Exhibit 10.7.1
STOCK RIGHTS AGREEMENT
This is a Stock Rights Agreement (the "Agreement"), dated August 13,
1998, between XXXXXXX X. XXXXXXXX ("Shareholder"), PAETEC CORP., a Delaware
corporation with its principal place of business at 000 Xxxxxxxxx Xxxxx,
Xxxxxxxx, Xxx Xxxx 00000 (the "Company"), PAETEC COMMUNICATIONS, INC., a
Delaware corporation and wholly-owned subsidiary of the Company with its
principal place of business at 000 Xxxxxxxxx Xxxxx, Xxxxxxxx, Xxx Xxxx 00000
("Subsidiary"), and XXXXXX X. XXXXXXXX ("Founder").
RECITALS
A. The Company is a Delaware corporation having 110,000,000 shares of
authorized capital stock, 10,000,000 of which are designated preferred stock,
75,000,000 of which are designated Class A common and 25,000,000 of which are
designated Class B common. Founder is one of the founding shareholders of the
Company.
B. Shareholder is an employee of the Subsidiary and is subject to the
terms of a non-competition covenant set forth in an Incentive Stock Option
Agreement, dated July 27, 1998, between Shareholder and the Company (the
"ISO Agreement").
C. The Company has offered to issue to Shareholder 5,000 shares of
Class B common stock of the Company at a purchase price of $.833 per share,
subject to certain restrictions.
D. The Company, Subsidiary, Shareholder, and Founder enter into this
Agreement for the purpose of confirming Shareholder's equity interest in the
Class B common stock of the Company and outlining the rights of Shareholder and
the restrictions imposed by the Company with respect to the Class B common stock
to be held by Shareholder.
TERMS
NOW, THEREFORE, in consideration of the following mutual promises, the
parties agree as follows:
1. Modification of ISO Agreement Provisions. To the extent that any
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provision of this Agreement modifies or contradicts any provision contained in
the ISO Agreement, this Agreement shall control.
2. Issuance of Shares.
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(a) The Company confirms its offer to issue 5,000 shares of Class
B common stock (the "Class B Shares") to Shareholder at a price of $.833 per
share, payable in
full upon issuance of the Class B Shares. A stock certificate evidencing the
Class B Shares shall be issued in the name of Shareholder upon receipt of this
executed Agreement and payment in full of the purchase price.
(b) In order to induce the Company to issue the Class B Shares,
Shareholder represents and warrants to the Company as follows:
(i) Shareholder (A) understands that an investment in the
Class B Shares is speculative due to factors including (but not limited to) the
start-up nature of the Company and the risk of economic loss from the operations
of the Company, but believes that such an investment is suitable for Shareholder
based upon Shareholder's financial needs, (B) can withstand a complete loss of
the investment in the Class B Shares, and (C) has the net worth to undertake
these risks.
(ii) Shareholder is acquiring the Class B Shares for the
personal account of Shareholder, with no present intention of reselling,
distributing or otherwise transferring the Class B Shares or any portion of the
Class B Shares to anyone else.
(iii) Shareholder understands and acknowledges that the
Class B Shares are being offered and sold under one or more exemptions provided
in the Securities Act of 1933, as amended (the "Securities Act"), Regulation D
promulgated thereunder and applicable New York State securities laws, and that
this transaction has not been reviewed or passed upon by the United States
Securities and Exchange Commission, the New York State Attorney General, or any
other federal or state agency.
(iv) Shareholder realizes that Shareholder must bear the
economic risk of investment for an indefinite period of time because (A) the
Class B Shares have not been registered under the Securities Act and cannot be
resold by Shareholder unless they are subsequently registered under the
Securities Act or an exemption from registration is available, (B) the
transferability of the Class B Shares is restricted by the terms of this
Agreement, and (C) there currently is no public market for the Class B Shares,
and Shareholder may not be able to liquidate the investment in the Class B
Shares in the event of an emergency. Shareholder has adequate means of providing
for Shareholder's current financial needs and personal contingencies, and has no
need for liquidity of investment with respect to the Class B Shares.
(v) Shareholder believes that Shareholder, either alone or
together with the assistance of professional advisor(s), has knowledge and
experience in business and financial matters sufficient to make Shareholder
capable of evaluating the merits and risks of an investment in the Class B
Shares.
