(f)                                    The determinations and designations set
forth in this Section 3 may not be revoked without the prior written consent of
the Investor.

 

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(g)                                 DFR agrees that the Warrant Shares shall be
listed on the trading exchange on which DFR’s Common Stock then trades by the
date upon which the Warrants first vest in respect of any Warrant Shares (the
“Listing Date”); provided, that, if the issuance of the Warrants requires the
consent of DFR’s shareholders to effect such listing, then the Warrant Shares
shall be listed within sixty (60) days following the Listing Date.  If the
Warrant Shares are not listed within the time periods and otherwise as set forth
in this Section 4(g) and if, at such time, DFR’s Common Stock remains listed on
such exchange, then DFR shall have breached its obligations under this Letter
Agreement, the Registration Rights Agreement, the Warrants and the Side Letter
and each Investor Warrant Party shall have the rights and remedies against DFR
in respect of such breach as are available in law or equity.

 

4.                                       CERTAIN TRANSACTIONS.

 

(a)                                  Without the prior written consent of
Investor, DFR shall not declare any dividend or any other distribution upon the
Common Stock (other than any dividend or distribution upon an Organic Change (as
defined below)) that is payable in any of its assets (including cash) or in debt
securities or that is payable in Non-Common Stock Options (as defined below),
except that DFR shall be permitted, without the prior written consent of
Investor, to make regular quarterly cash dividends; provided that the per share
amount of such quarterly cash dividends does not exceed the per share amount of
the last regular quarterly cash dividend immediately preceding the date of this
Letter Agreement.

 

(B)                                 WITHOUT THE PRIOR WRITTEN CONSENT OF
INVESTOR, DFR SHALL NOT ISSUE OR SELL DISCOUNTED STOCK (AS DEFINED BELOW) TO ANY
PERSON OTHER THAN INVESTOR OR ITS AFFILIATES AT A PRICE PER SHARE THAT IS LOWER
THAN THE THEN CURRENT FAIR MARKET VALUE (AS DEFINED BELOW) PER SHARE OF COMMON
STOCK IN EFFECT IMMEDIATELY PRIOR TO SUCH SALE OR ISSUANCE.

 

(c)                                  Notwithstanding Section 4(b) above, the
prior written consent of Investor shall not be required for DFR to issue
(i) securities to employees, officers, directors, consultants or other service
providers of DFR pursuant to a plan or agreement approved by the DFR Board,
including pursuant to DFR’s Amended and Restated Stock Incentive Plan; provided
that the number of shares of Common Stock issued (on a fully diluted basis)
pursuant to such plans or agreements after the date hereof shall not exceed
569,253, (ii) securities pursuant to the exercise of Common Stock Options and
Non-Common Stock Options issued and outstanding as of the date hereof (but
excluding the rights issuable pursuant to DFR’s Rights Agreement dated as of
March 11, 2009 by and between DFR and American Stock Transfer & Trust Company
LLC as Rights Agent), (iii) securities at a value not less than the Fair Market
Value as consideration for, or in connection with the financing of, an
acquisition of shares or assets of a target company, or (iv) Common Stock or
other equity securities to Investor or its Affiliates.

 

(d)                                 Definitions:

 

(i)  “Discounted Stock” means shares of Common Stock or any right, option,
warrant or other security that is convertible into, or exchangeable or
exercisable for, shares of Common Stock (each, a “Common Stock Option”) issued
or sold at a price per share (determined, in the case of Common Stock Options,
by dividing (A) the total amount receivable by DFR in consideration (notes or
debt shall not be considered consideration) of the issuance and sale of such
Common Stock Options, plus the total consideration, if any, payable to DFR upon
exercise thereof, by (B) the total number of shares of Common Stock covered by
such Common Stock Options), which price is lower than the then current Fair
Market Value per share of Common Stock in effect immediately prior to such sale
or issuance.

 

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(ii)  “Fair Market Value” means (A) with respect to the Common Stock or any
other security, as applicable, the average VWAP (as defined below) of the Common
Stock or such security for the ten days preceding the issuance of such shares of
Common Stock or other security, and (B) with respect to any other property or
asset, the fair market value thereof as determined by an independent appraiser
mutually agreed to by Investor and DFR (and in the event such Parties cannot
agree within a reasonable time on an appraiser, each  of them shall appoint an
appraiser and such appraisers shall appoint a third who shall act as the
independent appraiser for purposes of this Section 4(d)); the fees and expenses
in relation to such appraisal shall be paid by DFR.

