Exhibit (d)(2)
EXCHANGE AND VOTING AGREEMENT
AGREEMENT dated as of September 18, 2000, among Nova Finance Company
LLC, a Delaware limited liability company ("Merger Subsidiary"), Sunburst
Hospitality Corporation, a Delaware corporation (the "Company"), and each of the
persons listed on Schedule A hereto (each, a "Shareholder" and, collectively,
the "Shareholders").
BACKGROUND
1. Immediately after the execution and delivery of this Agreement,
Merger Subsidiary, a limited liability company formed by the Shareholders, and
the Company are entering into a Recapitalization Agreement (the
"Recapitalization Agreement"). Capitalized terms used but not defined herein
will have the meanings assigned to them in the Recapitalization Agreement. The
Recapitalization Agreement provides, among other things, for the merger of
Merger Subsidiary with and into the Company, with the Shares being converted
into the right to receive the Merger Consideration, the Class A Converted Shares
being converted into the right to receive the Class A Merger Consideration and
the Merger Subsidiary Common Shares being converted into the right to receive
the Surviving Corporation Common Shares.
2. As of the date hereof, each Shareholder owns (i) the number of
shares of common stock, par value $0.01 per share, of the Company (the "Company
Common Stock") specified opposite its name under the column "Owned Shares" on
Schedule A, of which owned shares the number of shares specified opposite its
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name under the column "Restricted Stock" on Schedule A are shares of Restricted
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Stock, and (ii) the number of Options specified opposite the name under the
column "Options" on Schedule A. All of such shares, together with any shares of
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Company Common Stock acquired of record or beneficially owned by such
Shareholders in any capacity after the date hereof and prior to the Effective
Time of the Merger, whether upon exercise of options, conversion of convertible
securities, purchase, exchange or otherwise, will be referred to herein as
"Owned Shares". For purposes of this Agreement, after the Exchange Date (as
defined herein), all references herein to "Owned Shares" shall refer to Shares
owned after the Exchange Date. Each Shareholder is hereby agreeing, among other
things, that (i) such Shareholder will exchange prior to the Merger the Shares
specified opposite its name under the column "Owned Shares" on Schedule A hereto
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(including all Restricted Stock) for Class A Preferred Stock and receive the
Class A Merger Consideration in exchange therefor at the Effective Time and (ii)
such Shareholder's Options shall not be modified or altered pursuant to the
Merger. It is understood that, following consummation of the Merger, references
to "Company Common Stock" will mean the shares of Common Stock, par value $0.01
per share, of the Surviving Corporation.
ARTICLE 1
REPRESENTATIONS AND WARRANTIES
1.1 Representations and Warranties of the Shareholders. Each
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Shareholder, severally and not jointly, represents and warrants to Merger
Subsidiary as follows:
(a) Authority; Enforceability. Such Shareholder has the legal
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capacity (in the case of Shareholders that are natural persons) and all
requisite power and authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
This Agreement has been duly authorized (in the case of Shareholders that are
not natural persons), executed and delivered by such Shareholder and constitutes
a valid and binding obligation of such Shareholder enforceable against it in
accordance with its terms.
(b) No Conflicts. Except for filings required under the applicable
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requirements of the 1934 Act, (A) no filing with, and no permit, authorization,
consent or approval of, any Governmental Authority or any other person is
necessary for the execution of this Agreement by such Shareholder and the
consummation by it of the transactions contemplated hereby and (B) the execution
and delivery of this Agreement by such Shareholder, the consummation of the
transactions contemplated hereby and compliance with the terms hereof by such
Shareholder will not conflict with, or result in any violation of, or default
(with or without notice or lapse of time or both) under any provision of, the
certificate of incorporation, by-laws or analogous documents of such Shareholder
(if the Shareholder is not a natural person) or any other agreement to which
such Shareholder is a party, including any voting agreement, shareholders
agreement, voting trust, trust agreement, pledge agreement, loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license, or violate any judgment,
order, notice, decree, statute, law, ordinance, rule or regulation applicable to
such Shareholder or to its property or assets, except, in each case for such
consents required under, and such defaults in respect of, the agreements and
arrangements set forth on Schedule 1.1(b) attached hereto.
