KBR enters material agreement - 112006 - Form 8- K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
8-K
Current
Report
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of Report (date of earliest event reported): November 20,
2006
HALLIBURTON
COMPANY
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of
Incorporation)
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1-3492
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No.
75-2677995
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(Commission
File Number)
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(IRS
Employer Identification No.)
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1401
McKinney, Suite 2400, Houston, Texas
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77010
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(713)
759-2600
(Registrant’s
Telephone Number, Including Area Code)
Not
Applicable
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see
General
Instruction A.2. below):
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o
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
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INFORMATION
TO BE INCLUDED IN REPORT
ITEM
1.01. Entry
into a Material Definitive Agreement.
On
November 20, 2006, Halliburton Company entered into a master separation
agreement with KBR, Inc. and a tax sharing agreement with KBR in connection
with
KBR’s initial public offering of its common stock, which offering closed on
November 21, 2006. The master separation agreement provides for the separation
of KBR’s assets and businesses from those of Halliburton and also contains
agreements relating to the conduct of KBR’s initial public offering and future
transactions, and governs the relationship between Halliburton and KBR
subsequent to the separation and KBR’s initial public offering. These agreements
will continue in accordance with their terms after any distribution by
Halliburton of KBR’s common stock to its stockholders. Summaries of the master
separation agreement and the tax sharing agreement are set forth below, and
these agreements are filed as exhibits to this current report. Halliburton
is
the majority stockholder of KBR, owning approximately 81% of KBR’s outstanding
common stock following the completion of KBR’s initial public offering.
References herein to “Halliburton” mean Halliburton Company or Halliburton
Company and its subsidiaries, excluding KBR, as applicable. References herein
to
“KBR” mean KBR, Inc. or KBR, Inc. and its subsidiaries, as
applicable.
Master
Separation Agreement
Potential
Future Transactions
Concurrent
with the execution and delivery of the master separation agreement, KBR entered
into a registration rights agreement with Halliburton pursuant to which KBR
granted to Halliburton certain registration rights for the registration and
sale
of shares of KBR’s common stock Halliburton owns following completion of KBR’s
initial public offering. KBR also agreed in the registration rights agreement
to
cooperate with registrations and related offerings of Halliburton’s and certain
of its transferees’ shares.
In
addition to KBR’s agreements with Halliburton contained in the registration
rights agreement, KBR has agreed in the master separation agreement that KBR
and
KBR’s affiliates, at KBR’s expense, will use reasonable best efforts to assist
Halliburton in the transfer (whether in a public or private sale, exchange
or
other transaction) of all or any portion of its KBR common stock and to vest
in
the transferee all related rights and obligations that Halliburton assigns
to it
under the master separation agreement or any ancillary agreement.
Furthermore,
KBR has agreed to cooperate, at KBR’s expense, with Halliburton to accomplish a
tax-free distribution by Halliburton to its stockholders of shares of KBR’s
common stock, and KBR has agreed to promptly take any and all actions necessary
or desirable to effect any such distribution, including, without limitation,
entering into a distribution agreement in form and substance acceptable to
Halliburton. A form of distribution agreement is attached to the master
separation agreement and addresses, among other things, the elimination of
any
remaining intercompany arrangements between KBR and Halliburton and KBR’s cash
management arrangement with Halliburton, the conditions to a distribution and
the mechanics of the distribution. The terms and conditions of any distribution
agreement will supplement the provisions of the master separation agreement.
The
distribution may occur through a dividend, exchange or other transaction.
Halliburton will determine, in its sole discretion, whether such distribution
shall occur, the date of the distribution and the form, structure and all other
terms of any transaction, exchange or offering to effect the distribution.
A
distribution may not occur at all. At any time prior to completion of the
distribution, Halliburton may decide to abandon the distribution, or may modify
or change the terms of the distribution, which could have the effect of
accelerating or delaying the timing of the distribution.
Indemnification
General
Indemnification and Mutual Release.
The
master separation agreement provides for cross-indemnities that generally place
the financial responsibility on KBR and KBR’s subsidiaries for all liabilities
associated with the current and historical KBR businesses and operations, and
generally place on Halliburton and its subsidiaries (other than KBR) the
financial responsibility for liabilities associated with all of Halliburton’s
other current and historical businesses and operations, in each case regardless
of the time those liabilities arise. The master separation agreement also
contains indemnification provisions under which KBR and Halliburton each
indemnify the other with respect to breaches of the master separation agreement
or any ancillary agreement.
