¨ Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
¨ Definitive
Proxy Statement
¨ Definitive
Additional Materials
¨ Soliciting
Material Pursuant to §240.14a-12
E*TRADE
FINANCIAL CORPORATION
(Name of
Registrant as Specified In Its Charter)
(Name of
Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
x No
fee required.
¨ Fee
computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1)
Title
of each class of securities to which transaction
applies:
(2)
Aggregate
number of securities to which transaction
applies:
(3)
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was
determined):
(4)
Proposed
maximum aggregate value of
transaction:
(5)
Total
fee paid:
¨ Fee
paid previously with preliminary materials:
¨
Check
box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its
filing.
Below are
details of important and timely matters that require your immediate
attention.
You are
cordially invited to attend a Special Meeting of Stockholders of E*TRADE
Financial Corporation (“E*TRADE,”“we,”“us” or the “Company”) that will be held
on [ ], August [ ], 2009, at 9 a.m., local time, at
Doral Arrowwood Conference Center, 975 Anderson Hill Road Rye Brook, NY10573.
E*TRADE
has called this Special Meeting to ask our stockholders to vote upon a series of
proposals which will permit us to:
(1)
complete
a debt exchange for up to approximately $1.7 billion of our outstanding
debt securities (the “Debt Exchange”) which is key to our plan to
strengthen the Company’s capital structure by increasing equity and
reducing our debt burden, and
(2)
engage
in additional transactions, as needed, to further strengthen the Company’s
capital structure in the future.
We
believe that these transactions are not only in the best interest of all of our
stockholders, but also critical to the immediate future of the
Company. The Company has adopted and is implementing a plan to
strengthen its capital structure by raising cash equity primarily to support
E*TRADE Bank and to reduce the Company’s debt burden. We completed
the first step of our plan on June 24, 2009 when we closed a public offering of
our common stock and raised nearly $600 million. The next step is
completion of the Debt Exchange for which we need your support.
Because
one of the proposals requires the affirmative vote of a majority of all
outstanding shares of E*TRADE common stock, we urge you to vote your shares so
that we can complete the Debt Exchange as soon as possible. If the
proposals to complete the Debt Exchange are not approved and the proposed
transactions are not completed, we may be unable to strengthen the Company’s
capital structure and could face negative regulatory consequences, such as a
public supervisory action by our primary regulator. These
consequences could have a material negative effect on our business and financial
condition and the value of our common stock.
On June22, 2009 we commenced the Debt Exchange in which we are offering to exchange up
to approximately $1.7 billion of our outstanding debt securities for an
equivalent amount of newly-issued convertible debentures due 2019 (the
“Debentures”). The Debt Exchange will significantly reduce our debt
burden by materially reducing interest costs, lengthening the weighted-average
maturities of our indebtedness and potentially reducing our repayment
obligations to the extent that holders of the Debentures convert rather than
hold to maturity. We are seeking approval to increase the amount of common stock
authorized for issuance, a portion of which is required to complete the Debt
Exchange, and a portion of which may be used to conduct future debt exchange
transactions. The remainder may be available for general corporate
purposes. In order
to complete the Debt Exchange and future debt exchanges, stockholder approval of
the proposals described in this Proxy Statement is required. We need
your vote to approve this important measure.
Citadel
Investment Group L.L.C (“Citadel”), our largest stock and bond holder has
tendered approximately $1.230 billion aggregate principal amount of the notes
owned by it in the Debt Exchange and has agreed to vote in favor of Proposals 1,
2 and 3 described in this proxy statement.
At the
Special Meeting, holders of the Company’s common stock will be asked to consider
and vote on proposals to:
·
amend
E*TRADE’s Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 1,200,000,000 to
4,000,000,000;
·
approve
the issuance of Debentures in the Debt Exchange and the issuance of common
stock issuable upon conversion of the Debentures under the applicable
provisions of NASDAQ Marketplace Rule
5635;
·
approve
the potential issuance of common stock, or securities convertible into or
exchangeable or exercisable for common stock, in connection with future
debt exchange transactions in an amount up to 365 million shares;
and
·
grant
management the authority to adjourn, postpone or continue the Special
Meeting.
OUR BOARD
HAS APPROVED THE FOREGOING PROPOSALS AND RECOMMENDS THAT OUR STOCKHOLDERS VOTE
FOR THE
PROPOSALS LISTED ABOVE.
At the
Special Meeting, holders of the Company’s common stock also will be asked to
consider and vote on a non-binding resolution concerning whether we should
retain our Stockholder Rights Plan until its scheduled expiration on July 9,2011 or terminate the Stockholder Rights Plan. OUR BOARD MAKES NO
RECOMMENDATION TO OUR STOCKHOLDERS REGARDING THIS PROPOSAL.
Please
read the attached proxy statement carefully for information about the matters
you are being asked to consider and vote upon. Whether or not you
attend the Special Meeting in person, I urge you to promptly vote your proxy as
soon as possible via the Internet, by telephone or by mail using the enclosed
postage-paid reply envelope. If you decide to attend the Special
Meeting and vote in person, you will, of course, have that
opportunity.
Thank you
for your continued support of E*TRADE.
Sincerely,
Donald H.
Layton
Chairman
of the Board and Chief Executive Officer
----------------
Notice
of Special Meeting of Stockholders
to
Be Held [ ], August [ ], 2009
----------------
TO
OUR STOCKHOLDERS:
You are
cordially invited to attend a Special Meeting of Stockholders of E*TRADE
Financial Corporation (“E*TRADE,”“we,”“us” or the “Company”), which will be
held at Doral Arrowwood Conference Center, 975 Anderson Hill Road Rye Brook, NY10573, at 9 a.m. local time on [ ], August [ ], 2009, for the
following purposes:
1.
To
amend Article FOURTH of the Company’s Restated Certificate of
Incorporation to increase the number of authorized shares of common stock,
par value $0.01, from 1,200,000,000 to 4,000,000,000 (and,
correspondingly, increase the total number of authorized shares of capital
stock from 1,201,000,000 to
4,001,000,000);
2.
To
approve under the applicable provisions of NASDAQ Marketplace Rule 5635
the issuance of Class A Senior Convertible Debentures due 2019 and Class B
Senior Convertible Debentures due 2019 (and the issuance of common stock
issuable upon conversion of the Class A Senior Convertible Debentures due
2019 and Class B Senior Convertible Debentures due 2019) in connection
with the proposed debt exchange transaction described in the attached
proxy statement;
3.
To
approve under the applicable provisions of NASDAQ Marketplace Rule 5635
the potential issuance of common stock, or securities convertible into or
exchangeable or exercisable for common stock, in connection with future
debt exchange transactions described in the attached proxy statement in an
amount up to 365 million shares;
4.
To
grant management the authority to adjourn, postpone or continue the
Special Meeting.
The
Board of Directors recommends stockholders vote FOR proposals 1, 2, 3 and 4 set
forth above.
At the
Special Meeting, holders of the Company’s common stock also will be asked to
consider and vote on a non-binding resolution concerning whether the Company
should retain its Stockholder Rights Plan until its scheduled expiration on July9, 2011 or terminate the Stockholder Rights Plan. Our Board of Directors makes NO
RECOMMENDATION to our stockholders regarding this advisory
resolution.
The Board
of Directors has fixed the close of business on June 26, 2009 as the record date
for determining those stockholders entitled to vote at the Special
Meeting. The stock transfer books will not be closed between the
record date and the date of the Special Meeting.
All
stockholders of record on June 26, 2009 are invited to attend the Special
Meeting. No ticket is required for admission. For security
purposes, however, to gain admission to the Special Meeting, you will be
required to present identification containing a photograph and some indication
that you are a stockholder. Packages and bags may be inspected, and
they may have to be checked at the door. In addition, other security
measures may be used for the security of those attending the Special
Meeting. Please plan accordingly.
Representation
of at least a majority of all outstanding shares of common stock entitled to
vote at the Special Meeting is required to constitute a quorum. For
that reason, it is important that your shares be represented at the Special
Meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND
RETURN IT
IN THE ENCLOSED ENVELOPE. This Proxy Statement is also available on
the Company’s website at http://www.etrade.com. The
Company encourages you to vote online. Even if your shares are held
in a bank or brokerage account, you still may be eligible to vote your shares
online. Your proxy may be revoked at any time prior to the time that
the polls close and the vote is tallied.
Please
read the proxy materials carefully. Your vote is important, and
E*TRADE appreciates your cooperation in considering and acting on the matters
presented.
IMPORTANT
If you
are a stockholder, whether or not you expect to attend the Special Meeting in
person, the Company urges you to vote your proxy at your earliest convenience
via the Internet, by telephone or by mail using the enclosed postage-paid reply
envelope. This will ensure the presence of a quorum at the Special
Meeting and will save the Company the expense of additional
solicitation. Sending in your proxy will not prevent you from voting
your shares in person at the Special Meeting if you desire to do
so. Your proxy is revocable at your option in the manner described in
the Proxy Statement.
2
Stockholders
Should Read the Entire Proxy Statement Carefully
Prior
to Returning Their Proxy Cards
---------------
PROXY
STATEMENT
--------------
FOR
SPECIAL MEETING OF STOCKHOLDERS OF E*TRADE FINANCIAL CORPORATION
To
Be Held [ ], August [ ], 2009
This
Proxy Statement is furnished in connection with the solicitation by the Board of
Directors of E*TRADE Financial Corporation (“E*TRADE,”“we”, “us” or the
“Company”) of proxies to be voted at a Special Meeting of Stockholders (the
“Special Meeting”), which will be held at Doral Arrowwood Conference Center, 975
Anderson Hill Road Rye Brook, NY10573, on [ ], August
[ ], 2009 at 9 a.m. local time, or at any adjournments or
postponements thereof, for the purposes set forth in the accompanying Notice of
Special Meeting of Stockholders. This Proxy Statement and the proxy
card were first mailed to stockholders on or about [ ],
2009. The principal executive offices of E*TRADE are located at 135
East 57th Street, New York, New York10022.
GENERAL
INFORMATION ABOUT VOTING
Who
may vote and how many votes do I have?
Stockholders
of record at the close of business on June 26, 2009 (the “Record Date”) may vote
at the Special Meeting. On that date there were 1,115,429,538
outstanding shares of the Company’s common stock, $0.01 par value per share (the
“Common Stock”). All
of the shares of the Company’s Common Stock held at the Record Date are entitled
to vote at the Special Meeting. Stockholders of record will have one
vote for each share they hold on the matters to be voted on.
What
am I voting on?
You are
voting on the following matters:
·
To
amend Article FOURTH of the Company’s Restated Certificate of
Incorporation to increase the number of authorized shares of Common Stock,
par value $0.01, from 1,200,000,000 to 4,000,000,000 (and,
correspondingly, increase the total number of authorized shares of capital
stock from 1,201,000,000 to
4,001,000,000);
·
To
approve under the applicable provisions of NASDAQ Marketplace Rule 5635
the issuance of Class A Senior Convertible Debentures due 2019 (the “Class
A Debentures”) and Class B Senior Convertible Debentures due 2019 (the
“Class B Debentures”, and together with Class A Debentures, the
“Debentures”) (and the issuance of Common Stock issuable upon conversion
of the Debentures) in connection with the proposed debt exchange
transaction described in this proxy
statement;
·
To
approve under the applicable provisions of NASDAQ Marketplace Rule 5635
the potential issuance of Common Stock, or securities convertible into or
exchangeable or exercisable for Common Stock, in connection with future
debt exchange transactions described in the attached proxy statement in an
amount up to 365 million shares;
·
Grant
of authority to management to adjourn, postpone or continue the Special
Meeting.
You are
also being asked to cast an advisory vote on a non-binding resolution on whether
the Company should retain its Stockholder Rights Plan until its scheduled
expiration on July 9, 2011 or terminate the Stockholder Rights
Plan.
How
many votes are required to hold the Special Meeting and what are the voting
procedures?
3
Quorum
Requirement: Delaware law and the Company’s Restated
Certificate of Incorporation provide that any stockholder action at a meeting
requires that a quorum exist with respect to that action. A quorum
for the actions to be taken at the Special Meeting will consist of a majority of
all of the Company’s outstanding shares of Common Stock that are entitled to
vote at the Special Meeting. Therefore, at the Special Meeting, the
presence, in person or by proxy, of the holders of at least 557,714,770 shares
of Common Stock will be required to establish a
quorum. Stockholders of record who are present at the Special
Meeting in person or by proxy and who abstain are considered stockholders who
are present and entitled to vote, and will count towards the establishment of a
quorum. There is no separate quorum requirement for the advisory vote
on the Stockholder Rights Plan. This will include brokers holding
customers’ shares of record who cause abstentions to be recorded at the Special
Meeting.