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(c) Ownership, Etc. of Shares. As of the date hereof, such
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Shareholder is the record and beneficial owner of the number of shares of
Company Common Stock set forth opposite such Shareholder's name under the column
"Owned Shares" on Schedule A and the number of Options set forth opposite such
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Shareholder's name under the column "Options" on Schedule A. As of the Exchange
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Date, such Shareholder will be the record and beneficial owner of the number of
shares of Class A Preferred Stock equal to the number of Owned Shares. Each
such Shareholder has good and marketable title to its Owned Shares and Options,
free and clear of any encumbrances, agreements, adverse claims, liens or other
arrangements with respect to the ownership of or the right to dispose of its
Owned Shares, except
pursuant to the terms of the Option Plans with respect to Options and Restricted
Stock and the terms of this Agreement and except for those encumbrances,
agreements, adverse claims, liens or other arrangements in effect on the date
hereof and listed on Schedule 1.1(c) attached hereto. Such Shareholder has sole
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power of disposition with respect to all of its Owned Shares and Options and
sole voting power with respect to the matters set forth in Section 3.1 and sole
power to demand dissenter's or appraisal rights, in each case with respect to
all of its Owned Shares, with no restrictions on such rights, subject to
applicable federal securities laws and the terms of this Agreement (subject to
the Option Plans with respect to Options and Restricted Stock). None of such
Owned Shares or Options is subject to any voting trust, stockholders agreement
or other agreement, arrangement or restriction with respect to the voting or
transfer of any of the Owned Shares, except the terms of the Company Plans with
respect to Options and Restricted Stock and as contemplated by this Agreement
and the agreements and arrangements in effect on the date hereof and listed on
Schedule 1.1(c).
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(d) Access to Information, Etc. Such Shareholder has been provided
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with a copy of the Recapitalization Agreement and has had an opportunity to
review it. It has been supplied with, or otherwise has had access to, adequate
information and the opportunity to ask questions in order to make its own
independent decision to exchange its Shares for the Class A Preferred Stock and
receive in the Merger the Class A Merger Consideration. It understands that the
Surviving Corporation Common Shares that it will receive in the Merger will not
have been registered under the 1933 Act and that the certificates for such
shares will bear an appropriate legend to such effect. It further understands
that the Surviving Corporation Common Shares that it will receive in the Merger
will bear an appropriate legend with respect to the stockholders agreement
referred to in Section 4.3 below.
1.2 Representations and Warranties of Merger Subsidiary. Merger
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Subsidiary represents and warrants to each Shareholder as follows:
(a) Authority. It is duly formed, validly existing and in good
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standing under the laws of Delaware. It has all requisite power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by it
and constitutes its valid and binding obligation, enforceable against it in
accordance with its terms.
(b) No Conflicts; Enforceability. Except for filings required under
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the applicable requirements of the 1934 Act, (A) no filing with, and no permit,
authorization, consent or approval of, any Governmental Authority or any other
person is necessary for the execution of this Agreement by Merger Subsidiary and
the consummation by it of the transactions contemplated hereby, and (B) the
execution and delivery of this Agreement by Merger Subsidiary, the consummation
by it of the transactions contemplated hereby and its compliance with the terms
hereof will not conflict with, or result in any violation of, or default (with
or without
notice or lapse of time or both) under any provision of, any limited liability
company agreement, or any other agreement to which it is a party, including any
voting agreement, stockholders agreement, voting trust, trust agreement, pledge
agreement, loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license, or
violate any judgment, order, notice, decree, statute, law, ordinance, rule or
regulation applicable to Merger Subsidiary or to its property or assets.
(c) Business Activities by Merger Subsidiary. Merger Subsidiary
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was formed solely for purposes of effecting the transactions described in this
Agreement and the Recapitalization Agreement. Merger Subsidiary has conducted
no business activities, and has incurred no liabilities, since such formation.