In
addition to KBR’s general indemnification obligations described above relating
to the current and historical KBR business and operations, KBR has agreed to
indemnify Halliburton for liabilities under various outstanding and certain
additional credit support instruments relating to KBR’s businesses and for
liabilities under litigation matters related to KBR’s business. KBR has also
agreed to indemnify Halliburton against liabilities arising from misstatements
or omissions in the prospectus for KBR’s initial public offering or the
registration statement of which it is a part, except for misstatements or
omissions relating to information that Halliburton provided to KBR specifically
for inclusion in the prospectus for KBR’s initial public offering or the
registration statement of which it forms a part. KBR has also agreed to
indemnify Halliburton for any misstatements or omissions in KBR’s subsequent SEC
filings and for information KBR provides to Halliburton specifically for
inclusion in Halliburton’s annual or quarterly reports following the completion
of KBR’s initial public offering.
In
addition to Halliburton’s general indemnification obligations described above
relating to the current and historical Halliburton business and operations,
Halliburton will indemnify KBR for liabilities under litigation matters related
to Halliburton’s business and for liabilities arising from misstatements or
omissions with respect to information that Halliburton provided to KBR
specifically for inclusion in the prospectus for KBR’s initial public offering
or the registration statement of which it forms a part.
For
liabilities arising from events occurring on or before the separation of the
companies at the time of KBR’s initial public offering, the master separation
agreement contains a general release. Under this provision, KBR has released
Halliburton and its subsidiaries, successors and assigns, and Halliburton has
released KBR and KBR’s subsidiaries, successors and assigns, from any
liabilities arising from events between KBR and/or KBR’s subsidiaries on the one
hand, and Halliburton and/or its subsidiaries (other than KBR) on the other
hand, occurring on or before the separation of the companies at the time of
KBR’s initial public offering, including in connection with the activities to
implement KBR’s separation from Halliburton, KBR’s initial public offering and
any distribution of KBR’s shares by Halliburton to its stockholders. The general
release does not apply to liabilities allocated between the parties under the
master separation agreement or any ancillary agreement or to specified ongoing
contractual arrangements.
FCPA
Indemnification.
Halliburton has been cooperating with the SEC and DOJ investigations and with
other investigations in France, Nigeria and Switzerland into the Bonny Island
project in Rivers State, Nigeria. KBR is also aware that the Serious Frauds
Office in the United Kingdom is conducting an investigation relating to the
activities of TSKJ. Halliburton’s Board of Directors has appointed a committee
of independent directors to oversee and direct the FCPA investigations.
Halliburton, acting through its committee of independent directors, will
continue to oversee and direct the investigations after KBR’s initial public
offering, and a special committee of KBR’s directors that are independent of
Halliburton and KBR will monitor the continuing investigations directed by
Halliburton.
Halliburton
has agreed to indemnify KBR and any of KBR’s greater than 50%-owned subsidiaries
as of the date of the master separation agreement for fines or other monetary
penalties or direct monetary damages, including disgorgement, as a result of
a
claim made or assessed by a governmental authority of the United States, the
United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement
thereof, relating to alleged or actual violations occurring prior to the date
of
the master separation agreement of the FCPA or particular, analogous applicable
foreign statutes and regulations identified in the master separation agreement
by KBR or KBR’s current or former directors, officers, employees, agents,
representatives or subsidiaries in connection with the construction and
subsequent expansion by TSKJ of a natural gas liquefaction complex and related
facilities at Bonny Island or in connection with any other project, whether
located inside or outside of Nigeria, including without limitation the use
of
agents in connection with such projects, identified by a governmental authority
of the United States, the United Kingdom, France, Nigeria, Switzerland or
Algeria in connection with the current investigations in those jurisdictions.
The Halliburton indemnity would not apply to any fines or other monetary
penalties or direct monetary damages, including disgorgement, assessed by
governmental authorities in jurisdictions other than the United States, the
United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement
thereof, or assessed against entities such as TSKJ or Brown & Root-Condor
Spa in which KBR does not have an interest greater than 50%. With respect to
any
greater than 50%-owned subsidiary of KBR’s that is not directly or indirectly
wholly owned, the Halliburton indemnity is limited to the proportionate share
of
any fines or other monetary penalties or direct monetary damages, including
disgorgement, equal to KBR’s ownership interest in such subsidiary as of the
date of the master separation agreement.
The
Halliburton indemnity will not cover, and KBR will be responsible for, all
other
losses in connection with the FCPA investigations. These other losses could
include, but are not limited to, KBR’s costs, losses or expenses relating
to:
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any
monitor required by or agreed to with a governmental authority appointed
to review future practices for compliance with FCPA law and any other
actions required by governmental authorities;
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third
party claims against KBR, which would include any claims against
KBR by
persons other than governmental authorities;
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special,
indirect, derivative or consequential damages, which are typically
damages
other than actual damages, such as lost profits;
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claims
by directors, officers, employees, affiliates, advisors, attorneys,
agents, debt holders or other interest holders or constituents of
KBR and
KBR’s subsidiaries in their capacity as such, including any indemnity
claims by individuals and claims for breach of contract;
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damage
to KBR’s business or reputation;
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adverse
effect on KBR’s cash flow, assets, goodwill, results of operations,
business, prospects, profits or business value, whether present or
future;
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threatened
or actual suspension or debarment from bidding or continued activity
under
government contracts; and
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alleged
or actual adverse consequences in obtaining, continuing or terminating
financing for current or future construction projects in which KBR
is
involved or for which KBR intend to submit bids.
