Case Document 286 Filed in TXSB on 01/24/18 Page 1 of 20

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1 Case Document 286 Filed in TXSB on 01/24/18 Page 1 of 20 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ) In re: ) Chapter 11 ) COBALT INTERNATIONAL ENERGY, INC., et al., 1 ) Case No (MI) ) Debtors. ) (Jointly Administered) ) DEBTORS COMBINED REPLY IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE DEBTORS TO HONOR CERTAIN SEVERANCE PROGRAMS AND DEBTORS MOTION FOR ENTRY OF AN ORDER AUTHORIZING AND APPROVING THE DEBTORS SALES INCENTIVE PLAN The above-captioned debtors and debtors in possession (collectively, the Debtors ) respectfully submit this combined reply in support of the Debtors Motion for Entry of an Order Authorizing the Debtors to Honor Certain Severance Programs [Docket No. 125] (the Severance Motion ) and the Debtors Motion for Entry of an Order Authorizing and Approving the Debtors Sales Incentive Plan [Docket No. 126] (the SIP Motion, and together with the Severance Motion, the Motions ), 2 and in response to the objections filed thereto by the U.S. Trustee [Docket Nos. 236 (the UST SIP Objection ), 239 (the UST Severance Objection )] and the creditors committee [Docket No. 250 (the Committee Severance Objection )] and respectfully state as follows. 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Cobalt International Energy, Inc. (1169); Cobalt International Energy GP, LLC (7374); Cobalt International Energy, L.P. (2411); Cobalt GOM LLC (7188); Cobalt GOM # 1 LLC (7262); and Cobalt GOM # 2 LLC (7316). The Debtors service address is: 920 Memorial City Way, Suite 100, Houston, Texas Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Motions, as applicable.

2 Case Document 286 Filed in TXSB on 01/24/18 Page 2 of 20 Introduction 1. The Debtors insider Sales Incentive Plan and insider and non-insider executive severance plans are critical to fairly compensating their management-level workforce and driving these cases to a successful and value-maximizing (but career-altering) sale. Future executive severance payments subject for insiders to the cap set forth in section 503(c)(2) of the Bankruptcy Code represent obligations of the Debtors estates expressly permitted to be paid under the Bankruptcy Code. The Sales Incentive Plan revised significantly in connection with discussions with creditors offers an opportunity for the Debtors to drive insider performance toward a successful resolution of these chapter 11 cases. In both instances, the Debtors request that the Court approve the plans, allow the Debtors to honor their obligations thereunder (subject to the relevant caps), and overrule the objections. 2. There is a competitive market for top talent in the energy industry, and, accordingly, oil and gas companies offer competitive compensation packages, including severance and incentive programs, to their employees. The Debtors are no different. As described in the Motions (as well as the first-day wages motion), the Debtors offer a comprehensive suite of compensation and benefits programs to their employees. Among these programs, the Debtors provide, or historically have provided, benefits including (i) health and welfare benefits, (ii) vacation and other paid time off, (iii) retention programs, (iv) severance pay, and (v) incentive compensation. (As described below, other than prepetition payments made to certain employees in 2017, the Debtors do not currently offer any retention programs for insider or non-insider employees.) In addition to fairly compensating the Debtors employees, these programs maintain morale and incentivize performance both of which are important in these cases when the chapter 11 process and ongoing sale efforts only place increased pressure on the Debtors employees (especially their senior management team) as they work around the clock responding to creditor and bidder 2

3 Case Document 286 Filed in TXSB on 01/24/18 Page 3 of 20 diligence requests, meeting with creditors and potential bidders, and working through the transition into chapter 11 with the help of their advisors, all in addition to running the Debtors businesses, including preparing to secure a suspension of production or drill a well in advance of the June 2018 deadline for the Debtors North Platte discovery (and working with partners on similar development deadlines for some of the Debtors other assets). 3. The Debtors have historically maintained a comprehensive severance program comprised of a series of plans, programs, and agreements for the benefit of their full-time employees. As described in the Severance Motion, the Debtors severance program includes a severance plan for the benefit of executives and senior management as well as a severance agreement for their chief executive officer. Upon involuntary termination, these severance benefits have historically included a cash payment equal to a multiple of base salary plus the pro rata share of the annual bonus that such employee would have been entitled to receive for the calendar year in which termination occurs, any unpaid performance bonus earned on account of the calendar year immediately preceding the date of termination, and the vest of any unvested, timed-based equity awards that would have vested during the applicable period. If all the Debtors current employees were terminated within the calendar year, the total aggregate base severance would total approximately $10.2 million with a mean payment of approximately $140,000 per participant. If the chief executive officer and the executive severance participants were likewise terminated, the Debtors aggregate severance obligation (accounting for the section 503(c)(2) cap on insider severance) would be approximately $5.3 million (including approximately $3.5 million to insiders). The severance benefits at issue reflect negotiated compensation payable as administrative claims in the event of a termination of employment for any of the participants. 3

