UPDATE: J.C. Penney Enters into Stockholders Agreement with Pershing Square Capital Management

On August 19, 2011, J. C. Penney Company, Inc.

entered into a stockholders agreement with Pershing Square Capital Management, L.P., in its capacity as investment advisor to certain funds, and on behalf of its controlled affiliates. Pursuant to the August Agreement, Pershing Square will be prohibited from purchasing shares of common stock of 50¢ par value of the Company and derivative securities whose value is derived in whole or in part from the value of Common Stock in excess of 26.1% of the shares of Common Stock. Pershing Square will cause the number of shares of Common Stock as to which it possesses the power to vote (or direct the voting of) in excess of the Applicable Share Number to be present for quorum purposes and to be voted at a meeting of the Company's stockholders either (1) as recommend by the Company's Board of Directors or (2) in direct proportion to the manner in which all stockholders (other than Pershing Square and Vornado Realty Trust and its controlled affiliates) vote. As used in the August Agreement, the “Applicable Share Number” means the number of shares of Common Stock equal to the lesser of (a) 16.5% of the shares of Common Stock and (b) the greater of (i) 15% of the shares of Common Stock and (ii) the number of shares of common stock in clause (a) minus the aggregate number of shares of Common Stock of which Pershing Square has acquired beneficial ownership or holds economic exposure through derivative securities after the date of the August Agreement. The August Agreement provides that Pershing Square will not knowingly transfer shares of Common Stock to any person if, following such transfer, such person would beneficially own 10% or more of the shares of Common Stock, subject to certain limitations in the case of a tender or exchange offer with respect to which the Company accepts or takes no position. The August Agreement permits Pershing Square to designate one member of the Board of Directors, which member is currently William A. Ackman. The August Agreement will terminate if the Company fails to nominate Pershing Square's board designee in certain cases, if Pershing Square ceases to beneficially own at least 10% of the shares of Common Stock for one year or if Pershing Square is no longer required to report beneficial ownership of Common Stock on Schedule 13D or Schedule 13G under the Securities Exchange Act of 1934, as amended. In connection with the execution of the August Agreement, the Company has entered into an amendment to the Stockholder Protection Rights Agreement by and between the Company and Mellon Investor Services, LLC as the Rights Agent pursuant to which the Company declared a dividend of one preferred stock purchase right for each outstanding share of Common Stock. The Amendment will amend the definition of “Acquiring Person” in the Rights Agreement to permit Pershing Square to acquire derivative securities in accordance with the terms and conditions of the August Agreement.