EX-10.1



 




Exhibit 10.1



Confirmation of OTC Convertible Note Hedge




	 	 	 
	Date:

	 	October 11, 2007
	 
	 	 
	To:

	 	Morgans Hotel Group Co. (“Counterparty”)
	 

	 	Attention:
	 

	 	Telephone No.:
	 

	 	Facsimile No.:
	 
	 	 
	From:

	 	Merrill Lynch Financial Markets, Inc. (“Dealer”)






Dealer Reference:




Dear Sir / Madam:




     The purpose of this letter agreement (this “Confirmation”) is to confirm the terms and
conditions of the above-referenced transaction entered into among Counterparty, Dealer and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, (the “Agent”) on the Trade Date specified below
(the “Transaction”). This Confirmation constitutes a “Confirmation” as referred to in the
Agreement specified below.



     The definitions and provisions contained in the 2000 ISDA Definitions (the “Swap
Definitions”) and the 2002 ISDA Equity Derivatives Definitions (the “Equity
Definitions” and, together with the Swap Definitions, the “Definitions”), in each case
as published by the International Swaps and Derivatives Association, Inc. are incorporated into
this Confirmation. In the event of any inconsistency between the Swap Definitions and the Equity
Definitions, the Equity Definitions will govern, and in the event of any inconsistency between the
Definitions and this Confirmation, this Confirmation will govern. References herein to a
“Transaction” shall be deemed to be references to a “Share Option Transaction” for purposes of the
Equity Definitions and a “Swap Transaction” for the purposes of the Swap Definitions.



     This Confirmation evidences a complete binding agreement between you and us as to the terms of
the Transaction to which this Confirmation relates. This Confirmation (notwithstanding anything to
the contrary herein), shall be subject to, and form part of, an agreement in the 1992 form of the
ISDA Master Agreement (Multicurrency – Cross Border) (the “Master Agreement” or
“Agreement”) as if we had executed an agreement in such form (but without any Schedule and
with the elections specified in the “ISDA Master Agreement” Section of this Confirmation) on the
Trade Date. In the event of any inconsistency between the provisions of that Agreement and this
Confirmation, this Confirmation will prevail for the purpose of this Transaction. The parties
hereby agree that the Transaction evidenced by this Confirmation shall be the only Transaction
subject to and governed by the Agreement.



     The parties acknowledge that this Confirmation is entered into on the date hereof with the
understanding that the provisions of the Note Indenture (as defined below) that are referred to
herein will conform to the descriptions thereof in the Offering Memorandum dated October 11, 2007
(the “Offering Memorandum”) relating to the Reference Notes (as defined below). The
parties agree that in the event of any inconsistency between the Note Indenture and the Offering
Memorandum, the parties will amend this Confirmation in good faith to preserve the intent of the
parties.



     The terms of the particular Transaction to which this Confirmation relates
are as follows:




 









 





     General Terms: 



	 	 	 
	Trade Date:

	 	October 11, 2007
	 
	 	 
	Effective Date:

	 	The date of issuance of the Reference Notes.
	 
	 	 
	Option Style:

	 	Modified American, as described under “Settlement Terms” below.
	 
	 	 
	Option Type:

	 	Call
	 
	 	 
	Seller:

	 	Dealer
	 
	 	 
	Buyer:

	 	Counterparty
	 
	 	 
	Shares:

	 	The shares of Common Stock, $0.01 par value, of Counterparty (Security
Symbol: “MHGC”) or such other securities or property (including cash)
into which the Reference Notes are convertible on the date of
determination.
	 
	 	 
	Number of Options:

	 	The number of Convertible Notes in denominations of USD1,000 principal
amount issued by Counterparty on the closing date for the initial
issuance of the Convertible Notes; provided that the Number of Options
shall be automatically increased as of the date of exercise by Merrill
Lynch, Pierce, Fenner & Smith Incorporated of the Initial Purchasers’
(as such term is defined in the Purchase Agreement) option to purchase
additional Convertible Notes pursuant to Section 2(b) of the Purchase
Agreement related to the purchase and sale of the Convertible Notes
dated as of October 11, 2007 among Counterparty and the Initial
Purchasers (the “Purchase Agreement”) by the number of Convertible
Notes in denominations of USD1,000 principal amount issued pursuant to
such exercise (such Convertible Notes, the “Additional Convertible
Notes”).
	 
	 	 
	Number of Shares:

	 	The product of the Applicable Percentage, the Number of Options and the
Conversion Rate (as defined in the Note Indenture), but without regard
to any adjustment to the Conversion Rate as a result of the Excluded
Provisions.
	 
	 	 
	Premium:

	 	$33,750,000; provided that if the Number of Options is increased
pursuant to the proviso to the definition of “Number of Options” above,
an additional Premium equal to the product of the number of Options by
which the Number of Options is so increased and $337.50 shall be paid
on the Additional Premium Payment Date.
	 
	 	 
	Premium Payment Date:

	 	The date of issuance of the Reference Notes.
	 
	 	 
	Additional Premium Payment Date:

	 	The closing date for the purchase and sale of the Additional
Convertible Notes.
	 
	 	 
	Exchange:

	 	Nasdaq Global Market
	 
	 	 
	Related Exchange(s):

	 	All Exchanges
	 
	 	 
	Reference Notes:

	 	2.375% Senior Subordinated Convertible Notes due 2014 of Counterparty







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	Applicable Percentage:

	 	 662/3%
	 
	 	 
	Note Indenture:

	 	The indenture, dated as of closing of the issuance of the Reference
Notes, between Counterparty and The Bank of New York, as trustee
relating to the Reference Notes, as the same may be amended, modified
or supplemented from time to time. Certain defined terms used herein
have the meanings assigned to them in the Note Indenture.
	 
	 	 
	Procedures for Exercise:
	 	 
	 
	 	 
	Potential Exercise Dates:

	 	Each Conversion Date.
	 
	 	 
	Conversion Date:

	 	Each “conversion date” for any Reference Note pursuant to the terms of
the Note Indenture occurring before the Expiration Date.
	 
	 	 
	Required Exercise on Conversion 

Dates:

	 	
On each Conversion Date, a number of Options equal to the number of
Convertible Notes in denominations of $1,000 principal amount submitted
for conversion on such Conversion Date in accordance with the terms of
the Note Indenture shall be automatically exercised.
	 
	 	 
	Exercise Period:

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

	 	The earliest of (i) the maturity date of the Reference Notes, (ii) the
first day on which none of such Reference Notes remain outstanding,
whether by virtue of conversion, issuer repurchase or otherwise and
(iii) the occurrence of an Additional Termination Event and designation
of an Early Termination Date hereunder in respect of the termination of
the Transaction in whole but not in part.
	 
	 	 
	Multiple Exercise:

	 	Applicable, as provided above under “Required Exercise on Conversion
Dates”.
	 
	 	 
	Minimum Number of Options:

	 	Zero
	 
	 	 
	Maximum Number of Options:

	 	Number of Options
	 
	 	 
	Automatic Exercise:

	 	As provided above under “Required Exercise on Conversion Dates”.
	 