4 Case Document 286 Filed in TXSB on 01/24/18 Page 4 of The Sales Incentive Plan, on the other hand, has been designed (and revised in connection with creditor negotiations) to drive a highly favorable outcome of the Debtors ongoing marketing and sale process. The Sales Incentive Plan properly aligns the incentives of the Debtors senior management team with those of the Debtors estates and all stakeholders in these chapter 11 cases by directly tying compensation to realized total distributable proceeds under the Debtors ultimate chapter 11 plan. More specifically, the Sale Incentive Plan provides for compensation that increases based on the total amount of value received through a sale transaction. 5. The Debtors have worked diligently with their key stakeholders to seek consensus regarding the Sales Incentive Plan and severance. As a result of these discussions, the Debtors have made modifications to the Sales Incentive Plan, as set forth in Exhibit A, that raises the bar for achieving or exceeding the Threshold. Specifically, the Debtors have agreed to: first, raise the Threshold from $1.25 billion to $1.5 billion and the Target (as defined in the Sales Incentive Plan) from $1.75 billion to $2.0 billion; second, revise the base Bonus Pool amounts for certain Enterprise Value intervals; and third, revise the variable Bonus Pool amounts for each Enterprise Value interval. The following table and chart illustrate the potential size of the Bonus Pool under the revised Sales Incentive Plan and compare the revised Sales Incentive Plan to the original plan. Enterprise Value Less than $1.5 billion $1.5 billion to $2.0 billion $2.0 billion to $3.0 billion Greater than $3.0 billion $0 Bonus Pool Amount The sum of: (i) $1.5 million and (ii) 1.5% of the excess over $1.5 billion The sum of: (i) $10.0 million and (ii) 2.5% of the excess over $2.0 billion The sum of: (i) $35.0 million and (ii) 3.0% of the excess over $3.0 billion 4

5 Case Document 286 Filed in TXSB on 01/24/18 Page 5 of 20 The Debtors believe these modifications resolve any remaining concerns the creditors committee may have regarding the Sales Incentive Plan. Accordingly, the creditors committee s reservation of rights with respect to the Sales Incentive Plan should not inhibit the Court from approving the Sales Incentive Plan at the hearing. 6. The executive severance plans and the Sales Incentive Plan are entirely appropriate and should be approved on their merits. Contrary to the statements of the U.S. Trustee and the creditors committee and as discussed in detail below, neither independent plan is a retention plan, and neither is duplicative of the 2017 prepetition retention payments made by the Debtors to certain of their employees, including their insider management team and other participants in the 5