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With
respect to third party claims, KBR understands that the government of Nigeria
gave notice in 2004 to the magistrate overseeing the investigation in France
of
a civil claim as an injured party in that proceeding. KBR is not aware of any
further developments with respect to this claim.
KBR
has
agreed with Halliburton that Halliburton in its sole discretion will continue
to
control the investigation, defense and/or settlement negotiations regarding
the
FCPA investigations to which Halliburton’s indemnification is applicable. KBR
has the right to assume control of the investigation, defense and/or settlement
negotiations regarding these FCPA investigations. However, in such case,
Halliburton may terminate the indemnity with respect to FCPA fines, penalties
and damages described above. Furthermore, Halliburton may terminate the
indemnity if KBR refuses to agree to a settlement of these FCPA investigations
negotiated and presented by Halliburton to KBR or if KBR enters into a
settlement of these FCPA investigations without Halliburton’s consent. In
addition, Halliburton may terminate the indemnity if KBR materially breaches
KBR’s obligation to consistently implement and maintain, for five years
following KBR’s separation from Halliburton, currently adopted business
practices and standards relating to the use of foreign agents. KBR has agreed
with Halliburton that no settlement by KBR of any claims relating to the FCPA
investigations to which Halliburton’s indemnification is applicable effected
without the prior written consent of Halliburton will be binding on Halliburton.
KBR also has agreed with Halliburton that no settlement by Halliburton of any
claims relating to these FCPA investigations that is effected without KBR’s
prior written consent will be binding on KBR. Notwithstanding the foregoing,
a
minority-owned KBR subsidiary as of the date of the master separation agreement
may control the investigation, defense and/or settlement of these FCPA
investigations solely with respect to such subsidiary, and may agree to a
settlement of claims relating to these FCPA investigations solely with respect
to such subsidiary without the prior written consent of Halliburton, and any
such control or agreement to a settlement shall not allow Halliburton to
terminate its indemnity of KBR and KBR’s greater than 50%-owned subsidiaries
with respect to FCPA fines, penalties and damages, including disgorgement,
described above.
KBR
has
agreed, at all times during the term of the master separation agreement and
whether or not KBR decides to assume control over the investigation, defense
and/or settlement negotiations regarding the FCPA investigations to which the
Halliburton indemnity applies, to assist, at Halliburton’s expense, with
Halliburton’s full cooperation with any governmental authority in Halliburton’s
investigation and defense of FCPA Matters. KBR’s ongoing obligation to cooperate
with Halliburton’s defense will require KBR to, among other things, at
Halliburton’s request:
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make
disclosures to Halliburton and governmental authorities regarding
the
activities of KBR, Halliburton and the current and former directors,
officers, employees, agents, distributors and affiliates of KBR and
Halliburton relating to these FCPA investigations;
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make
available documents, records or other tangible evidence and electronic
data in KBR’s possession, custody or control relating to these FCPA
investigations and to preserve, maintain and retain such evidence;
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provide
access to KBR’s documents and records in KBR’s possession, custody or
control relating to these FCPA investigations and use reasonable
best
efforts to provide access to KBR’s documents and records in the custody or
control of KBR’s current and former directors, officers, employees,
agents, distributors, attorneys and affiliates;
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use
reasonable best efforts to make available any of KBR’s current and former
directors, officers, employees, agents, distributors, attorneys and
affiliates who may have been involved in the activities under
investigation and whose cooperation is requested by Halliburton or
any
governmental authority; to recommend that such persons cooperate
fully
with these FCPA investigations or any prosecution of individuals
or
entities; and to take appropriate disciplinary action with respect
to
those persons who do not cooperate or cease to cooperate fully;
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provide
testimony and other information deemed necessary by Halliburton to
authenticate information to be admitted into evidence in any criminal
or
other proceeding;
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use
reasonable best efforts to provide access to KBR’s outside accounting and
legal consultants whose work includes or relates to these FCPA
investigations and their records, reports and documents relating
thereto;
and
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refrain
from asserting a claim of attorney-client or work-product privilege
as to
certain documents related to these FCPA investigations or related
to
transactions or events underlying these FCPA investigations.
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KBR
has
agreed to inform and disclose promptly to Halliburton any developments,
communications or negotiations between KBR, on the one hand, and any
governmental authority or third party, on the other hand, with respect to these
FCPA investigations, except as prohibited by law or legal restraint. Halliburton
may terminate its indemnification relating to FCPA Matters upon a material
breach by KBR of KBR’s cooperation obligations.
