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EXHIBIT 10.16
S CORPORATION REVOCATION, TAX ALLOCATION AND
INDEMNIFICATION AGREEMENT
This Revocation, Tax Allocation and Indemnification Agreement, dated as of
June 6, 1997 (the "Agreement"), is made by and between Syntel, Inc., a Michigan
corporation (the "Company"), and the persons identified on Schedule 1 hereto
who constitute all of the shareholders of the Company on the date hereof (each
individually, a "Shareholder," and collectively, the "Shareholders").
RECITALS:
A. The Company is an S corporation, within the meaning of section 1361 of
the Internal Revenue Code of 1986, as amended (the "Code"), and the
Shareholders are its only shareholders as of the date of this Agreement.
B. The Company intends to enter into an underwriting agreement to sell
shares of its common stock to the public in an initial public offering
registered under the Securities Act of 1933, as amended (the "Public
Offering").
C. The Shareholders are currently the only shareholders of the Company and
will continue to be so until immediately before the Closing (as defined below)
of the Public Offering.
D. In connection with the Public Offering, and in order to induce the
investment by the public in the Company, the Company and the Shareholders
desire to provide for an S corporation termination, tax allocation and
indemnification agreement in connection with tax periods prior to and following
the Termination Date (as defined below).
AGREEMENT:
NOW, THEREFORE, for mutual consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and the Shareholders do hereby
covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms, as used herein, have the following meanings:
"Accumulated Adjustments Account" shall have the meaning assigned to that
term by Section 1368(e)(1) of the Code.
"Closing" shall mean the closing and completion of the offering by the
Company of shares of its stock, as described in the Form S-1 Registration
Statement initially filed by the Company with the Securities and Exchange
Commission on June 6, 1997.
"Code" shall have the meaning set forth in Recital A.
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"C Short Year" shall have the meaning set forth in Section 1362 (o) (1)
(B) of the Code.
"Public Offering" shall have the meaning set forth in Recital B.
"S corporation" shall have the meaning set forth in Section 1361 of the
Code.
"S corporation Taxable Income" shall mean, for periods beginning on or
after the date the Company became an S corporation and ending with the close of
the last day of the S Short Year, the sum of (i) the Company's items of
separately stated income and gain (within the meaning of Section 1366(a)(1)(A)
of the Code) reduced, to the extent applicable, by the Company's separately
stated items of deduction and loss (within the meaning of Section 1366(a)(1)(A)
of the Code) and (ii) the Company's non-separately computed net income (within
the meaning of Section 1366(a)(1)(B) of the Code).
"S Short Year" shall have the meaning set forth in Section 1362 (e) (1)
(A) of the Code.
"Termination Date" shall mean the date on which the Company's status as an
S corporation is terminated by reason of revocation of the election for the
Company to be an S corporation pursuant to Section 1362(d)(1) of the Code,
which date shall be not earlier than the date the registration statement
related to the Public offering is declared effective by the Securities and
Exchange Commission and not later than two days prior to the date of the
Closing, as designated by the Company.
ARTICLE II
THE TERMINATION; TERMINATION PAYMENTS
2.1 TERMINATION OF S CORPORATION STATUS. The Company shall terminate its
status as an S corporation pursuant to an election, as permitted pursuant to
Section 1362(d)(1) of the Code, which election shall be made by the Company and
the Shareholders and shall be effective on the Termination Date.
2.2 TERMINATION PAYMENTS TO SHAREHOLDERS. Immediately prior to the
Termination Date, the Company shall distribute to the Shareholders (pro rata in
accordance with the relative number of shares of stock of the Company held by
each Shareholder) an amount equal to the "accumulated adjustments account" of
the Company as of the Termination Date. Such distribution shall take the form
of a promissory note of the Company in the form set forth as Exhibit A. For
purposes of this Section 2.2, the term "accumulated adjustments account" shall
have the meaning set forth in Section 1368(e) of the Code as determined by the
Chief Financial Officer of the Company in accordance with the Company's books
and records and without regard to any future adjustments to the Company's
taxable income as described in Section 2.3.
2.3 FUTURE ADJUSTMENTS. In the event that any future examination of any
tax return by any taxing authority results in a final determination increasing
the taxable income of the Company
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for the S Short Year, or for any period ending prior to the Termination Date,
the Company shall distribute to the Shareholders (pro rata in accordance with
the relative number of shares of stock of the Company held by each Shareholder)
within 30 days of such final determination, cash in an amount equal to the
product of (i) the amount of such increase in the taxable income of the Company
resulting from such final determination, multiplied by (ii) the highest
marginal federal income tax rate applicable to individuals for the taxable year
to which such adjustment relates.
