ARTICLE I
ELECTION OF DIRECTORS
1.1. Election of Directors
ARTICLE II
RIGHT OF CO-SALE
ARTICLE III
RESTRICTIONS ON TRANSFER
ARTICLE IV
RIGHT OF FIRST OFFER
ARTICLE V
MANAGEMENT AND CONTROL
ARTICLE VI
MISCELLANEOUS
6.1. Transfer of Stock
6.2. Duration of Agreement
6.3. Legend
6.4. Severability; Governing Law
6.5. Insider Transactions
6.6. Injunctive Relief
6.7. Binding Effect
6.8. Modification or Amendment
6.9. Counterparts
6.10. Notices
6.11. No Other Agreements
6.12. Certificate of Incorporation and Bylaws
6.13. I.R.C. Section 305
6.14. Aggregation of Stock
SHAREHOLDERS AGREEMENT
[sometimes called an Investors’ Rights Agreement]
SHAREHOLDERS AGREEMENT, dated as of [Month] [Day], [Year], by and among NEWCO, Inc., a Delaware corporation (the “Company”), the investors listed on Schedule A hereto (collectively the “Investors” and individually an “Investor”), and those existing holders (collectively the “Founders”) of the Company’s outstanding $.01 par value per share common stock (the “Common Stock”) who appear on Schedule B hereto (the Investors and the Founders sometimes hereinafter collectively referred to herein as the “Shareholders” or individually as the “Shareholder”).
PREAMBLE
The Investors are purchasing shares of the Company’s Series A Cumulative Convertible Preferred Stock, $.01 par value per share (the “Series A Preferred Stock”) pursuant to that certain Stock Purchase Agreement of the same date herewith between the Company and the Investors (the “Agreement”), and the Founders hold shares of Common Stock of the Company in the proportions set forth on Schedule B; and
One of the conditions to the Closing as defined in the Agreement is the execution [by the holders of X% of the outstanding Series Preferred Stock and Y% of outstanding common stock] of this Agreement;
Certain of the Investors hold shares of the Company’s Series A Preferred Stock (the “Series A Preferred Stock”) and/or shares of Common Stock issued upon conversion thereof and possess registration rights, information rights, rights of first offer, and other rights pursuant to an Investors’ Rights Agreement dated as of _____________, between the Company and such Investors (the “Prior Agreement”).
The undersigned Investors who hold Series A Preferred Stock desire to terminate the Prior Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
ELECTION OF DIRECTORS
1.1. Election of Directors. At each annual meeting of the stockholders of the Company, or at each special meeting of the stockholders of the Company involving the election of directors of the Company, and at any other time at which stockholders of the Company will have the right to or will vote for or render consent in writing regarding the election of directors of the Company, then and in each event, the Shareholders hereby covenant and agree to vote all shares of capital stock of the Company presently owned or hereafter required by them (whether owned of record or over which any person exercises voting control) in favor of the following actions:
(a) to fix and maintain the number of directors at five (5);
(b) to cause and maintain the election to the Board of Directors of the Company of (i) two (2) representatives designated by the Investors, who shall initially be John Smith and Robert Brown (individually, an “Investor Director” and collectively the “Investor Directors”), and (ii) two (2) representatives designated by the Founders who shall initially be ___________ (individually a “Founder Director” and collectively the “Founder Directors”), and (iii) James Jones of New York (“Jones”).
None of the parties entitled to designate directors hereunder shall vote to remove either Jones or any director designated by any other party or group of Shareholders pursuant hereto, except for bad faith or willful misconduct. Each of the parties hereto shall vote or cause to be voted all shares owned by them or over which they have voting control (i) to remove from the Board of Directors any director designated by any party pursuant hereto at the request of such party, and (ii) to fill any vacancy in the membership of the Board of Directors with a designee of the party whose designee’s resignation or removal from the Board caused such vacancy.
Resignation of Directors. Concurrently with the consummation of a sale of substantially all the shares owned by either the Investors or the Founders, the sellers shall deliver the resignations of the member(s) of the Board of Directors of the Company who are represented by such seller’s interest.