Until
such time, if ever, that KBR exercises its right to assume control over the
investigation, defense and/or settlement of the FCPA investigations to which
the
Halliburton indemnity applies, Halliburton, at its sole expense, will bear
all
legal and non-legal fees, expenses and other costs incurred on behalf of
Halliburton and KBR in the investigation, defense and/or settlement of these
matters (other than indemnification and advancement of expenses for KBR’s
current and former employees under contract or charter or bylaw requirements).
Thereafter, Halliburton and KBR will each be responsible for their own fees,
expenses and other costs.
KBR
and
Halliburton have agreed to provide to each other, upon request, information
relating to the FCPA investigations to which the Halliburton indemnity applies.
Until such time, if ever, that KBR exercises KBR’s right to assume control over
the investigation, defense and/or settlement of these FCPA investigations,
the
attorneys, accountants, consultants or other advisors of the Halliburton board
of directors or any special committee of independent directors thereof will,
from time to time and upon reasonable request, brief KBR’s board of directors or
any special committee of independent directors thereof formed for purposes
of
monitoring these FCPA investigations concerning the status of or issues arising
under or relating to Halliburton’s investigation of the FCPA Matters and its
defense and/or settlement of FCPA Matters. KBR also has agreed with Halliburton
that each party is subject to the duty of good faith and fair dealing in the
performance of such party’s rights and obligations under the master separation
agreement.
A
special
committee of KBR’s board of directors, composed of members independent of
Halliburton and KBR, will monitor, at KBR’s cost, the FCPA investigations by the
SEC and the DOJ and other governments and governmental agencies, Halliburton’s
investigation, defense and/or settlement thereof, and KBR’s cooperation with
Halliburton. These directors will have access to separate advisors and counsel
to assist in their monitoring, the cost of which will be borne by KBR. Any
decision to take control over the investigation, defense and/or settlement,
to
refuse to agree to a settlement of FCPA Matters negotiated by Halliburton or
to
discontinue cooperation with Halliburton would be made by this independent
committee.
Enforceability
of Halliburton FCPA Indemnification. Under the indemnity with Halliburton with
respect to FCPA Matters, KBR’s share of any liabilities for fines or other
monetary penalties or direct monetary damages, including disgorgement, as a
result of governmental claims or assessments relating to FCPA Matters would
be
funded by Halliburton and would not be borne by KBR or KBR’s public
stockholders. KBR’s indemnification from Halliburton for FCPA Matters may not be
enforceable as a result of being against governmental policy. KBR believes
that
the proposed Halliburton indemnification does not contravene the terms of any
statutes, rules, regulations, or policies on indemnity for securities law
violations promulgated by the SEC or Congress, and KBR has stated it will
vigorously defend the enforceability of the indemnification. However, the SEC,
the DOJ and/or a court of competent jurisdiction may not agree that the
indemnification from Halliburton is enforceable.
Barracuda-Caratinga
Indemnification.
Halliburton has agreed to indemnify KBR and any of KBR’s greater than 50%-owned
subsidiaries as of the date of the master separation agreement for all
out-of-pocket cash costs and expenses, or cash settlements or cash arbitration
awards in lieu thereof, KBR may incur after the effective date of the master
separation agreement as a result of the replacement of the subsea flow-line
bolts installed in connection with the Barracuda-Caratinga project, which are
referred to as “B-C Matters.” The Halliburton indemnity will not cover, and KBR
will be responsible for, all other losses in connection with the
Barracuda-Caratinga project. These other losses include, but are not limited
to,
warranty claims on the Barracuda-Caratinga project, damage claims as a result
of
any failure on the Barracuda-Caratinga vessels and other losses relating to
certain third party claims, losses that are special, indirect, derivative or
consequential in nature, losses relating to alleged or actual damage to KBR’s
business or reputation, losses or adverse effect on KBR’s cash flow, assets,
goodwill, results of operations, business, prospects, profits or business value,
whether present or future, or alleged or actual adverse consequences in
obtaining, continuing or terminating of financing for current or future
projects.
KBR
will
at its cost continue to control the defense, counterclaim and/or settlement
of
B-C Matters, but Halliburton will have discretion to determine whether to agree
to any settlement or other resolution of these matters. Halliburton has the
right to assume control over the defense, counterclaim and/or settlement of
B-C
Matters at any time. If Halliburton assumes control over the defense,
counterclaim and/or settlement of B-C Matters, and KBR refuses a settlement
proposed by Halliburton, Halliburton may terminate the indemnity relating to
B-C
Matters. KBR has agreed to inform and disclose promptly to Halliburton any
developments, communications or negotiations between KBR, on the one hand,
and
Petrobras and its affiliates or any third party, on the other hand, with respect
to B-C Matters, except as prohibited by law or legal restraint. Halliburton
may
terminate the indemnity relating to B-C Matters upon a material breach by KBR
of
its obligations to cooperate with Halliburton or upon KBR’s entry into a
settlement of any claims relating to B-C Matters without Halliburton’s consent.