2.4 SHORT TAXABLE YEARS. The parties acknowledge that the taxable year in
which the S corporation status of the Company is terminated will be an S
Termination Year for tax purposes, as defined in Section 1362(e)(4) of the
Code. Pursuant to Section 1361(e)(1) of the Code, the S Termination Year of
the Company shall be divided into two short taxable years: an "S Short Year"
and a "C Short Year." As defined in Section 1362(e)(1)(A) of the Code, the S
Short Year shall be that portion of the Company's S Termination Year ending on
the day immediately preceding the Termination Date. Pursuant to Section
1362(e)(1)(B) of the Code, that portion of the S Termination Year beginning on
the Termination Date and ending on the last day of the taxable year shall be
the C Short Year of the Company.
ARTICLE III
ALLOCATION OF INCOME
The Company and the Shareholders agree that for tax purposes (including
for purposes of determining the Company's S corporation Taxable Income for its
fiscal year ending December 31, 1997) the Company shall allocate its items of
income, gain, loss, deduction and credit for its fiscal year ending December
31, 1997 between the S Short Year and the C Short Year in accordance with
normal tax accounting rules (the so-called "closing of the books method"), as
permitted by Section 1362(a)(3) of the Code. The Company will make the
election permitted by Section 1362(e)(3) in a timely manner. The Shareholders
agree to consent to such election and to provide the Company with the statement
of consent of all Shareholders described in Section 1.1362-6(b) of the Treasury
Regulations. The Company and the Shareholders agree to make, and to provide
such information and obtain such consents as are necessary to make, any
comparable election required under applicable state and local income tax laws.
ARTICLE IV
TAXES
4.1 LIABILITY FOR TAXES INCURRED DURING THE S SHORT YEAR AND FOR TAX
PERIODS ENDING PRIOR TO THE TERMINATION DATE. Each Shareholder, severally and
not jointly, covenants and agrees that: (i) such Shareholder has duly included,
or will duly include, in such Shareholder's own federal, state, and local
income tax returns such Shareholder's respective allocable shares of all items
of income, gain, loss, deduction, or credit attributable to the S Short Year of
the Company or to any prior period (or that portion of any period) during which
the Company was an S corporation to the extent required by applicable law, (ii)
such returns shall, to the extent required by applicable law, include such
Shareholder's allocable share of S corporation Taxable Income of the Company
from
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all sources through and including the close of business on the last day of the
S Short Year of the Company, and (iii) such Shareholder shall, to the extent
required by applicable law, pay any and all taxes such Shareholder is required
to pay, as a result of being a Shareholder of the Company, for all taxable
periods (or that portion of any period) during which the Company was an S
corporation.
4.2 SHAREHOLDER INDEMNIFICATION FOR TAX LIABILITIES. The Shareholders,
severally (according to the relative percentage of the outstanding shares of
Company common stock owned by each Shareholder on the last day of any
applicable period to which a liability described below relates) and not
jointly, each hereby indemnify and hold the Company harmless from, against and
in respect of any unpaid income tax liabilities of the Company (including
interest and penalties imposed thereon) (i) which are attributable to the S
Short Year or any period ending prior to the Termination Date, or (ii) which
are incurred by the Company as a result of a final determination of an
adjustment (by reason of an amended return, claim for refund, audit, judicial
decision or otherwise) to the taxable income of the Shareholders for any period
(including, without limitation, the S Short Year) which (in the case of this
clause (ii)) results in a decrease for any period in the Shareholders' taxable
income and a corresponding increase for any period in the taxable income of the
Company.
4.3 COMPANY INDEMNIFICATION FOR TAX LIABILITIES. The Company hereby
indemnifies and agrees to hold the Shareholders harmless from, against and in
respect of income tax liabilities (including interest and penalties imposed
thereof), if any, incurred by the Shareholders as a result of a final
determination of an adjustment (by reasons of an amended return, claim for
refund, audit, judicial decision or otherwise) to the taxable income of the
Company for any period ending after the Termination Date (including, without
limitation, the C Short Year) which results in a decrease for any period in the
Company's taxable income and a corresponding increase for any period in the
taxable income of the Shareholders.
4.4 PAYMENTS. The Shareholders or the Company, as the case may be, shall
make any payment required under Sections 4.2 and 4.3 of this Agreement within
30 days after receipt of notice from the other party that a final determination
has occurred and a payment is due by such party to the appropriate taxing
authority.
4.5 REFUNDS. If the Company receives a refund of any income tax
(including penalties and interest) for any period prior to the Termination
Date, or as to which it has previously been indemnified by the Shareholders, it
shall pay an amount equal to such refund, within 30 days after receipt thereof,
to the Shareholders in accordance with the percentage of the outstanding shares
of Company common stock owned by each such Shareholder on the last day of any
applicable period to which the refund relates. If the Shareholders receive a
refund of any income tax (including penalties and interest) as to which they
have previously been indemnified by the Company, they shall, within 30 days
after receipt thereof, remit an amount equal to such refund to the Company.
