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	SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW

YORK

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:

X
	 	Index No. 06/603 842

IAS Part 53

J.S.C. Charles E. Ramos
	 

	 	

	 	

	 
	 	 	 	 
	Maxine Babus, Derivatively On Behalf Of Nominal Defendant

LORAL SPACE & COMMUNICATIONS INC.,

Plaintiff,

vs.

MICHAEL B. TARGOFF, MARK H. RACHESKY, M.D., SAI

DEVABHAKTUNI, HAL GOLDSTEIN, JOHN D. HARKEY, JR., DEAN A.

OLMSTEAD, ARTHUR L. SIMON, and JOHN P. STENBIT,

Defendants,

and

LORAL SPACE & COMMUNICATIONS INC.,

Nominal Defendant.

	 	





















	 	





















	 

	 	

	 	







MEMORANDUM OF UNDERSTANDING




The undersigned parties to the shareholder derivative action filed on November 3, 2006 in the
Supreme Court of the State of New York, County of New York (the “Court”), captioned Babus v.
Targoff, et al., Index No. 06/603 842 (the “Lawsuit”), and MHR Capital Partners Master Account LP
(“Master Account”), MHR Capital Partners (100) LP (“Capital Partners (100)”), MHR Institutional
Partners II LP (“Institutional Partners II”), MHR Institutional Partners IIA LP (“Institutional
Partners IIA”) and MHR Institutional Partners III LP (“Institutional Partners III” and together
with Master Account, Capital Partners (100), Institutional Partners II, Institutional Partners IIA
and Institutional Partners III, the “MHR Funds”) have reached an agreement in principle providing
for the settlement of the causes of action set forth in the Shareholder Derivative Complaint on the
terms and subject to the conditions set forth in this Memorandum of Understanding (“MOU”):



WHEREAS, the Lawsuit is brought by shareholder Maxine Babus (“Plaintiff”) and asserts
derivative claims on behalf of Loral Space & Communications Inc. (“Loral” or the “Company”) against
Michael B. Targoff, Mark H. Rachesky, M.D., Sai Devabhaktuni, Hal Goldstein, John D. Harkey, Jr.,
Dean A. Olmstead, Arthur L. Simon and John P.



Stenbit (collectively, the “Individual Defendants”) who constitute Loral’s board of directors (the
“Board”);



WHEREAS, the Lawsuit alleges that the Individual Defendants breached their fiduciary duties,
including the fiduciary duty of loyalty, in connection with the Company’s agreement to sell to the
Company’s largest shareholder, MHR Fund Management LLC (“Fund Management”), approximately $300
million in shares (the “Preferred Shares”) of the Company’s Series A-1 Cumulative 7.50% Convertible
Preferred Stock, par value $.01 per share, and the Company’s Series B-1 Cumulative 7.50% Preferred
Stock, par value $.01 per share, pursuant to that certain Securities Purchase Agreement, dated as
of October 17, 2006, as amended and restated as of February 27, 2007 (the “SPA”), by and between
the Company and Fund Management;



WHEREAS, the Lawsuit seeks declaratory relief, preliminary and permanent equitable relief, and
monetary damages;



WHEREAS, on December 8, 2006, Plaintiff served a motion for expedited discovery on Loral and
the Individual Defendants (together, the “Defendants”). Defendants served their opposition to
Plaintiff’s motion on December 18, 2006, and Plaintiff served her reply on December 21, 2006. The
motion was scheduled for oral argument before the Court on January 3, 2007;



WHEREAS, the parties conferred prior to the hearing on January 2, 2007, and Plaintiff agreed
to withdraw her motion in exchange for Defendants’ agreement to produce the documents requested by
Plaintiff;



WHEREAS, as a result of the parties’ January 2, 2007 negotiation and subsequent discussions
concerning discovery, Defendants produced, and Plaintiff’s counsel have reviewed, non-public
documents over the past three months produced by Defendant’s counsel and interviewed the financial
advisor to the Special Committee of Loral’s Board;



WHEREAS, on January 2, 2007, Defendants served a motion to dismiss Plaintiff’s complaint
pursuant to CPLR 3211(a) for failure to adequately allege the futility of demand on Loral’s Board
and for failure to state a cause of action for breach of fiduciary duty;



WHEREAS, on or about February 12, 2007, Plaintiff’s counsel advised Defendants that it was
their intention to file an amended complaint incorporating the new factual allegations developed by
Plaintiff during discovery;