Required
Votes: Each outstanding share of the Company’s Common Stock is
entitled to one vote on each proposal at the Special Meeting.
·
Approval
of Proposal 1 to amend the Company’s Restated Certificate of Incorporation
requires the affirmative vote of a majority of the shares of Common Stock
entitled to vote on the matter. Accordingly, failure to vote,
broker non-votes or an abstention will have the same effect as a vote
against this proposal.
·
Approval
of Proposals 2, 3 and 4 require the affirmative vote of a majority of the
shares of Common Stock present at the Special Meeting and eligible to
vote. Accordingly, failure to vote and broker non-votes will
not affect whether these proposals are approved, but an abstention will
have the same effect as a vote against the
proposals.
·
The
outcome of the advisory vote on whether the Company should retain the
Stockholder Rights Plan until its scheduled expiration on July 9, 2011
will not be binding on the Board of Directors. Therefore, there
is no “required vote” on this non-binding resolution. Citadel
has advised the Company that it will vote the shares of Common Stock it
owns representing no more than 9.9% of the shares of Common Stock
outstanding and entitled to vote at the Special Meeting to TERMINATE the
Stockholder Rights Plan and has agreed contractually to vote the balance
of the shares of Common Stock it owns in the same proportions as the votes
cast by all other stockholders. The Board of Directors, in the exercise of
its fiduciary duties, will consider the outcome of the advisory vote in
determining whether to retain or terminate the Stockholder Rights Plan
following such vote.
Broadridge
Financial Solutions, Inc., the Company’s independent proxy tabulator, will count
the votes and act as the inspector of election for the Special
Meeting.
How
do I vote?
You may
vote in person by attending the Special Meeting or by proxy. If you
are a stockholder of record, you may vote by proxy through the Internet, by
telephone or by mail. You may follow the instructions on the proxy
card or the instructions below for voting by one of these methods.
To vote
through the Internet, please visit the website at www.ProxyVote.com
before 11:59 p.m., New York City time on [ ], August [ ],
2009. The Internet voting procedures are designed to authenticate the
stockholder’s identity and to allow stockholders to vote their shares and
confirm that their instructions have been properly recorded. If you
would like to receive future stockholder materials electronically, please enroll
after you complete your voting process on www.ProxyVote.com.
Please
help the Company save time by voting through the Internet or by
telephone. If your shares are held in “street name” by a broker or
other nominee, you will receive instructions from the holder of record that you
must follow in order to vote your shares. WHETHER YOU PLAN TO ATTEND THE
SPECIAL MEETING OR NOT, THE COMPANY ENCOURAGES YOU TO VOTE BY PROXY AS SOON AS
POSSIBLE.
4
What
does it mean if I receive more than one proxy card?
You may
receive more than one proxy card depending on how you hold your
shares. You will receive a proxy card for shares registered in your
name. If you hold shares through someone else, such as a bank or
broker, you may also receive material from them asking how you want to
vote. If your shares are registered differently and are in more than
one account, you will receive more than one proxy card. The Company
encourages you to have all accounts registered in the same name and address
whenever possible.
Can
I change my vote or revoke my proxy?
You can
revoke your proxy before the time of voting at the Special Meeting in several
ways (the revocation must be received before the Special Meeting to be
counted):
·
by
mailing a revised proxy dated later than the prior
proxy;
by
notifying the Corporate Secretary of the Company in writing that you are
revoking your proxy. The Corporate Secretary may be reached at
the Company’s corporate offices located at 135 East 57th Street, New York,
New York10022.
You can
also revoke your proxy by voting in person at the Special Meeting.
What
happens if the Special Meeting is postponed or adjourned?
Your
proxy will still be effective and may be voted at the rescheduled
meeting. You will still be able to change or revoke your proxy until
it is voted.
Who
pays for the solicitation of proxies?
The
Company pays the cost of soliciting proxies. The Company retained
Morrow & Co., LLC (the “Solicitation Agent”), to assist with the
solicitation of proxies for an estimated fee of $17,500 plus reasonable
out-of-pocket expenses. The Company will reimburse brokerage firms
and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses for sending proxy materials to stockholders and obtaining
their votes. In addition to solicitation by mail, proxies may be
solicited personally or by telephone or electronic media by the Company’s
regular employees.
Who
do I call if I have questions?
If you
have questions regarding the Special Meeting, please contact Morrow & Co,
LLC, the Solicitation Agent for the Special Meeting. Stockholders
should call (800) 607-0088 and banks and brokerage firms should call (203)
658-9400.
Important
Notice Regarding Delivery of Stockholder Documents
Only one
copy of this proxy statement and set of accompanying materials, if applicable,
is being delivered by the Company to multiple stockholders sharing an address
until the Company receives contrary instructions from one or more of the
stockholders. The Company will deliver, promptly upon written or oral request, a
separate copy of such materials to a stockholder at a shared address to which a
single copy of such materials was delivered. A stockholder who wishes to receive
a separate copy of this proxy statement and accompanying materials now or in the
future, or stockholders sharing an address who are receiving multiple copies of
this proxy statement and accompanying materials and wish to receive a single
copy of such materials, should submit a request to Morrow & Co., LLC, 470
West Avenue, 3rd Floor,
Stamford, CT06902 or call 800-607-0088.
5
OVERVIEW
Overview
The
Company has adopted and is implementing a plan to strengthen the Company’s
capital structure by raising cash equity primarily to support E*TRADE Bank and
also to reduce the Company’s debt burden. In furtherance of the plan,
the Company has called the Special Meeting to ask its stockholders to support
its plan to reduce the Company’s outstanding debt burden by (1) extending the
maturity profile of its debt, (2) reducing the amount of interest expense the
Company is required to pay in the future and (3) potentially decreasing the
principal amount of debt outstanding by permitting holders of a portion of the
Company’s existing high-yield debt securities (the “Outstanding Notes”) to
convert into common equity if they participate in the Debt Exchange (as defined
below) or other debt exchange transactions. The proposed Debt Exchange
described below and in Proposal 2 and the potential future debt exchange
transactions described in Proposal 3 are important steps in meeting the
Company’s objective of strengthening its capital structure. In order
to complete these transactions, it is necessary to increase the number of shares
of Common Stock that the Company is authorized to issue as set forth in Proposal
1. The matters to be voted on at this meeting are critical components of the
Company’s capital plan.
The
Company is a Savings and Loan Holding Company for E*TRADE Bank, its FDIC-insured
thrift subsidiary, and both the Company and E*TRADE Bank are subject to
regulation by the Office of Thrift Supervision (“OTS”) as their primary federal
banking regulator. At May 31, 2009, E*TRADE Bank’s Tier 1 capital ratio was
6.07% and E*TRADE Bank’s risk-based capital ratio was 12.75%. The OTS
has advised the Company, and the Company agrees, that E*TRADE needs to raise
additional equity capital for E*TRADE Bank and reduce substantially the amount
of the Company’s outstanding debt in order to withstand any further
deterioration in current credit and market conditions. Pursuant to a
memorandum of understanding the Company has entered into with the OTS, the OTS
is requiring the Company to submit to the OTS and implement written plans to
address these and related matters. To address the concerns identified
by the Company and the OTS, the Company has:
·
Raised nearly $600 million in
cash. On June 18, 2009, the Company sold 500 million
shares of its Common Stock in a public offering (the “Public Equity
Offering”) which closed on June 24, 2009. The net proceeds to
the Company from the sale of the shares of Common Stock in the Public
Equity Offering were $522.6 million, after deducting underwriting
discounts and commissions and estimated offering expenses. When
added to the net proceeds to date from the Company’s Equity Drawdown
Program (described below) the Company has raised net cash equity of
approximately $586 million in the second quarter of
2009.
·
Launched an offer to exchange
up to $1.7 billion of the Company’s debt. On June 22,2009, the Company launched the Debt Exchange, completion of which is
conditioned upon approval of Proposal 1 and Proposal 2. If the
conditions to the Debt Exchange are met, it will allow the Company to
exchange up to approximately $1.7 billion of outstanding debt securities
for an equivalent amount of newly issued convertible debentures which will
not bear interest. As of the expiration of the early tender
period for the Debt Exchange, more than $1.8 billion of notes had been
tendered, including an amount of 12.5% Springing Lien Notes due 2017 that
exceeded the maximum amount sought by the Company and approximately 99% of
the Company’s outstanding 8% Senior Notes due 2011. Assuming
that the Debt Exchange is approved by the Company’s stockholders and is
completed, it will result in a significant reduction in annual debt
service and significant lengthening of the weighted-average maturities of
the Company’s debt.
The
Company believes that the completion of these transactions would constitute
substantial progress in addressing the most significant concerns raised by the
OTS, although the OTS has offered no assurance that these transactions will be
sufficient to address their concerns. The Debt Exchange is a critical
component of the Company’s plan and the Company needs stockholder approval to
complete it. If the Company is unable to consummate the Debt Exchange, it will
be substantially more likely to face negative regulatory
consequences. Regulatory consequences may take the form of a public
supervisory action from
6
the OTS.
Such supervisory action could, among other things, result in the Company and
E*TRADE Bank becoming subject to significant restrictions on their ability to
develop new business, as well as restrictions on their existing business, and
they could be required to raise additional capital and/or dispose of certain
assets and liabilities within a prescribed period of time. The terms
of any public supervisory action by the OTS could have a material negative
effect on the Company’s business and financial condition and the value of its
Common Stock. The Company and E*TRADE Bank could also become subject
to supervisory actions by the OTS if market conditions were to deteriorate to
such an extent that the equity capital the Company raised in the Public Equity
Offering proved to be insufficient for E*TRADE Bank’s or its
needs. Citadel, the Company’s largest stock and bond holder, has
tendered approximately $1.230 billion aggregate principal of the notes owned by
it in the Debt Exchange and has agreed to vote in favor of the Proposals
described in this Proxy Statement. Due to the benefits that will
result from the Debt Exchange, and the adverse consequences the Company will
face if the Debt Exchange is not completed, the Board recommends that the
stockholders vote FOR Proposal 1 and
2.
Background
Over the
past several months, the Company’s management team has been highly focused on
taking additional steps to strengthen the Company’s capital structure and
enhance its financial flexibility. The Company has considered and
continues to explore a variety of capital-raising transactions, including
transactions involving the issuance of preferred stock, common stock, rights,
warrants or other equity securities, transactions involving the sale of
businesses or assets, refinancing existing indebtedness, and transactions
involving specialized commercial arrangements. Since May 2009,
E*TRADE has entered into a series of transactions to raise cash and reduce the
Company’s debt burden. Affiliates of Citadel Investment Group LLC.
(“Citadel”), the Company’s largest stock and bond holder, have agreed to
participate in these transactions, as further described
below. Citadel and its affiliates collectively are referred to as
Citadel throughout this proxy statement.
·
On
May 8, 2009, the Company entered into a distribution agreement with J.P.
Morgan Securities Inc. (“J.P. Morgan”) pursuant to which the Company may
offer and sell up to $150,000,000 of shares of its Common Stock from time
to time (the “Equity Drawdown Program”) through J.P. Morgan as
distribution agent. During the period from May 11, 2009 through
June 2, 2009, pursuant to the Equity Drawdown Program, the Company sold
40.7 million shares of its Common Stock, resulting in gross proceeds to
the Company of approximately $65.1 million, or approximately $63.2 million
after deducting underwriting discounts and commissions and estimated
offering expenses.
·
On
June 15, 2009, the Company and a subsidiary entered into an Amended and
Restated Equities and Options Order Handling Agreement (the “Amended and
Restated Order Handling Agreement”) with Citadel. Subject to
certain execution quality requirements and regulatory approvals, the
Amended and Restated Order Handling Agreement requires the Company to
route 97.5% of its marketable customer orders in Regulation NMS Stocks (an
increase from 40%) until the sixth anniversary of the commencement date,
which will not be later than the later of July 15, 2009 and three (3)
business days following OTS’ approval, and 97.5% all of its customer
orders in exchange-listed options to Citadel for order handling and
execution until the third anniversary of the commencement
date. Citadel may extend the options order flow commitment for
an additional year on the third, fourth, and fifth anniversaries of the
commencement date. The Company will receive an aggregate cash
payment of $100 million within three business days of the commencement
date, of which $65 million is in full consideration for the increase in
NMS Stock flow and $35 million is in exchange for a credit of $35 million
toward future payment for options order flow, which the Company will
continue to earn on a monthly basis. Because the Amended and
Restated Order Handling Agreement is subject to approval by the OTS, there
is no assurance that the agreement will become effective on the terms
negotiated, if at all. See the Company’s Current Report on Form
8-K filed on June 17, 2009 for further description of the terms and
conditions of the Amended and Restated Order Handling
Agreement.
