FLUID AUDIO NETWORK, INC. STOCK RESTRICTION AGREEMENT
Exhibit
10.5
FLUID
AUDIO NETWORK, INC.
THIS
STOCK RESTRICTION AGREEMENT (the "Agreement")
is
entered into as of March 15, 2006 by and among Fluid Audio Network, Inc., a
Delaware corporation (the "Company")
and
Xxxxxx Xxxx (the "Stockholder").
RECITALS
A. The
Stockholder owns 431,338 of the outstanding shares of the Company's Common
Stock
(the "Shares").
B. The
Company and the Stockholder wish to enter into this Agreement in order to
(a)
protect the Company and the Company's other stockholders in the event the
Stockholder is no longer employed by the Company and (b) make the Company more
attractive to prospective investors and business partners.
NOW
THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1. Definitions.
1.1 "Anti-Dilution
Securities" means the securities issued by the Company pursuant to Section
3(b)
of the Restricted Stock Purchase Agreement.
1.2 "Cause"
means a termination of Stockholder's engagement or employment with
the
Company by the Company due to (A) Stockholder's (after the cure period set
forth
below)
gross negligence and/or misconduct (including but not limited to dishonesty,
fraud, deceit,
material incidents of insubordination, poor performance or excessive absenteeism
or tardiness), (B) the conviction (by trial, upon a plea or otherwise) of
Stockholder of, or the admission
of guilt by Stockholder of, a felony or a crime involving moral turpitude or
any
other act
of
dishonesty, fraud or deceit or is punishable by imprisonment of thirty (30)
days
or more, provided, however, that nothing in this Agreement shall obligate the
Company to pay any compensation or benefits during
any
period that Stockholder is unable to perform his duties hereunder due to any
incarceration, and also provided, however, that nothing shall prevent
Consultant's termination under another section of this Agreement if it provides
independent grounds
for termination, (C) a material breach of the Agreement or a breach of fiduciary
duty to the Company, or (D)
a
breach
of this Agreement that adversely affects the Company; provided that
the
Company may not terminate Stockholder's engagement pursuant to clauses (A)
or
(D), unless,
as to matters that are capable of cure, the Company has given Stockholder
written notice of such matters in specific detail and of its intention to so
terminate Stockholder if such matter is not
remedied within ten (10) days after written notice thereof from the
Company.
1.3 "Change
of Control" shall mean the occurrence of any one of the following:
(i) any "person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange
Act of 1934, as amended (the "Exchange Act") (other than the Company, a
subsidiary, an
affiliate, or a Company employee benefit plan, including any trustee of such
plan acting as trustee)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Company representing
fifty percent (50%) or more of the combined
voting
power of Company's then outstanding securities; (ii) a sale of assets involving
all
or
substantially all of die assets of Company; or (iii) a merger, reorganization
or
other transaction
of Company whether or not another entity is the survivor, pursuant to which
holders. of
all
the shares of capital stock of Company outstanding prior to the transaction
hold, as a group, less
than
.fifty
percent (50%) of the shares of capital stock of the Company outstanding after
the transaction; provided, however, that a transaction the sole purpose of
which
is to change the Company's
state of incorporation or to raise capital for the Company shall not constitute
a Chanue
of
Control.
1
1.4 "Option
Notice" has the meaning set forth in Section 2.3 hereof.
1.5 "Option
Period" has the meaning set forth in. Section 2.1 hereof.
1.6 "Option
Price" means $0.01 per share.
1.7 "Repurchase
Option" has the meaning set forth in Section 2.1 hereof
1.8 "Restricted
Shares" means, as of any date, the Shares and the Anti-dilution Securities
that remain subject to the Repurchase Option, as more specifically set forth
on
Schedule
I hereto and Section 2.1 hereof.
1.9 "Restricted
Stock Purchase Agreement" means that certain Restricted Stock
Purchase Agreement, dated August 1, 2004, by and between Stockholder and the
Company.
1.10
"Securities Act" means the Securities Act of 1933, as amended.
1.11
"Termination
Date" means the date on which Stockholder's employment or
consulting relationship with the Company terminates, whether voluntarily or
involuntarily, with
or
without cause, and including termination resulting from Stockholder's death
or
disability.
1.12
"Unrestricted Shares" means, as of any date, the Shares and the Anti-dilution
Securities
that
are
no longer subject to
the
Repurchase Option.