	 	 
	Exercise Notice:

	 	Notwithstanding the exercise of any Options hereunder, Buyer shall be
entitled to receive the deliveries provided under “Settlement Terms”
below only if Buyer shall have notified Seller in writing prior to 5:00
PM, New York City time, on the “Business Day”, as defined in the Note
Indenture, prior to the first Scheduled Valid Day of the Conversion
Reference Period relating to the Convertible Notes converted on the
Conversion Date occurring on the relevant Exercise Date (such time, the
“Notice Deadline”) of (i) the number of Options being exercised, (ii)
the first Scheduled Valid Day of the Conversion Reference Period and
(iii) the scheduled settlement date under the Note Indenture for the
Convertible Notes converted on the Conversion Date occurring on the
Exercise Date for such exercise; provided that, notwithstanding the
foregoing, such notice (and the related automatic exercise of Options)
shall be effective if given after the relevant Notice Deadline but
prior to 5:00 PM New York City time, on the fifth Scheduled Valid Day
following the Notice Deadline, in which event the Calculation Agent
shall have the right to adjust the Delivery Obligation (as






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	 	defined
below) as appropriate to reflect the additional costs (including, but
not limited to, hedging mismatches and market losses) and reasonable
expenses incurred by Seller in connection with its hedging activities
(including the unwinding of any hedge position) as a result of its not
having received such notice prior to the applicable Notice Deadline.
Notwithstanding the foregoing, in respect of Options with a related
Exercise Date on or after July 15, 2014, the Notice Deadline shall be
5:00 PM, New York City time, on the Business Day prior to the Final
Maturity Date (as defined in the Note Indenture) and the related
Exercise Notice need not contain the information specified in clause
(ii) above.






	 	 	 	 	 
	Seller’s Telephone Number and
Telex and/or Facsimile Number
and Contact Details for purpose
of Giving Notice:

	 	Address:
	 	Merrill Lynch Financial Markets, Inc.

4 World Financial Center, 17th Floor

New York, New York 10080

Merrill Lynch Financial Centre
	 

	 	Attention:
	 	Manager of Equity Documentation
	 

	 	Facsimile No.:
	 	(917) 778-0835
	 

	 	Telephone No.:
	 	(212) 449-1951
	 
	 	 	 	 
	Settlement Terms:
	 	 	 	 
	 
	 	 	 	 
	Settlement Date:	 	As defined in the Note Indenture.






	 	 	 
	Delivery Obligation:

	 	In lieu of the obligations set forth in Sections 8.1 and 9.1 of the
Equity Definitions, and subject to “Exercise Notice” above, in respect
of an Exercise Date occurring on a Conversion Date, Seller will deliver
to Buyer on the related Settlement Date the product of (x) the
Applicable Percentage, (y) the number of Options exercised or deemed
exercised on such Exercise Date and (z) the sum of the quotients, for
each Valid Day during the Conversion Reference Period for such Exercise
Date, of (A) the product of (I) excess, if any, of the Relevant Price
less the Conversion Price on such Valid Day and (II) the Conversion
Rate on such Valid Day divided by (B) such Relevant Price, divided by
(z) the number of Valid Days in the Conversion Reference Period (such
number of Shares, the “Convertible
Obligation”); provided that such
Convertible Obligation shall be determined without regard to any
adjustments to the Conversion Rate or the Conversion Price pursuant to
the to the Excluded Provisions of the Note Indenture.
	 
	 	 
	 

	 	Any fractional Shares to be delivered with respect to any Delivery
Obligation shall be valued at the Relevant Price for the last Valid Day
of the Conversion Reference Period, and Dealer shall deliver cash in
lieu thereof.
	 
	 	 
	Excluded Provisions:

	 	Section 4.06(g) of the Note Indenture.
	 
	 	 
	Conversion Reference Period:

	 	For any Exercise Date, the “conversion reference period” as defined in
the Note Indenture with respect to the Conversion Date occurring on
such Exercise Date.
	 
	 	 
	Valid Day:

	 	A day on which (i) there is no Market Disruption Event and (ii) trading
in the Shares generally occurs on the Exchange or, if the Shares are
not then listed on the Exchange, on the principal other U.S. national
or regional securities exchange on which the Shares are then listed or,
if the Shares are not then listed on a U.S. national or regional
securities exchange, on the principal other market on which the Shares
are then traded. If the Shares (or other security for which a Relevant
Price must be determined) is not so listed or quoted, a Valid Day means
a Business Day






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	Scheduled Valid Day:

	 	A day that is scheduled to be a Valid Day.
	 
	 	 
	Market Disruption Event:

	 	Section 6.3(a) of the Equity Definitions is hereby replaced in its
entirety by the following:
	 
	 	 
	 

	 	“‘Market Disruption Event’ means in respect of a Share, (i) a failure
by the Exchange or, if the Shares are not then listed on the Exchange,
by the principal other U.S. national or regional securities exchange on
which the Shares are then listed or, if the Shares are not then listed
on a U.S. national or regional securities exchange, by the principal
other market on which the Shares are then traded, to open for trading
during its regular trading session or (ii) the occurrence or existence
on any trading day for the Shares of any suspension or limitation
imposed on trading (by reason of movements in price exceeding limits
permitted by the stock exchange or otherwise) in the Shares or in any
options, contracts or future contracts relating to the Shares that, in
each case, for more than one half-hour period in the aggregate on such
trading day.”
	 
	 	 
	Relevant Price:

	 	The VWAP Price (as defined below under “Disposition of Hedge Shares”).
	 
	 	 
	Other Applicable Provisions:

	 	To the extent Seller is obligated to deliver Shares hereunder, the
provisions of Sections 9.1(c), 9.8, 9.9, 9.10, 9.11 (except 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 Buyer is
the issuer of the Shares) and 9.12 of the Equity Definitions will be
applicable as if “Physical Settlement” applied to the Transaction.
	 
	 	 
	Adjustments:
	 	 
	 
	 	 
	Method of Adjustment:

	 	Calculation Agent Adjustment; provided that the terms of this
Transaction shall be adjusted in a manner consistent with adjustments
of the Conversion Rate of the Reference Notes as provided in the Note
Indenture; provided that no adjustment in respect of any Potential
Adjustment Event or Extraordinary Event shall be made hereunder as a
result of any adjustments to the Conversion Rate resulting from a
discretionary adjustment to the Conversion Rate by Counterparty.
	 
	 	 
	Potential Adjustment Event:

	 	Notwithstanding Section 11.2(e) of the Equity Definitions, a “Potential
Adjustment Event” means, subject to the preceding paragraph, the
occurrence of an event or condition that would result in an adjustment
of the Conversion Rate of the Reference Notes pursuant to the Note
Indenture.
	 
	 	 
	Extraordinary Events:
	 	 
	 
	 	 
	Merger Events:

	 	Notwithstanding Section 12.1(b) of the Equity Definitions, a “Merger
Event” means the occurrence of any event or condition to which Section
4.10 of the Note Indenture applies.
	 
	 	 
	Consequences for Merger Events:
	 	 






	 	 	 	 	 
	 

	 	Share-for-Share:
	 	The Transaction will be adjusted in a manner corresponding to the
adjustments to the Reference Notes as provided in the Note Indenture.