4.6 NOTICE AND CONTROL OF PROCEEDINGS. Each of the Company and the
Shareholders agree that (i) within 10 days of receiving written notice of any
income tax examinations, claims,
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settlements, proposed adjustments or related matters that may affect in any way
the income tax liability of a party under this Agreement, such person shall
provide written notice thereof to such each other party hereto, and (ii) the
party or parties who would be responsible for the payment of the applicable
taxes if the matter in question were to be resolved adversely shall be
entitled, in his or its reasonable discretion and at his or its sole expense,
to handle, control and compromise or settle the defense thereof , so long as
such party or parties are acting diligently and in good faith. Such party or
parties shall keep the other party(ies) apprised of the status thereof and
shall consult with such other party(ies) concerning the conduct of the defense
thereof. Notwithstanding the foregoing, however, no party may take any action
that could adversely affect the tax liability of another party without such
other party's prior written consent, which shall not be unreasonably withheld.
The parties hereto shall execute all instruments required to effectuate the
provisions of this Section 4.6.
4.7 COOPERATION. The parties will make available to one another, as
reasonably requested, and to any taxing authority, all information, records or
documents relating to the liability for taxes covered by this Agreement and
will preserve any such information, records or documents until the expiration
of the applicable statute of limitations or extensions thereof. The party
requesting such information shall reimburse the other party for all reasonable
out-of-pocket costs incurred in producing such information.
4.8 COSTS. Except as otherwise provided herein, each party shall bear his
or its own costs in administering this Agreement.
4.9 CONDUCT OF THE COMPANY IN THE ORDINARY COURSE OF BUSINESS. From the
date hereof until the Termination Date, the Company will be operated in the
ordinary course of business, consistent with past practices (including, without
limitation, its receivables collection and expense payment practices).
ARTICLE V
MISCELLANEOUS
5.1 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which counterparts collectively
shall constitute an instrument representing the Agreement between the parties
hereto.
5.2 CONSTRUCTION OF TERMS. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors, any
rights or remedies under or by reason of this Agreement.
5.3 INTENT OF PARTIES. It is the parties' intent that the liability for
income taxes arising from the operations of the Company will be borne by the
Shareholders for all periods through and including the S Short Year and by the
Company for periods beginning with the C Short Year, and this Agreement shall
be construed so as most equitably to achieve such intent.
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5.4 GOVERNING LAW. This Agreement between the parties hereto shall be
governed by and construed in accordance with the substantive laws of the State
of Michigan without regard to its choice of law rules.
5.5 SEVERABILITY. In the event that any one or more of the provisions of
this Agreement shall be held to be illegal, invalid or unenforceable in any
respect, the same shall not in any respect affect the validity, legality or
enforceability of the remainder of this Agreement, and the parties shall use
their best efforts to replace such illegal, invalid or unenforceable provisions
with an enforceable provision approximating, to the extent possible, the
original intent of the parties.
5.6 NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery or telecopy (receipt confirmed, with a copy to be
sent by reputable overnight courier as set forth herein) to the party to be
notified, or one business day after delivery to a reputable overnight courier,
postage prepaid, and addressed to the party to be notified at the address
indicated for such party on the signature pages hereof, or at such other
address as such party may designate by ten (10) days, advance written notice to
the other parties.
5.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended,
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of each of the parties hereto;
provided, however, that no consent of the Company shall be effective unless
approved by a majority of the disinterested members of its Board of Directors.
5.8 FULL UNDERSTANDING. Each Shareholder represents and agrees that such
Shareholder fully understands his or her right to discuss all aspects of this
Agreement with such Shareholder's private attorney, and that to the extent, if
any, that the Shareholder desired, has availed himself or herself of such
right. Each Shareholder further represents that he or she has carefully read
and fully understands all of the provisions of this Agreement, that such
Shareholder is competent to execute this Agreement, that the Shareholder's
agreement to execute this Agreement has not been obtained by any duress and
that he or she freely and voluntarily enters into it, and that he or she has
read this document in its entirety and fully understands the meaning, intent
and consequences of this document.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
this first date set forth above.
SYNTEL, INC.