ARTICLE 2
TRANSFER AND ACQUISITION RESTRICTIONS
2.1 Transfer Restrictions. Each Shareholder hereby agrees during the
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term of this Agreement not to (i) directly or indirectly sell, transfer, pledge,
encumber, assign or otherwise dispose of (including by gift) to a person who is
not a Shareholder (collectively, "Transfer"), or enter into any contract, option
or other arrangement or understanding (including any profit sharing arrangement)
with respect to the Transfer of, any of its Owned Shares or Options to any
person other than pursuant to the terms of the Recapitalization Agreement or
this Agreement, (ii) enter into any voting arrangement or understanding other
than under this Agreement, whether by proxy, voting agreement or otherwise, with
respect to any of its Owned Shares or Options, or (iii) take any action that
would make any of its representations or warranties contained herein untrue or
incorrect or have the effect of preventing or impeding such Shareholder from
performing any of its obligations under this Agreement.
2.2 Acquisition Restrictions. Each Shareholder hereby agrees not to
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purchase or otherwise acquire beneficial ownership of any additional shares of
Common Stock except for Options and Restricted Stock granted under the Option
Plans.
ARTICLE 3
SUPPORT OF TRANSACTIONS
3.1 Voting of Total Shares. Under the terms of this Agreement, at
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any Company Shareholders' Meeting or at any adjournment thereof or in any other
circumstances upon which any shareholders' vote, consent or other approval is
sought, each of the Shareholders will attend such meeting, in person or by
proxy, and will vote all of its Owned Shares, or otherwise provide requisite
written consent (i) in favor of the Transactions and the adoption
and the approval of the Recapitalization Agreement and the Transactions, (ii)
against any action or agreement that would result in a breach in any material
respect of any covenant, representation or warranty or any other obligation or
agreement of the Company under the Recapitalization Agreement, and (iii) against
any action or agreement that would impede, interfere with, delay or postpone or
that would reasonably be expected to discourage the Transactions, including, but
not limited to, any action referred to in Section 6.01 of the Recapitalization
Agreement.
3.2 No Other Proxies. Each Shareholder will not, unless and until
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this Agreement terminates in accordance with Section 3.3 or Section 5.2 hereof,
grant (other than through a proxy solicited by the Board of Directors of the
Company through which the Shareholder will provide voting instructions
consistent with the requirements of Section 3.1 hereof) any proxy or power of
attorney with respect to any of its Owned Shares, deposit any of its Owned
Shares or Options into a voting trust or enter into any agreement (other than
this Agreement), arrangement or understanding with any person, directly or
indirectly, to vote, grant any proxy or give instructions with respect to the
voting of any of its Owned Shares. Each Shareholder further agrees not to
commit or agree to take any action inconsistent with any of the matters covered
in this Article 3.
ARTICLE 4
COVENANTS
4.1 Exchange of Certain Shares Prior to the Merger. On the Closing
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Date, but prior to the Effective Time (such time and date, the "Exchange Date"),
each Shareholder shall exchange each of its Owned Shares for one-tenth of a
share of Class A Preferred Stock. Each Shareholder agrees that its Options
shall not be affected or modified by reason of the Merger Agreement or the
Merger.
4.2 Appraisal Rights. Each Shareholder hereby irrevocably waives any
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rights of appraisal with respect to any of its Owned Shares or Class A Preferred
Stock in connection with the Merger or rights to dissent from the Merger that
such Shareholder may otherwise have, with respect to the Merger, under the DGCL.
4.3 Stockholders and Registration Rights Agreement. Each Shareholder
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agrees that, on or prior to the Effective Time, it will enter into a
stockholders and registration rights agreement relating to the Surviving
Corporation Common Shares with the terms set forth on Exhibit A hereto, with
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such changes as may be reasonably agreed to by the Shareholders, in a form
reasonably satisfactory to such Shareholders prior to or at the Effective Time.