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	 	Share-for-Other:
	 	The Transaction will be adjusted in a manner corresponding to the
adjustments to the Reference Notes as provided in the Note Indenture.
	 
	 	 	 	 
	 

	 	Share-for-Combined:
	 	The Transaction will be adjusted in a manner corresponding to the
adjustments to the Reference Notes as provided in the Note Indenture.
	 
	 	 	 	 
	Notice of Merger Consideration:	 	Upon the occurrence of a Merger Event that causes the Shares to be
converted into the right to receive more than a single type of
consideration (determined based in part upon any form of stockholder
election), Buyer shall reasonably promptly (but in any event prior to
the third Exchange Business Day prior to the effective date of such
Merger Event) notify the Calculation Agent of the weighted average of
the types and amounts of consideration (a) received by the holders of
Shares entitled to receive cash, securities or other property or assets
with respect to or in exchange for such Shares in any Merger Event who
affirmatively make such an election and (b) selected by holders of the
Reference Notes as the form of consideration into which the Reference
Notes shall be convertible from and after the effective date of such
Merger Event.
	 
	 	 	 	 
	Tender Offer:	 	Applicable, subject to “Consequences of Tender Offers” below.
Notwithstanding Section 12.1(d) of the Equity Definitions, “Tender
Offer” means the occurrence of any event or condition set forth in
Section 4.06(e) of the Note Indenture.
	 
	 	 	 	 
	Consequences of Tender Offers:	 	The Transaction will be adjusted in a manner corresponding to the
adjustments to the Reference Notes as provided in the Note Indenture.
	 
	 	 	 	 
	Nationalization, Insolvency and
Delisting:	 	Cancellation and Payment (Calculation Agent Determination); provided
that Buyer shall determine whether payment shall be settled in cash or
Shares. In addition to the provisions of Section 12.6(a)(iii) of the
Equity Definitions, it will also constitute a Delisting if the Exchange
is located in the United States and the Shares are not immediately
re-listed, re-traded or re-quoted on any of the New York Stock
Exchange, the American Stock Exchange, the NASDAQ Global Market or the
NASDAQ Global Select 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 Disruption Events:	 	 






	 	 	 	 	 
	 

	 	Change in Law:
	 	Applicable
	 
	 	 	 	 
	 

	 	Failure to Deliver:
	 	Applicable.
	 
	 	 	 	 
	 

	 	Insolvency Filing:
	 	Applicable
	 
	 	 	 	 
	 

	 	Hedging Disruption Event:
	 	Applicable
	 
	 	 	 	 
	 

	 	Increased Cost of Hedging:
	 	Not Applicable
	 
	 	 	 	 
	 

	 	Loss of Stock Borrow:
	 	Not Applicable






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	 	Increased Cost of Stock Borrow:
	 	Not Applicable
	 
	 	 	 	 
	 

	 	Hedging Party:
	 	Seller
	 
	 	 	 	 
	 

	 	Determining Party:
	 	Seller
	 
	 	 	 	 
	Non-Reliance:	 	Applicable
	 
	 	 	 	 
	Agreements and Acknowledgments


Regarding Hedging Activities:	 	Applicable
	 
	 	 	 	 
	Additional Acknowledgments:	 	Applicable






Additional Agreements, Representations and Covenants of Buyer, Etc.: 





	1.	 	Buyer hereby represents and warrants to Seller, on each day from the Trade Date to and
including the earlier of (i) November 17, 2007 and (ii) the date by which Seller is able to
initially complete a hedge of its position relating to this Transaction, that:






	 	a.	 	it will effect (and cause any “affiliated purchaser” (as defined in Rule 10b-18
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) to effect) any purchases, direct or indirect (including by means of any
cash-settled or other derivative instrument), of Shares or any security convertible
into or exchangeable or exercisable for Shares solely through Agent in a manner that
would not cause any purchases by Seller of its hedge in connection with this
Transaction not to comply applicable securities laws;
	 
	 	b.	 	it will not engage in, or be engaged in, any “distribution,” as such term is
defined in Regulation M promulgated under the Exchange Act, other than a distribution
meeting the requirements of the exceptions set forth in sections 101(b)(10) and
102(b)(7) of Regulation M (it being understood that Buyer makes no representation
pursuant to this clause in respect of any action or inaction taken by Seller or any
initial purchaser of the Reference Notes); and
	 
	 	c.	 	Buyer has publicly disclosed all material information necessary for Buyer to be
able to purchase or sell Shares in compliance with applicable federal securities laws.






	2.	 	If Buyer would be obligated to pay cash (other than payment of the Premium and except in the
case of an Event of Default in which Buyer is the Defaulting Party or a Termination Event in
which Buyer is the Affected Party, other than an (x) Event of Default of the type described in
Section 5(a)(iii), (v), (vi) or (vii) of the Master Agreement or (y) a Termination Event of
the type described in Section 5(b)(i), (ii), (iii), (iv), or (v) of the Master Agreement that
in the case of either (x) or (y) resulted from an event or events outside Buyer’s control) to,
or receive cash from, Seller pursuant to the terms of this Agreement for any reason without
having had the right (other than pursuant to this paragraph (2), but including (x) the right
to deliver Shares under the Note Indenture upon conversion of the Reference Notes or (y) the
right to deliver or receive Shares in any other document or agreement that would result,
directly or indirectly, in a cash payment hereunder) to elect to deliver or receive Shares in
satisfaction of such payment obligation, then Buyer may elect (by giving notice to Seller no
later than 8 a.m. New York time on the Exchange Business Day immediately following the date of
occurrence of the event giving rise to such payment obligation) that such payment obligation
shall be satisfied by the delivery of a number of Shares (or, if the Shares have been
converted into other securities or property in connection with an Extraordinary Event, a
number or amount of such other securities or property as a holder of Shares would be entitled




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	 	 	to receive upon the consummation or closing of such Extraordinary Event) having a cash value
equal to the amount of such payment obligation. Such number of Shares or amount of other
securities or property to be delivered shall be determined by the Calculation Agent to be the
number of Shares or amount of such other securities or property that could be purchased or
sold, as applicable, over a reasonable period of time with the cash equivalent of or producing
the cash equivalent of such payment obligation). Settlement relating to any delivery of Shares
or other securities or property pursuant to this paragraph (2) shall occur within a reasonable
period of time. Notwithstanding anything herein or in the Agreement to the contrary, the
aggregate number of Shares that Counterparty may be required to deliver to Dealer under this
Transaction shall not exceed the product of (a) 1.5 and (b) the Number of Shares, as adjusted
by the Calculation Agent to account for any subdivision, stock-split, stock combination,
reclassification or similar dilutive or anti-dilutive event with respect to the Shares.
	 
	3.	 	Counterparty is not, and after giving effect to the Transaction contemplated hereby, will not
be, an “investment company” as such term is defined in the Investment Company Act of 1940, as
amended.
	 
	4.	 	As of the Trade Date and each date on which a payment or delivery is made by Counterparty
hereunder, (i) the assets of Counterparty at their fair valuation exceed the liabilities of
Counterparty, including contingent liabilities; (ii) the capital of Counterparty is adequate
to conduct its business; and (iii) Counterparty has the ability to pay its debts and other
obligations as such obligations mature and does not intend to, or believe that it will, incur
debt or other obligations beyond its ability to pay as such obligations
mature.
	 