6 Case Document 286 Filed in TXSB on 01/24/18 Page 6 of 20 executive severance plans. 3 Indeed, the executive severance plans and the Sales Incentive Plan are completely consistent with the Bankruptcy Code and the Debtors are in no way seeking to exceed the limits of section 503(c)(2). 7. Failure to obtain approval of either program as requested in the Motions will significantly hamper employee morale and the Debtors ability to incentivize performance, which, in turn, could result in a reduction in value for all stakeholders that will far exceed the short term cash outlay contemplated under the severance plans and the Sales Incentive Plan. It is for precisely these reasons that the true economic stakeholders the ad hoc groups of first lien noteholders, second lien noteholders, and the unsecured noteholders support the relief requested. Accordingly, for all the reasons set forth herein and in other evidence the Debtors intend to offer at the hearing in support of their Motions, the Debtors respectfully request that the Court overrule the objections and grant the Motions approving the executive severance plans and the Sale Incentive Plan. 4 Argument I. The Severance Plans Comply with Section 503 of the Bankruptcy Code. A. The Severance Payments Satisfy the Requirements of Section 503(c)(2) of the Bankruptcy Code. 8. Pursuant to section 503(c)(2) of the Bankruptcy Code, a severance payment to an insider may not be made unless (a) the payment is part of a program generally applicable to all 3 Originally disclosed in a quarterly report filed with the SEC, the retention payments referenced herein and highlighted in the second paragraph of the SIP Motion may be subject to clawback and repayment by a recipient in the event he or she is terminated with cause or resigns without good reason before the earlier of the one-year anniversary of the agreement or a change in control, including a sale of all or substantially all of the Debtors assets. See Cobalt International Energy, Quarterly Report (Form 10-Q) (Aug. 8, 2017). 4 In support of the Motions and this reply, the Debtors will submit evidence, including the testimony of the Debtors investment banker, John-Paul Hanson of Houlihan Lokey Capital, Inc.; compensation consultant Jim Wolf of Meridian Compensation Partners, LLC; and Jonathan A. Marshall, chairman of the compensation committee of parent Debtor Cobalt International Energy, Inc. s board of directors. 6

7 Case Document 286 Filed in TXSB on 01/24/18 Page 7 of 20 full-time employees and (b) the amount is not more than ten times the amount of mean severance given to non-management employees in that calendar year. See 11 U.S.C. 503(c)(2). 9. As set forth in the Motion, the executive severance plans are part of a larger broadbased severance program offered to all full-time employees consistent with section 503(c)(2)(A) of the Bankruptcy Code. See Severance Motion 18. The creditors committee s assertions to the contrary fail. See Committee Severance Objection 15. The creditors committee attempts to impose a narrow reading of the statute requiring all employees to receive the same severance awards regardless of their position. Courts that have addressed this issue, however, have rejected the creditors committee s narrow reading. Those courts instead found that severance programs comprised of separate policies or a series of plans, including contractual arrangements, comply with section 503(c)(2). See In re Majestic Capital, Ltd., 463 B.R. 289, 295 (Bankr. S.D.N.Y. 2012) ( [T]here is no limiting language in section 503(c)(2) that could support an argument that severance payments that are created under individual contracts, as opposed to programs of broader applicability, are beyond the scope of the Code section. ); In re Forum Health, 427 B.R. 650, 655 (Bankr. N.D. Ohio 2010) (finding that a separation policy available to all full-time employees not represented by a collective bargaining agreement and each individual employment agreement, including the employment agreement of the chief executive officer, together formed a program that was generally applicable to all full-time employees in satisfaction of 503(c)(2)). Put another way, section 503(c)(2) does not distinguish between severance payments provided under individual contracts or distinct plans or tiers, so long as an overarching severance program is in effect for all full-time employees clearly the case for the Debtors. 10. As to the second prong of 503(c)(2), the Debtors do not seek authority to honor severance payments to insiders in excess of the amount permitted under section 503(c)(2) of the 7

8 Case Document 286 Filed in TXSB on 01/24/18 Page 8 of 20 Bankruptcy Code. See Severance Motion 22. Indeed, the order is crystal clear on this point. See Order Authorizing the Debtors to Pay Severance 2. The creditors committee also argues in their purported expert report that the amount of severance permitted under section 503(c)(2) is zero because no employees have been severed in This is factually and legally incorrect. As a matter of fact, the Debtors have terminated a number of employees effective February 1, 2018, which the Debtors representative disclosed at the section 341 meeting of creditors. As such, at the time any payment is likely to be made to any insider, the calculation in the creditors committee s expert report will be wrong. 11. As a matter of law, the creditors committee s reading of the statute i.e., that you only consider the short period in 2018 rather than the full calendar year from the date on which the termination occurs is nonsense. Such a tortured reading would create perverse incentives to terminate insiders in the first few weeks of a new calendar year to eliminate any potential claims for those terminated insiders. See 4 Collier on Bankruptcy, (16th ed. 2017) (noting that calculating the section 503(c)(2) cap based on the portion of the calendar year that has elapsed would create anomalies if layoffs occur during the early part of the year). Moreover, such a reading of the statute would not allow the Court to calculate the section 503(c)(2) severance cap until after the calendar year has ended because the amount of such cap would depend upon which employees are terminated in the calendar year after the insider has been terminated. Simply put, the more logical reading of section 503(c)(2) is that the cap on severance is calculated using the calendar year beginning 12 months before the severance payment and ending on the date the payment is made. See 74 Am. Jur. 2d Time 7 (2017) ( In the context of the measurement of a period of time preceding or following a specific event or date, the term year or calendar year means a period of 12 months commencing at a fixed or designated month and terminating with the day of the 8