The Company shall provide to each party entitled to designate directors hereunder prior written notice of any intended mailing of notice to stockholders for a meeting at which directors are to be elected, and any party entitled to designate directors pursuant hereto shall notify the Company in writing, prior to such mailing, of the person(s) designated by it or them as its or their nominee(s) for election as director(s).
The Investor Directors shall be selected by holders of a majority of the outstanding stock owned by the Investors, equating for this purpose Common Stock with the shares of Common Stock owned by the holders of Series A Preferred Stock as if such Preferred Stock were than converted.
If any party entitled to designate directors hereunder fails to give notice to the Company as provided above, it shall be deemed that the designee of such party then serving as director shall be its designee for reelection.
Each party entitled to designate directors hereunder hereby agrees that the Company shall not have any executive or similar committee of the Board of Directors unless the Board of Directors unanimously consents to the formation of such committee.
If Jones shall cease to serve for any reason, the Shareholders will negotiate in good faith a replacement for Jones and, failing agreement, Jones’ replacement shall be designated by the majority of the Shareholders.
Observer Rights. As long as Investor X owns not less than ___________ percent (____%) of the shares of Series A Preferred Stock it is purchasing hereunder (or an equivalent amount of Common Stock issued upon conversion thereof), the Company shall invite a representative of Investor X to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents and other materials it provides to its directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel.
ARTICLE II
RIGHT OF CO-SALE
If any Founder proposes to sell any Shares (“Co-Sale Shares”) to a party or affiliated group (the “Transferee”) in a transaction or series of related transactions involving the sale of more than [ ] shares or resulting in the Transferee for the first time controlling the power to vote more than 50% of the total votes for nominees to the Company’s board of directors, such Founder shall first give reasonable notice in reasonable detail to each Investor in sufficient time to allow each Investor to participate in the sale on the same terms and conditions as such Founder.
To the extent any prospective purchaser or purchasers refuses to purchase shares or other securities from an Investor exercising its rights of co-sale hereunder, the Founder shall not sell to such prospective purchaser or purchasers any Shares unless and until, simultaneously with such sale, the Founder shall purchase the offered shares or other securities from the Investor.
Notwithstanding the foregoing, the provisions of Sections 2(b) through 2(h) shall not apply to (i) any pledge of Co-Sale Shares made pursuant to a bona fide loan transaction that creates a meresecurity interest; (ii) any transfer to the ancestors, descendants or spouse or to trusts for the benefit of such persons of a Founder; or (iii) any bona fide gift; provided that (A) the transferring Founder shall inform the Investors of such pledgee, transfer or gift prior to effecting it and (B) the pledgee, transferee or donee shall furnish the Investors with a written agreement to be bound by and comply with all provisions of Section 2. Such transferred Co-Sale Shares will remain “Co-Sale Shares” hereunder, and such pledgee, transferee or donee shall be treated as a “Founder” for purposes of this Agreement.
Notwithstanding the foregoing, the provisions of Section 2 shall not apply to the sale of any Co-Sale Shares to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”); or (ii) to the Company.
In the event of a conflict between the Investors’ right of Co-Sale hereunder and the provisions, either in an agreement or the Company’s certificate of incorporation, requiring the Investor to offer Shares prior to sale to the Company or a third party (“Restrictions on Transfer”), the right of Co-Sale shall control. Nothing in this paragraph shall, however, diminish the Founders’ first refusal obligations under such restrictions on Transfer.
Drag-Along Rights. If at any time any one or more of the Shareholders (the “Seller(s)”) shall propose to undertake a sale of fifty percent (50%) or more of the Company’s then issued and outstanding shares of capital stock to a single person in a single transaction or series of related transactions (a “Proposed Transaction”) (or if any sale of Shares shall be mandated by paragraph 4(c)), then each Shareholder shall, if requested by such Seller(s), sell all of his Shares in such transaction on the same terms and for the same consideration. Such Seller(s) shall give each Shareholder written notice of any Proposed Transaction at least twenty (20) days prior to the date on which such transaction shall be consummated, including the terms and conditions thereof, and each Shareholder shall have the obligation to sell his Shares on such same terms and conditions in accordance with the instructions set forth in such notice. In such event, each Shareholder shall deliver the Share certificate(s) (accompanied by duly executed stock powers or other instrument of transfer duly endorsed in blank) representing the Shares to the Company or to an agent designated by the Company, for the purpose of effectuating the transfer of the Shares to the purchaser and the disbursement of the proceeds of such transactions to the Shareholder(s).