	5.	 	The representations and warranties set forth in Section 1 of the Purchase Agreement (as
defined herein) are hereby deemed to be repeated to Dealer as if set forth herein.





Additional Termination Events: 



The occurrence of an Amendment Event or a Repayment Event shall be an Additional Termination Event
with respect to which the Transaction is the sole Affected Transaction and Counterparty is the sole
Affected Party; provided that in the case of a Repayment Event, the Transaction shall be subject to
termination only in respect of the number of Convertible Notes that cease to be outstanding in
connection with or as a result of such Repayment Event:





	1.	 	“Amendment Event” means that the Counterparty, without Dealer’s consent, amends,
modifies, supplements or obtains a waiver of (a) any term of the Note Indenture (as in effect
prior to such amendment, modification, supplement or waiver) or the Reference Notes relating
to the principal amount, coupon, maturity, repurchase obligation of the Counterparty or
redemption right of the Counterparty, (b) any term relating to conversion of the Reference
Notes, including, without limitation, any changes to the conversion price, conversion
settlement dates or conversion conditions or (c) any term that would require consent of the
holders of 100% of the principal amount of the Reference Notes to amend.
	 
	2.	 	“Repayment Event” means that (a) any Reference Notes are repurchased (whether in
connection with or as a result of a fundamental change or change of control, howsoever
defined, or for any other reason) by the Counterparty, (b) any Reference Notes are delivered
to the Counterparty in exchange for delivery of any property or assets of the Counterparty or
any of its subsidiaries (howsoever described), other than as a result of and in connection
with a Conversion Date, (c) any principal of any of the Reference Notes is repaid prior to the
Final Maturity Date (as defined in the Note Indenture) (whether following acceleration of the
Reference Notes or otherwise), provided that no payments of cash made in respect of the
conversion of a Reference Note shall be deemed a payment of principal under this clause (c),
(d) any Reference Notes are exchanged by or for the benefit of the holders thereof for any
other securities of the Counterparty or any of its Affiliates (or any other property, or any
combination thereof) pursuant to any exchange offer or similar transaction or (e) any of the
Reference Notes is surrendered by Counterparty to the trustee for cancellation, other than
registration of a transfer of such Reference Notes or as a result of and in connection with a
Conversion Date.




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	3.	 	Initial Purchase Event. If an Initial Purchase Event (as defined below) occurs, this
Transaction shall terminate automatically in its entirety and, notwithstanding anything to the
contrary herein, only the payments specified below shall be required hereunder in connection
with such Initial Purchase Event.
	 
	 	 	“Initial Purchase Event” means that the transactions contemplated by the Purchase
Agreement shall fail to close for any reason by the closing date for the offering of the
Reference Notes as specified in the Purchase Agreement.
	 
	 	 	If an Initial Purchase Event occurs for any reason other than due to a breach of the
Purchase Agreement by the Initial Purchasers, then all payments previously made hereunder
shall be returned to the person making such payment, including the Premium, less an amount
equal to the product of (a) the Number of Shares, (b) 0.50 and (c) an amount equal to the
excess, if any, of the closing price of the Shares on the Trade Date over the closing price
of the Shares on the date of the Termination Event (the “Break Expense”); provided
that any negative amount shall be replaced by zero and provided further that to the extent
the Premium has not been paid, Buyer shall promptly pay Seller the Break Expense. Seller and
Buyer agree that actual damages would be difficult to ascertain under these circumstances
and that the amount of liquidated damages resulting from the determination in the preceding
sentence is a good faith estimate of such damages and not a penalty.
	 
	 	 	If an Initial Purchase Event occurs due to a breach of the Purchase Agreement by the Initial
Purchasers,
then all payments previously made hereunder, including the Premium, promptly shall be
returned to the person making such payment and no payments shall be required hereunder in
connection with such Initial Purchase Event.





Staggered Settlement: 



If Seller determines reasonably and in good faith that the number of Shares required to be
delivered to Buyer hereunder on any Settlement Date would exceed 8.0% of all outstanding Shares,
then Seller may, by notice to Buyer on or prior to such Settlement Date (a “Nominal Settlement
Date”), elect to deliver the Shares comprising the related Delivery Obligation on two or more
dates (each, a “Staggered Settlement Date”) or at two or more times on the Nominal
Settlement Date as follows:





	1.	 	in such notice, Seller will specify to Buyer the related Staggered Settlement Dates (each of
which will be such Nominal Settlement Date and the last of which will be no later than twenty
(20) Valid Days following such Nominal Settlement Date) or delivery times and how it will
allocate the Shares it is required to deliver hereunder among the Staggered Settlement Dates
or delivery times;
	 
	2.	 	the aggregate number of Shares that Seller will deliver to Buyer hereunder on all such
Staggered Settlement Dates or delivery times will equal the number of Shares that Seller would
otherwise be required to deliver on such Nominal Settlement Date; and
	 
	3.	 	the procedures set forth above under the heading “Settlement Terms” will apply on each
Staggered Settlement Date, except that the Shares comprising the Delivery Obligation will be
allocated among such Staggered Settlement Dates or delivery times as specified by Seller in
the notice referred to in clause (1) above.




Notwithstanding anything herein to the contrary, solely in connection with a Staggered Settlement
Date, Seller shall be entitled to deliver Shares to Buyer from time to time prior to the date on
which Seller would be obligated to deliver them to Buyer pursuant to the Delivery Obligation terms
set forth above, and Buyer agrees to credit all such early deliveries against Seller’s obligations
hereunder in the direct order in which such obligations arise. No such early delivery of Shares
will accelerate or otherwise affect any of Buyer’s obligations to Seller hereunder.




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Disposition of Hedge Shares: 



Counterparty hereby agrees that if, in the reasonable judgment of Seller based on advice of
counsel, the Shares acquired by Seller for the purpose of hedging its obligations pursuant to the
Transaction (the “Hedge Shares”) cannot be sold in the U.S. public market by Seller without
registration under the Securities Act, Counterparty shall, at its election: (i) in order to allow
Seller to sell the Hedge Shares in a registered offering, make available to Seller 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 Seller, 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 Seller, (d) provide
other customary opinions, certificates and closing documents customary in form for registered
offerings of equity securities and (e) afford Seller 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 Seller, in its sole 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 shall apply at the election of Counterparty; (ii) in order to allow
Seller 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, in form and substance satisfactory to Seller, including customary
representations, covenants, blue sky and other governmental filings and/or registrations,
indemnities to Seller, due diligence rights (for Seller or any designated buyer of the Hedge Shares
from Seller), opinions and certificates and such other documentation as is customary for private
placements agreements, all reasonably acceptable to Seller (in which case,
the Calculation Agent shall make any adjustments to the terms of the Transaction that are necessary
to compensate Seller for any discount from the public market price of the Shares incurred on the
sale of Hedge Shares in a private placement); or (iii) purchase the Hedge Shares from Seller at the
VWAP Price on such Exchange Business Days, and in such amounts, as requested by Seller. “VWAP
Price” means, on any Exchange Business Day, the per Share volume-weighted average price as
displayed under the heading “Bloomberg VWAP” on Bloomberg page MHGC.Q <equity> VAP (or any
successor thereto) in respect of the period from 9:30 a.m. to 4:00 p.m. (New York City time) on
such Exchange Business Day (or if such volume-weighted average price is unavailable, the market
value of one Share on such Exchange Business Day, as determined by the Calculation Agent using a
volume-weighted method).




