Item 5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
2021 Annual Equity Awards
On December 31, 2020, the Compensation Committee of the Concho Board (the
"Compensation Committee") approved the grant of performance units (the "2021
Performance Units") and restricted stock (the "2021 Restricted Stock Awards") to
officers on January 4, 2021 of the Concho under Concho's 2019 Stock Incentive
Plan, which was approved by Concho stockholders in May 2019. The number of
awards granted was based on the mean of the high and low sales price of Concho
common stock on December 31, 2020. These awards were previously disclosed in the
Proxy Statement under the heading "The Merger Proposal - Interests of Concho
Directors and Executive Officers in the Merger - 2021 Long-Term Incentive
Awards".
2021 Performance Unit Awards
The 2021 Performance Units granted to each recipient are payable in shares of
Concho common stock based upon the achievement by Concho over a performance
period commencing on January 1, 2021 and ending on December 31, 2023 of
performance goals established by the Compensation Committee. The number of
shares of Concho common stock that may be issued pursuant to an award will be
determined by multiplying the number of 2021 Performance Units granted under the
award by the result of multiplying the "Relative TSR Percentage" by the
"Absolute TSR Percentage." The "Relative TSR Percentage" is the percentage, if
any, achieved by attainment of the following performance goals for the
performance period, as certified by the Compensation Committee: (i) if Concho's
total shareholder return ("TSR") measured against Concho's peer group is below
the 25th percentile, the Relative TSR Percentage is 0%; (ii) if the TSR measured
against Concho's peer group is at the 25th percentile, the Relative TSR
Percentage is 50%; (iii) if the TSR measured against Concho's peer group is at
the 50th percentile, the Relative TSR Percentage is 100%; (iv) if the TSR
measured against Concho's peer group is at the 70th percentile, the Relative TSR
Percentage is 150%; and (v) if the TSR measured against Concho's peer group is
in the 90th percentile or above, the Relative TSR Percentage is 200%, with 200%
being the maximum and the Compensation Committee applying straight line
interpolation for all points between such performance levels. The "Absolute TSR
Percentage" is the percentage achieved by attainment of the following
performance goals for the performance period, as certified by the Compensation
Committee: (a) if Concho's absolute annualized TSR is less than 0%, the Absolute
TSR Percentage is 75%; (b) if Concho's absolute annualized TSR is at least 0%
and not greater than 5%, the Absolute TSR Percentage is 87.5%; (c) if Concho's
absolute annualized TSR is at least 5% and not greater than 10%, the Absolute
TSR Percentage is 100%; (d) if Concho's absolute annualized TSR is at least 10%
and not greater than 15%, the Absolute TSR Percentage is 112.5%; and (e) if
Concho's absolute annualized TSR is greater than 15%, the Absolute TSR
Percentage is 125%. TSR for Concho and each of the peer companies is generally
determined by dividing (A) the average closing stock prices on each trading day
during the period beginning on the first day of the calendar month in which the
last day of the performance period occurs and ending on the last day of the
performance period plus cash dividends paid over the performance
period minus the starting average stock price by (B) the starting average stock
price, with the starting average stock price being the average of the closing
stock prices on each trading day in the calendar month immediately preceding the
first day of the performance period.
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Dividend equivalents with respect to any cash dividends paid during the
performance period are paid at the same time, and subject to the same terms and
conditions, as are applicable to 2021 Performance Units, except that if more
than one share of Concho common stock becomes payable in respect of a 2021
Performance Unit, then the maximum amount of dividend equivalents payable with
respect to such unit equals the aggregate amount of cash dividends paid during
the performance period on one share of Concho common stock.
Upon the closing of the Merger, the 2021 Performance Units will be automatically
converted into a number of ConocoPhillips restricted stock based on the Exchange
Ratio and assuming achievement of the applicable performance goals at target
performance (100%). As converted, each ConocoPhillips restricted stock award
corresponding to a 2021 Performance Unit will (i) vest one-third per year on the
first, second and third anniversaries of the grant date, (ii) immediately vest
in full upon a Qualifying Termination (as defined in the 2021 Performance Unit
Award Agreement) and (iii) otherwise be subject to substantially the same terms
and conditions as applied to the corresponding 2021 Performance Unit immediately
prior to the Effective Time; provided, that as of the Effective Time, the
performance-vesting conditions shall no longer apply. In addition, in
consideration for the 2021 Performance Units and certain other awards, the 2021
Performance Units granted to each of Messrs. Leach, Harper and Giraud contain
certain non-competition restrictions that will apply in the event such officer
is terminated prior to the second anniversary of the closing of the Merger and
eligible to receive severance in connection with such termination and "good
reason" will be defined per their ConocoPhillips employment letter.