WHEREAS, between January 2, 2007 and the present, the parties and the MHR Funds, by and
through their respective counsel, have engaged in extensive arm’s-length and good faith discussions
regarding the possibility of settling the Lawsuit;



WHEREAS, on February 26, 2007, all other conditions having been satisfied, Loral obtained the
regulatory approvals required under the SPA to permit and require the consummation of the SPA, and
on February 27, 2007, Loral and the MHR Funds consummated the SPA;



WHEREAS, the parties and the MHR Funds have reached an agreement in principle concerning the
proposed settlement of the Lawsuit as set forth below;



WHEREAS, counsel for the parties and the MHR Funds believe that the proposed settlement is
fair, reasonable, adequate, and in the best interests of Loral;



WHEREAS, Defendants, to avoid the costs, disruption, and distraction of further litigation,
and without admitting the validity of any allegations made or causes of action asserted in the
Lawsuit, or any liability with respect thereto, have concluded that it is desirable that the causes
of action against them be settled on the terms reflected in this MOU;



NOW, THEREFORE, as a result of the foregoing and the negotiations among counsel, the parties
and the MHR Funds have agreed in principle to settle the Lawsuit on the terms and conditions set
forth below (the “Settlement”), subject to the approval of the Court:



1. a. The MHR Funds will pay to Loral $4 million in cash within five (5) business days of
obtaining Final Court Approval (as defined in paragraph 6 below); and



b. The MHR Funds will pay to Loral an amount in cash within five (5) business days following
the MHR Funds’ (which for purposes of this Section 1(b) shall be deemed to include any investment
partnerships controlled by Fund Management) actual receipt of net cash or cash equivalent proceeds
as set forth in this Section 1(b). In the event that the MHR Funds’ actual receipt of net cash or
cash equivalent proceeds from the sale by the MHR Funds of (A) any or all Preferred Shares, (B) any
shares, including any paid-in-kind dividends or Conversion Shares (as hereinafter defined) issued
in respect of and pursuant to the terms of such Preferred Shares, or (C) any securities issued or
delivered in exchange for or in respect of the securities referred to in clauses (A) and (B) above,
taken together with the aggregate amount actually received by the MHR Funds in cash or cash
equivalents for the securities referred to in clauses (A) and (B) above in consideration for any
prior sales of such securities, in one or more transactions, is in excess of an amount equal to the
product of:



(i) (X) $55 multiplied by (Y) the sum of the number of Preferred Shares issued on the Closing
Date, plus any other shares, including any paid-in-kind dividends, issued in respect and pursuant
to the terms thereof through the date of such sale, then the MHR Funds will pay (or cause the
payment) to Loral an amount in cash equal to $9.5 million;



(ii) (X) $70 multiplied by (Y) the sum of the number of Preferred Shares issued on the Closing
Date, plus any other shares, including any paid-in-kind dividends, issued in respect and pursuant
to the terms thereof through the date of such sale, then the MHR Funds will pay (or cause the
payment) to Loral an additional amount in cash equal to $8.5 million, such that the total amount of
all cash payments to Loral pursuant to this Section 1(b) will equal $18 million; and



(iii) (X) $80 multiplied by (Y) the sum of the number of Preferred Shares issued on the
Closing Date, plus any other shares issued, including any paid-in-kind dividends, in respect and
pursuant to the terms thereof through the date of such sale, then the MHR Funds will pay (or cause
the payment) to Loral an additional amount in cash equal to $8.5 million, such that the total
amount of all cash payments to Loral pursuant to this Section 1(b) will equal $26.5 million.



Any distribution of any securities referred to in this Section 1(b) by any of the MHR Funds to
any of their respective limited partners shall be deemed to be a sale for cash or cash equivalent
proceeds at the value determined by the MHR Funds in accordance with the applicable MHR Fund
partnership agreement.



“Conversion Shares” means the shares issued to the MHR Funds upon conversion of the Preferred
Shares or any other preferred shares issued, including any paid-in-kind dividends, in respect of
and pursuant to the terms of such Preferred Shares, and any replacement securities which the MHR
Funds actually receive from time to time in exchange for such Conversion Shares.