(vi) Shareholder is fully familiar with the business of the
Company and its present and proposed operations. Shareholder has been given
reasonable
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opportunity to ask representatives of the Company questions concerning the
Company and making an investment in the Class B Shares. Shareholder has obtained
sufficient information to evaluate the merits and risks of an investment in the
Class B Shares.
(vii) Shareholder confirms that Shareholder has been advised
to rely on professional accounting, tax, legal and financial advisers with
respect to an investment in the Class B Shares and has obtained, to the extent
Shareholder deems it necessary, professional advice with respect to the risks
inherent in an investment in the Class B Shares and the suitability of an
investment in the Class B Shares in light of Shareholder's financial condition
and investment needs.
3. Restriction on Transfer of Class B Shares.
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(a) Shareholder may not sell, transfer, pledge, assign,
transfer, or otherwise encumber or dispose of, in any manner or by any means,
any Class B Shares that are subject to the Company's Purchase Option described
in Section 4 of this Agreement, except as set forth in subparagraph (b) below.
This restriction on transfer does not apply to any Class B Shares that, pursuant
to Section 4, no longer are subject to the Company's Purchase Option or to any
additional shares of capital stock of the Company that Shareholder might acquire
in the future.
(b) The restrictions on transfer of Shareholder's Class B
Shares, set forth in subparagraph (a) above, shall not operate to prohibit
Shareholder to selling, assigning, or transferring any or all of the Class B
Shares held by Shareholder to the following:
(i) Shareholder's spouse, parent(s), siblings, or natural
or adopted lineal descendants, or the spouses of Shareholder's parent(s),
siblings, or lineal descendants (collectively, together with the Shareholder,
referred to as "Shareholder's Family Members");
(ii) the trustee of a trust (including a voting trust)
principally for the benefit of Shareholder and/or one or more of Shareholder's
Family Members; provided that the trust may also grant a general or special
power of appointment to one or more of Shareholder's Family Members and may
permit trust assets to be used to pay taxes, legacies, and other obligations of
the trust or of the estates of one or more of Shareholder's Family Members
payable by reason of the death of any of Shareholder's Family Members; and
(iii) a corporation, partnership, or limited liability
company, a majority of the voting equity interest in which is owned by
Shareholder or by one or more of Shareholder's transferees under subparagraphs
(i) or (ii) of this subparagraph.
4. Repurchase of Class B Shares upon Termination of Employment with
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Subsidiary. Upon termination of Shareholder's employment with the Subsidiary,
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the Company
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shall have an option, but shall not be obligated, to repurchase (the "Purchase
Option") from Shareholder or Shareholder's personal representative all or a
portion of Shareholder's Class B Shares, as set forth in the following
subparagraphs.
(a) If Shareholder's employment with the Subsidiary terminates
due to voluntary separation or dismissal for Cause (as defined below), the
number of Class B Shares that are subject to the Company's Purchase Option shall
be determined as follows:
(i) The Company shall have the option to repurchase up to
100% of the Class B Shares should Shareholder's employment terminate at any time
prior to the first anniversary of Shareholder's employment with the Subsidiary.
(ii) The Company shall have the option to repurchase up to
60% of the Class B Shares should Shareholder's employment terminate on the first
anniversary date, or at any time between the first and second anniversary dates,
of Shareholder's employment with the Subsidiary.
(iii) The Company shall have the option to repurchase up to
40% of the Class B Shares should Shareholder's employment terminate on the
second anniversary date, or at any time between the second and third anniversary
dates, of Shareholder's employment with the Subsidiary.
(iv) The Company shall have the option to repurchase up to
20% of the Class B Shares should Shareholder's employment terminate on the third
anniversary date, or at any time between the third and fourth anniversary dates,
of Shareholder's employment with the Subsidiary.
(b) If Shareholder's employment with the Subsidiary terminates
because of Shareholder's death or disability, Shareholder or Shareholder's
personal representative may negotiate a transfer of all or a portion of
Shareholder's Class B Shares back to the Company at any time. With respect to
Class B Shares that were subject to the Company's Purchase Option and that are
not transferred back to the Company, the transfer restrictions set forth in
Section 3 above shall apply to the same extent that they would have applied if
Shareholder's employment had continued. This restriction on transfer does not
apply to any Class B Shares that would no longer have been subject to the
Company's Purchase Option, or to any additional shares of capital stock of the
Company that Shareholder might acquire in the future.