·
On
June 18, 2009, the Company sold 500 million shares of its Common Stock the
Public Equity Offering which provided net proceeds to the Company from the
sale of the shares of Common Stock in the Public Equity Offering of $522.6
million, after deducting underwriting discounts and commissions
7
and
estimated offering expenses. Citadel purchased approximately 90.9
million shares of the Company’s Common Stock in the Public Equity
Offering. The Company did not pay any commissions and the
underwriters did not receive any discounts on shares sold in the Public Equity
Offering to Citadel.
·
On
June 22, 2009, the Company commenced an offer to all holders of its 8%
Senior Notes due 2011 (the “2011 Notes”) and its 12.5% Springing Lien
Notes due 2017 (the “2017 Notes” and, together with the 2011 Notes, the
“Notes”) to
exchange (the “Debt
Exchange”) (i) any
and all outstanding 2011 Notes and (ii) up to $310 million aggregate
principal amount of 2017 Notes not held by Citadel, plus at least $600
million but not more than $1 billion of 2017 Notes to be tendered by
Citadel, in each case for an equal aggregate principal amount of
convertible debentures due 2019 (the “Debentures”). Holders
tendering their Notes will receive, upon closing of the Debt Exchange,
cash in the amount of the accrued and unpaid interest on the Notes
exchanged. During the period ending at midnight, New York City
time, on July 1, 2009 (the “Early Tender
Period”),
approximately $430 million aggregate principal amount of 2011 Notes and
approximately $1.407 billion aggregate principal amount of 2017 Notes had
been validly tendered, including approximately $230 million of 2011 Notes
and $1 billion of 2017 Notes tendered by Citadel. The 2011
Notes tendered represent 100% of Citadel’s holdings
and approximately 97% of non-Citadel holdings, and the 2017 Notes tendered
represent the maximum of Citadel’s commitment
to participate in the Debt Exchange and approximately 99% of non-Citadel
holdings. Because the aggregate principal amount of 2017 Notes
tendered by holders other than Citadel exceeds $310,000,000, acceptance of
the 2017 Notes tendered by such holders for exchange will be
pro-rated. As of June 12, 2009, there were $435.5 million
aggregate principal amount of 2011 Notes and $2,185.6 million aggregate
principal amount of 2017 Notes outstanding. The Debentures issued in the
Debt Exchange will be designated as either Class A Debentures or Class B
Debentures and will be identical except for the conversion price for each
class of Debentures. The Debt Exchange is described in greater
detail below.
In
addition to the transactions described above and the Debt Exchange described
below, the Company is focused on reducing its outstanding indebtedness and
interest expense and plans to offer to enter into future debt exchange
transactions with holders of its outstanding high-yield debt securities,
including Citadel, for Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock. As of March 31, 2009,
the Company had $3.2 billion face amount of high-yield debt securities
outstanding (the “Outstanding Notes”).
Your approval of Proposal 1 (increase
in authorized Common Stock) and Proposal 2 (approval of the Debt Exchange) is a
condition to the completion of the Debt Exchange. The Company
will not be able to meaningfully reduce its outstanding indebtedness and
interest expense unless, among other things, its stockholders approve these
important proposals.
Terms
and Conditions of the Debt Exchange
In the
Debt Exchange, the Company has offered to exchange (i) any and all outstanding
2011 Notes and (ii) up to $310 million aggregate principal amount of 2017
Notes not held by Citadel, plus at least $600 million but not more than
$1 billion of 2017 Notes to be tendered by Citadel. The
Debentures issued in the Debt Exchange will be designated as either Class A
Debentures or Class B Debentures and will be identical except for the conversion
price for each class of Debentures. The initial conversion price for
the Class A Debentures will be $1.0340, which is equal to the public offering
price of the Common Stock in the Public Equity Offering, minus underwriting
discounts and commissions. The initial conversion price for the Class
B Debentures will be $1.5510, or 150% of the initial conversion price applicable
to the Class A Debentures. Holders of more than $1.7 billion aggregate
principal amount of Notes, including Citadel, tendered such Notes in the Early
Tender Period and will receive $1.7 billion Class A Debentures in exchange
for their tendered Notes if the Company accepts such tendered Notes, Proposals 1
and 2 are approved and the Debt Exchange is consummated. Holders
tendering their 2011 Notes in the Debt Exchange after the Early Tender Period
will be entitled to receive Class B Debentures in exchange for their tendered
2011 Notes. Citadel has tendered the Notes it has committed to
tender in the Debt Exchange during the Early Tender Period and will receive
approximately $1.230 billion Class A Debentures (representing 71% of the Class A
Debentures) if the Debt Exchange is consummated.
8
The
material difference between the Debentures and the Notes are as
follows:
·
the
Debentures will have a ten year maturity, whereas the 2011 Notes mature in
2011 and the 2017 Notes mature in
2017;
·
the
Debentures will not pay any interest, whether in cash or in-kind, nor will
the principal amount of the Debentures increase over time in lieu of
interest, whereas the 2011 Notes pay interest at 8% and the 2017 Notes pay
interest at 12.5%, which may be capitalized for interest payments prior to
May 31, 2010;
·
the
Debentures will be convertible into shares of the Company’s Common Stock
at any time at the election of the holder, whereas the Notes are not
convertible into shares of the Company’s Common
Stock;
·
the
Debentures will not be redeemable at the option of the Company, but will
be redeemable at the option of holders upon a “Fundamental Change,” which
is substantially similar to a “Change of Control” under the Notes except
that a delisting (and failure to secure a listing within a specified cure
period) of the Company’s Common Stock also constitutes a “Fundamental
Change,” whereas the Notes are redeemable at the option of holders upon a
“Change of Control” and are redeemable at the option of Company with the
proceeds of public equity offerings. In addition, the Company may redeem
the 2017 Notes in connection with a “Change of
Control.”
The
Debentures will (i) be convertible into a number of shares of the Company’s
Common Stock equal to the quotient of (x) the principal amount of Debentures of
such class to be converted and (y) the conversion price applicable to such
Debentures immediately prior to conversion; provided that no holder may convert
Debentures to the extent such conversion would result in either (A) such holder
beneficially owning in excess of 9.9% of the Company’s outstanding Common Stock
(which limitation may be waived by such holder), or (B) such holder owning in
excess of 24.9% of the Company’s outstanding Common Stock, under the OTS control
rules, which limitations may be amended or waived, as applicable, upon the later
of (a) one year notice to the Company and (b) receipt of any necessary
regulatory approvals, (ii) contain customary anti-dilution provisions,
(iii) have covenants and events of default substantially similar to those of the
2017 Notes and (iv) be subject to covenant defeasance (but not legal defeasance)
on terms substantially similar to those in the Notes, which defeasance shall not
release the Company from its obligation to convert Debentures into Common
Stock. Unlike zero-coupon convertible debentures that are initially
issued at a discount, the principal amount of the Debentures, whether at
maturity or upon early redemption, and the effective conversion price will
remain constant throughout the life of the Debentures, unless adjusted pursuant
to the anti-dilution provisions of the Debentures.
The
Company is not in default in payment of principal or interest with respect to
either the 2011 Notes or the 2017 Notes.
In
connection with the Debt Exchange, the Company has obtained consents
representing a majority of the outstanding principal amount of the 2011 Notes
and 2017 Notes (both including and excluding such Notes held by Citadel) (the
“Requisite Consents”) to amend and/or waive certain provisions of the indentures
governing the Notes.
The
Company will be obligated to issue an aggregate number of shares of Common Stock
issuable upon conversion of the Debentures to be issued as exchange
consideration in the Debt Exchange. Assuming the maximum amount of
Notes are tendered in the Debt Exchange and based on the amount of Notes
tendered during the Early Tender Period, the Company would be obligated to issue
up to approximately 1.686 billion shares upon conversion of the Debentures at
the respective initial conversion prices of the Class A Debentures and the Class
B Debentures.
Completion
of the Debt Exchange is conditioned upon, among other things, receipt of
stockholder approval to increase the Company’s authorized Common Stock in
Proposal 1 of this proxy statement and stockholder approval of the issuance of
the Debentures in Proposal 2. The Debt Exchange also is subject to
9
required
regulatory approvals, including approvals from the OTS with respect to Citadel’s
participation in the Debt Exchange, and other customary closing
conditions.
Further
details about the terms and conditions of the Debt Exchange are set forth in the
Offering Memorandum and Consent Solicitation Statement dated June 22, 2009,
which was filed with the Securities and Exchange Commission as Exhibit T3E.1 to
the Company’s Form T-3 dated June 22, 2009.
Risk
Factors - Risks Relating to Proposals 1, 2 and 3
If
Proposals 1 and 2 are not approved, the Debt Exchange transaction will not be
completed. As a result, the Company’s primary regulator would likely
take action against the Company, including a public form of supervisory action
by the OTS. Any such actions could have a material negative effect on
the Company’s business and the value of its Common Stock.
As
discussed above, the Company’s primary federal banking regulator, the OTS, has
advised the Company, and the Company agrees, that it needs to raise additional
equity capital for E*TRADE Bank and reduce substantially the amount of the
Company’s outstanding debt and interest expense in order to withstand any
further deterioration in current credit and market
conditions. Pursuant to a memorandum of understanding the Company has
entered into with the OTS, the OTS is requiring the Company to submit to the OTS
and implement written plans to address these and related matters.
In an
effort to address the concerns identified by the Company and the OTS, the
Company has raised net cash equity of $586 million in the second quarter of 2009
and on June 22, 2009the Company launched the Debt Exchange. The
Company believes completion of these transactions will contribute materially to
addressing the issues raised by the OTS, although the OTS has offered no
assurance that these transactions will be sufficient to satisfy their
concerns. If the Company is unable to consummate the Debt Exchange,
it would be substantially more likely to face negative regulatory consequences
in the form of a public supervisory action, such as a written agreement or a
cease and desist order, from the OTS. If the OTS were to take any
such supervisory action against the Company, it and E*TRADE Bank could, among
other things, become subject to significant restrictions on the Company’s
ability to develop any new business, as well as restrictions on the Company’s
existing business, and the Company could be required to raise additional capital
and/or dispose of certain assets and liabilities within a prescribed period of
time. The terms of any public supervisory action by the OTS could
have a material negative effect on the Company’s business and financial
condition and the value of its Common Stock. Furthermore, any
significant reduction in E*TRADE Bank’s regulatory capital could result in
E*TRADE Bank being less than “well capitalized” or “adequately capitalized”
under applicable capital rules. Either condition could also lead to a
public supervisory action by the OTS. A failure of E*TRADE Bank to be
“adequately capitalized” that is not cured within time periods specified in the
indentures governing the Company’s Outstanding Notes would constitute a default
under the Company’s Outstanding Notes and likely result in the Outstanding Notes
becoming immediately due and payable at their full face value.
If the
Company were unable to comply with the terms of any supervisory action against
it, the Company and E*TRADE Bank could become subject to further regulatory
actions by the OTS, including more severe restrictions on E*TRADE Bank’s
business. The Company and E*TRADE Bank could also become subject to
supervisory actions by the OTS if market conditions were to deteriorate to such
an extent that the equity capital the Company raised in the Public Equity
Offering proved to be insufficient for E*TRADE Bank’s or its
needs. In either event, in the worst case, the OTS has the authority
to place a thrift, such as E*TRADE Bank, into receivership, in which case the
Federal Deposit Insurance Corporation (the “FDIC”) would likely be appointed
receiver of the thrift and would proceed to, among other things: (i)
enter into a purchase and assumption agreement with a third party in which that
third party would purchase and assume all or some of the thrift’s assets and
deposits and liquidate the remaining assets and liabilities; (ii) transfer all
or some of the thrift’s assets and deposits to a “bridge bank” until such time
as one or more purchasers may be found for all or some of the “bridge bank’s”
assets and deposits, and liquidate the remaining assets and liabilities; or
(iii) liquidate the thrift’s assets and liabilities and pay insured depositors
the amount of their deposits up to the insured limits and, to the extent
sufficient proceeds from the liquidation are available, pay the remaining claims
of insured depositors and the claims of uninsured depositors and other
creditors.
10
In the
event of the Company’s bankruptcy or liquidation and E*TRADE Bank’s
receivership, E*TRADE would not be entitled to receive any cash or other
property or assets from its subsidiaries (including E*TRADE Bank and E*TRADE
Securities) until those subsidiaries pay in full their respective creditors,
including customers of those subsidiaries and, as applicable, the FDIC and the
Securities Investor Protection Corporation. At the request of the
OTS, E*TRADE Securities became a subsidiary of E*TRADE Bank on June 9,2009. As a result, claims of the FDIC would also have to be satisfied
in full before any of E*TRADE Securities’ assets would be available to holders
of the Company’s Common Stock. Furthermore, in the event of the
Company’s bankruptcy or liquidation, holders of Common Stock would not be
entitled to receive any cash or other property or assets until holders of the
Company’s Outstanding Notes and its other creditors have been paid in full, and
as a result you would likely lose the entire value of your
investment.