By:__________________________________
Xxxx Xxxxxx, Treasurer
_____________________________________
Xxxxxx Xxxxx
_____________________________________
Xxxxxx Xxxxx
_____________________________________
Xxxxxxxx Xxxxxx
_____________________________________
_____________________________________
_____________________________________
106831.3 DRM/BH
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SCHEDULE 1
SHAREHOLDERS
Xxxxxx Xxxxx
Xxxxxx Xxxxx
Xxxxxxxx Xxxxxx
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EXHIBIT A
DEMAND PROMISSORY NOTE
Executed at Troy, Michigan
________________, 1997
FOR VALUE RECEIVED, SYNTEL, INC., a Michigan corporation ("Maker"),
promises to pay the persons identified on Exhibit 1 hereto (each a "Payee" and,
collectively, the "Payees"), the Principal (as defined herein), with interest
on the balance of the Principal outstanding from time to time at a rate per
annum equal to the Interest Rate (as defined herein), compounded annually, on
the following terms and conditions:
1. DEFINITIONS. For purposes of this Demand Promissory Note, the
following capitalized terms shall have the meaning ascribed thereto:
(a) "Agreement" shall mean that certain S Corporation Termination, Tax
Allocation and Indemnification Agreement, dated as of ____________, 1997, by
and among Maker and Payees, a copy of which is attached hereto as Exhibit 2 and
is incorporated herein by this reference.
(b) "Interest Rate" shall mean the prime rate of interest an published by
the Wall Street Journal under the caption "Money Rates" on the Termination Date
(as defined in the Agreement).
(c) "Principal" shall mean a dollar amount not previously paid to Payees
equal to the amount payable by Maker to Payees pursuant to Section 2.2 of the
Agreement.
2. PAYMENT. The entire Principal balance (together with all accrued and
unpaid interest) shall be due and payable immediately upon the presentment of
written demand therefore by Payees to Maker; provided, however, that no such
demand may be made prior to , 1997 (45 days after issuance of
the Note). Principal and interest accrued hereunder shall be payable in lawful
money of the United States of America to Payees, at 0000 Xxxxxxxxx, Xxxxx 000,
Xxxx, Xxxxxxxx 00000, or at such other address an Payees may designate in
writing from time to time to maker. All payments to Payees hereunder shall be
made pro rata, to each Payee in proportion to the number of shares of stock of
the Company held by each Payee on the Termination Date an set forth on Exhibit
1.
3. PREPAYMENTS. The indebtedness evidenced by this Demand Promissory Note
may be prepaid in full or in part without penalty at the option of Maker at any
time.
4. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default under this Note:
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(a) Failure by Maker to pay Principal or interest under this Demand
Promissory Note when and as the same becomes due and payable and the
continuation of such failure for a period of five (5) days thereafter; or
(b) Maker shall: (i) be generally unable or admit in writing the inability
to pay Maker's debts as they become dues; (ii) have an order for relief entered
in any case commenced by Maker under the federal bankruptcy laws, an now or
thereafter in effect; (iii) commence a proceeding under any federal or state
bankruptcy, insolvency, reorganization or similar law, or have such a
proceeding commenced against Maker and either have an order of insolvency or
reorganization entered against Maker or have the proceeding remain undismissed
and unstayed for ninety (90) days; (iv) make an assignment, for the benefit of
creditors; or (v) have a receiver, trustee or custodian appointed for Maker for
the whole or any substantial party of maker's properties.
5. PENALTY INTEREST. Upon the occurrence of an Event of Default, and to
the extent permitted by applicable law, interest shall accrue on the amount of
unpaid Principal and interest at a rate per annum equal to the Interest Rate,
plus two percent (2%), until said Principal and interest is paid in full to
Payees.
6. WAIVER. Maker agrees (i) that the failure of Payees to exercise any
rights or remedies granted hereunder shall not constitute a waiver of such
rights or remedies or any other rights or remedies, or preclude the exercise of
such rights or remedies or any other rights or remedies at any time, and (ii)
that failure of Payees to exercise any rights or remedies granted hereunder, in
the event of a breach thereof or an Event of Default hereunder, shall not be
deemed a waiver of such breach or Event of Default or of any other or further
breaches or Events of Default. In addition, Maker hereby waives demand,
presentment for payment, notice of dishonor, protest and notice of protest, and
diligence in collection and bringing suit and agrees that Payee may extend the
time for payment, accept partial payment, or take, exchange, or release
security without discharging or releasing Maker.
7. GOVERNING LAW. This Note shall be construed and enforced in accordance
with the laws of the State of Michigan, without giving affect to principles of
conflicts of law.
8. RIGHTS AND REMEDIES. The rights and remedies set forth herein shall be
cumulative and in addition to any other or further rights and remedies
available at law or in equity. The invalidity or unenforceability of any term
or provision of this Demand Promissory Note, or the application of such term or
provision to any person or circumstance, shall not impair or affect the
remainder of this Demand Promissory Note and its application to other persons
and circumstances and the remaining terms and provisions hereof shall not be
invalid, but shall remain in full force and effect.
9. ASSIGNMENT BY MAKER. Assignment by Maker and the assumption by any
third party of Maker's obligations hereunder shall be made only with the
written consent of Payees.
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IN WITNESS WHEREOF, this Demand Promissory Note has been executed by Maker
as of the day and year first above written.
MAKER:
SYNTEL, INC.
By:_______________________________________
Xxxx Xxxxxx, Treasurer
BH/106831.3
ID/DRM