9 Case Document 286 Filed in TXSB on 01/24/18 Page 9 of 20 corresponding month in the next succeeding year thereafter, rather than a period commencing January 1 and terminating December 31. ). Accordingly, the Debtors submit that the executive severance plans comply with section 503(c)(2) of the Bankruptcy Code, and the objections should be overruled. B. Certain of the Participants Are Not Insiders Under the Bankruptcy Code But Even If They Were, It Would Be Irrelevant. 12. The U.S. Trustee and the creditors committee both assert that certain participants of the executive severance plan are insiders solely based on their job titles of President, or Vice President for purposes of section 503(c)(2) of the Bankruptcy Code. See UST Severance Objection 22; Committee Severance Objection 17. Certain of the participants in the executive severance plans are not insiders under section 101(31)(B) of the Bankruptcy Code because they do not possess the broad responsibility or control to make strategic decisions or set overall company policy typically characteristic of an insider. See In re Borders Grp., Inc., 453 B.R. 459, (Bankr. S.D.N.Y. 2011) (noting that courts have interpreted director to mean an individual who sits on the board of directors of a corporation and officer to mean a person elected or appointed by the board of directors for purposes of a section 503(c) analysis, and that insiders must have at least a controlling interest in the debtor or... exercise sufficient authority over the debtor so as to unqualifiably dictate corporate policy and the disposition of corporate assets ); In re Patriot Coal Corp., 492 B.R 518, 521 (Bankr. E.D. Mo. 2016) ( Whether an employee is an insider turns on the degree of involvement in the debtor s affairs... the label an employee chooses to attach to a position is not dispositive for purposes of insider analysis. ) (citing In re Glob. Aviation Holdings, 478 B.R. 142, 148 (Bankr. E.D.N.Y. 2012)). Nevertheless, for purposes of the executive severance plans, the insider or non-insider distinction makes no difference: the Debtors 9

10 Case Document 286 Filed in TXSB on 01/24/18 Page 10 of 20 do not seek authority to make severance payments to any participant in excess of the section 503(c)(2) statutory cap. C. Section 503(c)(3) of the Bankruptcy Code Does Not Apply to the Debtors Obligations Under the Severance Plans. 13. Section 503(c)(3) of the bankruptcy Code does not apply to the continuation of the executive severance plans in the ordinary course of the Debtors business. It is well-settled that a debtor may continue ordinary course compensation programs without further order of the court pursuant to section 363(c) of the Bankruptcy Code subject to the limitations of sections 503(c)(1) and 503(c)(2). Importantly, the Debtors do not seek authority to pay any prepetition obligations under the executive severance plans. Rather, the Debtors seek authority only to continue such plans in the ordinary course of business on a postpetition basis consistent with past practice. As a result, continuing of the Debtors severance program does not implicate section 503(c)(3) of the Bankruptcy Code. 14. Even if section 503(c)(3) of the Bankruptcy Code applies, the Debtors have satisfied the applicable standard with respect to the executive severance plans. Section 503(c)(3) of the Bankruptcy Code prohibits transfers or obligations that are outside of the ordinary course of business and not justified by the facts and circumstances of the case, including transfers made to, or obligations incurred for the benefit of, officers, managers, or consultants hired after the date of the filing of the petition. 11 U.S.C. 503(c)(3). Courts have held the facts and circumstances test creates a standard no different than the business judgment standard under section 363(b) of the Bankruptcy Code. In re Residential Capital, LLC, 491 B.R. 73, 84 (Bankr. S.D.N.Y. 2013); see In re Glob. Home Prods., LLC, 369 B.R. 778, 783 (Bankr. D. Del. 2007) (noting that a review under section 503(c)(3) of the Bankruptcy Code, as opposed to section 503(c)(1), utilizes the more liberal business judgment review under 363 ). While the U.S. Trustee argues that the 10