The number of 2021 Performance Units granted on January 4, 2021 by the
Compensation Committee to the Company's named executive officers is as follows:
Mr. Leach, 103,014 Performance Units; Mr. Harper, 42,236 Performance Units;
Mr. Giraud, 31,763 Performance Units; Mr. Counts, 18,886 Performance Units and
Ms. Schroer, 18,886 Performance Units.
The foregoing description of the 2021 Performance Units granted to Concho's
named executive officers is qualified in its entirety by reference to the
complete text of the form of 2021 Performance Unit Award Agreement, attached
hereto as Exhibit 10.1, and incorporated herein by reference.
2021 Restricted Stock Awards
The 2021 Restricted Stock Awards granted to each officer vest in four equal
annual installments beginning on January 4, 2022. Upon the closing of the
Merger, the 2021 Restricted Stock Awards will be automatically converted into a
number of ConocoPhillips restricted stock based on the Exchange Ratio. As
converted, each ConocoPhillips restricted stock award corresponding to a 2021
Restricted Stock Award will (i) vest one-third per year on the first, second and
third anniversaries of the grant date, (ii) immediately vest in full upon a
Qualifying Termination (as defined in the 2021 Restricted Stock Award Agreement)
and (iii) otherwise be subject to substantially the same terms and conditions as
applied to the corresponding 2021 Restricted Stock Award immediately prior to
the Effective Time.
The number of 2021 Restricted Stock Awards granted on January 4, 2021 by the
Compensation Committee to the Company's named executive officers is as follows:
Mr. Leach, 51,507 Restricted Stock Awards; Mr. Harper, 28,157 Restricted Stock
Awards; Mr. Giraud, 31,763 Restricted Stock Awards; Mr. Counts, 18,886
Restricted Stock Awards and Ms. Schroer, 18,886 Restricted Stock Awards.
The foregoing description of the 2021 Restricted Stock Award granted to Concho's
named executive officers is qualified in its entirety by reference to the
complete text of the form of 2021 Restricted Stock Award Agreement, attached
hereto as Exhibit 10.2, and incorporated herein by reference.
Amendment of Succession Restricted Stock Awards
On January 2, 2019, each of Messrs. Harper and Giraud were granted certain
awards of restricted stock that vest over a period of ten years at a rate of 20%
per year commencing on the sixth anniversary of the grant date (the "Succession
Restricted Stock Awards"). On December 31, 2020, the Compensation Committee
amended the Succession Restricted Stock Awards, contingent on the closing of the
Merger, so that each such award shall vest in three equal installments on each
of January 2, 2022, 2023 and 2024, subject to such other terms and conditions of
the applicable award agreement (including immediate vesting acceleration upon a
Qualifying Termination (as defined therein)). Except for the aforementioned
change to the vesting schedule, the Succession Restricted Stock Awards will
continue to remain governed
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by the terms and conditions of the applicable award agreement. This action was
previously disclosed in the Proxy Statement under the heading "The Merger
Proposal - Interests of Concho Directors and Executive Officers in the Merger -
Other Compensation Matters".
The foregoing description of the Succession Restricted Stock Awards is qualified
in its entirety by reference to the complete text of a Succession Restricted
Stock Agreement which contains the terms of the award. The Succession Restricted
Stock Awards granted to each of Messrs. Harper and Giraud are evidenced by a
form Succession Restricted Stock Award previously approved by the Compensation
Committee that was filed as Exhibit 10.4 to Concho's Current Report on Form 8-K
on January 4, 2019 and is incorporated herein by reference.
2018 Performance Unit Awards
On December 28, 2020, the Compensation Committee determined that the performance
units previously granted to certain officers of Concho with respect to a
. . .
Item 8.01 Other Events.