KBR
has
agreed at its cost to disclose to Halliburton any developments, negotiation
or
communication with respect to B-C Matters. KBR will be entitled to retain the
cash proceeds of any arbitration award entered in KBR’s favor or in favor of
Halliburton, or any cash settlement or compromise in lieu thereof (other than
with respect to recovery of Halliburton’s attorneys’ fees or recovery of cash
costs and expenses advanced to KBR by Halliburton pursuant to Halliburton’s
indemnity for B-C Matters). KBR has agreed with Halliburton that no settlement
by KBR of any claims relating to B-C Matters effected without the prior written
consent of Halliburton will be binding on Halliburton. KBR has also agreed
with
Halliburton that no settlement by Halliburton of any claims relating to B-C
Matters that is effected without KBR’s prior written consent will be binding on
KBR.
Until
such time, if ever, that Halliburton exercises its right to assume control
over
the defense, counterclaim and/or settlement of B-C Matters, KBR, at its sole
expense, will bear all legal and non-legal expenses incurred on behalf of
Halliburton and KBR in the defense, counterclaim and/or settlement of B-C
Matters.
Bidding
Practices Investigations
The
master separation agreement provides that both Halliburton and KBR will use
their respective reasonable best efforts to assist each other in fully
cooperating with certain ongoing bidding practices investigations, and the
defense and/or settlement of any claims made by governmental authorities
relating to or arising out of such investigations, although Halliburton’s
indemnity to KBR does not apply to liabilities, if any, for fines, monetary
damages or other potential losses arising out of the bidding practices
investigations. KBR and Halliburton have agreed, for the term of the master
separation agreement and with respect to the bidding practices investigations,
to provide each other with access to relevant information, to preserve, maintain
and retain relevant documents and records, to make available and encourage
the
cooperation of personnel and to inform each other of relevant developments,
communications or negotiations.
Corporate
Governance
The
master separation agreement also contains several provisions regarding KBR’s
corporate governance that apply for so long as Halliburton owns specified
percentages of KBR’s common stock. KBR will use its reasonable best efforts to
avail itself of exemptions from certain corporate governance requirements of
the
New York Stock Exchange while Halliburton owns a majority of KBR’s outstanding
voting stock. As permitted under these exemptions, KBR has agreed that, so
long
as Halliburton owns a majority of KBR’s voting stock, Halliburton will have the
right to:
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designate
for nomination by KBR’s board of directors, or a nominating committee of
the board, a majority of the members of the board, including KBR’s
chairman; and
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designate
for appointment by the board of directors at least a majority of
the
members of any committee of KBR’s board of directors (other than the audit
committee or a special committee of independent directors).
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If
Halliburton’s beneficial ownership of KBR’s common stock is reduced to a level
of at least 15% but less than a majority of KBR’s outstanding voting stock,
Halliburton will have the right to:
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designate
for nomination a number of directors proportionate to its voting
power;
and
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designate
for appointment by the board of directors at least one member of
any
committee of KBR’s board of directors, to the extent permitted by law or
stock exchange requirements (other than the audit committee or a
special
committee of independent
directors).
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KBR
has
also agreed to use its reasonable best efforts to cause Halliburton’s nominees
to be elected.
Pursuant
to the master separation agreement, for so long as Halliburton beneficially
owns
a majority of KBR’s outstanding voting stock, KBR’s board of directors will have
an executive committee consisting solely of Halliburton designees. If
Halliburton’s beneficial ownership is reduced to less than a majority but at
least 15% of KBR’s outstanding voting stock, Halliburton will be entitled to
designate at least one Halliburton designee to the executive committee. The
executive committee will exercise the authority of the board of directors when
the full board of directors is not in session in reviewing and approving the
analysis, preparation and submission of significant project bids; managing
the
review, negotiation and implementation of significant project contracts; and
reviewing KBR’s business and affairs. In addition, as long as Halliburton
beneficially owns a majority of KBR’s outstanding voting stock, Halliburton’s
board of directors will review and approve all of KBR’s projects that have an
estimated value in excess of $250 million.
KBR
has
agreed in the master separation agreement that, until the earlier to occur
of a
distribution by Halliburton to its stockholders of its stock in KBR or the
date
that Halliburton ceases to control KBR for U.S. tax purposes, KBR will not,
without Halliburton’s prior written consent, issue any stock, or any securities,
options, warrants or rights convertible into or exercisable or exchangeable
for
KBR’s stock, if such issuance would cause Halliburton to fail to control KBR
within the meaning of Section 368(c) of the Internal Revenue Code, cause
Halliburton to fail to satisfy the stock ownership requirements of Section
1504(a)(2) of the Internal Revenue Code with respect to KBR, or cause a change
of control under the provisions of Section 355(e) of the Internal Revenue Code.