Repurchase Notices:



Counterparty shall, on any day on which Counterparty effects any repurchase of Shares, promptly
give Seller a written notice of such repurchase (a “Repurchase Notice”) on such day if following
such repurchase, the Notice Percentage as determined on such day is (i) greater than 6% and (ii)
greater by 0.5% than the Notice Percentage included in the immediately preceding Repurchase Notice
(or, in the case of the first such Repurchase Notice, greater than the Notice Percentage as of the
date hereof). In the event that Counterparty fails to provide Seller with a Repurchase Notice on
the day and in the manner specified in this section, then Counterparty agrees to indemnify and hold
harmless Seller, its affiliates and their respective directors, officers, employees, agents and
controlling persons (Seller and each such person being an “Indemnified Party”) from and against any
and all losses, 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, 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 and documented expenses (including reasonable 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 Seller.
Counterparty will not be liable under this Indemnity provision to the extent that any loss, claim,
damage, liability or expense is found in a final judgment by a court to have resulted from Dealer’s
gross negligence or willful misconduct. The “Notice Percentage” as of any day is the fraction,
expressed as a


OTC Convertible Note Hedge




10









 






percentage, (i) the numerator of which is the product of (a) the Applicable
Percentage, (b) the number of outstanding Reference Notes and (c) a number of Shares per Reference
Note equal to the Conversion Rate (as defined in the Note Indenture) and (ii) the denominator of
which is the number of Shares outstanding on such day.




Conversion Rate Adjustment Notices



In connection with any adjustments to the Conversion Rate under the terms of the Note Indenture,
Counterparty shall provide to Dealer a copy of the notice of adjustment required to be delivered to
the Trustee (as defined in the Note Indenture) pursuant to Section 4.08 of the Note Indenture
concurrently with filing of such notice with the Trustee.




	 	 	 
	Compliance with 

Securities Laws:

	 	Each party represents and agrees that, in
connection with this Transaction and all related
or contemporaneous sales and purchases of Shares
by either party, Buyer, or in the case of Seller,
the person(s) that directly influences the
specific trading decisions of Seller, has
complied and will comply with the applicable
provisions of the Securities Act of 1933, as
amended (the “Securities Act”), and the Exchange
Act, and the rules and regulations each
thereunder, including, without limitation,
Section 9(a) of, and Rules 10b-5 and 13e and
Regulation M under, the Exchange Act; provided
that each party shall be entitled to rely
conclusively on any information communicated by
the other party concerning such other party’s
market activities.
	 
	 	 
	 

	 	Each party acknowledges that the offer and sale
of the Transaction to it is intended to be exempt
from registration under the Securities Act by
virtue of Section 4(2) thereof. Accordingly,
Buyer represents and warrants to Seller 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, (ii)
it is an “accredited investor” as that term is
defined in Regulation D as promulgated under the
Securities Act and (iii) the disposition of the
Transaction is restricted under this
Confirmation, the Securities Act and state
securities laws.
	 
	 	 
	 

	 	Buyer further represents:
	 
	 	 
	 

	 	(a) Buyer is not entering into this Transaction
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);
	 
	 	 
	 

	 	(b) Buyer acknowledges that as of the date hereof
and without limiting the generality of Section
13.1 of the Equity Definitions, Seller is not
making any representations or warranties with
respect to the treatment of the Transaction under
FASB Statements 149 or 150, EITF Issue No. 00-19
(or any successor issue statements) or under
FASB’s Liabilities & Equity Project.
	 
	 	 
	Account Details:

	 	Account for payments to Buyer:    To be advised
	 
	 	 
	 

	 	Account for payment to Seller:      To be advised
	 
	 	 
	 

	 	Accounts for deliveries of Shares: To be advised
	 
	 	 
	Bankruptcy Rights:

	 	In the event of Buyer’s bankruptcy, Seller’s
rights in connection with this Transaction shall
not exceed those rights held by common
shareholders. For the avoidance of doubt, the
parties acknowledge and agree that Seller’s
rights with respect to any other claim arising
from this Transaction prior to Buyer’s bankruptcy
shall remain in full force and effect and shall not be otherwise abridged or modified in connection herewith.







OTC Convertible Note Hedge





11









 






	 	 	 
	 
	 	 
	Set-Off:

	 	Each party waives any and all rights it may have
to set-off, whether arising under any agreement,
applicable law or otherwise.
	 
	 	 
	Collateral:

	 	None.
	 
	 	 
	Transfer:

	 	Buyer shall have the right to assign its rights
and delegate its obligations hereunder with
respect to any portion of this Transaction,
subject to Seller’s consent, such consent not to
be unreasonably withheld; provided that such
assignment or transfer shall be subject to
receipt by Seller of opinions and documents
reasonably satisfactory to Seller and effected on
terms reasonably satisfactory to the Seller with
respect to any legal and regulatory requirements
relevant to the Seller; provided further that
Buyer shall not be released from its obligation
to deliver any Exercise Notice or its obligations
pursuant to “Disposition of Hedge Shares”,
“Repurchase Notices” or “Conversion Rate
Adjustment Notices” above.
	 
	 	 
	 

	 	Seller may transfer any of its rights or delegate
its obligations under this Transaction with the
prior written consent of Buyer, such consent not
to be unreasonably withheld. In addition, if, as
determined in Seller’s sole discretion, its
“beneficial ownership” (within the meaning of
Section 13 of the Exchange Act and rules
promulgated thereunder) could be deemed to exceed
8% of Counterparty’s outstanding Shares, Seller
may, without Counterparty’s consent, transfer or
assign all or any part of its rights or
obligations under this Transaction to reduce such
“beneficial ownership” to 7.5% to any third party
with a rating for its (or, if applicable, its
Credit Support Provider’s) long term, unsecured
and unsubordinated indebtedness of AA or better
by Standard & Poor’s Ratings Service or its
successor (“S&P”), or Aa3 or better by Moody’s
Investors Service (“Moody’s”) or, if either S&P
or Moody’s ceases to rate such debt, at least an
equivalent rating or better by a substitute
rating agency mutually agreed by Company and
Seller. If after Seller’s commercially reasonable
efforts, Seller is unable to effect such a
transfer or assignment on pricing terms
reasonably acceptable to Seller and within a time
period reasonably acceptable to Seller of a
sufficient number of Options to reduce Seller’s
“beneficial ownership” (within the meaning of
Section 13 of the Exchange Act and rules
promulgated thereunder) to 7.5% of Counterparty’s
outstanding Shares or less, Seller may designate
any Exchange Business Day as an Early Termination
Date with respect to a portion (the “Terminated
Portion”) of this Transaction, such that its
“beneficial ownership” following such partial
termination will be equal to or less than 7.5%.
In the event that
Seller so designates an Early
Termination Date with respect to a portion of
this Transaction, a payment shall be made
pursuant to Section 6 of the Agreement as if (i)
an Early Termination Date had been designated in
respect of a Transaction having terms identical
to this Transaction and a Number of Options equal
to the Terminated Portion, (ii) Counterparty
shall be the sole Affected Party with respect to
such partial termination and (iii) such
Transaction shall be the only Terminated
Transaction.