The
Debt Exchange is part of the Company’s plans to satisfy the requirements by the
OTS that the Company increase its equity and reduce its debt, but the Company
does not know whether it will be fully sufficient to satisfy regulatory
requirements.
By completing the Public Equity
Offering, the Company has improved its and E*TRADE Bank’s capital position, but
the Company cannot assure you that the amount of cash equity raised in the
Public Equity Offering for E*TRADE Bank, together with the Debt Exchange if
consummated, will satisfy the OTS’s requirements. The OTS is not, at
this time, confirming whether the completion of the Public Equity Offering and
the Debt Exchange would improve the Company’s and E*TRADE Bank’s capital
position and financial condition to the extent necessary to avoid the conditions
that would lead the OTS to take public supervisory actions against the
Company or E*TRADE Bank. Even if the Company completes the Debt
Exchange, the OTS, which the Company believes is currently considering public
supervisory actions against it in the absence of a satisfactory increase in
capital and reduction in debt, may still take such actions at any
time. If the OTS takes any such public supervisory actions against
the Company and E*TRADE Bank, such as a cease and desist order, the Company
believes that it could lead to a loss of confidence in the Company and E*TRADE
Bank by investors and customers, as applicable, which could have a materially
adverse impact on the Company’s business and financial condition.
Stockholders
will face significant dilution as a result of the Company’s proposed debt
exchange transactions and future equity issuances.
If
Proposals 1 and 2 are approved and the Debentures are issued, assuming the
maximum number of Notes are tendered in the Debt Exchange and based on the
amount of Notes tendered during the Early Tender Period, the Debentures will be
convertible into an aggregate of up to approximately 1.686 billion shares of
Common Stock at the respective initial conversion prices of the Class A
Debentures and Class B Debentures. As a result and based on such
assumptions, upon completion of the Debt Exchange, the shares of Common Stock
issuable upon conversion of the Debentures post-transaction would represent up
to 60% of the Company’s outstanding Common Stock on an as-converted
basis. As a result, the Company’s existing stockholders would incur
substantial dilution to their voting interests and will own a smaller percentage
of the Company’s outstanding Common Stock. The dilutive effect of the
Debt Exchange may have an adverse impact on the market price of the Company’s
Common Stock.
The
Company anticipates that one method for reducing its non-convertible debt in the
future will involve debt exchanges in which the Company raises no cash but
reduces the outstanding principal amount, cash interest payment obligations or
extend the maturity profile of the Company’s debt. Such exchange
transactions may reduce the amount of interest the Company is required to pay in
the future, reduce the principal amount due at maturity or extend the maturity
profile of the Company’s outstanding debt, but would not result in the Company
receiving cash proceeds. If the Company is able to consummate these
debt exchange transactions, including the Debt Exchange, it expects that the
fair market value of the equity or convertible debt the Company issues would
have to exceed the fair market value of the debt offered in exchange in order to
provide sufficient incentive to debtholders to participate. Also, the
Company estimates that the aggregate fair market value of the Outstanding Notes
is significantly higher than the fair market value of the Company’s Common
Stock. Therefore, any meaningful reduction in the Company’s leverage
through debt exchange transactions would result in significant dilution to
holders of its Common
11
Stock. In
addition, a reduction of the Company’s debt in sufficient size to meet its
capital objectives will require participation in these debt exchanges by the
Company’s most significant debtholders, including Citadel. Proposal 3
would permit the Company to enter into such additional debt exchange
transactions in the future.
In the
future, the Company may need to raise additional funds via debt and/or equity
instruments, which may not be available on favorable terms, if at
all. If adequate funds are not available on acceptable terms, the
Company may be unable to fund its plans for the growth of its
business. In addition, if funds are available, the issuance of equity
securities could significantly dilute the value of the Company’s shares of its
Common Stock and cause the market price of its Common Stock to
fall. If Proposal 1 is approved by the Company’s stockholders, the
Company will have the ability to issue a significant number of shares of stock
in future transactions without seeking further stockholder
approval. However, if such approval is not granted, then the Company
will be unable to complete the Debt Exchange and its ability to raise additional
funds in the future may be curtailed.
The
Company could as a result of the various transactions described herein, or as a
result of future transactions, experience an “ownership change” for tax purposes
that could cause the Company to permanently lose a significant portion of its
U.S. federal and state deferred tax assets.
The
transactions contemplated in this proxy statement could cause the Company to
experience an “ownership change” as defined for U.S. federal income tax
purposes. Even if these transactions do not cause the Company to
experience an “ownership change,” these transactions materially increase the
risk that the Company could experience an “ownership change” in the future. As a
result, issuances or sales of Common Stock or other securities in the future
(including Common Stock issued on conversion of the Debentures and any future
debt-for-equity exchanges), or certain other direct or indirect changes in
ownership, could result in an “ownership change” under Section 382 of the
Internal Revenue Code of 1986, as amended. In the event an “ownership change”
were to occur, the Company could realize a permanent loss of a significant
portion of its U.S. federal and state deferred tax assets and lose certain
built-in losses that have not been recognized for tax purposes. The amount of
the permanent loss would depend on the size of the annual limitation (which is
in part a function of the Company’s market capitalization at the time of an
ownership change) and the remaining carryforward period (U.S. federal net
operating losses generally may be carried forward for a period of 20 years). The
resulting loss would have a material adverse effect on the Company’s results of
operations and financial condition.
The
Company has not established a valuation allowance against its U.S. federal
deferred tax assets or against a portion of its state and local deferred tax
assets as of March 31, 2009, as the Company believed, based on its analysis as
of that date, that it was more likely than not that all of these assets would be
realized. Section 382 imposes restrictions on the use of a corporation’s net
operating losses, certain recognized built-in losses and other carryovers after
an “ownership change” occurs. An “ownership change” is generally a greater than
50 percentage point increase by certain “5% stockholders” during the testing
period, which is generally the three year-period ending on the transaction date.
Upon an “ownership change,” a corporation generally is subject to an annual
limitation on its pre-change losses and certain recognized built-in losses equal
to the value of the loss corporation immediately before the “ownership change,”
multiplied by the long-term tax-exempt rate (subject to certain adjustments).
The annual limitation is increased each year to the extent that there is an
unused limitation in a prior year. Since U.S. federal net operating losses
generally may be carried forward for up to 20 years, the annual limitation also
effectively provides a cap on the cumulative amount of pre-change losses and
certain recognized built-in losses that may be utilized. Pre-change losses and
certain recognized built-in losses in excess of the cap are effectively
lost.
The
relevant calculations under Section 382 are technical and highly complex. The
transactions contemplated in this proxy statement could cause the Company to
experience an “ownership change.” As of March 31, 2009, the Company’s deferred
tax asset reflected on its balance sheet was $1.1 billion. If an “ownership
change” were to occur, the Company believes it would permanently lose the
ability to realize a substantial amount of this asset, resulting in reduction to
the Company’s total stockholders’ equity. This could also decrease E*TRADE
Bank’s regulatory capital. The Company does not believe, however, that
12
any such
decrease in regulatory capital would be material because, among other things,
only a small portion of the federal deferred tax asset is currently included in
E*TRADE Bank’s regulatory capital.
Impact
of the Debt Exchange on the Company’s Capitalization
The
following table sets forth the Company’s cash and cash equivalents and its
capitalization as of March 31, 2009:
·
on
an actual basis;
·
on
a pro forma basis to give effect to the Company’s entry into the
Amended and Restated Order Handling Agreement (which will become effective
only upon approval by the OTS), the receipt of net proceeds of $63.4
million from the sale of 40,722,445 shares of the Company’s Common Stock
through June 2, 2009 pursuant to the Equity Drawdown Program, and the
receipt by the Company of net proceeds of $522.6 million from the sale of
500 million shares of Common Stock in the Public Equity Offering;
and
·
on
a pro forma, as adjusted basis to give effect to the pro forma changes
described above as well as the consummation of the Debt Exchange based on
the amount of Notes tendered as of the expiration of the Early Tender
Period (approximately $430 million aggregate principal amount of 2011
Notes and $1.310 billion aggregate principal amount of 2017
Notes).
The table
should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in the Company’s Quarterly Report
on Form 10-Q for the three months ended March 31, 2009, its Current Report on
Form 8-K filed May 14, 2009, and its consolidated financial statements and the
notes to those financial statements incorporated by reference in this Proxy
Statement.
Pro
Forma As Adjusted for the Debt Exchange
(1)(2)
(in
millions, except for share
amounts
and par value)
Cash
and equivalents
$
4,492
$
686
$
5,178
$
5,178
Debt:
8.0%
Senior Notes due 2011(3)
$
435
$
435
(430
)
$
5
7.375%
Senior Notes due 2013(3)
415
415
415
7.875%
Senior Notes due 2015(3)
243
243
243
12.5%
Springing Lien Notes due 2017(3)
2,057
2,057
(1,310
)
747
Class
A Convertible Debentures(3)
(4)
−
−
1,740
1,740
Class
B Convertible Debentures(5)
−
−
−
−
Discount
and fair value adjustments
(397
)
(397
)
259
(138
)
Total
debt
2,753
2,753
259
3,012
Stockholders
equity:
Preferred
stock; 1,000,000 shares authorized;
−
−
−
Common
stock, $0.01 par value; 1,200,000,000 shares authorized; 572,051,743(6)
shares issued and outstanding actual, 1,112,774,188 shares issued and
outstanding pro forma
6
5
11
11
Additional
paid-in capital
4,085
580
4,665
702
5,367
Accumulated
deficit
(1,079
)
(169
)
(1,248
)
(931
)(7)
(2,179
)
Accumulated
other comprehensive loss
(554
)
(554
)
(554
)
Total
stockholders’ equity
2,458
416
2,874
(229
)
2,645
Total
capitalization
$
5,211
$
416
$
5,627
30
$
5,657
(1)
The
actual and pro forma columns in this table do not give effect to the
increase in the authorized shares of the Company’s common stock set forth
in Proposal 1. See note 7
below.
(2)
As
a result of the Amended and Restated Order Handling Agreement (which will
become effective only upon approval by the OTS), the Company’s Capital
Markets business will no longer receive this order flow, which results in
a decrease in the level of income attributed to this business. As such, it
is likely that the goodwill and intangibles of approximately $170 million
related to the Company’s Capital Markets business will be impaired. This
potential impairment is reflected in the table on a pro forma
basis.
(3)
Debt
balances represent principal amount, which is exclusive of premium
(discount) and adjustments on fair value hedge
relationships.
(4)
This
amount is based on the aggregate principal amount of Notes tendered in the
Early Tender Period. These amounts represent the maximum
principal amount of 2017 Notes and 99% of the maximum principal amount of
2011 Notes that the Company offered to exchange. The Notes
tendered for exchange include approximately $230 million and $1 billion of
Citadel’s holdings in the Company’s 2011 Notes and 2017 Notes,
respectively. As a result, based on the results obtained as of
the expiration of the Early Tender Period, Citadel will own approximately
$1.230 billion aggregate principal amount, or 71%, of the Company’s Class
A Debentures, which will be convertible into 1,189,792,070 shares of
Common Stock at the initial conversion price of $1.0340 per
share.
14
(5)
Up
to $5.9 million aggregate principal amount of 2011 Notes may be tendered
prior to the expiration of the Debt Exchange. Any such 2011
Notes would be exchanged for Class B
Debentures.
(6)
This
number is the total number of shares outstanding as of March 31, 2009. The
number of shares of common stock outstanding as of June 26, 2009 is
1,115,429,538, which does not
include:
·
31,767,825
shares subject to outstanding options at a weighted average exercise price
of $9.48 per share as of June 26,2009;
·
11,664,004
shares underlying outstanding restricted stock units as of June 26,2009;
·
29,802,637
additional shares reserved as of June 26, 2009 for future issuance under
the Company’s equity incentive plans;
and
·
on
an actual and pro forma as adjusted basis, shares of common stock issuable
upon conversion of Debentures issued upon completion of the Debt
Exchange. Based on the aggregate principal amount of Notes
tendered in the Early Tender Period, a total of 1,682,413,926 shares of
Common Stock will be issuable upon conversion of the Class A Debentures at
the initial conversion price. The Company may issue up to $5.9
million of Class B Debentures, which would be convertible into up to
3,803,353 additional shares of Common Stock at the initial conversion
price of $1.5510 per share.
(7)
Includes
a pre-tax loss on exchange of $980 million and includes the write-off of
capitalized debt issuance costs associated with the exchanged debt. This
loss is based on the estimated fair value of convertible debentures issued
of $2,460 million. The Company’s stock price assumed in determining this
fair value was the closing price of the stock on July 1, 2009, or
$1.35.