4.4 No Conduct of Business Activities by Merger Subsidiary. Merger
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Subsidiary agrees that it will not conduct any business activities, and will not
incur any liabilities, from the date of this Agreement through the time at which
Merger Subsidiary merges with and into the Company. Without limiting the
generality of the foregoing, Merger Subsidiary shall be in existence solely to
effect the transactions described in this Agreement and the Recapitalization
Agreement.
4.5 Further Assurances. Each of the parties hereto agrees that it
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will, from time to time, execute and deliver, or cause to be executed and
delivered, such additional or further consents, documents and other instruments
as any of the other parties to this Agreement may reasonably request for the
purpose of effectively carrying out the transactions contemplated by this
Agreement.
ARTICLE 5
MISCELLANEOUS
5.1 Assignment. Neither this Agreement nor any of the rights,
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interests or obligations hereunder may be assigned by any of the parties hereto
without the prior written consent of the other parties hereto. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
permitted assigns.
5.2 Termination. This Agreement will terminate, and no party hereto
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shall have any rights or obligations hereunder, upon the first to occur of (a)
the Effective Time of the Merger or (b) the termination of the Recapitalization
Agreement in accordance with its terms.
5.3 Entire Agreement. This Agreement constitutes the entire
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agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, including any written
or oral agreement or understanding, among or between the parties with respect to
the subject matter hereof.
5.4 Amendments. This Agreement may not be amended or compliance with
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any provision hereof waived, except by an instrument in writing signed by each
of the parties hereto whose rights or obligations are affected by such amendment
or waiver. Without limiting the generality of the foregoing, this Agreement may
be amended to add to or subtract from the list of Shareholders and/or to modify
the treatment of Shareholders' holdings as set forth on Schedule A, and such
amendment need only be executed by Merger Subsidiary and those Shareholders who
are being added to or subtracted from the list of Shareholders or the treatment
of whose holdings is being modified as set forth on Schedule A.
5.5 Notices. All notices, requests, claims, demands and other
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communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by telecopy
or by registered or certified mail (postage prepaid, return receipt requested)
to the respective parties at the following addresses (or at such other address
to a party as shall be specified by like notice):
if to Merger Subsidiary:
Nova Finance Company LLC
c/o Sunburst Hospitality Corporation
00000 Xxxxxxxx Xxxx
Xxxxxx Xxxxxx, XX 00000
Attention: Xxxxx X. XxxXxxxxxxx
Facsimile: (000) 000-0000
with a copy to:
Xxxxxx Xxxxxx & Xxxxxxx
00 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: W. Xxxxxx Xxxxx, Esq.
Xxxxxxx X. Xxxxxx, Esq.
Facsimile: (000) 000-0000
if to the Company:
Sunburst Hospitality Corporation
00000 Xxxxxxxx Xxxx
Xxxxxx Xxxxxx, XX 00000
Attention: Chairman of the Board
General Counsel
Facsimile: (000) 000-0000
if to the Shareholders listed on Schedule A hereto:
c/o Sunburst Hospitality Corporation
00000 Xxxxxxxx Xxxx
Xxxxxx Xxxxxx, XX 00000
Facsimile: (000) 000-0000
5.6 Interpretation. When a reference is made in this Agreement to
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Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Wherever the words "include", "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation".
5.7 Counterparts. This Agreement may be executed in one or more
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counterparts, all of which shall be considered one and the same agreement.
5.8 Governing Law. The validity, construction and effect of this
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Agreement shall be governed by and construed enforced in accordance with the
laws of the State of Delaware, without giving effect to the principles of
conflicts of law of such state.
5.9 Enforcement. The parties agree that irreparable damage would
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occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that, in addition to any other remedy to which it may
be entitled, at law or in equity, the parties shall be entitled to the remedy of
specific performance of the covenants and agreements contained herein and
injunctive and other equitable relief.