(c) In the event that Shareholder's employment with the
Subsidiary terminates for any reason not addressed in subparagraphs (a) and (b)
above, the Company's Purchase Option, together with all transfer restrictions
set forth in Section 3, shall fully expire effective as of the date of
termination.
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(d) The Company's Purchase Option shall fully expire on the
fourth anniversary of Shareholder's employment with the Subsidiary. Class B
Shares as to which the Company's Purchase Option has expired are no longer
subject to the transfer restrictions set forth in Section 3.
(e) To exercise its Purchase Option, the Company must notify
Shareholder or Shareholder's personal representative of its intention to
exercise its Purchase Option within 60 days after the date of termination of
Shareholder's employment with the Subsidiary. Should the Company fail to
exercise the Purchase Option within such 60-day period, the Class B Shares shall
no longer be subject to the transfer restrictions set forth in Section 3.
(f) In the event of a consolidation or merger of the Company
with or into any other person or entity, a sale of all or substantially all of
the assets of the Company to another person or entity, or an acquisition of more
than 50% of the capital stock of the Company by another person or entity, the
Company's Purchase Option shall be terminated as of the effective date of the
transfer. Notwithstanding the foregoing, the Company's Purchase Option shall not
be terminated or in any other way affected by an initial public offering of
stock by the Company.
5. Repurchase Price and Payment Terms. The price for all Class B
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Shares repurchased by the Company pursuant to the Purchase Option shall be the
fair market value of the Class B Shares as of the date of the exercise of the
Purchase Option by the Company. "Fair market value" shall be determined by the
accounting firm then retained by the Company, which shall promptly perform an
appraisal. The determination shall be made in accordance with generally
accepted accounting principles and shall be binding on all parties.
Payment shall be made in full for all repurchased Class B Shares
within 30 days after the date on which the Company delivers notice of its
intention to exercise the Purchase Option. Upon payment, Shareholder or
Shareholder's personal representative shall deliver all stock certificates for
repurchased Class B Shares, properly endorsed in blank, to the Company or its
designee.
6. Stockholders' Agreement and Proxy. Concurrently with the
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execution of this Agreement and the issuance of the Class B Shares, Shareholder
is executing and delivering a Stockholders' Agreement and proxy appointing
Xxxxxx X. Xxxxxxxx Shareholder's attorney-in-fact and proxy to vote all Class B
Shares now or hereafter owned by Shareholder at any meeting of shareholders,
regular or special, whenever called, and for whatever purpose. Copies of the
Stockholders' Agreement and proxy shall be filed with the Secretary of the
Company, and the proxy shall be registered in the stock books of the Company.
Any transfer of the Class B Shares is subject to the terms of the Stockholders'
Agreement and proxy.
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7. Legends. Each certificate for Class B Shares owned by Shareholder
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shall bear the following legends:
(a) The shares represented by this certificate were
issued to the shareholder with restrictions. Neither the
shares, nor any interest in them, may be sold, transferred,
assigned, pledged, hypothecated, or otherwise disposed of,
unless that transfer is expressly permitted by a stock rights
agreement, including any amendment thereto, between the
shareholder and the Company, a copy of which is on file at
the office of the Company in Fairport, New York.
(b) The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended,
and may not be transferred in the absence of such registration
unless the Company receives an opinion of counsel reasonably
acceptable to it stating the such sale or transfer is exempt
from registration.
(c) The shares represented by this certificate are
subject to a Stockholders' Agreement and to a proxy in favor
of Xxxxxx X. Xxxxxxxx, a copy of which is on file with the
Company. Any transferee of the shares represented by this
certificate shall take the shares subject to the terms of
the Stockholders' Agreement and proxy.
With respect to Class B Shares that are subject to the Company's Purchase Option
described in Section 4 of this Agreement, however, Shareholder shall be entitled
to a certificate without the legend set forth in subparagraph (a), evidencing
any Class B Shares as to which the Purchase Option has expired.
8. Non-competition. The non-competition covenant between Shareholder
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and the Company, set forth in subparagraph 8(a)(iii) of the ISO Agreement, is
modified to read as follows:
(iii) hold five percent (5%) or more of the shares of a
corporation, or serve as a partner, officer, member, manager,
director, consultant or other representative of any third party, which
engages in any line of business competitive with the Company or any
affiliate of the Company (including any subsidiary) anywhere in the
world.