KBR has also agreed that, until the earliest to occur of a distribution by
Halliburton to its stockholders of its stock in KBR or the date that Halliburton
ceases to control KBR for U.S. tax purposes, KBR will refrain from issuing
any
of KBR’s stock (or any securities, options, warrants or rights convertible into
or exercisable or exchangeable for KBR’s stock) in settlement of any award
pursuant to any stock option or other executive or employee benefit or
compensation plan maintained by KBR, including without limitation any restricted
stock unit, phantom stock, option or stock appreciation right.
KBR
has
also agreed that for so long as Halliburton owns 15% or more of KBR’s
outstanding voting stock, KBR will not make discretionary changes to KBR’s
accounting principles and practices, and KBR will not select a different
accounting firm than Halliburton’s, which is currently KPMG LLP, to serve as
KBR’s independent registered public accountants.
KBR
has
agreed to grant to Halliburton a continuing subscription right to purchase
from
KBR, at the times set forth in the master separation agreement:
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such
number of shares of KBR’s voting stock as is necessary to allow
Halliburton to maintain its then-current voting percentage; and
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such
number of shares of KBR’s non-voting stock as is necessary to allow
Halliburton to maintain its then-current ownership percentage (or
80% of
the shares of each new class of non-voting stock that KBR may issue
in the
future).
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The
subscription right terminates, with respect to KBR’s voting stock, if
Halliburton owns less than 80% of KBR’s outstanding voting stock at any time
and, with respect to KBR’s non-voting stock, if Halliburton owns less than 80%
of KBR’s non-voting stock at any time. The subscription right does not apply
with respect to, among other things, certain issuances of shares by KBR pursuant
to any stock option or other employee benefit plan to the extent the issuance
would not result in Halliburton’s loss of control over KBR within the meaning of
Section 368(c) of the Internal Revenue Code, Halliburton’s failure to satisfy
stock ownership requirements of Section 1504(a)(2) of the Internal Revenue
Code
with respect to KBR, or a change of control under the provisions of Section
355(e) of the Internal Revenue Code.
Halliburton
may transfer all or any portion of its contractual corporate governance rights
described above to a transferee from Halliburton which holds at least 15% of
KBR’s outstanding voting stock.
KBR
has
agreed that, for so long as Halliburton beneficially owns a majority of KBR’s
outstanding voting stock, KBR will consistently implement and maintain
Halliburton’s business practices and standards with respect to internal controls
and the Halliburton Code of Business Conduct.
Halliburton
has also agreed, for so long as Halliburton owns at least 20% or more of KBR’s
outstanding voting stock, to renounce, to the fullest extent permitted by
applicable law, any and all rights it may have with respect to each investment,
commercial activity or other opportunity that is a “restricted opportunity” (as
such term is defined in KBR’s certificate of incorporation).
Credit
Support Instruments
In
the
ordinary course of KBR’s business, KBR enters into letters of credit, surety
bonds, performance guarantees, financial guarantees and other credit support
instruments. Prior to KBR’s separation from Halliburton, Halliburton and certain
of its affiliates agreed to be primary or secondary obligors on most of KBR’s
currently outstanding credit support instruments. KBR and Halliburton have
agreed that these credit support instruments will remain in full force and
effect until the earlier of: (1) the expiration of such instrument in accordance
with its terms or the release of such instrument by KBR’s customer, or (2) the
termination of the project contract to which such instrument relates or the
termination of KBR’s obligations under the contract.
In
addition, KBR and Halliburton have agreed that until December 31, 2009,
Halliburton will provide or cause to be provided additional guarantees and
indemnification or reimbursement commitments, or extensions of existing
guarantees and indemnification or reimbursement commitments, for KBR’s benefit
in connection with (a) letters of credit necessary to comply with KBR’s EBIC
contract, KBR’s Allenby & Connaught contract and all other contracts that
were in place as of December 15, 2005; (b) surety bonds issued to support new
task orders pursuant to the Allenby & Connaught contract, two existing job
order contracts for KBR’s G&I segment and all other contracts that KBR had
in place as of December 15, 2005; and (c) performance guarantees in support
of
these contracts.