All calculations set forth in this Section 1(b) shall be subject to proportionate adjustment
to take into account any stock dividend, split, reverse split, combination, recapitalization or any
similar transaction affecting the common stock, par value $0.01, of the Company as provided for in
the Company’s Certificate of Incorporation. When used in connection with any preferred shares
referred to in clause (Y) of subsections (i), (ii) and (iii) of this Section 1(b), such number of
preferred shares shall be multiplied by the applicable Conversion Number at the time of such sale
for such preferred shares as defined in the applicable Certificate of Designation relating thereto.



All capitalized terms used in this paragraph 1(b) and not defined herein shall have the
meanings ascribed to them in the SPA and the exhibits thereto.



2. The Individual Defendants, Loral and the MHR Funds acknowledge that the benefits described
in paragraph 1 above are the exclusive result of Plaintiff’s prosecution of the Lawsuit on Loral’s
behalf.



3. Upon the execution of this MOU, Plaintiff’s counsel will promptly file an amended complaint
which shall include the MHR Funds, Fund Management, MHR Institutional Advisors LP, MHRM LP, MHRA
LP, MHR Institutional Advisors LLC (“Institutional Advisors”), MHR Advisors LLC (“Advisors”), MHR
Institutional Advisors II LLC (“Institutional Advisors II”), MHR Institutional Advisors III LLC
(“Institutional Advisors III”) and Mark H. Racheskey (in his capacity as the managing member of
Fund Management, Advisors, Institutional Advisors, Institutional Advisors II and Institutional
Advisors III) (collectively, “MHR”) as a defendant and shall be the complaint for purposes of this
Settlement.



4. The parties to the Lawsuit and the MHR Funds will use their best efforts to agree upon and
execute an appropriate stipulation of settlement (the “Stipulation”) and such other documentation
as may be required in order to obtain Final Court Approval of the Settlement and dismissal of the
Lawsuit upon the terms and conditions set forth in this MOU (collectively with the Stipulation, the
“Settlement Documents”). The Stipulation will expressly provide, inter alia, that: (a) all
Individual Defendants have denied, and continue to deny, that they have committed, attempted to
commit, or aided and abetted others in committing, any violations of law or engaged in any wrongful
acts; (b) the Defendants are entering into the Stipulation because the proposed Settlement would
eliminate the burden, expense and distraction associated with further litigation; (c) Plaintiff and
Plaintiff’s counsel, having made a thorough investigation of the facts, believe that the proposed
Settlement is fair, reasonable and adequate and in the best interests of Loral and its
shareholders; (d) neither this MOU, the Stipulation, nor any of their respective terms shall
constitute an admission or finding of wrongful conduct, acts or omissions on the part of any of the
Defendants or be admissible in any proceeding (other than for the purpose of enforcing their
terms); (e) judgment be entered by the Court dismissing the Lawsuit in its entirety with prejudice
and without costs to any party (except as provided in paragraph 8 below) and barring any causes of
action that have been or might have been brought in any court or forum by Loral or any Loral
shareholder on Loral’s behalf relating to or arising out of allegations made in the Lawsuit; and
(f) complete discharge, dismissal with prejudice, settlement and release of, and an injunction
barring, any and all claims, rights and causes of action, for damages, injunctive or equitable
relief, or any other remedies, whether based on federal, state, local, statutory or common law or
any other law, rule, or regulation, including, without limitation, known and unknown claims and
claims under New York and Delaware statutory and common law, federal and state securities laws and
claims under any federal or state law governing fiduciaries or the duties of fiduciaries, that have
been, could have been, or in the future might be or could be asserted in any form and in any forum
by Loral shareholders on behalf of Loral against Defendants, MHR, and any of their families, parent
entities, affiliates or subsidiaries and each and all of their respective past, present, or future
officers, directors, employees, attorneys, accountants, auditors, agents, investment bankers,
consultants, insurers, reinsurers, heirs, executors, personal representatives, estates,
administrators, predecessors, successors and assigns, and all entities managed or advised by MHR
(collectively, the “Released Persons”) relating to or arising out of the subject matters contained
in the complaints filed in the Lawsuit (the “Released Claims”). The Stipulation shall include a
waiver, to the extent permitted by law, of unknown claims, including a waiver of the provisions of
California Civil Code § 1542 and any similar provisions of the law of any other jurisdictions.



5. The parties to the Lawsuit will present the Settlement Documents to the Court as soon as
practicable for approval of the proposed Settlement and any notice of the proposed Settlement to
Loral shareholders required by the Court. Loral shall be responsible for and pay all costs and
expenses incident to such notice. The contents and manner of such notice shall be mutually agreed
upon by the parties to this MOU.