The pro
forma and pro forma as adjusted information discussed above is illustrative only
and will change based on the actual total amount of Notes tendered in the Debt
Exchange.
Based on
the $430 million aggregate principal amount of 2011 Notes and $1,310 million
aggregate principal amount of 2017 Notes tendered as of the expiration of the
Early Tender Period, the Debt Exchange will result in a substantial reduction on
the Company’s corporate interest expense:
·
the
Company’s pro
forma corporate interest expense for 2008 would have been reduced
by approximately $164 million with respect to the 2017 Notes (including
$82 million which was paid in the form of additional Notes in November
2008) and $34 million with respect to the 2011
Notes;
·
the
Company’s pro
forma corporate interest expense for the three months ended March31, 2009 would have been reduced by approximately $41 million with respect
to the 2017 Notes and $9 million with respect to the 2011 Notes;
and
·
the
Company estimates that its future corporate interest expense will be
reduced by approximately $9 million with respect to the 2011 Notes and $41
million with respect to the 2017 Notes, respectively, on a quarterly
basis.
In
addition, based on the amount of Notes tendered during the Early Tender Period,
the Company will recognize a loss in 2009 to the extent the book value of such
Notes is less than the fair value of the Debentures issued in exchange for such
Notes. The book value of such 2011 Notes and 2017 Notes currently
includes an aggregate discount of approximately $260 million, which will
increase the loss on exchange by the same amount. For example, if the Debentures
are determined to have a fair value equal to their principal amount, such loss
would be $260 million. The fair value of the Debentures is not
estimable at this time and will depend, among other things, on the trading price
of the Company’s Common Stock upon closing of the Debt Exchange. The
table below illustrates the impact of movements in the Company’s trading price
on the fair value of the Debentures and the resulting loss that would be
recorded at the exchange date:
(1) This
is the stock price assumed in the pro forma balance sheet data included in the
table above.
Based on
the amount of notes tendered during the Early Tender Period, the Company's
basic and diluted loss per share for 2008 would have been $(1.40) for
2008 and $(1.20) for the three months ended March 31, 2009,
respectively.
Relationship
With Citadel
In
November 2007, the Company entered into an agreement to receive a $2.5 billion
cash infusion from Citadel. In consideration for the cash infusion,
Citadel received three primary items: substantially all of the Company’s
asset-backed securities portfolio, approximately 79.9 million shares of the
Company’s Common Stock and approximately $1.8 billion in 2017
Notes.
Citadel
is the largest holder of the Company’s Common Stock, and owns approximately 180
million shares (approximately 16%), including shares purchased by Citadel in the
Public Equity Offering. In addition, not taking into account any
Notes tendered in the Debt Exchange, Citadel beneficially holds approximately
52.8% of the principal amount of the outstanding 2011 Notes and approximately
81.2% of the principal amount of the outstanding 2017 Notes, and a majority of
each of the Company’s 7.375% Senior Notes due 2013 and 7.875% Senior Notes due
2015.
Board
of Directors
Effective
June 8, 2009, the Company’s Board of Directors expanded the number of members of
the Board from eleven to twelve, expanded the number of Class II directors from
three to four and appointed Kenneth C. Griffin, President and Chief Executive
Officer of Citadel Investment Group, L.L.C., as a director. Mr. Griffin will be
a Class II member of the Board and will stand for election by the stockholders
at the next annual meeting. Mr. Griffin was appointed pursuant to the
right of Wingate Capital Ltd., an affiliate of Citadel, under the Master
Investment and Securities Purchase Agreement dated November 29, 2007 between
Wingate Capital Ltd. and the Company.
Also as
of June 8, 2009, the Board appointed Mr. Griffin to serve as a member of its
Finance and Risk Oversight Committee.
The Board
approved the payment of a $25,000 cash annual retainer to Mr. Griffin under the
terms of the Company’s non-employee director compensation policy as in effect
from time to time, as described in the proxy statement for the Company’s 2009
annual meeting of stockholders.
Exchange
Agreement
Pursuant
to an Exchange Agreement dated June 17, 2009, as amended (the “Exchange
Agreement”) between E*TRADE and Citadel, under which Citadel agreed to early
tender in the Debt Exchange not less than $200 million aggregate principal
amount of its 2011 Notes and not less than $600 million, nor more than $1
billion, aggregate principal amount of its 2017 Notes for exchange in, and not
to withdraw any of these tendered Notes (except as set forth in the Exchange
Agreement) from the Debt Exchange. As of July 1, 2009, Citadel
tendered approximately $230 million aggregate principal amount of its 2011 Notes
and $1 billion aggregate principal amount of its 2017 Notes. Citadel,
which by itself controls a majority of the
16
outstanding
principal amount of each of the 2011 Notes and the 2017 Notes, also provided its
consent with respect to a principal amount of 2011 Notes and 2017 Notes not
tendered by Citadel as necessary to ensure that consents with respect to a
majority of the aggregate principal amount of each of the 2011 Notes and 2017
Notes were delivered by the end of the Early Tender Period and waived any
consent fee with respect to any and all such Notes, unless the Debt Exchange is
not consummated in which case Citadel will be entitled to the same fee as other
consenting holders of the Notes. If the Exchange Agreement is
terminated by either party, the Company will terminate the Debt
Exchange. Additionally, pursuant to its commitment under the Exchange
Agreement, Citadel purchased $100 million of the Company’s Common Stock in the
Public Equity Offering.
Transfer
Restrictions Applicable to the Debentures
The terms
of the Debentures include certain restrictions on conversion of the
Debentures. For example, a holder of the Debentures may not convert
Debentures to the extent such conversion would result in it beneficially owning
as defined in Rule 13d-3 of the Exchange Act in excess of 9.9% of the Company’s
Common Stock outstanding immediately after giving effect to such
conversion.
In
addition, a holder of the Debentures may not convert Debentures to the extent
such conversion would result in it holding in excess of 24.9% of the Company’s
Common Stock. These limitations may be waived by any holder effective
upon the later of (a) one year from the date of notice provided by the holders
to the Company, and (b) receipt of any necessary regulatory
approvals.
Citadel
has agreed that it will not transfer Debentures to the extent all Debentures
held by Citadel on an as-converted basis, as a percentage of the Common Stock,
combined with the shares of the Common Stock held by Citadel, would, in the
aggregate, exceed 24.9% of the Company’s voting stock (as such percentage is
calculated under the OTS’ Acquisition of Control Regulations, 12 C.F.R. §
574). Notwithstanding the foregoing, there will be no such transfer
limitations applicable to Citadel with respect to Debentures that are converted
or transferred in: (i) widely dispersed public offerings; (ii) private
sales in which no purchaser or group of purchasers acting in concert would
acquire more than 2% of the Common Stock on a fully diluted basis; provided, for
the avoidance of doubt, Debentures may not be sold in a private sale to the
extent such sale would cause the transferee to purchase from Citadel, in
aggregate, in excess of 24.9% of the Common Stock and Debentures (on an as
converted basis as a percentage of the Common Stock, assuming conversion of
Debentures only by the transferee); (iii) transfers or sales to the Company or
one of its subsidiaries; (iv) transfers or sales to an unaffiliated third party
acquiring a majority of the Common Stock or merging with the Company; or (v)
transfers to affiliates of Citadel (which affiliates will continue to be bound
by the restrictions set forth above.)
Amendment
to Rights Plan and Agreement to Submit Rights Plan Proposal to
E*TRADE Stockholders
In connection with the Company’s Public
Equity Offering and the Debt Exchange, the Company amended the Rights Agreement,
dated of July 9, 2001, as amended, between the Company and American Stock
Transfer and Trust Company (the “Stockholder Rights Plan”) to:
·
exempt
Citadel from becoming an “Acquiring Person,” as defined in the Stockholder
Rights Plan, in connection with its purchase of shares in the Company’s
Public Equity Offering and its acquisition of Debentures (including the
Common Stock issuable upon conversion thereof), as well as pursuant to the
exercise of its pre-emptive rights as described
below;
·
increase
Citadel’s allowance for acquiring additional shares of the Company’s
Common Stock without becoming an Acquiring Person from approximately 8.5
million shares to 25.0 million shares (excluding shares acquired by
exercise of its preemptive rights, acquired upon conversion of the
Debentures, purchased in the Public Equity Offering and purchased during
any Rights Plan Holiday Period), effective and contingent upon the
settlement of the Debt Exchange;
and
·
provide
that Citadel will be exempt from becoming an Acquiring Person with respect
to any acquisitions of additional shares of the Company’s Common Stock
during any Rights Plan Holiday Period, effective and contingent upon the
settlement of this Debt Exchange.
17
A “Rights Plan Holiday Period” means,
at any time in which the Company’s Stockholder Rights Plan remains in effect,
the period commencing upon the Company’s public disclosure that E*TRADE Bank has
failed to satisfy the Financial Metrics Test for any quarter and ending upon the
next public disclosure that E*TRADE Bank has once again satisfied the Financial
Metrics Test at the end of a quarter.
The “Financial Metrics Test” means, at
the balance sheet date for a fiscal quarter, that E*TRADE Bank has both (i) at
least $450 million in Excess Risk-Based Capital and (ii) a Tier 1 Capital Ratio
of at least 6.00%.
“Excess Risk-Based Capital” means that
portion of E*TRADE Bank’s total capital, as such term is defined in 12 CFR
567.5(c) (as currently or hereafter in effect), that is in excess of the amount
of total capital that would be required in order for E*TRADE Bank to have a
total risk-based capital ratio of 10.0% as calculated in accordance with 12 CFR
Part 567 (as currently or hereafter in effect).
“Tier 1 Capital Ratio” means E*TRADE
Bank’s core capital, as such term is defined in 12 CFR 567.5(a) (as currently or
hereafter in effect), divided by its adjusted total assets, as such term is
defined in 12 CFR 567.1 (as currently or hereafter in effect).
In addition, the Company agreed that at
the Special Meeting it would submit to its stockholders an advisory resolution
regarding whether the Company should retain or terminate its Stockholder Rights
Plan. The Company has agreed with Citadel that neither the Company’s
Board of Directors nor Citadel will take any position on whether stockholders
should vote to retain or terminate the Stockholder Rights Plan or otherwise seek
to influence the outcome of the advisory vote. Citadel has agreed that it will
vote its shares representing no more than 9.9% of the Company’s shares
outstanding and entitled to vote at the Special Meeting on this advisory
resolution to terminate the Stockholder Rights Plan, and that it will vote the
balance of its shares on the advisory resolution in the same proportions, to
retain or terminate the Stockholder Rights Plan, as the votes cast by all other
stockholders. Following the vote, which will not be binding, the Company’s Board
of Directors will determine whether to retain or terminate the Company’s
Stockholder Rights Plan based on its consideration of all factors deemed
relevant to the exercise of its fiduciary duties.
Preemptive
Rights
Under the Exchange Agreement the Company also
granted Citadel pre-emptive rights to allow Citadel to maintain its fully
diluted percentage ownership of the Company’s
Common Stock in connection with future issuances by the Company,
subject to Citadel’s purchasing the Company’s
securities on the same terms and conditions as other purchasers and certain
other conditions. The pre-emptive rights became effective upon the expiration of
the Early Tender Period. If the Company fails
to complete the Debt Exchange, then Citadel’s pre-emptive
rights will terminate and be of no further force or effect.
The pre-emptive rights will not apply
to issuances of Common Stock or securities convertible into or exercisable for
shares of the
Company’s Common Stock, among other things, (i) in connection with
acquisitions by the
Company of other companies or businesses, (ii) in exchange for the Company’s 2011
Notes, 2013 Notes, 2015 Notes or 2017 Notes or (iii) pursuant to the Company’s stock
plans or otherwise in equity compensation arrangements with its directors,
officers, employees or consultants.
The pre-emptive rights will be in
effect so long as the Company has in
effect a stockholder rights plan, provided that the pre-emptive rights shall
terminate and be of no further force or effect upon the earliest to occur of (i)
the earlier of the termination of the Exchange Agreement or failure to
consummate the Debt Exchange by October 31, 2009 or (ii) the date after the
consummation of the Debt Exchange that Citadel beneficially owns less than 19.9%
of the
Company’s outstanding Common Stock on a fully diluted basis assuming
conversion of all securities beneficially owned by Citadel (whether or not such
securities are convertible or exchangeable for shares of Common Stock at such
time in accordance
with their terms or by reason of any condition precedent to such conversion or
exchange not been satisfied at such time). The pre-emptive rights will be
suspended upon the termination of the Company’s Stockholder Rights Plan, but
18
will be automatically
reinstated if the Company reinstates its Stockholder Rights Plan or if the
Company subsequently adopts a new rights plan, “poison pill” or similar
plan.