2. Right
of Companyto
Repurchase Shares and the Anti-Dilution Securities.
2.
I Repurchase
Option. The
Restricted Shares shall initially consist of 260,600 of the Shares and all
Anti-Dilution Securities. Effective as
of
the
Termination Date, the Company shall have an irrevocable_ exclusive
option
to
repurchase all or any portion of the Restricted
Shares (the "Repurchase Option") at the Option Price. The Repurchase Option
will
expire
with respect to 8,986 of the Restricted Shares on April 1, 2006, and with
respect to an additional 8,986 of the Restricted Shares on the first day of
each
calendar month thereafter until August I, 2008, so that the Repurchase Option
shall have expired with respect to all of the Restricted Shares on August 1,
2008. The Repurchase Option with respect to any Anti-Dilution Securities shall
expire in the same proportion as the Shares (i.e., if upon issuance of the
Anti-Dilution
Securities the Repurchase Right has expired with respect to 75% of the Shares,
and 12 months
remain until the Repurchase Right shall have expired with respect to all of
the
Shares, then
the
Repurchase Right
shall
apply to 25% of the Anti-Dilution Securities upon issuance and shall
expire ratably monthly over 12 months thereafter).
2
2.2 Repurchase
Option Exercise Period. Subject
to Section 2.5 hereof, the Repurchase
Option shall be exercisable for a period of sixty (60) days from the Termination
Date (such period, the "Option Period"); provided, however, that the Company
may
extend the Option Period for up to one (1) year from the Termination Date if
the
Board reasonably determines that such
extension is necessary to prevent a material adverse effect on the Company's
financial or operational
status. If the Company so extends the Option Period, during the period between
the date
of
delivery of notice extending the Option Period and the earlier of exercise
of
the Right of Repurchase
and expiration of such one-year period. the Stockholder hereby grants the
Company with
full
power of substitution an irrevocable proxy to vote such the shares subject
to
the Repurchase
Option (or execute a written consent) on all matters submitted to a vote of
stockholders.
lithe Company elects to extend the Option Period, it shall deliver written
notice of
same
to Stockholder within thirty (30) days of the Termination Date. A right to
a
Repurchase Option
with respect to fractional shares shall be rounded to the nearest whole
share.
2.3 Exercise
ofRepurchase
Option. Subject
to Section 2.5 hereof', the Company shall, within sixty (60) days after the
Termination Date, deliver written notice to Stockholder
of its election to exercise its Repurchase Option (the "Option Notice"), and
shall (A) deliver
a
check in the amount of the Option Price, (B) in the event Stockholder is
indebted to the Company,
cancel Stockholder's debt in an amount equal to the Option Price, or (C) take
combined
action under (A) and (13), such that the combined payment and cancellation
of
indebtedness
equals the Option Price. Upon delivery of the Option Notice and compliance
with
(A),
(B)
and/or (C) above. the Company shall become the legal and beneficial owner of
the
repurchased
securities and all rights and interest therein or related thereto, and the
Company shall have the right to transfer to its own name the number of
repurchased securities without further action
by
Stockholder.
2.4 Transfer
ofSecurities.
Stockholder
acknowledges and agrees that in addition
to the limitations set forth herein. the Shares and the Anti-dilution Securities
are or will be
subject to certain transfer restrictions set forth in the Restricted Stock
Purchase Agreement, and
that
certain Stockholders Agreement to be made by and among the Company (the
"Stockholders
Agreement"), Stockholder and certain other stockholders of the Company.
Stockholder
agrees that he shall not transfer any of the Shares or Anti-dilution Securities
except in
accordance with the terms and conditions set forth herein and in the Restricted
Stock Purchase Agreement
and the Stockholders Agreement. In the event the Stockholder transfers any
of
the Shares
or
Anti-dilution Securities, in addition such other restrictions on transfer that
may apply, any
Restricted Shares at the time of such transfer shall continue to be Restricted
Shares in the possession of such transferee.
2.5 Acceleration
ofLapse
of Repurchase
Rights Upon
Certain Events. Notwithstanding
the provisions of Section 2.1 hereof, the Repurchase Option shall expire with
respect
to all Restricted Shares existing upon the consummation of a Change or Control
or a termination
of Stockholder's engagement or employment with the Company without
Cause.