11 Case Document 286 Filed in TXSB on 01/24/18 Page 11 of 20 standard of review requires a higher burden of proof as stated in In re Pilgrim s Pride Corp., 401 B.R. 229, (Bankr. N.D. Tex. 2009), the Court has not adopted such a standard. Yet even if a heightened standard were to apply, the executive severance plans satisfy this test. The continuation of the Debtors historical severance program, including the executive severance plans is not just a valid exercise of the Debtors business judgment, but it is justified in this case because entry into the agreement[] is in the best interests of creditors and Debtors estates. See In re Pilgrim s Pride, 401 B.R. at In particular, failure to honor the obligations under the executive severance plans even at the capped amounts will result in senior management being compensated below market. The creditors committee and the U.S. Trustee argue that the executive severance plans are double-dipping without providing any evidence as to how the severance plans fits into the overall compensation program. The evidence at trial will show, however, that the severance program is a reasonable and necessary component of the Debtors overall compensation program and is not duplicative of retention under the circumstances. Compare In re Dana Corp., 351 B.R. 96, 102 (Bankr. S.D.N.Y. 2006) (describing severance payments as a form of compensation for the termination of the employment relation, for reasons other than the displaced employees misconduct, primarily to alleviate the consequent need for economic readjustment but also to recompense him for certain losses attributable to the dismissal ); with In re Journal Register Co., 407 B.R. 520, 536 (Bankr. S.D.N.Y. 2009) (describing retention payments as payments made with the primary purpose of induc[ing] participating employees to remain with the Debtors ); with In re Hawker Beechcraft, Inc., 479 B.R. 308, 312 (Bankr. S.D.N.Y. Aug. 2012) (describing incentive payments as payments that reward[] insiders for achieving financial or other targets, rather than for simply remaining in the employment of the debtor ). In contrast, the evidence will also show 11

12 Case Document 286 Filed in TXSB on 01/24/18 Page 12 of 20 that the Debtors compensation committee insisted that participants in the Sales Incentive Plan waive their severance if they elect to receive a payment under the Sales Incentive Plan. This reflects a reasoned decision by the Debtors compensation committee to ensure that the Debtors overall compensation structure remained reasonable and consistent with market. The Court should not countenance the creditors committee s and the U.S. Trustee s attempt to second guess the sound business judgment of the Debtors compensation committee and board of directors. D. The Hearing on the Severance Programs Should Not Be Further Adjourned. 16. The Court should reject the U.S. Trustee s request to adjourn the hearing on the Severance Motion until after the Debtors have filed their schedules and statements. See U.S. Trustee Objection 1. The Debtors sought authority to continue all employee compensation and benefit programs, including the severance plans for executives and senior management, in the firstday wages and benefits motion. Upon the request of the U.S. Trustee, the Debtors agreed to seek relief on account of the executive severance plans pursuant to a separate motion. On December 21, 2017, the Debtors filed the Severance Motion seeking such relief. The initial hearing on the Severance Motion was set for January 11, 2018, but the Debtors agreed to continue the hearing until January 25, 2018, at the request of the creditors committee. During this time the Debtors engaged in discussions with the creditors committee and other parties (including the U.S. Trustee) and produced documents in response to informal diligence requests (as well as formal discovery launched by the creditors committee). The matters are briefed and the parties ready. Indeed, as discussed above, the true economic stakeholders support the continuation of the executive severance plans in the ordinary course, including the ad hoc groups of first lien noteholders, second lien noteholders, and unsecured noteholders. Moreover, the Debtors and their management team need the certainty of Court approval to ensure that the senior management team remains focused on the sale process and these chapter 11 cases knowing that they can count on the benefits provided 12