The
description of the terms of the Exchange Agreement is a summary and does not
purport to be complete. The full Exchange Agreement is attached as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on
June 17, 2009.
19
PROPOSAL
1. INCREASE IN AUTHORIZED SHARES OF COMMON STOCK
Proposal
The Board
of Directors proposes to amend Article FOURTH of the Company’s Restated
Certificate of Incorporation to increase the number of shares of Common Stock
the Company is authorized to issue from 1,200,000,000 to 4,000,000,000, and,
correspondingly, increase the total number of authorized shares of capital stock
from 1,201,000,000 to 4,001,000,000.
1,115,429,538
shares of Common Stock issued and outstanding, including 40,722,445 shares
issued pursuant to the Equity Drawdown Program and 500,000,000 shares of
Common Stock issued pursuant to the Public Equity Offering;
and
·
an
aggregate of up to 73,234,466 shares of Common Stock reserved
for issuance under the Company’s existing equity incentive arrangements
and awards issued pursuant thereto.
The
Company needs to increase the number of shares of Common Stock it is authorized
to issue in order to fulfill its commitment to issue Common Stock issuable upon
conversion of the Debentures to be issued as exchange consideration in the Debt
Exchange. Assuming the maximum amount of Notes are tendered in the
Debt Exchange and based on the amount of Notes tendered during the Early Tender
Period, the Company would be obligated to issue approximately 1.686 billion
shares upon conversion of the Debentures. The proposed increase in
the number of authorized shares of Common Stock is a condition to the completion
of the Debt Exchange. In addition, the additional shares of Common
Stock would facilitate the Company’s participation in the U.S. Treasury
Department’s TARP Capital Purchase Program, which would require the Company to
issue warrants to acquire Common Stock to the U.S. Treasury and would give the
Company the flexibility to conduct additional debt exchanges and raise
capital.
Impact
on Stockholders of Approval or Disapproval of this Proposal
If this
Proposal is not approved, the Company will be unable to complete the Debt
Exchange, as it will not have sufficient authorized shares to issue the number
of shares of Common Stock issuable upon conversion of the
Debentures. If the Company is unable to complete the Debt Exchange,
the existing debt will remain in place without any extension of debt maturities
or reduction in cash interest expenses, negatively impacting the value of the
Company’s Common Stock and bringing about negative regulatory consequences as
described above under “Overview – Risk Factors- Risks Relating To Proposals 1, 2
and 3.”The Company may be unable to strengthen its capital structure
to the extent that the OTS has requested and, as a result, may face a
public supervisory action, could be required to raise additional capital and/or
dispose of certain assets and liabilities within a prescribed period of time,
and could have restrictions placed on its ability to conduct
business. In the worst case, the OTS has the authority to place a
thrift, such as E*TRADE Bank, into receivership and, as a result, you would
likely lose the entire value of your Common Stock. Due to the
benefits that will result from the Debt Exchange, and the adverse consequences
the Company will face if the Debt Exchange is not completed, the Board recommends that the
stockholders vote FOR this Proposal.
If
approved, the increase in authorized Common Stock will facilitate the Company’s
ability to complete the Debt Exchange and will enable the Company to avail
itself of any additional potential opportunities to execute on its plan to
reduce indebtedness by conducting additional debt exchanges and raise cash
proceeds, all as discussed in this proxy statement under
“Overview.” It would also give the Company the ability to issue
shares for other general corporate purposes. As a result of the Debt
Exchange, the Company’s existing stockholders will incur substantial dilution to
their voting interests and will own a smaller percentage of the Company’s
outstanding Common Stock. The dilutive effect of the Debt Exchange
may have an adverse impact on the market price of the Company’s Common
Stock. Additional issuances of Common Stock would further dilute the
interests of existing stockholders.
20
Except as described in this proxy
statement, the Company has no current plans to issue shares in an exchange,
merger, consolidation, acquisition or similar transaction. Approval
of the amendment to the Company’s Restated Certificate of Incorporation would in
certain circumstances permit such actions to be taken without the delays and
expense associated with obtaining stockholder approval at that time, except to
the extent required by applicable state law or stock exchange listing
requirements for the particular transaction. Although the
availability of additional shares of stock provides flexibility in carrying out
corporate purposes, the increase in the number of shares of authorized stock
could make it more difficult for a third party to acquire a majority of the
Company’s outstanding voting stock and could also result in the issuance of a
significant number of shares to one or more investors in transactions that may
not require stockholder approval. For more information regarding dilution to
stockholders, see “Overview – Risk Factors – Risks Relating To
Proposals 1, 2 and 3.”
Text
of the Proposed Amendment to the Restated Certificate of
Incorporation
The Board
of Directors has adopted resolutions setting forth the following proposed
amendment to the Restated Certificate of Incorporation and directing that the
proposed amendment be submitted to the holders of the Company’s Common Stock for
approval at the Special Meeting.
FOURTH. (a) The
Corporation is authorized to issue two classes of stock to be designated,
respectively, “Common
Stock” and “Preferred Stock.” The total number
of shares that the Corporation is authorized to issue is 4,001,000,000 shares.
4,000,000,000 shares shall be Common Stock, $0.01 par value per share (the
“Common
Stock”). 1,000,000 shares shall be Preferred Stock, $0.01 par
value per share, of which 1 share shall be designated Series A Preferred Stock
and 500,000 shares shall be designated Series B Preferred Stock. The
Series A Preferred Stock and Series B Preferred Stock are collectively
referred to as “Preferred
Stock.”
If
adopted by the stockholders, the amendment to the Restated Certificate of
Incorporation will become effective upon filing of a certificate of amendment to
the Restated Certificate of Incorporation with the Secretary of State of
Delaware.
Vote
Required and Board of Directors’ Recommendation
Approval
of the amendment to the Restated Certificate of Incorporation requires the
affirmative vote of a majority of the shares of the Common Stock entitled to
vote on the matter. As a result, abstentions, broker non-votes or the
failure to submit a proxy or vote in person at the Special Meeting will have the
same effect as a vote against the proposal.
The
E*TRADE Board of Directors recommends that stockholders vote FOR the approval of
the amendment to Article FOURTH of the Restated Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 1,200,000,000 to
4,000,000,000 shares and, correspondingly, increase the total number of
authorized shares of capital stock from 1,201,000,000 to
4,001,000,000.
21
PROPOSAL 2. THE
ISSUANCE OF DEBENTURES AND THE ISSUANCE OF THE COMMON STOCK UPON CONVERSION OF
THE DEBENTURES
Proposal
The
Company is seeking stockholder approval under the applicable provisions of
NASDAQ Marketplace Rule 5635 for the issuance of Common Stock issuable upon
the conversion of the Debentures to be issued as exchange consideration in the
Debt Exchange. As described above under the caption “Terms and
Conditions of the Debt Exchange,”the Company will offer to issue Debentures in
exchange for the surrender and cancellation of up to $435.5 million aggregate
principal amount of 2011 Notes and up to $1.3 billion aggregate principal amount
of 2017 Notes. The Company will be obligated to issue shares of
Common Stock upon conversion of the Debentures to be issued as exchange
consideration in the Debt Exchange. Assuming the maximum amount of
Notes are tendered in the Debt Exchange and based on the amount of Notes
tendered during the Early Tender Period, the Company would be obligated to issue
an aggregate of approximately 1.686 billion shares upon conversion of the
Debentures at the respective initial conversion price of Class A Debentures and
Class B Debentures.
For a
more detailed description of the Debt Exchange and the terms of the Class A
Debentures and Class B Debentures, see the section entitled “Description of the
Debt Exchange” above.
Reason
for Request for Stockholder Approval
The
Company’s Common Stock is listed on the NASDAQ Global Select Market, and the
Company is subject to the NASDAQ Marketplace Rules. The Company is
seeking approval for the issuance of Common Stock issuable upon the conversion
of the Debentures issued in the Debt Exchange under all the applicable
provisions of Marketplace Rule 5635, which applies to the issuance of securities
in certain circumstances.
NASDAQ
Marketplace Rule 5635(d) requires stockholder approval of the issuance of common
stock equal to 20% or more of the common stock outstanding before the issuance
for less than the greater of book or market value of the stock. Because the
Company has agreed to issue securities convertible into more than 20% of the
Company’s shares at a price that is lower than the book value of the shares, the
Company is seeking stockholder approval pursuant to Marketplace Rule
5635(d).
In
addition, under Marketplace Rule 5635(b), companies are required to obtain
stockholder approval prior to the issuance of securities when the issuance or
potential issuance would result in a “change of control” as defined by
NASDAQ. NASDAQ generally characterizes a transaction whereby an
investor or group of investors acquires, or obtains the right to acquire, 20% of
more of the voting power of an issuer on a post−transaction basis as a “change
of control” for purposes of Rule 5635(b). As of June 26, 2009 Citadel holds
approximately 16% of the Company’s outstanding pre-transaction shares of Common
Stock. Assuming approval by the stockholders of this proposal and
Citadel’s participation in the Debt Exchange, Citadel could acquire more than
20% of voting power of the Company’s Common Stock. Because Citadel
could potentially own in excess of 20% of the voting power of the Company’s
Common Stock following Debt Exchange, the Company is seeking stockholder
approval in order to comply with Marketplace Rule 5635(b).
Furthermore,
under Marketplace Rule 5635(c), companies are required to obtain stockholder
approval prior to issuance of common stock or securities convertible into or
exercisable for common stock to certain affiliates in a private placement at a
price less than the market value of the common stock, as such issuance is
considered a form of “equity compensation”. To the extent that the
issuance of the Debentures could be considered a form of “equity compensation”,
the Company is seeking stockholder approval pursuant to Marketplace Rule
5635(c).
Impact
on Stockholders of Approval or Disapproval of this Proposal
If this
Proposal is not approved, the Company will be unable to complete the Debt
Exchange and will be unable to retire the 2011 Notes and 2017 Notes tendered in
the Debt Exchange. As discussed in relation
22
to
Proposal 1 and under “Overview – Risk Factors – Risks Relating To
Proposals 1, 2 and 3,” if this Proposal is not approved, the Company will face
negative regulatory consequences which are likely to have a material adverse
effect on its business and the value of its Common Stock. For the
reasons stated previously, the
Board therefore recommends that the stockholders vote FOR this Proposal.
If this
Proposal is approved, there may be other effects on the stockholders, including
the following:
Citadel
may exercise significant influence over the Company and Citadel’s interests may
conflict with the interests of other stockholders.
Citadel
holds a majority of the outstanding notes in each series of the Company’s
high-yield debt securities. Following the Debt Exchange and Public
Equity Offering, the Company estimates that the Common Stock owned by Citadel,
together with the Common Stock issuable on conversion of the Debentures received
by Citadel, will represent 49% of the Company’s Common Stock on a fully diluted
basis, depending on the total amount of Notes tendered in the Debt
Exchange. This would most likely be sufficient to permit Citadel to
elect a substantial number of directors and control or significantly impact
corporate policy. Citadel will be unable to accomplish these matters
for so long as it is subject to certain rules of the OTS regarding rebuttal of
control over thrifts and thrift holding companies. If these rules
change, or if Citadel receives a waiver or decides to become a thrift holding
company, it will be in a position to elect a substantial number of directors and
to control, or substantially impact, corporate policy. Further, if
Citadel acquires common shares representing more than 50% of the total voting
power, holders of the Company’s debt securities would have the right to require
the Company to repurchase all such securities for cash at a premium to their
face amount. In addition, Citadel is an independent entity with its
own investors and is entitled to act in its own economic interest with respect
to its equity and debt investments in E*TRADE. Any sales by Citadel
of the Company’s Common Stock it received under the Investment Agreement, in the
Public Equity Offering or upon conversion of the Debentures may have a
depressing effect on the trading price of the Company’s Common
Stock. After the Debt Exchange, Citadel would own 71% of the Class A
Debentures and 88% of the remaining outstanding 2017 Notes. Citadel
has a right to declare defaults and enforce remedies just like any other lender
for so long as Citadel retains 25% or more of the applicable series of
high-yield debt securities. In pursuing its economic interests, Citadel may make
decisions with respect to fundamental corporate transactions which may be
different than the decisions of investors who own only common
shares.
The
issuance of the Debentures may have an anti-takeover effect on the
Company.
The
issuance of the Debentures could have an anti-takeover effect because such
issuance would make it more difficult for, or discourage an attempt by, a party
to obtain control of the Company by tender offer or other means. The
issuance of the Common Stock issuable upon conversion of the Debentures will
increase the number of shares entitled to vote, increase the number of votes
required to approve a change of control of the Company, and dilute the interest
of a party attempting to obtain control of the Company. The Board of
Directors does not have any current knowledge of any effort by any other third
party to accumulate the Company’s securities or obtain control of the Company by
any means.