Matters Relating to Agent: 





	1.	 	Agent will be responsible for the operational aspects of the Transactions effected through
it, such as record keeping, reporting, and confirming Transactions to Buyer and Seller;
	 
	2.	 	Unless Buyer is a “major U.S. institutional investor,” as defined in Rule 15a-6 of the
Exchange Act, neither Buyer nor Seller will contact the other without the direct involvement
of Agent;
	 
	3.	 	Agent’s sole role under this Agreement and with respect to any Transaction is as an agent of
Buyer and 




OTC Convertible Note Hedge




12









 




Seller on a disclosed basis and Agent shall have no responsibility or liability to
Buyer or Seller hereunder except for gross negligence or willful misconduct in the performance
of its duties as agent. Agent is authorized to act as agent for Buyer, but only to the extent
expressly required to satisfy the requirements of Rule 15a-6 under the Exchange Act in respect
of the Options described hereunder. Agent shall have no authority to act as agent for Buyer
generally or with respect to transactions or other matters governed by this Agreement, except
to the extent expressly required to satisfy the requirements of Rule 15a-6 or in
accordance with express instructions from Buyer.







Certain Important Information:



Dealer is an OTC Derivatives Dealer registered with the U.S. Securities and Exchange Commission
(SEC). Applicable SEC rules require us to provide you with the following information regarding SEC
regulation of OTC Derivatives Dealers: Dealer is exempt from the provisions of the Securities
Investor Protection Act of 1970 (SIPA), including membership in the Securities Investor Protection
Corporation (SIPC). Therefore, your account is not covered by SIPA protection. Except as otherwise
agreed in writing by you and us, Dealer may repledge and otherwise use in its business collateral
you have pledged to Dealer under the Agreement. Collateral you have pledged to Dealer will not be
subject to the requirements of Securities Exchange Act Rules: 8c-1 and 15c2-1 regarding
hypothecation of collateral; 15c3-2 regarding free credit balances; or 15c3-3 regarding custody of
securities and calculations of a reserve formula applicable to a fully regulated SEC registered
broker or dealer. In the event of Dealer’s failure (by insolvency or otherwise), you would likely
be considered to be an unsecured creditor of Dealer as to any collateral pledged to Dealer under
the Agreement.



Dealer is incorporated in Delaware and is a direct, wholly owned subsidiary of Merrill Lynch & Co.,
Inc. Dealer has entered into this transaction as principal through Agent as its agent. The time of
this Transaction shall be notified to the Counterparty upon request.




ISDA Master Agreement: 



With respect to the Agreement, Seller and Counterparty each agree as follows:




“Specified
Entity” means in relation to Seller and in relation to Counterparty for purposes
of this Transaction: Not applicable.



The definition of “Specified Transaction” in Section 14 of this Agreement is hereby amended
by adding the text “commodity transaction, credit derivative transaction, repurchase or reverse
purchase transaction, securities lending transaction, futures transaction, prime brokerage or
margin lending transaction” after the words “foreign exchange transaction” in the sixth line
thereof and by replacing the words “any other similar transaction” in the eighth line thereof with
the text “any other transaction between the parties”. “Specified Transaction” shall exclude any
default under a Specified Transaction if caused solely by the general unavailability of the
currency in which payments under such Specified Transaction are denominated due to exchange
controls or other governmental action.



The “Cross Default” provisions of Section 5(a)(vi) of the Agreement will not apply
to Seller and will not apply to Counterparty.



The “Credit Event Upon Merger” provisions of Section 5(b)(iv) of the Agreement will
not apply to Seller and will not apply to Counterparty.



The “Automatic Early Termination” provision of Section 6(a) of the Agreement will
not apply to Seller or to Counterparty.



Payments on Early Termination. For the purpose of Section 6(e) of the Agreement: (i) Loss
shall apply; and (ii) the Second Method shall apply.



“Termination Currency” means USD.




OTC Convertible Note Hedge




13









 








Tax Representations.





	(a)	 	Payer Representations. For the purpose of Section 3(e) of the Agreement, each party
represents to the other party that it is not required by any applicable law, as modified by
the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to
make any deduction or withholding for or
on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii), or
6(e) of the Agreement) to be made by it to the other party under the Agreement. In making
this representation, each party may rely on (i) the accuracy of any representations made by
the other party pursuant to Section 3(f) of the Agreement, (ii) the satisfaction of the
agreement contained in Section 4(a)(i) or 4(a)(iii) of the Agreement, and the accuracy and
effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or
4(a)(iii) of the Agreement, and (iii) the satisfaction of the agreement of the other party
contained in Section 4(d) of the Agreement; provided that it will not be a breach of this
representation where reliance is placed on clause (ii) above and the other party does not
deliver a form or document under Section 4(a)(iii) of the Agreement by reason of material
prejudice to its legal or commercial position.
	 
	(b)	 	Payee Representations. For the purpose of Section 3(f) of the Agreement, each party makes the
following representations to the other party:






	 	(i)	 	Dealer represents that it is a company incorporated in a jurisdiction within the United
States.
	 
	 	(ii)	 	Counterparty represents that it is a corporation incorporated in Delaware.




Delivery Requirements. For the purpose of Sections 4(a)(i) and (ii) of the
Agreement, each party agrees to deliver the following documents:





	(a)	 	Tax forms, documents or certificates to be delivered are:
	 
	 	 	Dealer agrees to complete (accurately and in a manner reasonably satisfactory to
Counterparty), execute, and deliver to Counterparty, United States Internal Revenue Service
Form W-9 and all required attachments, or any successor of such form(s): (i) before the
first payment date under this agreement; (ii) promptly upon reasonable demand by
Counterparty; and (iii) promptly upon learning that any such Form previously provided by
Dealer has become obsolete or incorrect.
	 
	 	 	Counterparty agrees to complete (accurately and in a manner reasonably satisfactory to
Dealer), execute, and deliver to Dealer, United States Internal Revenue Service Form W-9 or
W-8 BEN, or any successor of such form(s): (i) before the first payment date under this
agreement; (ii) promptly upon reasonable demand by Dealer; and (iii) promptly upon learning
that any such form(s) previously provided by Counterparty has become obsolete or incorrect.
	 