Litigation Related to the Merger
In connection with the Merger, seven lawsuits were filed between November 23 and
December 28, 2020 against one or more of Concho, the directors of Concho,
ConocoPhillips, the directors of ConocoPhillips and Merger Sub (collectively,
the "Defendants"). Four complaints, Stein v. Concho Resources Inc. et al., C.A.
No. 1:20-cv-01582-UNA, Chappidi v. Concho Resources Inc. et al., C.A. No.
1:20-cv-01584-UNA, Lovoi v. ConocoPhillips et al., C.A. No. 1:20-cv-01638-UNA
and Davydov v. ConocoPhillips et al., C.A. No. 1:20-cv-01674-UNA (the "Davydov
lawsuit"), were filed in the U.S. District Court for the District of Delaware.
One complaint, Ortiz v. Concho Resources Inc. et al., C.A. No. 1:20-cv-05886,
was filed in the U.S. District Court for the Eastern District of New York. One
complaint, Stracener v. ConocoPhillips et al., C.A. No. 1:20-cv-10954, was filed
in the U.S. District Court for the Southern District of New York. One complaint,
Garfield v. Bunch et al., No. 2020-79700, was filed in the District Court of
Harris County, Texas (the "Garfield lawsuit").
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The complaints filed in federal court generally allege, among other things, that
the Defendants disseminated a false or misleading registration statement
regarding the proposed Merger in violation of Section 14(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") and SEC Rule 14a-9 promulgated
thereunder. These complaints allege that the preliminary joint proxy
statement/prospectus or the Definitive Proxy Statement filed by ConocoPhillips
misstated or omitted material information regarding the parties' financial
projections, the analyses performed by Concho's and ConocoPhillips' respective
financial advisors, potential conflicts of interest involving Concho's and
ConocoPhillips' respective financial advisors and/or the sales process leading
up to the Merger, and that disclosure of material information is necessary for
Concho's and ConocoPhillips' stockholders to make informed decisions regarding
whether to vote in favor of the Merger or the issuance of shares of
ConocoPhillips common stock in connection with the Merger (the "Share
Issuance"). Other than the Davydov lawsuit, the complaints further allege that
Concho's or ConocoPhillips' directors and/or ConocoPhillips are liable for
alleged violations as "controlling persons" of Concho and ConocoPhillips under
Section 20(a) of the Exchange Act. The Garfield lawsuit alleges, among other
things, that ConocoPhillips and the directors of ConocoPhillips disseminated a
Definitive Proxy Statement that contains materially false and misleading
statements and omissions in violation of Texas common law. The complaint alleges
that the Definitive Proxy Statement included false or misleading statements
regarding conflicts of interests of those promoting the Merger, as well as
financial information underlying the analyses conducted by ConocoPhillips'
financial advisor in formulating its fairness opinion, and that disclosure of
material information is necessary for ConocoPhillips' stockholders to make
informed decisions regarding whether to vote in favor of the Share Issuance.
Among other relief, the complaints seek injunctive relief, including enjoining
the Merger unless and until the Defendants disclose the allegedly omitted
material information, rescinding the Merger in the event the Defendants
consummate the Merger (or awarding rescissory damages), damages, and an award of
attorneys' and experts' fees. ConocoPhillips and Concho believe that the claims
in the complaints are without merit and that no further disclosure is required
under applicable law.
As a result of supplemental disclosures set forth herein, the plaintiff in the
Garfield lawsuit has entered into an agreement to voluntarily dismiss his action
with prejudice.
Supplemental Disclosures to Definitive Proxy Statement
This supplemental information to the Definitive Proxy Statement should be read
in conjunction with the Definitive Proxy Statement, which should be read in its
entirety. Nothing herein shall be deemed an admission of the legal necessity or
materiality of any of the disclosures set forth herein. All page references in
the information below are to pages in the Definitive Proxy Statement, and all
terms used but not defined below shall have the meanings set forth in the
Definitive Proxy Statement.
The following underlined language is added to the second full paragraph in the
section of the Definitive Proxy Statement entitled "The Merger-Opinion of
Goldman Sachs, ConocoPhillips' Financial Advisor-Illustrative Discounted Cash
Flow Analysis-Concho Standalone" that appears on pages 94-95.