13 Case Document 286 Filed in TXSB on 01/24/18 Page 13 of 20 by the executive severance plans. As a result, there is no benefit to continuing to delay the hearing on the Severance Motion. 17. Accordingly, for all of these reasons, the Debtors respectfully request that the Court overrule the UST Severance Objection and the Committee Severance Objection and authorize the Debtors to honor their obligations under the executive severance plans as requested in the Severance Motion. II. The Sales Incentive Plan Is Justified by the Facts and Circumstances of the Chapter 11 Cases and Should Be Approved. A. The Sales Incentive Plan Is Not a Disguised Retention Plan Because the Threshold Will Only Be Met Through Driven Performance. 18. The U.S. Trustee s assertion that the Sales Incentive Plan is a disguised retention plan prohibited under section 503(c)(1) of the Bankruptcy Code misses the mark. The evidence at trial will show that the Sales Incentive Plan sets goals that challenge the participants to drive the value of any sale transaction. Any retentive benefit is merely ancillary. 19. In determining whether an employee bonus plan is primarily incentivizing, courts consider whether the plan is designed to motivate insiders to rise to the challenge or merely report to work. In re Hawker Beechcraft, Inc., 479 B.R. at 313; see In re Nellson Nutraceutical, Inc., 369 B.R. 787, 802 (Bankr. D. Del. 2007) (finding that section 503(c)(1) applies only to retention programs with the primary purpose of inducing [an employee] to remain with the debtor s business (emphasis in original)). Here, after the agreed upon modificaitons discussed above, the Sales Incentive Plan provides award opportunities if and only if the Debtors achieve an Enterprise Value above and beyond the $1.5 billion Threshold. The primary effect of the Sales Incentive Plan, therefore, is to incentivize the participants to maximize value through the consummation of a Sale Transaction. Of course, providing incentives that simultaneously encourage management to remain with the Debtors does not mean the Sales Incentive Plan is a 13

14 Case Document 286 Filed in TXSB on 01/24/18 Page 14 of 20 retention program. In re Dana Corp., 358 B.R. at 571 ( [M]erely because a plan has some retentive effect does not mean that the plan, overall, is retentive rather than incentivizing in nature. ). 20. Further, the Sales Incentive Plan contains no retention-based or severance components. No participant is paid merely for maintaining their employment. Rather, payments under the Sales Incentive Plan are made only upon the occurrence of a Change of Control resulting in an Enterprise Value above the $1.5 billion Threshold in conjunction with a Sale Transaction. Thus, there is no guarantee that the participants will receive any payments under the Sales Incentive Plan. In other words, they can remain in their positions as long as they want, but if the requisite performance metrics are not met, then the participants will receive no additional compensation under the Sales Incentive Plan. 21. The U.S. Trustee s assertion that the participants can simply sit back, relax, and coast their way into a payout under the Sales Incentive Plan ignores the realities of the amount of work required to sell a company. If the Debtors are able to reach a value maximizing transaction that meets or exceeds the $1.5 billion Threshold, it will be because of the direct efforts of the participants. See, e.g., In re CJ Holding Co., No (DRJ) (Bankr. S.D. Tex. Nov. 4, 2016 Hr g Tr. 63:2 11) ( Part of the return to normality involves compensation of management and while it s easy to stand in the weeds and say, How can a bankruptcy entity pay a senior executive X dollars? The fact of the matter is, entities don t exist and entities don t succeed unless you have talent and talent costs money because talent will migrate. ). Given the technical nature of the Debtors assets and the assets various stages of development, the Debtors top management will be key to educating any potential purchasers regarding the status of the assets. As stated in the SIP Motion, the insiders duties with regard to the sale process have included, and will continue to include, among others, the development and distribution of sale and marketing materials, 14

