America Online 2014 Annual Report Download - page 42

exchangeable for our common stock, or the perception that such issuances and sales may occur, could adversely
affect the market price of our common stock and impair our ability to raise capital through the sale of additional
equity securities.
The convertible note hedge and warrant transactions may affect the value of our common stock.
In August 2014, we entered into convertible note hedge transactions with certain option counterparties. We
also entered into warrant transactions with the option counterparties pursuant to which we will sell warrants for
the purchase of our common stock. The convertible note hedge transactions are expected generally to reduce the
potential dilution to our common stock upon any conversion of our outstanding Notes and/or offset any cash
payments we are required to make in excess of the principal amount upon conversion of any Notes. The warrant
transactions could separately have a dilutive effect to the extent that the market price per share of our common
stock exceeds the strike price of the relevant warrants.
The option counterparties or their respective affiliates may modify their hedge positions by entering into or
unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock
or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do
so during any observation period related to a conversion of Notes or following any repurchase of notes by us in
connection with any fundamental change repurchase date or otherwise). This activity could also cause or avoid
an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
The option counterparties for our convertible note hedge transactions are financial institutions or affiliates of
financial institutions, and we are subject to the risk that one or more of such option counterparties may default under
the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties is not secured by
any collateral. If any option counterparty becomes subject to insolvency proceedings, we will become an unsecured
creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge
transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated
to the increase in our common stock market price and in volatility of our common stock. In addition, upon a default
by the option counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock.
We can provide no assurance as to the financial stability or viability of any option counterparty.
The terms of our outstanding Notes, Delaware law and provisions in our certificate of incorporation, bylaws
and stockholder rights plan could discourage, delay or prevent a change in control of us, thereby depressing
the market price of our common stock.
The holders of our Notes have the right, at their option, to require us to repurchase all or a portion of their
Notes if a fundamental change occurs prior to the maturity date of the Notes. In addition, if a make-whole
fundamental change occurs prior to the maturity date of the Notes, we will in some cases be required to increase
the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental
change. Furthermore, the indenture for the Notes prohibits us from engaging in certain mergers or acquisitions
unless, among other things, the surviving entity assumes our obligations under the Notes. These and other
provisions in the indenture could discourage, delay or prevent a third party from acquiring us.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation
Law also may discourage, delay, or prevent a third party from acquiring us by prohibiting us from engaging in a
business combination with an interested stockholder for a period of three years after the person becomes an
interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition,
our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to
acquire a majority of our outstanding voting stock. These provisions include the following:
• the ability of our board of directors to create and issue preferred stock without prior stockholder
approval;
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