6. The parties to the Lawsuit will also use their best efforts to obtain Final Court Approval
of the Stipulation and Settlement, entry of final judgment, and dismissal of the Lawsuit with
prejudice as to all causes of action asserted or which could have been asserted against Defendants
and MHR in the Lawsuit and without costs to any party (other than counsel fees and expenses as
provided in paragraph 8 below). As used herein, “Final Court Approval” of the Settlement means
that the Court has entered an order approving the Settlement in accordance with the terms of the
Settlement Documents and that such order is finally affirmed on appeal or is no longer subject to
appeal.



7. The consummation of the Settlement is subject to: (a) the drafting and execution of the
Settlement Documents; (b) the completion by Plaintiff of confirmatory discovery in the Lawsuit
reasonably satisfactory to Plaintiff’s counsel; and (c) Final Court Approval of the Stipulation and
Settlement and dismissal of the Lawsuit in its entirety with prejudice and without awarding costs
to any party (except as provided in paragraph 8 below). Any information disclosed during the
course of confirmatory discovery may not be used for any purpose, except for pleadings and court
papers filed for the purpose of effectuating the Settlement. This MOU shall be null and void and of
no force and effect should any of the conditions set forth in this paragraph not be met or should
Plaintiff’s counsel reasonably determine, following confirmatory discovery, that the Settlement is
not fair and reasonable, and in that event, this MOU shall neither be deemed to prejudice in any
way the positions of the parties with respect to the Lawsuit nor entitle any party to recover any
costs or expenses incurred in connection with the implementation of this MOU.



8. Following the negotiation of the Settlement terms above, the parties negotiated at
arm’s-length and in good faith over the attorneys’ fees, costs and expenses to be awarded to
Plaintiff’s counsel subject to approval by the Court. Plaintiff’s Counsel have advised the
Defendants that they intend to apply to the Court for an award of attorneys’ fees and
reimbursements of expenses and disbursements, in an aggregate amount not to exceed (i) $1.5 million
in cash to be paid solely by Loral to the account of Rigrodsky & Long, P.A., as escrow agent of
Plaintiff’s counsel (“Rigrodsky”), within five (5) business days of Final Court Approval of the
Settlement and the fee award, and (ii) an additional amount not to exceed $250,000 promptly
following any payment made pursuant to each of Sections 1(b)(i), 1(b)(ii) and 1(b)(iii). Rigrodsky
shall be solely responsible for the distribution of Plaintiff’s attorneys’ fees, costs and
expenses. Loral shall have no responsibility or liability for any award of fees, costs and expenses
in excess of $2.25 million and neither the Defendants nor MHR shall have any responsibility or
liability for the allocation of the fees, costs and expense awards among Plaintiff’s counsel in the
Lawsuit. The court’s decision regarding award of attorneys’ fees, costs and expenses shall not
affect the validity or finality of the remaining terms of the Settlement.



9. Miscellaneous: (a) this MOU may be executed in counterparts by any of the signatories
hereto, including by fax or telecopy, and as so executed shall constitute one agreement; (b) this
MOU, the Stipulation and the Settlement contemplated by them shall be governed by and construed in
accordance with the laws of the State of New York without regard to New York conflict of laws
rules, and the Court shall have exclusive jurisdiction over any action or proceeding to enforce or
challenge the effect of this MOU, the Stipulation or the Settlement; (c) this MOU shall be binding
upon and inure to the benefit of the parties and their respective agents, attorneys, executors,
heirs, successors and assigns, subject to the conditions set forth herein; (d) each of the
attorneys executing this MOU represents that she or he has been duly empowered and authorized by
his/her respective client(s) to do so; (e) Plaintiff and her undersigned counsel represent and
warrant that none of the claims or causes of action asserted in the Lawsuit has been assigned,
encumbered or in any manner transferred in whole or in part; (f) neither the Individual Defendants
nor MHR (except as expressly provided herein) shall bear any responsibility for any payments under
this MOU, the Stipulation, or the Settlement, or any expenses, costs, damages or fees alleged or
incurred by Plaintiff or her attorneys, experts, advisors, agents or representatives; (g) the
provisions contained in this MOU, and any of the negotiations or proceedings connected with it,
shall not be deemed or construed as a presumption, concession or admission by any of the Individual
Defendants, Loral, or MHR of any breach of duty, liability, default or wrongdoing or as to any
facts or causes of action which were or could have been alleged or asserted in the Lawsuit, and
shall not be interpreted, construed, deemed, invoked, offered or received in evidence or otherwise
used by any person in the Lawsuit or in any other action or proceeding of any nature whatsoever;
and (h) this MOU contains the parties’ entire agreement on the subject hereof, and supersedes any
prior oral or written communications by the parties, and may be modified or amended only by a
writing signed by the signatories hereto.