The Company may, at its option, deposit the consideration payable for the Shares with a depository designated by it and thereafter each Share certificate shall represent only the right to receive the consideration payable in the transaction.
ARTICLE III
RESTRICTIONS ON TRANSFER
ARTICLE IV
RIGHT OF FIRST OFFER
Right of First Offer. Subject to the terms and conditions specified in this Article IV, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Article IV, a Major Investor shall mean (i) any Investor who holds at least 10% of the original investment such Investor made in the Company pursuant to this Agreement and (ii) any person who acquires at least 10% of the Series A Preferred Stock (or the Common Stock issued upon conversion thereof) issued pursuant to this Agreement. (For purposes of this Section, “Investor” includes any general partners and/or affiliates of an Investor. An Investor shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate.)
Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class or its capital stock (“Shares”), the Company shall first make an offering of such Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail (“Notice”) to the Major Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares.
(b) Within 20 calendar days after [receipt] [giving] of the Notice, each Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock then held, by such Major Investor bears to the total number of shares of Common Stock of the Company (assuming full conversion and exercise of all convertible [or exercisable] securities) then held by all the Major Investors. The Company shall promptly, in writing, inform each Major Investor which purchases all the shares available to it (“Fully-Exercising Investor”) of any other Major Investor’s failure to do likewise. During the ten-day period commencing after [receipt of] such information [is given], each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares not subscribed for by the Major Investors equal to the proportion the number of shares of Common Stock issued and held, or issuable upon conversion of Series A Preferred Stock then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock issued and held, or issuable upon conversion of the Series A Preferred Stock then held, by all Fully-Exercising Investors who wish to purchase some of the unsubscribed shares.
(c) If all Shares are not elected to be obtained as provided in subsection (b), the Company may, during the 30-day period following the expiration of the period provided in subsection (b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 30 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith.
(d) The right of first offer in this Article shall not be applicable (i) to the issuance or sale of not to exceed [ ] Shares of Common Stock (or options therefor) to employees for the primary purpose of soliciting or retaining their employment or (ii) to or after consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Act pursuant to a registration statement on Form S-1, at an offering price of at least [$ ] per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization) and $________ in the aggregate, (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, or (v) the issuance of stock, warrants or other securities or rights to persons or entities with which the Company has business relationships [provided such issuances are for other than primarily equity-financing purposes and provided that at the time of any such issuance, the aggregate of such issuance and similar issuances in the preceding 12-month period do not exceed 2% of the then outstanding Common Stock of the Company (assuming full conversion and exercise of all convertible and exercisable securities)].
ARTICLE V
MANAGEMENT AND CONTROL
5.1. General. The business and affairs of the Company shall be managed, controlled and operated in accordance with its certificate of incorporation and bylaws, as the same may be amended from time to time, except that neither the certificate of incorporation nor the bylaws shall be amended in any manner that would conflict with, or be inconsistent with, the provisions of this Agreement.
5.2. Limitation on Certain Actions by the Company. Without the prior affirmative vote of the Majority Shareholders, the Company shall not:
(a) adopt or effect any plan of sale, merger, consolidation, dissolution, reorganization or recapitalization of the Company;
(b) offer for sale or sell all or substantially all of the assets of the Company; or
(c) issue, sell or deliver any capital stock, or any interest therein, of the Company; or
(d) amend or restate the Company’s certificate of incorporation or bylaws.
ARTICLE VI
MISCELLANEOUS
6.1. Transfer of Stock. Except as otherwise expressly provided by this Agreement, each Shareholder agrees not to transfer any of his shares of capital stock of the Company unless the transferee agrees in writing to be bound by the terms and conditions of this Agreement and executes a counterpart of this Agreement, and unless such Shareholder has complied with applicable law in connection with such transfer.