Vote
Required and Board of Directors’ Recommendation
The
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy and voting on the matter is necessary
under Rule 5635(e)(4) of the NASDAQ Marketplace Rules to approve the issuance of
the Common Stock issuable upon conversion of the
Debentures. Accordingly, failure to vote and broker non-votes will
not affect whether this proposal is approved, but an abstention will have the
same effect as a vote against the proposal.
The
E*TRADE Board of Directors has approved the Debt Exchange and the issuance of
the Debentures and the issuance of the Common Stock upon conversion of the
Debentures. Based on E*TRADE’s reasons for the Debt Exchange
described in this proxy statement, the Board of Directors of E*TRADE believes
that the approval of the issuance of Debentures and the issuance of Common Stock
upon conversion of the Debentures is in the best interests of E*TRADE and its
stockholders and recommends that you vote FOR approval of the
issuance of the Debentures and the issuance of
23
Common
Stock upon conversion of the Debentures
under the applicable provisions of NASDAQ Marketplace Rule 5635.
24
PROPOSAL
3. POTENTIAL ISSUANCE OF SHARES OF COMMON STOCK
Proposal
The
Company is seeking stockholder approval under the applicable provisions of
NASDAQ Marketplace Rule 5635 for the potential issuance of up to 365 million
shares of Common Stock, or securities convertible into or exchangeable or
exercisable for Common Stock, in connection with potential future exchange
transactions for its Outstanding Notes. The Company may decide to
offer to exchange Common Stock, or securities convertible into or exchangeable
or exercisable for Common Stock, for the Outstanding Notes in a registered
tender offer or from time to time in one or more privately negotiated
transactions that are exempt from registration pursuant to the Securities Act
under Section 3(a)(9) or otherwise. Although the Company expects to
offer to enter into these debt exchange transactions with the holders of its
Outstanding Notes, no such holders have made any commitments to enter into any
such transactions and there can be no assurance that the holders will agree to
any such exchanges in the future.
Reason
for Request for Stockholder Approval and Impact on Stockholders of Approval or
Disapproval of this Proposal
As
discussed in more detail under “Overview” above, the Company is seeking to
reduce its outstanding indebtedness and strengthen its capital
structure. The benefit of future exchange transactions is that they
may permit the Company to retire indebtedness without using cash. If
the Debt Exchange is consummated, assuming the maximum amount of Notes are
tendered in the Debt Exchange and based on the amount of Notes tendered during
the Early Tender Period, the Company would be obligated to issue an aggregate of
1.686 billion shares of Common Stock upon conversion of the Debentures at the
respective initial conversion prices of Class A Debentures and Class B
Debentures. If the Company retires outstanding indebtedness in an
exchange transaction, it will reduce the amount of cash interest the Company is
required to pay in the future. This will permit the Company to use
its cash for other purposes, including contributing equity capital to E*TRADE
Bank.
Because
the Company’s Common Stock is listed on the NASDAQ Global Select Market, the
Company is subject to the NASDAQ Marketplace Rules. The Company is
seeking approval for the issuance of Common Stock in potential exchange
transactions under the applicable provisions of Marketplace Rule 5635, which
applies to the issuance of securities in certain circumstances.
For
example, NASDAQ Marketplace Rule 5635(d) requires a company to obtain
stockholder approval in connection with the issuance of securities in certain
circumstances, including in connection with a transaction or series of related
transactions (other than a public offering) involving the potential sale or
issuance of common stock at a price less than the greater of book or market
value of the common stock if the amount of common stock to be issued equals 20%
or more of the common stock or the voting power of the company’s shares
outstanding before giving effect to the issuance. The Company
believes that these transactions have been and will continue to be beneficial to
the Company and its stockholders such that it is seeking approval to enter into
additional transactions periodically over time that could involve the issuance
of Common Stock in excess of the 20% threshold.
In
addition, under Marketplace Rule 5635(c), companies are required to obtain
stockholder approval prior to issuance of common stock or securities convertible
into or exercisable for common stock to certain affiliates in a private
placement at a price less than the market value of the common stock, as such
issuance is considered a form of “equity compensation”. To the extent
that the issuance of the Common Stock or securities convertible into or
exercisable for Common Stock could be considered a form of “equity
compensation”, the Company is seeking stockholder approval pursuant to
Marketplace Rule 5635(c).
The potential future debt exchange
transactions contemplated by this Proposal will not result in cash proceeds to
the Company and any meaningful reduction in the Company’s indebtedness through
these transactions will result in significant dilution to stockholders. If
Citadel were to participate in these debt exchanges, Citadel’s ownership of the
Company’s Common Stock or securities convertible into Common Stock would
increase. The Company currently has no commitment from Citadel or any other
holder of Outstanding Notes to engage in future debt exchange transactions. Even
if this Proposal 3 is approved, it is
25
possible
that the Company may need to seek additional stockholder approvals to cover
future equity issuances to Citadel or other holders of its Outstanding
Notes. For additional information regarding the dilution to
stockholders, see “Overview – Risk Factors- Risks Relating To Proposals 1, 2 and
3.”
In the
past six months the closing price of the Company’s Common Stock has ranged from
$0.59 to $2.58. Due to the volatility of the trading price of the
Company’s Common Stock and the Outstanding Notes, the Company cannot predict the
number of shares that would be issued in these exchange transactions, the
effective purchase price it would be obligated to pay for Outstanding Notes in
these exchange transactions or the market price of its Common Stock on the dates
on which it enters into these exchange transactions. Depending on
market conditions, the Company may enter into these exchange transactions
periodically over time for as much of the principal amount of the Outstanding
Notes as possible within the limits of this approval. In addition,
the Company may use any available authorized but unissued shares to conduct
exchange transactions in circumstances where the exchange transactions do not
require stockholder approval under the NASDAQ rules. Therefore, the
Company may issue in the aggregate more than 365 million shares of Common Stock,
or securities convertible into or exchangeable or exercisable for Common Stock
in future debt exchanges.
In order
to take advantage of any opportunity that arises to exchange the Outstanding
Notes and reduce its indebtedness, the Company is asking you to approve the
issuance of shares of Common Stock for use in exchange transactions involving
Outstanding Notes, on such terms and conditions that the Board of Directors, in
its discretion, considers favorable to the Company.
Vote
Required and Board of Directors’ Recommendation
The
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy and voting on the matter is necessary
under Rule 5635(e)(4) of the NASDAQ Marketplace Rules to approve the potential
issuance of Common Stock in debt exchange transactions under the applicable
provisions of NASDAQ Marketplace Rule 5635. Accordingly, failure to
vote and broker non-votes will not affect whether this proposal is approved, but
an abstention will have the same effect as a vote against the
proposal.
The E*TRADE Board of
Directors recommends that stockholders vote FOR the approval of the issuance of
Common Stock, or securities convertible into or exchangeable or exercisable for
Common Stock, in connection with in future debt exchange transactions in an
amount up to 365 million
shares of Common Stock under the applicable provisions of NASDAQ Marketplace
Rule 5635.
26
PROPOSAL
4. ADJOURNMENT, POSTPONEMENT OR CONTINUATION OF
THE SPECIAL
MEETING
Proposal
If at the
Special Meeting, the number of shares of the Company’s Common Stock present or
represented and voting in favor of Proposals 1, 2 or 3 is insufficient to
approve the Proposals, the Company’s management may move to adjourn, postpone or
continue the Special Meeting in order to enable its Board of Directors to
continue to solicit additional proxies in favor of Proposals 1, 2 or
3. In that event, you will be asked to vote only upon the
adjournment, postponement or continuation proposal and not on any other
Proposals.
In this
proposal, the Company is asking you to authorize the holder of any proxy
solicited by its Board of Directors to vote in favor of adjourning, postponing
or continuing the Special Meeting and any later adjournments. If the
Company’s stockholders approve the adjournment, postponement or continuation
proposal, the Company could adjourn, postpone or continue the Special Meeting,
and any adjourned session of the Special Meeting, to use the additional time to
solicit additional proxies in favor of Proposals 1, 2 or 3, including the
solicitation of proxies from stockholders that have previously voted against the
Proposals. Among other things, approval of the adjournment,
postponement or continuation proposal could mean that, even if proxies
representing a sufficient number of votes against the other Proposals have been
received, the Company could adjourn, postpone or continue the Special Meeting
without a vote on the other Proposals and seek to convince the holders of those
shares to change their votes to votes in favor of the approval of the
Proposals.
Vote
Required and Board of Directors’ Recommendation
The
adjournment, postponement or continuation proposal requires that holders of more
of the Company’s shares vote in favor of the adjournment, postponement or
continuation proposal than vote against the proposal. Accordingly,
abstentions and broker non-votes will have no effect on the outcome of the
proposal. No proxy that is specifically marked AGAINST Proposals 1, 2
or 3 will be voted in favor of the adjournment, postponement or continuation
proposal, unless it is specifically marked FOR the discretionary authority to
adjourn, postpone or continue the Special Meeting to a later date.
The
E*TRADE Board of Directors recommends that stockholders vote FOR the proposal to
adjourn, postpone or continue the Special Meeting.
27
ADVISORY
RESOLUTION ON STOCKHOLDER RIGHTS PLAN
The Company is seeking a stockholder
vote on a non-binding resolution to retain until its scheduled expiration the
Rights Agreement, dated of July 9, 2001, as amended, between the Company and
American Stock Transfer and Trust Company, (the “Stockholder Rights Plan”),
subject to earlier termination or amendment in accordance with the Stockholder
Rights Plan.
Background
The
Stockholder Rights Plan was adopted in 2001 by the Board of
Directors. It works through the distribution to stockholders of
securities (called “rights”) that would cause substantial dilution to an
acquiror if the acquiror obtains ownership of more than 10% of the Company’s
Common Stock or engages in an unsolicited takeover attempt that would result in
greater than 10% ownership. The Board is permitted to redeem the
rights at a nominal cost to facilitate an acquisition that the Board regards as
advantageous to stockholders. The Company’s Board of Directors in the
past has permitted ownership positions in excess of the 10% threshold by
SOFTBANK America, Inc., an early investor in the Company, and Citadel (up to the
amount of its existing investment plus approximately 25 million additional
shares of Common Stock).
Companies
typically adopt stockholder rights plans to deter the accumulation of shares by
bidders to achieve a position of substantial influence, or even control, without
paying stockholders a control premium. Stockholder rights plans are
intended to give company boards of directors negotiating leverage in such
situations and to assure that all stockholders are treated equally in an
acquisition of the company.
In recent
years, rights plans have been criticized for their anti-takeover effect and for
being unfriendly to investors and on the grounds that they entrench
management. Many companies, under pressure from investors, have
terminated their rights plans. For example, according to
Shark.Repellant.net, the percentage of S&P 500 companies that had a
rights plan in effect at year-end 2008 is 21%, compared to 45% and 57% at
year-end 2005 and 2003, respectively. It is worth noting, however,
that boards of directors of companies without a stockholder rights plan in
effect, for the most part, have the ability to adopt one very rapidly and
without stockholder approval if, in the exercise of their fiduciary duties, the
directors determine that it is in the best interest of their
stockholders.
Reason
for Request for Stockholder Vote
Neither the Company’s Bylaws nor other
governing documents or applicable law require a stockholder vote to retain the
Stockholder Rights Plan. As part of the final negotiations leading to the Debt
Exchange and the Public Equity Offering, Citadel requested that the Company
either terminate the Stockholder Rights Plan or to, at a minimum, exempt Citadel
and its affiliates from being covered by the Stockholder Rights
Plan. Conversely, the Company’s Board of Directors requested that
Citadel agree to certain arrangements to freeze the amount of Citadel’s Common
Stock ownership and to provide contractually that non-Citadel directors be
permitted to represent the stockholders other than Citadel in connection with a
range of affiliate and control-related transactions. Neither party
agreed to these arrangements. Instead the Board and Citadel agreed,
as a matter of good corporate governance, to seek a non-binding advisory vote of
its stockholders to assist the Board in determining whether to retain the
Stockholder Rights Plan.
After
completion of the Public Equity Offering, Citadel owns approximately 16% of the
Company’s common shares. Following the Debt Exchange, based on the
results of the Early Tender Period, the Company estimates that the Common Stock
owned by Citadel, together with the Common Stock issuable on conversion of the
securities acquired by Citadel in the Debt Exchange, ignoring the prohibitions
on conversion of these securities imposed by agreements Citadel currently has
with the OTS, will represent approximately 49% of the Company’s Common Stock on
a fully diluted basis. Citadel’s interests as a significant creditor
and largest stockholder of the Company may be different from the interests of
the Company’s other stockholders. Citadel is currently subject to
certain rules of the OTS regarding rebuttal of control over thrifts and thrift
holding companies. If these rules change, or if Citadel receives a
waiver or decides to become a thrift holding company, it will be in a position
to elect a substantial number of directors and to control, or substantially
impact, corporate policy.