	(b)	 	Other documents to be delivered:





	 	 	 	 	 	 	 
	 	 	 	 	 	 	Covered by
	Party Required to	 	 	 	 	 	Section 3(d)
	Deliver Document	 	Document Required to be Delivered	 	When Required	 	Representation
	Counterparty

	 	Evidence of the authority and
true signatures of each official
or representative signing this
Confirmation
	 	Upon or before
execution and
delivery of this
Confirmation
	 	Yes
	 
	 	 	 	 	 	 
	Counterparty

	 	Certified copy of the resolution
of the Board of Directors or
equivalent document authorizing
the execution and delivery of
this Confirmation and such other
certificates as Seller shall
reasonably request
	 	Upon or before
execution and
delivery of this
Confirmation
	 	Yes






OTC Convertible Note Hedge




14









 






	 	 	 	 	 	 	 
	 	 	 	 	 	 	Covered by
	Party Required to	 	 	 	 	 	Section 3(d)
	Deliver Document	 	Document Required to be Delivered	 	When Required	 	Representation
	Seller

	 	Guarantee of its Credit Support
Provider, substantially in the
form of Exhibit A attached
hereto, together with evidence
of the authority and true
signatures of the signatories,
if applicable
	 	Upon or before
execution and
delivery of this
Confirmation
	 	No





Additional Notice Requirements. Counterparty hereby agrees to promptly deliver to Seller a copy of
all notices and other communications required or permitted to be given to the holders of any
Reference Notes pursuant to the terms of the Note Indenture on the dates so required or permitted
in the Note Indenture and all other notices given and other communications made by Counterparty in
respect of the Reference Notes to holders of any Reference Notes. Counterparty further covenants to
Seller that it shall promptly notify Seller of each Conversion Date, Amendment Event (including in
such notice a detailed description of any such amendment) and Repayment Event (identifying in such
notice the nature of such Repayment Event and the principal amount at maturity of Reference Notes
being paid).



Addresses for Notices. For the purpose of Section 12(a)
of the Agreement:



Address for notices or communications to Seller for all purposes:




	 	 	 	 	 
	 

	 	Address:
	 	Merrill Lynch Financial Markets, Inc.
	 

	 	 	 	4 World Financial Center, 17th Floor
	 

	 	 	 	New York, New York 10080
	 

	 	 	 	Merrill Lynch Financial Centre
	 

	 	Attention:
	 	Manager of Equity Documentation
	 

	 	Facsimile No.:
	 	(917) 778-0835
	 

	 	Telephone No.:
	 	(212) 449-1951





Additionally, a copy of all notices pursuant to Sections 5, 6, and 7 as
well as any changes to Counterparty’s address, telephone number or facsimile number should be sent
to:




	 	 	 	 	 
	 

	 	Address:
	 	Merrill Lynch Financial Markets, Inc.
	 

	 	 	 	4 World Financial Center, 17th Floor
	 

	 	 	 	New York, New York 10080
	 

	 	 	 	Merrill Lynch Financial Centre
	 

	 	Attention:
	 	Manager of Equity Documentation
	 

	 	Facsimile No.:
	 	(917) 778-0835
	 

	 	Telephone No.:
	 	(212) 449-1951





Address for notices or communications to Counterparty for all purposes:




	 	 	 	 	 
	 

	 	Address:
	 	To be advised.
	 
	 

	 	Attention:	 	 
	 

	 	Facsimile No.:	 	 
	 

	 	Telephone No.:	 	 





In addition, in the case of notices or communications relating to Section 5, 6,
11 or 13 of this Agreement, a second copy of any such notice or communication shall
be addressed to the attention of Counterparty’ General Counsel as follows:




	 	 	 	 	 
	 

	 	Address:
	 	To be advised.






OTC Convertible Note Hedge




15









 






	 	 	 	 	 
	 

	 	Attention:	 	 
	 

	 	Facsimile No.:	 	 
	 

	 	Telephone No.:	 	 





Process Agent. For the purpose of Section 13(c) of the Agreement, Seller appoints as its Process Agent:




	 	 	 	 	 
	 

	 	Address:
	 	Merrill Lynch, Pierce, Fenner & Smith Incorporated

222 Broadway, 16th Floor

New York, New York 10038
	 
	 	 	 	 
	 

	 	Attention:
	 	Litigation Department
	 
	 	 	 	 
	 	 	Counterparty does not appoint a Process Agent.






	 	 	 
	Multibranch Party.

	 	For the purpose of
Section 10(c) of the Agreement: Neither Seller nor Counterparty is a Multibranch
Party.
	 
	 	 
	Calculation Agent.

	 	Seller; provided that all determinations made by
the Calculation Agent shall be made in good faith
and in a commercially reasonable manner.






Credit Support Document.



Seller: Guarantee of Merrill Lynch & Co., Inc. in the form attached hereto as
Exhibit A.



Counterparty: Not Applicable




Credit Support Provider.



With respect to Seller: Merrill Lynch & Co., Inc.



With respect to Counterparty: Not Applicable.



Governing Law. This Confirmation will be governed by, and construed in accordance with, the laws of
the State of New York.



Submission to Jurisdiction. Each party hereby irrevocably and unconditionally submits for itself
and its property in any legal action or proceeding by the other party against it relating to the
Transaction to which it is a party, or for recognition and enforcement of any judgment in respect
thereof, to the exclusive jurisdiction of the Supreme Court of the State of New York, sitting in
New York County, the courts of the United States of America for the Southern District of New York,
and appellate courts from any of the foregoing.



Waiver of Jury Trial. Each party waives, to the fullest extent permitted by applicable law, any
right it may have to a trial by jury in respect of any suit, action or proceeding relating to this
Transaction. Each party (i) certifies that no representative, agent or attorney of the other party
has represented, expressly or otherwise, that such other party would not, in the event of such a
suit, action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and
the other party have been induced to enter into this Transaction, as applicable, by, among other
things, the mutual waivers and certifications provided herein.



Netting of Payments. The provisions of Section 2(c) of the Agreement shall not be
applicable to this Transaction.



Basic Representations. Section 3(a) of the Agreement is hereby amended by the deletion of
“and” at the end of Section 3(a)(iv); the substitution of a semicolon for the period at the
end of Section 3(a)(v) and the addition of Sections 3(a)(vi), as follows:




OTC Convertible Note Hedge




16









 







Eligible Contract Participant; Line of Business. Each party agrees and represents that it is an
“eligible contract participant” as defined in Section 1a(12) of the U.S. Commodity Exchange Act, as
amended (“CEA”), this Agreement and the Transaction thereunder are subject to individual
negotiation by the parties and have not been executed or traded on a “trading facility” as defined
in Section 1a(33) of the CEA, and it has entered into this Confirmation and this Transaction in
connection with its business or a line of business (including financial intermediation), or the
financing of its business.




Acknowledgements:





	(a)	 	The parties acknowledge and agree that there are no other representations, agreements or
other undertakings of the parties in relation to this Transaction, except as set forth in this
Confirmation.
	 
	(b)	 	The parties hereto intend for:






	 	(i)	 	Seller to be a “financial institution” as defined in Section 101(22) of Title
11 of the United States Code (the “Bankruptcy Code”) and this Transaction to be
a “securities contract” as defined in Section 741(7) of the Bankruptcy Code and a “swap
agreement” as defined in Section 101(53C) of the Bankruptcy Code, qualifying for the
protections of, among other sections, Sections 362(b)(6), 362 (b)(17), 546(e), 546(g),
555 and 560 of the Bankruptcy Code;
	 
	 	(ii)	 	a party’s right to liquidate this Transaction and to exercise any other
remedies upon the occurrence of any Event of Default under the Agreement with respect
to the other party to constitute a “contractual right” as defined in the Bankruptcy
Code;
	 
	 	(iii)	 	all payments for, under or in connection with this Transaction, all payments
for the Shares and the transfer of such Shares to constitute “settlement payments” as defined in the
Bankruptcy Code.