6.2. Duration of Agreement. The rights and obligations of the Company and each Shareholder under this Agreement shall terminate on the earliest to occur of the following:
(a) immediately prior to the consummation of the first underwritten public offering by the Company pursuant to an effective registration statement under the Securities Act of 1933 of any of its equity securities for its own account in which the aggregate gross proceeds to the Company equal or exceed $5,000,000, or when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the 1934 Act, whichever event shall first occur,
(b) immediately prior to the consummation of the sale of all, or substantially all, of the Company’s assets or capital stock or a merger, consolidation, reorganization or other business combination of the Company which results in the transfer of more than 50% of the voting securities of the Company, or
(c) the tenth anniversary hereof.
6.3. Legend. Each certificate representing shares of Series A Preferred Stock and Common Stock shall bear the following legend, until such time as the shares of Series A Preferred Stock and Common Stock represented thereby are no longer subject to the provisions hereof:
“The sale, transfer or assignment of the securities represented by this certificate are subject to the terms and conditions of a certain Shareholders Agreement dated March 31, 1991, among the Company and holders of its outstanding capital stock. Copies of such Agreement may be obtained at no cost by written request made by the holder of record of this certificate to the Secretary of the Company.”
6.4. Severability; Governing Law. If any provisions of this Agreement shall be determined to be illegal or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York.
6.5. The Company and the Shareholders agree that any transactions between the Company and its officers, directors, principal Shareholders or their affiliates, including, without limitation, any sales of capital stock or assets of the Company, will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties on an arm’s-length basis and will require the approval of a majority of the Company’s disinterested directors.
6.6. It is acknowledged that it will be impossible to measure the damages that would be suffered by the nonbreaching party if any party fails to comply with the provisions of this Agreement and that in the event of any such failure, the nonbreaching parties will not have an adequate remedy at law. The non-breaching parties shall, therefore, be entitled to obtain specific performance of the breaching party’s obligations hereunder and to obtain immediate injunctive relief. The breaching party shall not urge, as a defense to any proceeding for such specific performance or injunctive relief, that the nonbreaching parties have an adequate remedy at law. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.
6.7. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assignees, legal representatives and heirs. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. The administrator, executor or legal representative of any deceased, juvenile or incapacitated Shareholder shall have the right to execute and deliver all documents and perform all acts necessary to exercise and perform the rights and obligations of such Shareholder under the terms of this Agreement.
6.8. Modification or Amendment. Neither this Agreement nor any provisions hereof can be modified, amended, changed, discharged or terminated except by an instrument in writing, signed by the Shareholders of at least a majority of the shares of capital stock then subject to this Agreement held by such Shareholders, based upon voting power and calculated on an “as if converted” basis, together with the consent of Investors holding at least a majority of the outstanding shares of Series A Preferred Stock.
6.9. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument.
6.10. Notices. All notices to be given or otherwise made to any party to this Agreement shall be deemed to be sufficient if contained in a written instrument, delivered by hand in person, or by express overnight courier service, or by electronic facsimile transmission (with a copy sent by first-class mail, postage prepaid), or by registered or certified mail, return receipt requested, postage prepaid, addressed to such party at the address set forth herein or at such other address as may hereafter be designated in writing by the addressee to the addressor listing all parties.
All such notices shall, when mailed or telegraphed, be effective when received or when attempted delivery is refused.
6.11. No Other Agreements. Each Shareholder represents that he has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement, and no holder of Shares shall grant any proxy or become party to any voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement.
6.12. Certificate of Incorporation and Bylaws. The certificate of incorporation and bylaws of the Company may be amended in any manner permitted thereunder, except that neither the certificate nor the bylaws shall be amended in any manner that would conflict with, or be inconsistent with, the provisions of this Agreement.
6.13. I.R.C. Section 305. So long as any shares of Series A Preferred Stock remain outstanding, the Company will not, without approval of holders of a majority of the Series A Preferred Stock then outstanding, do any act or thing which would result in taxation of the holders of shares of the Series A Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended).
6.14. Aggregation of Stock. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.
IN WITNESS WHEREOF, the Company, the Investors and the Founders have executed this agreement in counterparts as of the date first above specified.
NEWCO, INC.
By:____________________________________
By:____________________________________
Investor
By:____________________________________
Founder
Dated:____________________________________