10. By signing this MOU, Plaintiff’s counsel represents and warrants that Plaintiff was a
Loral shareholder at the time the Lawsuit was filed and is still a shareholder of Loral.



11. Pending consummation of the Settlement, Plaintiff shall not seek relief in any forum, or
take any action in the Lawsuit, and all proceedings in the Lawsuit or otherwise shall be stayed and
suspended, except (i) as to the confirmatory discovery discussed at paragraph 7 above and (ii) that
the parties shall take all such action and file such papers as are necessary and appropriate to
effect consummation and approval of the Settlement.



12. If any action or other proceeding is or has been filed in state or federal court asserting
claims that are related to the subject matter of the Lawsuit prior to Final Court Approval of the
Settlement, Plaintiff’s counsel shall reasonably cooperate with Defendants in obtaining the stay,
dismissal, or withdrawal of any such action, including joining in any motion to dismiss such action
to the extent such action is consistent with Plaintiff’s counsel’s fiduciary duties.



	 	 	 
	Dated: March 21, 2007

	 	FARUQI & FARUQI, LLP

BY: /s/ Nadeem Faruqi
	
 
	 	 
	
 
	 	NADEEM FARUQI

BETH A. KELLER

369 Lexington Avenue, 10th Floor

New York, NY 10017 Telephone: 212/983-9330

Facsimile: 212/983-9331

Attorneys for Plaintiff
	 
	 	 
	Dated: March 21, 2007

	 	RIGRODSKY & LONG, P.A.

BY: /s/ Seth D. Rigrodsky
	
 
	 	 
	
 
	 	SETH D. RIGRODSKY

BRIAN D. LONG

919 North Market Street, Suite 980 Wilmington,

DE 19801

Telephone: 302/295-5310

Facsimile: 302/654-7530

Attorneys for Plaintiff
	 
	 	 
	Dated: March 21, 2007

	 	WILLKIE FARR & GALLAGHER LLP

BY: /s/ Francis J. Menton, Jr.
	
 
	 	 
	
 
	 	FRANCIS J. MENTON, JR.

RUSSELL D. MORRIS

DANIEL M. BURSTEIN

787 Seventh Avenue

New York, New York 10019 Telephone:
	
 
	 	212/728-8000 Facsimile: 212/728-8111

Attorneys for Michael Targoff, Dean

Olmstead and John Stenbit
	 
	 	 
	Dated: March 21, 2007

	 	STROOCK & STROOCK & LAVAN LLP

BY: /s/ Melvin A. Brosterman
	
 
	 	 
	
 
	 	MELVIN A. BROSTERMAN

RYAN M. PAPIR

180 Maiden Lane

New York, New York 10038 Telephone:
	
 
	 	212/806-5400 Facsimile: 212/806-6006

Attorneys for MHR Capital Partners Master

Account LP, MHR Capital Partners (100) LP, MHR

Institutional Partners II LP, MHR

Institutional Partners IIA LP, MHR

Institutional Partners III LP, Mark Rachesky,

Sai Devabhaktuni, and Hal Goldstein
	 
	 	 
	Dated: March 21, 2007

	 	KING & SPALDING LLP

BY: /s/ Richard A. Cirillo
	
 
	 	 
	
 
	 	RICHARD A. CIRILLO

1185 Avenue of the Americas

New York, NY 10036

Telephone: 212/556-2100 Facsimile: 212/556-2222

Attorneys for John D. Harkey, Jr. and Arthur

L. Simon
	 
	 	 
	Dated: March 21, 2007

	 	TRACHTENBERG RODES & FRIEDBERG LLP

BY: /s/ Leonard A. Rodes
	
 
	 	 
	
 
	 	LEONARD A. RODES

545 Fifth Avenue

New York, New York 10017

Telephone: 212/972-2929

Facsimile: 212/972-7581

Attorneys for Loral Space &

Communications Inc.