3
3. Company
Enforcement.
3.1 Company
Records. The
Company shall not transfer on its books any of the
shares of Common Stock held by the Stockholder without first ascertaining
compliance with all
of
the applicable provisions of this Agreement with respect to such
transfer.
3.2 Stop-Transfer
Orders.The
Stockholder agrees that, in order to ensure compliance
with the restrictions referred to herein, the Company may issue appropriate
"stop-transfer"
instructions to its transfer agent, if any, and that, if the Company transfers
its own securities,
it may make appropriate notations to the same effect in its own records. The
Company shall
not
be required to transfer on its books any Shares or Anti-dilution Securities
that
have been sold
or
otherwise transferred in violation of any of the provisions of this Agreement
or
any federal
or state securities laws, or to treat as owner of such Shares or Anti-dilution
Securities or to
accord
the right to vote or pay dividends to any purchaser or other transferee to
whom
such Shares
or
Anti-dilution Securities shall have been so transferred.
3.3 NoRegistration.
Stockholder
understands that the Shares and the Anti-dilution
Securities have not been registered under the Securities Act by reason of a
specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of
Stockholder's investment intent as expressed herein.
3.4 Restricted
Securities. Stockholder
understands that the Shares and the Anti-dilution
Securities are "restricted securities" under applicable U.S. federal and state
securities
laws and that, pursuant to these laws, he must hold the Shares and the
Anti-dilution Securities indefinitely unless they are registered with the
Securities and Exchange Commission and qualified by state authorities, or unless
an exemption from such registration and qualification requirements is available.
Stockholder acknowledges that the Company has no obligation to register or
qualify the Shares or the Anti-dilution Securities for resale. Stockholder
further acknowledges that if an exemption from registration or qualification
is
available, it may be conditioned
on various requirements including, but not limited to, the time and manner
of
sale, the
holding period for the Shares and the Anti-dilution Securities, and requirements
relating to the
Company which are outside of the Stockholder's control, and which the Company
is
under no obligation
and may not be able to satisfy.
3.5 No
Transfer. Without
limiting the representations set forth above, the Stockholder
will not make any disposition of all or any part of the Shares or the
Anti-dilution Securities which will result in the violation by the Stockholder
or by the Company of the Securities Act, the California Corporate Securities
Law
of 1968, or any other applicable securities
laws. Without limiting the foregoing, the Stockholder agrees not to make any
disposition
of all or any part of the Shares or the Anti-dilution Securities unless and
until:
4
(a) There
is
then in effect a registration statement under the Securities Act covering such
proposed disposition and such disposition is made in accordance with such
registration statement and any applicable requirements of state securities
laws;
or
(b) The
Stockholder has notified the Company of the proposed disposition and has
furnished the Company with a detailed statement of the circumstances surrounding
the proposed disposition, and, if reasonably requested by the Company, the
undersigned will have furnished to the Company a written opinion of counsel,
reasonably satisfactory
to the Company, that such disposition will not require registration of any
securities under
the
Securities Act or the consent of or a permit from appropriate authorities under
any applicable state securities law.
4. Legend-Requirement.All
certificates evidencing Shares and the Anti-dilution Securities
subject to this Agreement shall, during the term of this Agreement, bear such
restrictive
legends as the Company and the Company's counsel deem necessary or advisable
under
applicable law or pursuant to this Agreement, including, without limitation,
the
following;
"CERTAIN
OF THE SECURITIES REPRESENTED HEREBY MAY BE
SUBJECT
TO A RIGHT OF REPURCHASE BY THE COMPANY PURSUANT TO AN AGREEMENT RELATING TO
SUCH SECURITIES,
SHOULD THE PERSON INITIALLY ISSUED THESE SECURITIES CEASE TO BE EMPLOYED BY
THE
COMPANY OR ANY AFFILIATE THEREOF, AND SUCH SECURITIES MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IF SUCH SECURITIES ARE SUBJECT TO SUCH RIGHT OF
REPURCHASE."
5. Tax
Advice.The
Stockholder acknowledges that he has not relied and will not rely
upon
the Company with respect to any tax consequences related to the ownership,
purchase, or
disposition of the Shares and the Anti-dilution Securities. The Stockholder
assumes full responsibility for all such consequences and for the preparation
and filing of all tax returns and elections which may or must be filed in
connection with such Shares and the Anti-dilution Securities.