KBR
has
agreed to use its reasonable best efforts to attempt to release or replace
Halliburton’s liability under the outstanding credit support instruments and any
additional credit support instruments for which Halliburton may become liable
following KBR’s initial public offering for which such release or replacement is
reasonably available. For so long as Halliburton or its affiliates remain liable
with respect to any credit support instrument, KBR has agreed to pay the
underlying obligation as and when it becomes due. KBR has agreed to indemnify
Halliburton for all liabilities in connection with KBR’s outstanding credit
support instruments and any additional credit support instruments relating
to
KBR’s business for which Halliburton may become obligated following KBR’s
initial public offering. Furthermore, KBR has agreed to pay a carry charge
for
continuance of Halliburton’s obligations with respect to KBR’s letters of credit
and surety bonds. For so long as any letter of credit for which Halliburton
may
be obligated remains outstanding prior to December 31, 2009, KBR will pay to
Halliburton a quarterly carry charge for continuance of the letters of credit
equal to the sum of: (i) 0.40% per annum of the then outstanding aggregate
principal amount of all letters of credit for such quarter meeting the
definition of “Performance Letters of Credit” or “Commercial Letters of Credit”
(as such terms are defined by KBR’s revolving credit agreement), and (ii) 0.80%
per annum of the then outstanding aggregate principal amount of all letters
of
credit constituting financial letters of credit for such quarter. Thereafter,
following December 31, 2009, these quarterly carry charges for letters of credit
will increase to 0.90% per annum and 1.65% per annum, respectively. For so
long
as any surety bond for which Halliburton may be obligated remains outstanding
prior to December 31, 2009, KBR will pay to Halliburton a quarterly carry charge
for continuance of the surety bonds equal to 0.25% per annum of the then
outstanding aggregate principal amount of such surety bonds for such quarter.
Thereafter, following December 31, 2009, the quarterly carry charge for
continuance of surety bonds increases to 0.50% per annum.
The
master separation agreement provides that, except in connection with the
existing credit support instruments, any additional credit support instruments
relating to KBR’s business described above for which Halliburton may become
obligated, or as otherwise contemplated by KBR’s cash management arrangement
with Halliburton and KBR’s intercompany notes with Halliburton, Halliburton will
have no obligation to, but may at its sole discretion, provide or continue
any
credit support to, or advance any funds to or on behalf of, KBR following the
completion of KBR’s initial public offering.
Dispute
Resolution
The
master separation agreement contains provisions that govern the resolution
of
disputes, controversies or claims that may arise between KBR and Halliburton
under the master separation agreement and the related ancillary agreements,
or
between KBR and Halliburton for a period of ten years after completion of KBR’s
initial public offering relating to KBR’s commercial or economic relationship to
Halliburton. These provisions contemplate that efforts will be made to resolve
disputes by escalation of the matter to senior management representatives of
KBR
and Halliburton who have not previously been directly engaged in the dispute.
If
such efforts are not successful, either KBR or Halliburton may submit the
dispute to final, binding arbitration.
Expenses
Except
as
otherwise provided in the master separation agreement, the ancillary agreements
or any other agreement between KBR and Halliburton relating to the separation
or
KBR’s initial public offering, Halliburton will pay all out-of-pocket costs and
expenses incurred in connection with the separation of KBR’s business from
Halliburton, KBR’s initial public offering, and any future distribution of KBR
shares to Halliburton’s stockholders, and in connection with preparing the
master separation agreement and the ancillary agreements. KBR will pay all
underwriting fees, discounts and commissions and other direct costs incurred
in
connection with KBR’s initial public offering.
Other
Agreements
The
master separation agreement provides that KBR will continue to perform certain
contracts relating to Halliburton’s energy services group and that Halliburton
will continue to perform certain contracts relating to KBR’s business, with the
benefits, liabilities and costs of such performance to be for the account of,
respectively, Halliburton and KBR. The master separation agreement also contains
provisions relating to, among other matters, confidentiality and the exchange
of
information, provision of financial information and assistance with respect
to
financial matters, preservation of legal privileges and the production of
witnesses, cooperation with respect to the investigation, litigation, defense
and/or settlement of certain litigation, and a one-year mutual agreement to
refrain from soliciting for employment the current employees of KBR or
Halliburton, as applicable.
Tax
Sharing Agreement
KBR
has
entered into a tax sharing agreement with Halliburton to govern the allocation
of U.S. income tax liabilities and to set forth agreements with respect to
other
tax matters. Under the Internal Revenue Code, KBR will cease to be a member
of
the Halliburton consolidated group (a deconsolidation) if at any time
Halliburton owns less than 80% of the vote or 80% of the value of KBR’s
outstanding capital stock, whether by issuance of additional shares by KBR,
by
Halliburton’s sale of KBR’s stock, by Halliburton’s spin-off distributions of
KBR’s stock, by Halliburton’s split-off offerings of KBR’s stock or by a
combination of these transactions. Halliburton will be responsible for filing
any U.S. income tax returns required to be filed for any company or group of
companies of the Halliburton consolidated group through the date of the
deconsolidation. Halliburton will also be responsible for paying the taxes
related to the returns it is responsible for filing. KBR will pay Halliburton
KBR’s allocable share of such taxes. KBR is obligated to pay Halliburton
for the utilization of net operating losses, if any, generated by Halliburton
prior to the deconsolidation to offset KBR’s consolidated federal income tax
liability.