Amendment of Section 6(d)(ii). Section 6(d)(ii) of the Agreement is modified by deleting
the words “on the day” in the second line thereof and substituting therefore “on the day that is
three Local Business Days after the day.” Section 6(d)(ii) is further modified by deleting
the words “two Local Business Days” in the fourth line thereof and substituting therefore “three
Local Business Days.”



Consent to Recording. Each party consents to the recording of the telephone conversations of
trading and marketing personnel of the parties and their Affiliates in connection with this
Confirmation. To the extent that one party records telephone conversations (the “Recording Party”)
and the other party does not (the “Non-Recording  Party”), the Recording Party shall in the
event of any dispute, make a complete and unedited copy of such party’s tape of the entire day’s
conversations with the Non-Recording Party’s personnel available to the Non-Recording Party. The
Recording Party’s tapes may be used by either party in any forum in which a dispute is sought to be
resolved and the Recording Party will retain tapes for a consistent period of time in accordance
with the Recording Party’s policy unless one party notifies the other that a particular transaction
is under review and warrants further retention.



Disclosure. Each party hereby acknowledges and agrees that Seller has authorized Counterparty to
disclose this Transaction and any related hedging transaction between the parties if and to the
extent that Counterparty reasonably determines (after consultation with Seller) that such
disclosure is required by law or by the rules of the New York Stock Exchange or any securities
exchange. Notwithstanding the foregoing, 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.



Severability. If any term, provision, covenant or condition of this Confirmation, or the
application thereof to any party or circumstance, shall be held to be invalid or unenforceable in
whole or in part for any reason, the remaining terms, provisions, covenants, and conditions hereof
shall continue in full force and effect as if this Confirmation had




OTC Convertible Note Hedge




17









 







been executed with the invalid or unenforceable provision eliminated, so long as this Confirmation
as so modified continues to express, without material change, the original intentions of the
parties as to the subject matter of this Confirmation and the deletion of such portion of this
Confirmation will not substantially impair the respective benefits or expectations of parties to
this Agreement; provided, however, that this severability provision shall not be applicable
if any provision of Section 2, 5, 6 or 13 of the Agreement (or any
definition or provision in Section 14 to the extent that it relates to, or is used in or in
connection with any such Section) shall be so held to be invalid or unenforceable.



Affected Parties. For purposes of Section 6(e) of the Agreement, each party shall be deemed
to be an Affected Party in connection with Illegality and any Tax Event.




[Signatures follow on separate page]



OTC Convertible Note Hedge




18









 




Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the
copy of this Confirmation enclosed for that purpose and returning it to us.




	 	 	 	 	 
	 	Very truly yours,





MERRILL LYNCH FINANCIAL MARKETS, INC.

 	 
	 	By:  	/s/ Fran Jacobson
 	 
	 	Name:  	Fran Jacobson 	 	 
	 	Title:  	Authorized Signatory 	 	 
	 


Confirmed as of the date first above written:



MORGANS HOTEL GROUP CO.




	 	 	 	 	 
	By:

	 	/s/ Marc Gordon	 	 
	Name:

	 	 

Marc Gordon
	 	 
	Title:

	 	Chief Investment Officer &	 	 
	 

	 	Executive Vice President of Capital
Markets	 	 





Acknowledged and agreed as to matters to the Agent:



MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED



Solely in its capacity as Agent hereunder




	 	 	 	 	 
	By:

	 	/s/ Angelina Lopes	 	 
	Name:

	 	 

Angelina Lopes
	 	 
	Title:

	 	Authorized Signatory	 	 








 









 






EXHIBIT A




GUARANTEE OF MERRILL LYNCH & CO., INC.




     FOR VALUE RECEIVED, receipt of which is hereby acknowledged, MERRILL LYNCH & CO., INC., a
corporation duly organized and existing under the laws of the State of Delaware (“ML & Co.”),
hereby unconditionally guarantees to Morgans Hotel Group Co. (the “Company”), the due and punctual
payment of any and all amounts payable by Merrill Lynch Financial Markets, Inc., a company
incorporated in Delaware (“ML”), under the terms of the Confirmation of OTC Convertible Note Hedge
between the Company and ML (ML as Seller), dated as of October 11, 2007 (the “Confirmation”),
including, in case of default, interest on any amount due, when and as the same shall become due
and payable, whether on the scheduled payment dates, at maturity, upon declaration of termination
or otherwise, according to the terms thereof. In case of the failure of ML punctually to make any
such payment, ML & Co. hereby agrees to make such payment, or cause such payment to be made,
promptly upon demand made by the Company to ML & Co.; provided, however that delay by the Company
in giving such demand shall in no event affect ML & Co.’s obligations under this Guarantee. This
Guarantee shall remain in full force and effect or shall be reinstated (as the case may be) if at
any time any payment guaranteed hereunder, in whole or in part, is rescinded or must otherwise be
returned by the Company upon the insolvency, bankruptcy or reorganization of ML or otherwise, all
as though such payment had not been made.



     ML & Co. hereby agrees that its obligations hereunder shall be unconditional, irrespective of
the validity, regularity or enforceability of the Confirmation; the absence of any action to
enforce the same; any waiver or consent by the Company concerning any provisions thereof; the
rendering of any judgment against ML or any action to enforce the same; or any other circumstances
that might otherwise constitute a legal or equitable discharge of a guarantor or a defense of a
guarantor. ML covenants that this guarantee will not be discharged except by complete payment of
the amounts payable under the Confirmation. This Guarantee shall continue to be effective if ML
merges or consolidates with or into another entity, loses its separate legal identity or ceases to
exist.



     ML & Co. hereby waives diligence; presentment; protest; notice of protest, acceleration, and
dishonor; filing of claims with a court in the event of insolvency or bankruptcy of ML; all demands
whatsoever, except as noted in the first paragraph hereof; and any right to require a proceeding
first against ML.



     ML & Co. hereby certifies and warrants that this Guarantee constitutes the valid obligation of
ML & Co. and complies with all applicable laws.



     This Guarantee shall be governed by, and construed in accordance with, the laws of the State
of New York.



     This Guarantee may be terminated at any time by notice by ML & Co. to the Company given in
accordance with the notice provisions of the Confirmation, effective upon receipt of such notice by
the Company or such later date as may be specified in such notice; provided, however, that this
Guarantee shall continue in full force and effect with respect to any obligation of ML under the
Confirmation arising before or after such termination.



     This Guarantee becomes effective concurrent with the effectiveness of the Confirmation,
according to its terms.




 









 




IN WITNESS WHEREOF, ML & Co. has caused this Guarantee to be executed in its corporate name by its
duly authorized representative.




	 	 	 	 	 
	 	MERRILL LYNCH & CO., INC.

 	 
	 	By:  	/s/ Patricia Kroplewnicki
 	 
	 	 	Name:  	Patricia Kroplewnicki 	 
		 	Title:  	Designated Signatory
 	 
		 	Date:  	October 11, 2007