15 Case Document 286 Filed in TXSB on 01/24/18 Page 15 of 20 discussions with potential buyers regarding the Debtors assets (many of which are taking place right now as the Debtors approach their proposed bid deadline), facilitation of diligence requests, and evaluation of opportunities to optimize sale outcomes. SIP Motion 13. Further, the retention of an investment banker, such as Houlihan Lokey, does not eliminate the necessary participation of senior management and is not an appropriate basis to deny the Sales Incentive Plan. 22. The U.S. Trustee s assertion that a Debtors fiduciary duties are a sufficient incentive to drive individuals to go above and beyond their normal duties during a chapter 11 process is similarly misguided. If taken to its logical conclusion, insider incentive plans could never be approved in chapter 11 cases. A finding that a Debtors fiduciary duties provide sufficient motivation for individuals to go above and beyond their normal duties during a chapter 11 case would, in effect, eliminate incentive plans in the chapter 11 context. Such a finding would also ignore the large body of cases that have approved insider incentive plans where, despite the Debtors owing fiduciary duties to their creditors, the courts ruled that incentive plans were appropriate to incentivize the participants. See, e.g., In re Genon Energy, Inc., No (DRJ) (Bankr. S.D. Tex. Oct. 5, 2017) (approving debtors key employee incentive program tied to sale process); In re Gander Mountain Co., No (MER) (Bankr. D. Minn. Apr. 14, 2017) (approving debtors key employee incentive program tied to sale process); In re CJ Holding Co., No (DRJ) (Bankr. S.D. Tex. Nov. 4, 2016) (approving debtors continuation of prepetition key employee incentive program); In re SunEdison, Inc., No (SMB) (Bankr. S.D.N.Y. Sept. 16, 2016) (approving debtors key employee incentive program tied to sale process); In re Midstates Petrol. Co., No (DRJ) (Bankr. S.D. Tex. Aug. 12, 2016) (approving debtors continuation of prepetition key employee incentive program); In re Ultra Petrol. Corp., No (MI) (Bankr. S.D. Tex. Jun. 28, 2016) (same); In re LINN Energy, 15

16 Case Document 286 Filed in TXSB on 01/24/18 Page 16 of 20 LLC, No (DRJ) (Bankr. S.D. Tex. Aug. 1, 2016) (same); In re GreenHunter Res., Inc., No (RFN) (Bankr. N.D. Tex. Apr. 22, 2016) (approving debtors key employee incentive program tied to sale process). Accordingly, section 503(c)(1) is not applicable to the Sales Incentive Plan. B. The Debtors Have Established that the Sales Incentive Plan Complies with Section 503(c)(3) of the Bankruptcy Code. 23. As described above and in the SIP Motion, the Sales Incentive Plan complies with the business judgment standard applicable to incentive plans under section 503(c)(3) of the Bankruptcy Code. The Sales Incentive Plan will incentivize the Debtors senior management team to go above and beyond their normal duties to achieve a sale transaction that maximizes the distributable value for all stakeholders. Importantly, no creditor constituency has objected to the Motion, and the U.S. Trustee has done nothing to complete the near-herculean task of supplanting the Debtors business judgment, and its objection should be overruled. See In re Tower Air, Inc., 416 F.3d 229, 238 (3d Cir. 2005) ( Overcoming the presumptions of the business judgment rule on the merits is a near-herculean task ). 24. The U.S. Trustee argues that the Debtors are unable to satisfy the Dana II factors and the benchmarks in the Sales Incentive Plan are not sufficiently difficult to reach. See UST SIP Objection 29. The Debtors respectively disagree. The SIP Motion sets forth in detail how the Sales Incentive Plan satisfied each of the factors set forth in In re Dana Corp., 358 B.R. 567, (Bankr. S.D.N.Y. 2007). See SIP Motion 36. Further, the Debtors have established and will further establish at the hearing that (a) the Sales Incentive Plan is calculated to achieve desired performance, as payments under the Sales Incentive Plan are tailored to motivate the participants to achieve the highest possible Enterprise Value; (b) the cost of the Sales Incentive Plan is reasonable and market based; (c) the scope of the Sales Incentive Plan is reasonable, as it includes 16