The Stockholder has executed and delivered to the Company an Acknowledgment
in
the
form
of Exhibit
A hereto.
6. Miscellaneous.
6.1 Binding
Effect.This
Agreement shall be binding upon, and inure to the benefit
of, the executors. administrators, heirs, legal representatives, successors,
and
assigns of the
parties hereto.
6.2 Governing
Law.This
Agreement shall be governed by, and construed in accordance with, the laws
of
the State of California excluding those laws that direct the application of
another jurisdiction's laws.
6.3 Counterparts.This
Agreement may be executed in counterparts, each of which
shall be deemed an original, but which together shall constitute one instrument.
This Agreement may also be executed and delivered by facsimile signature and
in
two or more counterparts, each of which shall be deemed an original, but all
of
which together shall constitute one
and
the same instrument.
5
6.4 Notices.Any
notice required or permitted by this Agreement shall be in writing
and shall be deemed sufficient when delivered personally or sent by telegram
or
fax or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage
prepaid, and addressed to the party to be notified at such party's address
as
set forth below
the
signatures of the parties or as subsequently modified by written
notice.
6.5 Entire
Areement.This
Agreement constitutes and contains the entire agreement
of the parties pertaining to its subject matter and supersedes any and all
prior
and contemporaneous agreements, representations, and understandings; provided
however, that this Agreement
amends only those provisions of the Stockholder's stock purchase agreement
with
the Company
relating to repurchase rights with respect to shares held by the
Stockholder.
6.6 Arbitration.Any
and
all disputes or controversies arising out of this Agreement,
except for the obligation of Stockholder to deliver certificates representing
the Shares
or
the Anti-dilution Securities, shall be finally settled by arbitration conducted
in Los Angeles
County in accordance with the then existing Commercial Arbitration Rules of
the
American Arbitration Association, and judgment upon the award rendered by the
arbitrators may be
entered in any court having jurisdiction thereof; provided that nothing in
this
Section 6.6 shall prevent
a
party from applying to a court of competent jurisdiction to obtain temporary
relief pending
resolution of the dispute through arbitration. The parties hereby agree that
service of and
notices in the course of such arbitration at their respective addresses as
provided for in Section
6.4 shall be valid and sufficient. If any party to this Agreement seeks to
enforce its rights under this Agreement, the non-prevailing party shall pay
all
costs and expenses incurred by the prevailing
party, including reasonable attorneys, fees.
6.7 Adjustments.This
Agreement, and the rights and obligations of the parties
hereunder, shall be interpreted insofar as practicable to account for any stock
combination.
stock dividend, stock split, recapitalization, or other similar transaction
occurring after
the
effective date of this Agreement.
6.8 Amendment.This
Agreement may he amended, and any term hereof waived,
by the written consent of the Company and the Stockholder.
6.9 Enforcement.If
any
portion of this Agreement is determined to
be
invalid or
unenforceable, the remainder shall be valid and enforceable to the maximum
extent possible.
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In
WITNESS WHEREOF, the parties hereto have executed this Stock Restriction
Agreement as of the date first above written.
| Company: |
FLUID AUDIO NETWORK, INC.
a Delaware corporation
|
|
| By: |
 |
|
| Xxxxxx Xxxxxxx, Chief Executive Officer | ||
|
Address:
_________________________________
_________________________________
|
||
 ____________________________________________
Xxxxxx Xxxx
|
||
|
Address: 0000
Xxxxxxxx Xxx
Xxx Xxxxxxx, XX 00000
|
||
CONSENT
OF SPOUSE
(if
applicable)
I,
Xxxxxxx Xxxx, spouse of Xxxxxx Xxxx, have read and hereby approve the foregoing
Agreement. By execution of this Agreement, I agree to be irrevocably bound
by
the terms of this Agreement as to my interest, whether as community property
or
otherwise, if any, in the Shares and the Anti-dilution Securities, including,
without limitation, the terms of Section 1 of this Agreement. I hereby appoint
my spouse as my attorney-in-fact with respect to any amendment or exercise
of
any rights under the Agreement.,
 |
|
|
Purchaser's Spouse, if applicable
(Xxxx
"N/A" if not
applicable)
|
7