28
Citadel has advised the Company that it
will vote the shares of Common Stock it owns representing no more than 9.9% of
the shares of Common Stock outstanding and entitled to vote at the Special
Meeting to TERMINATE the Stockholder Rights Plan and has agreed contractually to
vote the balance of the shares of Common Stock it owns in the same proportions
as the votes cast by all other stockholders.
The outcome of the advisory vote on
whether the Company should retain the Stockholder Rights Plan until its
scheduled expiration on July 9, 2011 or terminate the Stockholder Rights Plan
will not be binding on the Board of Directors. Therefore, there is no
“required vote” on this non-binding resolution. The Board of
Directors, in the exercise of its fiduciary duties, will consider the outcome of
the advisory vote in determining whether to retain or terminate the Stockholder
Rights Plan following such vote.
The E*TRADE Board of Directors makes
NO
RECOMMENDATION as to how stockholders should vote on the non-binding
resolution whether to retain the Stockholder Rights Plan until its scheduled
expiration on July 9, 2011 or terminate the Stockholder Rights
Plan.
29
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of the
Company’s Common Stock as of June 26, 2009 by (i) each director; (ii) each
executive officer listed in the Summary Compensation Table in the Company’s
Definitive Proxy Statement on Schedule 14A for the 2009 annual meeting of
stockholders filed with the SEC on April 24, 2009; (iii) all current directors
and executive officers as a group; and (iv) each person who is known to the
Company to beneficially own more than 5% of the outstanding shares of the Common
Stock of the Company. All shares are subject to the named person’s
sole voting and investment power except where otherwise indicated.
Name
and Address of Beneficial Owner (1)
Number
of Shares
of
Common Stock
Beneficially
Owned
Percent
of
Common
Stock
Beneficially
Owned (2)
Directors
and Executive Officers:
Donald
H. Layton (3)
5,226,722
*
Bruce
P. Nolop (4)
545,171
*
Michael
Curcio (5)
1,266,578
*
Greg
Framke (6)
1,269,224
*
Nicholas
Utton (7)
1,119,615
*
R.
Jarrett Lilien (8)
245,938
*
Robert
J. Simmons (9)
574,042
*
Matthew
Audette (10)
325,824
*
Robert
A. Druskin (11)
233,162
*
Ronald
D. Fisher (12)
277,277
*
Kenneth
C. Griffin (13)
180,072,820
16.14%
George
A. Hayter (14)
489,940
*
Frederick
W. Kanner (15)
133,162
*
Michael
K. Parks (16)
166,904
*
C.
Cathleen Raffaeli (17)
152,111
*
Lewis
E. Randall (18)
1,553,213
*
Joseph
L. Sclafani (19)
25,295
*
Donna
L. Weaver (20)
308,661
*
Stephen
H. Willard (21)
191,879
*
All
directors and current executive officers as a group
(15 persons)
Unless
otherwise noted, all addresses are c/o E*TRADE Financial Corporation, 135
E. 57th
Street, New York, New York10022.
(2)
Based
on 1,115,429,538 shares outstanding on June 26, 2009. See
“Proposal 2. Increase In Authorized Shares Of Common Stock – Reason
for Request for Stockholder Approval and Impact on Stockholders of
Approval or Disapproval of this Proposal” for a discussion of shares
issued and
30
outstanding
or reserved for issuance and commitments to issue shares as of June 26,2009. Shares of Common Stock subject to options that are exercisable
within 60 days of June 26, 2009 are deemed beneficially owned by the person
holding such options for the purpose of computing the percentage of ownership of
such person but are not treated as outstanding for the purpose of computing the
percentage of any other person.
(3)
Includes
450,088 shares of unvested restricted Common Stock subject to the
Company’s right of repurchase and 3,462,040 shares of Common Stock
issuable upon exercise of vested stock options exercisable within 60 days
of June 26, 2009.
(4)
Includes
545,171 shares of unvested restricted Common Stock subject to the
Company’s right of repurchase.
(5)
Includes
804,689 shares of unvested restricted Common Stock subject to the
Company’s right of repurchase and 415,542 shares of Common Stock issuable
upon the exercise of vested stock options exercisable within 60 days of
June 26, 2009.
(6)
Includes
729,247 shares of unvested restricted Common Stock subject to the
Company’s right of repurchase and 479,796 shares of Common Stock issuable
upon exercise of vested stock options exercisable within 60 days of June26, 2009.
(7)
Includes
582,134 shares of unvested restricted Common Stock subject to the
Company’s right of repurchase and 450,103 shares of Common Stock issuable
upon exercise of the vested stock options exercisable within 60 days of
June 26, 2009.
(8)
Based
on information most recently available to the
Company. Mr. Lilien resigned from employment with the
Company effective April 22, 2008. Includes 245,938
outstanding stock options which will expire on April 22,2009.
(9)
Based
on the information most recently available to the
Company. Mr. Simmons resigned from employment with the
Company effective May 6, 2008. Includes 543,250
outstanding stock options which will expire on May 6,2009.
(10)
Includes
297,161 shares of unvested restricted Common Stock subject to the
Company’s right of repurchase and 205,049 shares of Common Stock issuable
upon exercise of vested stock options exercisable within 60 days of June26, 2009.
(11)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 10,000 shares of Common Stock issuable upon
exercise of vested stock options exercisable within 60 days of June 26,2009.
(12)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 198,592 shares of Common Stock issuable upon the
exercise of vested stock options exercisable within 60 days of June 26,2009.
(13)
Includes
shares beneficially owned by Citadel Investment Group, L.L.C. (“Citadel
Investment Group”), which is controlled by Mr. Griffin. See
footnote 22. Mr. Griffin was appointed to the Company’s Board
of Directors effective on June 8,2009.
(14)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 190,348 shares of Common Stock issuable upon the
exercise of vested stock options exercisable within 60 days of June 26,2009.
(15)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 10,000 shares of Common Stock issuable upon
exercise of vested stock options exercisable within 60 days of June 26,2009.
(16)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 112,939 shares of Common Stock issuable upon
exercise of vested stock options exercisable within 60 days of June 26,2009.
(17)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 112,939 shares of Common Stock issuable upon
exercise of vested stock options exercisable within 60 days of June 26,2009.
31
(18)
Includes
637,100 shares held by Lewis or Martha Randall, as Trustees of the Lewis
E. and Martha E. Randall Living Trust dated August 16,
1984. Includes 220,000 shares held solely by Mr. Randall’s
wife. Mr. Randall disclaims beneficial ownership of such
shares. Also includes 20,291 shares of unvested restricted
Common Stock subject to the Company’s right of repurchase and 170,000
shares of Common Stock issuable upon exercise of vested stock options
exercisable within 60 days of June 26,2009.
(19)
Includes
25,295 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase.
(20)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 90,000 shares of Common Stock issuable upon
exercise of vested stock options exercisable within 60 days of June 26,2009.
(21)
Includes
20,291 shares of unvested restricted Common Stock subject to the Company’s
right of repurchase and 125,000 shares of Common Stock issuable upon
exercise of vested stock options exercisable within 60 days of June 26,2009.
(22)
These
securities are owned by various individual and institutional investors for
which Citadel Investment Group serves as investment adviser with power to
direct investments and/or sole power to vote the
securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934 Citadel Investment Group is deemed to be a
beneficial owner of such securities; however, Citadel expressly disclaims
that it is, in fact, the beneficial owner of such
securities. The number of shares is based on Amendment No. 10
to Schedule 13D as filed by Citadel Investment Group and its affiliated
reporting persons with the Securities and Exchange Commission on June 22,2009.
32
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
The
Company files annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document that the Company
files at the Public Reference Room of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a
website at www.sec.gov, from which interested persons can electronically access
the Company’s SEC filings.
The SEC
allows the Company to “incorporate by reference” certain information the Company
files with it, which means that the Company can disclose important information
to you by referring you to those documents. The information incorporated by
reference is considered to be part of this proxy statement, and information that
the Company files later with the SEC will automatically update and supersede
previously filed information, including information contained in this document.
The Company incorporates by reference its Current Reports on Form 8-K filed with
the SEC on May 14, 2009 and the following sections of its Annual Report on Form
10-K for the fiscal year ended December 31, 2008, filed with the SEC on
February 26, 2009 and Quarterly Report on Form 10-Q for the quarter ended
March 31, 2009, filed with the SEC on May 5, 2009, which include the information
required by Item 13(a) of Schedule 14A: “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,”“Consolidated Financial
Statements,”“Notes to Consolidated Financial Statements,”“Quantitative and
Qualitative Disclosures about Market Risk” and “Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.” Representatives of
Deloitte & Touche LLP, the Company’s principal accountants, are not expected
to be available to answer questions of stockholders.
The
Company is incorporating by reference into this document important business and
financial information that is not included in or delivered with this document.
This information is available without charge to security holders upon written or
oral request.
Any
person, including any beneficial owner, to whom this proxy statement is
delivered may request copies of reports, proxy statements or other information
concerning the Company, without charge, by written or telephonic request
directed to the Corporate Secretary at 135 East 57th Street, New York, New York10022 or 646-521-4406. If you would like to request documents, please
do so by [ ], 2009, in order to receive them before the Special
Meeting.
IMPORTANT
NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING
OR STOCKHOLDERS TO BE HELD ON [ ], AUGUST[ ],
2009.
Management
does not know of any matters to be presented at this Special Meeting of
Stockholders other than those set forth herein and in the Notice accompanying
this Proxy Statement.
33
COMMON
STOCK
PROXY
FOR SPECIAL MEETING OF STOCKHOLDERS
AUGUST
[ ], 2009
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned hereby appoints Donald H. Layton, Bruce P. Nolop, and Karl A.
Roessner and each or any of them as Proxies of the undersigned, with full power
of substitution, and hereby authorizes them to represent and to vote, as
designated below, all of the shares of Common Stock of E*TRADE Financial
Corporation, held of record by the undersigned on June 26, 2009 at the Special
Meeting of Stockholders of E*TRADE Financial Corporation to be held August
[ ], 2009, or at any postponement or adjournment
thereof.
1.
To
amend Article FOURTH of the Company’s Restated Certificate of
Incorporation to increase the number of authorized shares of common stock,
par value $0.01, from 1,200,000,000 to 4,000,000,000 (and,
correspondingly, increase the total number of authorized shares of capital
stock from 1,201,000,000 to
4,001,000,000);
/__/ FOR /__/ AGAINST /__/ ABSTAIN
2.
To
approve under the applicable provisions of NASDAQ Marketplace Rule 5635
the issuance of Class A Senior Convertible Debentures due 2019 and Class B
Senior Convertible Debentures due 2019 and the issuance of common stock
issuable upon conversion of the Class A Senior Convertible Debentures due
2019 and Class B Senior Convertible Debentures due 2019 in connection with
the proposed debt exchange transaction described in the proxy
statement;
/__/ FOR /__/ AGAINST /__/ ABSTAIN
3.
To
approve under the applicable provisions of NASDAQ Marketplace Rule 5635
the potential issuance of common stock, or securities convertible into or
exchangeable or exercisable for common stock, in connection with future
debt exchange transactions described in the proxy statement in an amount
up to 365 million shares; and
/__/ FOR /__/ AGAINST /__/ ABSTAIN
4.
To
adjourn, postpone or continue the Special
Meeting.
/__/ FOR /__/ AGAINST /__/ ABSTAIN
5. Non-binding
resolution on whether to retain the Company’s Stockholder Rights Plan until its
scheduled expiration on July 9, 2011 or terminate the Stockholder Rights
Plan.
/__/ RETAIN
RIGHTS
PLAN /__/ TERMINATE
RIGHTS
PLAN /__/ ABSTAIN
THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF PROPOSALS 1, 2, 3 AND
4. THE BOARD OF DIRECTORS MAKES NO RECOMMENDATION WITH REGARD TO THE
ADVISORY RESOLUTION IN ITEM 5. THIS PROXY, WHEN PROPERLY EXECUTED,
WILL BE VOTED AS DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO SUCH
DIRECTIONS ARE MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE ABOVE
PROPOSALS.
PLEASE
SIGN EXACTLY AS YOUR NAME(S) IS (ARE) SHOWN ON THE SHARE CERTIFICATE TO WHICH
THE PROXY APPLIES. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD
SIGN. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
Dated:
_____________________, 2009
__________________________________
(Signature)
__________________________________
(Additional
signature if held jointly)
PLEASE
COMPLETE, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE.
Dates Referenced Herein and Documents Incorporated by Reference