17 Case Document 286 Filed in TXSB on 01/24/18 Page 17 of 20 a lean group of insider participants who must continue to perform their day jobs while also making significant contributions to advance the sale efforts; and (d) the Debtors performed due diligence in developing the Sales Incentive Plan and the Sales Incentive Plan awards are aligned with industry standards, as they are consistent with benchmarks and incentive plans approved in other chapter 11 cases. In re Dana Corp., 358 B.R. at Moreover, contrary to the U.S. Trustee s argument, the targets are, and will remain challenging, with no guarantee that the Debtors will achieve them. The U.S. Trustee points to the recent settlement reached between the Debtors and Sonangol to support its contention that the Threshold is too low to properly incentive the Debtors insider employees. See Objection 27. This argument fails. 26. First, the Sales Incentive Plan predates the settlement. The participants should not be penalized for their successful efforts following the adoption of the Sales Incentive Plan by the Debtors board of directors, but before the plan is approved by the Court. Second, the hard-won Sonangol settlement proves the Sales Incentive Plan is working. More specifically, with the Sales Incentive Plan in place, the Debtors senior management successfully negotiated a settlement with Sonangol. Third, as Sonangol s recent objection 5 indicates, there may still be uncertainty that the settlement will be consummated. Although the Debtors believe that all parties will work diligently to consummate the settlement, there is still significant work to be done by the Debtors senior management team, and there can be no guarantee that these efforts will be successful. 27. Accordingly, the Debtors respectfully request that the Court overrule the UST SIP Objection and approve the Debtors entry into the Sales Incentive Plan. 5 See Limited Objection & Reservation of Rights to Debtors Motion for Entry of an Order (I) Authorizing Performance Under Settlement Agreement, (II) Approving Settlement Agreement, and (III) Granting Related Relief [Docket No. 234]. 17

18 Case Document 286 Filed in TXSB on 01/24/18 Page 18 of 20 Conclusion 28. For the foregoing reasons, the Debtors respectfully request that this Court overrule the Objections, grant the relief requested in the Motions approving the executive severance plans and the Sales Incentive Plan, and grant such other relief as the Court deems just and proper under the circumstances. [Remainder of page intentionally left blank] 18

19 Case Document 286 Filed in TXSB on 01/24/18 Page 19 of 20 WHEREFORE, for the foregoing reasons and the reasons stated in the Motions, the Debtors respectfully request that the Court overrule the Objections and grant the relief requested in the Motions. Houston, Texas Dated: January 24, 2018 /s/ Zack A. Clement Zack A. Clement (Texas Bar No ) ZACK A. CLEMENT PLLC 3753 Drummond Street Houston, Texas Telephone: (832) and- James H.M. Sprayregen, P.C. (admitted pro hac vice) Marc Kieselstein, P.C. (admitted pro hac vice) Chad J. Husnick, P.C. (admitted pro hac vice) Brad Weiland (admitted pro hac vice) Laura Krucks (admitted pro hac vice) KIRKLAND & ELLIS LLP KIRKLAND & ELLIS INTERNATIONAL LLP 300 North LaSalle Street Chicago, Illinois Telephone: (312) Facsimile: (312) Co-Counsel to the Debtors and Debtors in Possession 19

20 Case Document 286 Filed in TXSB on 01/24/18 Page 20 of 20 Certificate of Service I certify that on January 24, 2018, I caused a copy of the foregoing document to be served by the Electronic Case Filing System for the United States Bankruptcy Court for the Southern District of Texas. /s/ Zack A. Clement Zack A. Clement

21 Case Document Filed in TXSB on 01/24/18 Page 1 of 2 Exhibit A

22 Case Document Filed in TXSB on 01/24/18 Page 2 of 2 Description of Sales Incentive Plan Total Distributable Proceeds Incentive Payments Low High Base Variable Comments Tranche 1 $0 $1.49B $0 0.00% If Total Distributable Proceeds ("TDP") are less than $1.5B, there are no payments made under the SIP Tranche 2 $1.50B $1.99B $1.5MM 1.50% If TDP are at least $1.5B, participants will earn (a) a base incentive of $1.5MM plus (b) 1.50% of the excess of (x) TDP over (y) $1.5B Tranche 3 $2.00B $2.99B $10.0MM 2.50% If TDP are at least $2.0B, participants will earn (a) a base incentive of $10.0 million plus (b) 2.50% of the excess of (x) TDP over (y) $2.0B * Identical to Ad Hoc Proposal Tranche 4 $3.00B > $3.00B $35.0MM 3.00% If TDP are at least $3.0B, participants will earn (a) a base incentive of $35.0 million plus (b) 3.00% of the excess of (x) TDP over (y) $3.0B * Identical to Ad Hoc Proposal Note: $3,499,050 Executive Severance for the 4 SIP participants remains in place (figures calculated as per the statutory cap); the 4 Executives eligible to participate may decide to 'opt-in' to the Sales Incentive Plan at the time of the Transaction