9. Co-Sale Rights.
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(a) In the event that Founder receives a bona fide offer from
any person to purchase any of Founder's Common Stock (the "Founder's Shares") in
a private transaction exempt from registration under the Securities Act, Founder
shall give Shareholder
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notice of his intention to sell Founder's Shares, describing the amount of
Founder's Shares proposed to be transferred, the identity of the proposed
transferee, and the price and terms upon which he proposes to make such transfer
(the "Transfer Notice").
(b) Within fifteen (15) days after delivery of the Transfer
Notice, Shareholder may elect to sell up to Shareholder's pro rata share of the
total number of shares to be purchased by the transferee described in the
Transfer Notice by giving written notice thereof to Founder and tendering to
Founder a certificate representing the shares to be sold, properly endorsed for
transfer, with written instructions to transfer the shares to the transferee
described in the Transfer Notice upon receipt of payment for such shares from
such transferee for the benefit of Shareholder. Founder shall thereupon notify
the transferee of the co-sale arrangements hereunder, and instruct the
transferee to deliver payment for the shares to be purchased from Shareholder to
Shareholder. For the purpose of the co-sale right set forth in this Section, the
pro rata share of Shareholder shall be determined based on the number of Shares
held by Shareholder that are subject to co-sale rights, divided by the sum of
(A) the total number of shares of common stock held by all stockholders of the
Company (including Shareholder) holding similar co-sale rights plus (B) the
number of shares of common stock held by Founder at the date of the Transfer
Notice (assuming conversion of all convertible securities and exercise of all
options and warrants). The resulting percentage shall then be multiplied by the
number of Shares proposed to be purchased by the transferee to determine the
actual number of Shares eligible for sale by Shareholder.
(c) In the event Shareholder declines to exercise the co-sale
right as allowed by this Section, Founder may, within 90 days after the date on
which Shareholder's co-sale rights lapsed, transfer some or all of Founder's
Shares which were the subject of the Transfer Notice at a price and on terms no
less favorable to the transferee(s) than specified in the Transfer Notice.
Founder's Shares transferred in accordance with the provisions of this Section
shall no longer be subject to the restrictions on Founder's Shares forth in this
Section. After the expiration of said 90-day period, Founder shall not transfer
any of Founder's Shares without again complying with this Section.
(d) Any transfer of Founder's Shares without consideration to a
family member of Founder or a trust or custodian for the benefit of Founder or a
family member of Founder, and transfers pursuant to a pledge to secure
indebtedness, shall not be subject to the provisions of this Section, provided
that the transferee agrees in writing to be bound by the provisions of this
Section with respect to any subsequent transfer of such shares.
10. Piggy-Back Registration Rights.
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(a) If at any time or from time to time the Company shall
determine to register any of its equity securities, either for its own account
or the account of a security holder or holders (other than a registration of
securities relating solely to employee benefit plans or to effect a merger or
other reorganization), the Company will promptly give to
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Shareholder written notice thereof and, upon the written request of Shareholder,
include in such registration (and any related qualification under blue sky laws
or other compliance), and in any underwriting involved therein, all the Class B
Shares specified in the written request made within 10 business days after
receipt of such written notice from the Company.
(b) If the registration of which the Company gives notice is for
a registered public offering involving an underwriting, the Company shall so
advise Shareholder as a part of the written notice given to Shareholder. In such
event the right of any Shareholder to registration pursuant to this Section
shall be conditioned upon Shareholder's participation in such underwriting, and
the inclusion of Class B Shares in the underwriting shall be limited to the
extent provided herein. Shareholder (together with the Company and the other
holders distributing their securities through such underwriting) shall enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may exclude some or all of the Class B Shares or securities
of other holders of similar registration rights from such registration. The
Company shall so advise Shareholder and other stockholders distributing their
securities through such underwriting, and the number of Class B Shares or
securities of other holders of similar registration rights that may be included
in the registration and underwriting, as determined by the managing underwriter,
shall be allocated on a pro rata basis. If Shareholder disapproves of the terms
of any such underwriting, Shareholder may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall continue to be subject to the terms of this Section.
(c) The Company shall have the right to terminate or withdraw
any registration initiated by it under this Section prior to the effectiveness
of such registration whether or not Shareholder has elected to include
securities in such registration.
(d) All expenses associated with the registration (including,
without limitation, registration, qualification and filing fees, printing
expenses, blue sky fees, and fees and disbursements of counsel and accountants
for the Company) shall be borne by the Company. Selling expenses, including
underwriters' discounts, shall be borne by Shareholder pro rata in proportion to
the number of securities being registered.