 

(iii)  “Non-Common Stock Options” means any right, option, warrant or other
security that is convertible into, or exchangeable or exercisable for, debt
securities, assets or other securities of DFR other than shares of Common Stock.

 

(iv)  “Organic Change” means any recapitalization, reorganization,
reclassification, consolidation or merger of DFR following which DFR is not a
surviving entity, sale of all or substantially all of DFR’s assets to another
Person or any similar transaction, in which the holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) securities
or assets (including cash) in respect of or in exchange for their Common Stock.

 

(v)  “VWAP” means, for any date, the price determined by the first of the
following clauses that applies: (A) if the Common Stock or other security, as
applicable, is then listed or quoted on a trading market, the daily volume
weighted average price of the Common Stock or other security for such date (or
the nearest preceding date) on the trading market on which the Common Stock or
other security is then listed or quoted for trading as reported by Bloomberg
L.P. (based on a trading day of standard length); (B) if the Common Stock or
other security is not then quoted for trading on a trading market and if prices
for the Common Stock or other security are then reported in the “Pink Sheets”
published by Pink Sheets, LLC (or a similar organization or agency succeeding to
its functions of reporting prices), the most recent bid price per share of the
Common Stock or other security so reported; or (C) in all other cases, the fair
market value of a share of Common Stock or other security as determined by an
independent appraiser mutually agreed to by Investor and DFR (and in the event
such Parties cannot agree within a reasonable time on an appraiser, each  of
them shall appoint an appraiser and such appraisers shall appoint a third who
shall act as the independent appraiser for purposes of this Section 4(d)); the
fees and expenses in relation to such appraisal shall be paid by DFR.

 

(e)                                  DCM, DFR and Investor agree that the rights
and restrictions set forth in this Section 4 shall expire and terminate on the
earlier of the expiration of the Warrants in accordance with their terms or the
exercise of the Warrants in respect all of the Warrant Shares.

 

5.                                       ASSIGNMENT.  THE RIGHTS AND OBLIGATIONS
OF THE PARTIES SET FORTH IN THIS LETTER AGREEMENT MAY ONLY BE TRANSFERRED OR
DELEGATED SIMULTANEOUSLY WITH AND TO THE EXTENT THAT EACH PARTY TRANSFERS OR
DELEGATES ITS RIGHTS OR OBLIGATIONS UNDER THE SIDE LETTER AGREEMENT, EXCEPT THAT
THE RIGHTS AND OBLIGATIONS OF INVESTOR AND ITS AFFILIATES PURSUANT TO SECTION 4
MAY BE TRANSFERRED TO ANY INVESTOR WARRANT PARTY.  ALL RIGHTS AND OBLIGATIONS OF
A PARTY HEREUNDER SHALL BECOME THE RIGHTS AND OBLIGATIONS OF ANY SUCCESSOR TO
THAT PARTY, WHETHER THROUGH MERGER, REORGANIZATION OR OTHER TRANSACTION.  THIS
LETTER AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF AND BE
ENFORCEABLE BY THE RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS OF THE PARTIES.

 

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6.                                       Notice.  Any notice or other
communication contemplated by any provision of this Letter Agreement shall be in
writing and may be delivered personally, sent by telecopy, commercial courier or
mailed by certified mail, postage prepaid, return receipt requested, addressed
to such party at the address, or sent to its telecopy number, as follows:

 

If to Investor:

 

Pegasus Partners IV, L.P.

 

 

 

 

505 Park Avenue

 

 

 

 

New York, NY 10022

 

 

 

 

Attn: Rodney Cohen

 

 

 

 

Fax No.: 212-355-2303

 

 

 

 

 

 

 

 

 

with a copy to:

 

 

 

 

 

 

 

 

 

Jason Schaefer

 

 

 

 

Fax No.: 212-710-2551

 

 

 

 

 

 

 

With a copy to: Akin Gump Strauss Hauer & Feld LLP

 

 

 

 

 

 

 

 

 

One Bryant Park

 

 

 

 

New York, NY 10036

 

 

 

 

Attn: Patrick Fenn

 

 

 

 

Fax No.: 212-872-1002

 

 

 

 

 

 

 

If to DFR or DCM:

 

Deerfield Capital Corp.