Halliburton
will determine all tax elections for tax periods during which KBR is a member
of
the Halliburton consolidated group consistent with past practice. KBR will
prepare and file all tax returns required to be filed by KBR and pay all taxes
related to such returns for all tax periods after KBR ceases to be a member
of
the Halliburton consolidated group.
Generally,
if there are tax adjustments related to KBR arising after the deconsolidation
date, which relate to a tax return filed for a pre-deconsolidation period,
KBR
will be responsible for any increased taxes and KBR will receive the benefit
of
any tax refunds. KBR has agreed to cooperate with and assist Halliburton in
any
tax audits, litigation or appeals that involve, directly or indirectly, tax
returns filed for pre-deconsolidation periods and to provide Halliburton with
information related to such periods. KBR and Halliburton have agreed to
indemnify each other for any tax liabilities resulting from the failure to
pay
any amounts due under the terms of the tax sharing agreement.
KBR
and
Halliburton have agreed that, except as described in the following paragraph,
any and all taxes arising from KBR’s deconsolidation with the Halliburton
consolidated group will be the responsibility of Halliburton. KBR has also
agreed that KBR will elect to not carry back net operating losses KBR generates
in KBR’s tax years after deconsolidation to tax years when KBR was part of the
Halliburton consolidated group. KBR may utilize such net operating losses in
KBR’s tax years after deconsolidation (subject to the applicable carryforward
limitation periods) but only to the extent of KBR’s income in such tax
years.
If
Halliburton distributes KBR’s stock to its stockholders, KBR and Halliburton
will be required to comply with representations that are made to Halliburton’s
tax counsel in connection with the tax opinion expected to be issued to
Halliburton regarding the tax-free nature of the distribution of KBR’s stock by
Halliburton to Halliburton stockholders. In addition, KBR and Halliburton will
be required to comply with representations that are made to the Internal Revenue
Service in connection with Halliburton’s request for a private letter ruling
with respect to the distribution. Further, KBR has agreed not to enter into
transactions for two years after the distribution date that would result in
a
more than immaterial possibility of a change of control of KBR pursuant to
a
plan unless a ruling is obtained from the Internal Revenue Service or an opinion
is obtained from a nationally recognized law firm that the transaction will
not
affect the tax-free nature of the distribution. For these purposes, certain
transactions are deemed to create a more than immaterial possibility of a change
of control of KBR pursuant to a plan, and thus require such a ruling or opinion,
including, without limitation, the merger of KBR with or into any other
corporation, stock issuances (regardless of size) other than in connection
with
KBR employee incentive plans, or the redemption or repurchase of any of KBR’s
capital stock (other than in connection with future employee benefit plans
or
pursuant to a future market purchase program involving 5% or less of KBR’s
publicly traded stock). If KBR takes any action which results in the
distribution becoming a taxable transaction, KBR will be required to indemnify
Halliburton for any and all taxes incurred by Halliburton or any of its
affiliates, on an after-tax basis, resulting from such actions.
Depending
on the facts and circumstances, if Halliburton distributes KBR’s stock to its
stockholders, the distribution may be taxable to Halliburton if KBR undergoes
a
50% or greater change in stock ownership within two years after any
distribution. Under the tax sharing agreement, Halliburton is entitled to
reimbursement of any tax costs incurred by Halliburton as a result of a change
in control of KBR after any distribution. Halliburton would be entitled to
such
reimbursement even in the absence of any specific action by KBR, and even if
actions of Halliburton (or any of its officers, directors or authorized
representatives) contributed to a change in control of KBR. Actions by a third
party after any distribution causing a 50% or greater change in KBR’s stock
ownership could also cause the distribution by Halliburton to be taxable and
require reimbursement by KBR.
ITEM
9.01.
Financial
Statements and Exhibits.
(d) Exhibits.
10.1
Master
Separation Agreement between Halliburton Company and KBR, Inc. dated as of
November 20, 2006.
10.2 Tax
Sharing Agreement, dated as of January 1 , 2006, by and between Halliburton
Company, KBR Holdings LLC, and
KBR, Inc.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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HALLIBURTON
COMPANY
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Date:
November 27, 2006
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By:
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/s/ Margaret E.
Carriere |
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Margaret
E. Carriere
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Senior
Vice President and Secretary
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EXHIBIT
INDEX
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EXHIBIT
NUMBER
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EXHIBIT
DESCRIPTION
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10.1
Master
Separation Agreement between Halliburton Company and KBR, Inc. dated as of
November 20, 2006.
10.2
Tax
Sharing Agreement, dated as of January 1 , 2006, by and between Halliburton
Company, KBR Holdings LLC, and KBR, Inc.