(e) In the case of each registration under this Section, the
Company will:
(i) prepare and file a registration statement with respect
to such securities and use its best efforts to cause such registration statement
to become and remain effective for at least 45 days or until the distribution
described in the registration statement has been completed, whichever first
occurs;
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(ii) furnish to Shareholder such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as Shareholder may reasonably request in order to
facilitate the public offering of the Class B Shares; and
(iii) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by
Shareholder, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify as a foreign corporation or as a
dealer in securities or to file a general consent to service of process in any
such states or jurisdictions in which it has not already done so and except as
may be required by the Securities Act.
(f) The Company will indemnify Shareholder against all expenses,
claims, losses, damages or liabilities (or actions in respect thereof), arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, or any violation by the Company of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
Shareholder for any legal and any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission, or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by Shareholder.
(g) Shareholder will, if Class B Shares held by such Shareholder are
included in the securities as to which such registration is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Shareholders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred, as such
expenses are incurred, in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that
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such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by Shareholder and
stated to be specifically for use therein.
(h) Shareholder shall furnish to the Company such information
regarding Shareholder, the Class B Shares held by Shareholder, and the
distribution proposed by Shareholder as the Company may request in writing and
as shall be required in connection with any registration referred to in this
Agreement.
(i) The registration rights granted to Shareholder in this
Section shall expire at such time (if ever) as Shareholder is free to sell the
Class B Shares under Rule 144 promulgated under the Securities Act (or any
successor thereto) without limitation as to volume or manner of sale
restrictions.
11. Notices. All notices and communications under this Agreement
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shall be in writing and shall be given by personal delivery or by registered or
certified mail, return receipt requested, addressed to the respective residences
of Shareholder and Founder set forth below or to such other address as may be
designated by Shareholder or Founder, and to the principal office of the
Company. Notice shall be deemed given upon personal delivery or upon receipt.
12. Miscellaneous.
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(a) Neither this Agreement, nor any action taken under it, shall
be construed as creating any limitation or restriction upon any right that
Subsidiary would otherwise have to terminate the employment of Shareholder at
any time for any reason.
(b) This Agreement may be modified or amended only upon the
written consent of all parties to the Agreement.
(c) This Agreement shall be interpreted, construed, and enforced
in accordance with the laws of the State of New York.
(d) Neither this Agreement, nor any rights or obligations under
it, may be assigned by any party without the prior written consent of the other
parties.
(e) This Agreement shall benefit and be binding upon the parties
and their successors, heirs, executors, personal representatives, and assigns.
(f) This Agreement sets forth the entire understanding and
agreement of the parties with respect to its subject matter and supersedes all
prior letters, agreements,
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covenants, communications, understandings, representations, or warranties,
whether oral or written, by any officer, employee, or representative of either
party.
(g) The waiver of any provision of this Agreement, or of any
breach of this Agreement, shall not constitute a subsequent waiver of any
provision or breach.
(h) In the event that Shareholder is a prevailing party in any
litigation arising under or in connection with this Agreement, the Company shall
pay the reasonable attorneys fees and expenses incurred by Shareholder in
connection with the litigation.
(i) If, at any time, any of the provisions of this Agreement
shall be deemed by a court or other body having jurisdiction over this Agreement
to be illegal, invalid, or unenforceable, those provisions shall be deemed
severed from this Agreement. The remaining provisions of this Agreement shall be
valid and binding as if this Agreement had never contained any illegal, invalid,
or otherwise unenforceable provisions, without the requirement that the
amendment be recorded in a writing signed by the parties.
The parties' assent to the terms of this Agreement is confirmed by
their signatures below.
PAETEC CORP.
By: /s/ Xxxxxx X. Xxxxxxxx
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Title: President
PAETEC COMMUNICATIONS, INC.
By: /s/ Xxxxxx X. Xxxxxxxx
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Title: President
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Address: /s/ Xxxxxxx X. Xxxxxxxx
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Xxxxxxx X. Xxxxxxxx
00 Xxxxxx Xxxxxx Xxx
Xxxxxxxx, Xxx Xxxx 00000
Address: /s/ Xxxxxx X. Xxxxxxxx
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Xxxxxx X. Xxxxxxxx
00 Xxxxxxxxx Xxx
Xxxxxx, Xxx Xxxx 00000
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