 

 

 

 

6250 North River Road

 

 

 

 

Rosemont, Illinois 60018

 

 

 

 

Attn: Jonathan Trutter

 

 

 

 

Fax No.: (773) 867-5186

 

 

 

 

 

 

 

 

 

with a copy to:

 

 

 

 

 

 

 

 

 

General Counsel

 

 

 

 

Fax No.: (773) 380-1695

 

 

 

 

 

 

 

And with a copy to:

 

Schulte Roth & Zabel LLP

 

 

 

 

919 Third Avenue

 

 

 

 

New York, New York 10022

 

 

 

 

Attn: Paul Watterson

 

 

 

 

Fax No.:  212-593-5955

 

 

 

Notice sent by telecopy shall be deemed given when confirmation of transmission
is received, and notice sent by any other means shall be deemed given when
received at the address set forth above; but any Party may designate a different
address by a notice similarly given to the other Parties.

 

7.                                       CONFLICTS.  TO THE EXTENT THERE IS ANY
CONFLICT BETWEEN THIS LETTER AGREEMENT AND ANY OTHER TRANSACTION DOCUMENT OR
DEERFIELD PEGASUS FUND DOCUMENT, THE PROVISIONS OF THIS LETTER AGREEMENT SHALL
APPLY WITH RESPECT TO THE PARTIES.

 

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8.                                       AMENDMENTS AND WAIVERS.  THIS LETTER
AGREEMENT MAY BE AMENDED AND THE OBSERVANCE OF ANY PROVISION OF THIS LETTER
AGREEMENT MAY BE WAIVED (EITHER GENERALLY OR IN A PARTICULAR INSTANCE AND EITHER
RETROACTIVELY OR PROSPECTIVELY) ONLY WITH THE WRITTEN CONSENT OF EACH PARTY
HERETO.

 

9.                                       MISCELLANEOUS.  THIS LETTER AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF DELAWARE, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.  THE
PARTIES HERETO HEREBY SUBMIT TO THE NONEXCLUSIVE JURISDICTION OF THE FEDERAL AND
STATE COURTS LOCATED IN NEW YORK, NEW YORK FOR THE RESOLUTION OF ALL MATTERS
PERTAINING TO THE ENFORCEMENT AND INTERPRETATION OF THIS LETTER AGREEMENT.  THIS
LETTER AGREEMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS, EACH OF WHICH
SHALL BE DEEMED AN ORIGINAL AND ALL OF WHICH TAKEN TOGETHER SHALL CONSTITUTE ONE
AND THE SAME INSTRUMENT.

 

[Remainder of page intentionally left blank; signature page follows.]

 

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IF THE ABOVE CORRECTLY REFLECTS OUR UNDERSTANDING AND AGREEMENT WITH RESPECT TO
THE FOREGOING MATTERS, PLEASE SO CONFIRM BY SIGNING THE ENCLOSED COPY OF THIS
LETTER AGREEMENT IN THE SPACE PROVIDED BELOW.

 

 

 

DEERFIELD CAPITAL CORP.

 

 

 

 

By:

/s/ Robert A. Contreras

 

 

Name: Robert A. Contreras

 

 

Title: General Counsel

 

 

 

 

DEERFIELD CAPITAL MANAGEMENT LLC

 

 

 

 

By:

/s/ Robert A. Contreras

 

 

Name: Robert A. Contreras

 

 

Title: General Counsel

 

 

 

 

PEGASUS DEERFIELD (AIV), LLC

 

 

 

 

By:

Pegasus Investors IV, L.P.,

 

 

its managing member

 

 

 

 

By:

Pegasus Investors IV GP, L.L.C.,

 

 

its general partner

 

 

 

 

By:

/s/ Rodney Cohen

 

Name:

Rodney Cohen

 

Title:

Vice President

 

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Portions of this exhibit have been omitted and filed separately pursuant to a
request for confidential treatment filed with the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.  Omissions are designated as [***].

 

Schedule A

 

Investor Designee Compensation and Benefits

 

Each Investor Designee to the DCM Board shall receive compensation equal to
$[***] per annum payable quarterly and coverage under the applicable DFR health
insurance benefits to the extent such coverage remains available to DFR Board
directors.  The cost of such health insurance coverage will be deducted from
such compensation consistent with whatever policies are enacted by DFR for the
non-employee members of the DFR Board.

 

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