Using discount rates ranging from 5.5% to 7.5%, reflecting estimates of Concho's
weighted average cost of capital, Goldman Sachs discounted to present value as
of June 30, 2020 (i) estimates of the unlevered free cash flows to be generated
by Concho on a standalone basis for the period from June 30, 2020 to
December 31, 2025, as reflected in the forecasts for Concho, and (ii) a range of
illustrative terminal values for Concho as of December 31, 2025, calculated by
applying perpetuity growth rates ranging from (0.5)% to 0.5% to the estimate of
the terminal year unlevered free cash flow of Concho, as reflected in the
forecasts for Concho (which analysis implied multiples of the implied terminal
values derived for Concho to estimated earnings before interest, taxes,
depreciation, and amortization expense (which we refer to as "EBITDA") for
Concho, as reflected in the forecasts for Concho, for 2025, ranging from 3.9x to
6.3x). Goldman Sachs derived the discount rates referenced above by application
of the capital asset pricing model (which we refer to as "CAPM"), which requires
certain company-specific inputs, including the company's target capital
structure weightings, the cost of long-term debt, future applicable marginal
cash tax rate and a beta for the company, as well as certain financial metrics
for the United States financial markets generally. The range of perpetuity
growth rates was estimated by Goldman Sachs utilizing its professional judgment
and experience, taking into account the forecasts for Concho on a standalone
basis and market expectations regarding long-term real growth of gross domestic
product and inflation. Goldman Sachs derived a range of illustrative enterprise
values for Concho by adding the ranges of present values it derived as described
above. Goldman Sachs then subtracted from the range of illustrative enterprise
values it derived the net debt of Concho as of June 30, 2020, as reflected in
Concho's consolidated balance sheet as of that date, adjusted by approximately
$100 million to reflect Concho's public offering of its 2.400% Senior Notes in
August 2020 and redemption of its 4.375% Senior Notes in September 2020, to
derive a range of illustrative equity values for Concho. Goldman Sachs then
divided the range of illustrative equity values it derived for Concho on a
standalone basis by the fully diluted shares of Concho common stock outstanding
as of October 16, 2020, calculated based on equity information provided by
Concho management and approved for standalone basis, for 2025, ranging from 4.3x
to 7.3x). Goldman Sachs derived the discount rates referenced above by
application of CAPM. The range of perpetuity growth rates was estimated by
Goldman Sachs utilizing its professional judgment and experience, taking into
account the forecasts for ConocoPhillips on a standalone basis and market
expectations regarding long-term real growth of gross domestic product and
inflation.
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The following underlined language is added to the first full paragraph in the
section of the Definitive Proxy Statement entitled "The Merger-Opinion of Credit
Suisse, Concho's Financial Advisor-Selected Company Analysis" that appears on
pages 107-108.
Credit Suisse considered certain financial data for Concho, ConocoPhillips and
selected companies with publicly traded equity securities Credit Suisse deemed
relevant. The selected companies were selected because they were deemed to be
similar to Concho and ConocoPhillips in one or more respects. For purposes of
these analyses, (1) Credit Suisse was directed by Concho to use the Concho
projections (Case A) and the Concho projections for ConocoPhillips (Case A)
given that the scenarios contemplated by Case A were considered by Concho
management to most closely resemble then current market conditions and near-term
production growth profiles, (2) except as otherwise noted, share prices for the
selected companies were closing prices as of October 16, 2020 and (3) estimates
of future financial performance for the selected companies for the years ending
December 31, 2021 and 2022 used to select the implied multiple ranges were based
on publicly available research analyst estimates for those companies.
The following underlined language is added to the first two full paragraphs in
the section of the Definitive Proxy Statement entitled "The Merger-Opinion of
Credit Suisse, Concho's Financial Advisor-Discounted Cash Flow Analysis" that
appear on pages 109-110.
Concho. Credit Suisse performed a discounted cash flow analysis with respect to
Concho by calculating the estimated net present value of the projected
after-tax, unlevered, free cash flows of Concho based on each of the four cases
described above comprising the Concho projections. Credit Suisse applied, based
on its professional judgment and experience, terminal multiples of 5.0x-6.0x to
Concho's estimated EBITDAX for the year ended December 31, 2030 based on each
. . .
Item 9.01 Financial Statements and Exhibits.
Exhibit
No. Description
10.1 Form of 2021 Performance Unit Award Agreement
10.2 Form of 2021 Restricted Stock Award Agreement
10.3 Form of Supplemental Retention Award Agreement
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
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