5.10 Parties in Interest. This Agreement shall be binding upon and
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inure solely to the benefit of each party hereto. Except as provided in the
preceding sentence, nothing in this Agreement, express or implied, is intended
to or shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
5.11 Descriptive Headings. The descriptive headings used herein are
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inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
5.12 Severability. Whenever possible, each provision or portion of
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any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
5.13 Definitions; Construction. For purposes of this Agreement:
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(a) "Beneficially own" or "beneficial ownership" with respect to any
securities shall mean having "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to
any agreement (other than by virtue of this Agreement), arrangement or
understanding, whether or not in writing. Without duplicative counting of the
same securities by the same holder, securities beneficially owned by a Person
shall include securities Beneficially Owned by all other Persons with whom such
Person would constitute a "group" as described in Section 13(d)(3) of the
Exchange Act.
(b) "Person" shall mean an individual, corporation, partnership,
limited liability company, joint venture, association, trust, unincorporated
organization or other entity.
(c) In the event of a stock dividend or distribution, or any change
in the Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like, the term "Shares"
shall be deemed to refer to and include the Shares as well as all such stock
dividends and distributions and any shares into which or for which any or all of
the Shares may be changed or exchanged.
5.14 Shareholder Capacity. Notwithstanding anything herein to the
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contrary, no person executing this Agreement who is, or becomes during the term
hereof, a director of the Company makes any agreement or understanding herein in
his capacity as such a director, and the agreements set forth herein shall in no
way restrict any director in the exercise of his fiduciary duties as a director
of the Company. Each Shareholder has executed this Agreement solely in his
capacity as the record or beneficial holder of such Shareholder's Owned Shares.
[Signature Pages Follow]
IN WITNESS WHEREOF, each of Merger Subsidiary and the Shareholders
listed below have caused this Agreement to be duly executed, as of the date
first written above.
NOVA FINANCE COMPANY LLC
By: ___________________________
Name:
Title:
SUNBURST HOSPITALITY CORPORATION
By: ___________________________
Name:
Title:
REALTY INVESTMENT COMPANY, INC.
/s/
By: ___________________________
Name:
Title:
THE XXXXXXX XXXXXX DECLARATION OF TRUST DATED
MAY 23, 1995
By: /s/
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Name:
Title:
THE XXXX X. XXXXXX DECLARATION OF TRUST DATED
MAY 23, 1995
By: /s/
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Name:
Title:
THE XXXXXXX X. XXXXXX DECLARATION OF TRUST DATED
DECEMBER 20, 1996
By: /s/
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Name:
Title:
THE XXXXXXX X. XXXXXX, XX.
DECLARATION OF TRUST DATED
MARCH 13, 1996
By: /s/
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Name:
Title:
THE XXXXX XXXXXX DECLARATION OF
TRUST DATED MARCH 13, 1997
By: /s/
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Name:
Title:
THE XXXXXXX XXXXXX IRREVOCABLE
GRANTOR TRUST
By: /s/
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Name:
Title:
MID PINES ASSOCIATES LIMITED
PARTNERSHIP
By: /s/
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Name:
Title:
CAMBRIDGE INVESTMENT COMPANY, LLC
By: /s/
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Name:
Title:
XXXXXXX XXXXXX
By: /s/
---------------------------------
Name:
Title:
XXXXXXX X. XXXXXX, XX.
By: /s/
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Name:
Title:
XXXXXXX X. XXXXXX
By: /s/
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Name:
Title:
XXXXX XXXXXX
By: /s/
----------------------------------
Name:
Title:
XXXXX X. XXXXXXXXXXX
By: /s/
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Name:
Title:
XXXXX X. XXXXXX
By: /s/
-----------------------------------
Name:
Title:
XXXXXX X. XXXXXXXX
By: /s/
-------------------------------
Name:
Title:
XXXXXXX XXXXXXX
By: /s/
-------------------------------
Name:
Title:
XXXXXXX XXXXXX
By: /s/
----------------------------------
Name:
Title:
EXHIBIT A: STOCKHOLDERS' AGREEMENT TERM SHEET
1. Provisions Relating to Making/Preserving an S Election.
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(a) All shareholders that qualify as S corporation shareholders should
agree to make an S election if the Board of Directors determines that
such an election is in the best interests of the Company and its
shareholders.
(b) No shareholder (whether or not the shareholder qualifies as an S
corporation shareholder) should be able to transfer its shares to any
person, trust or entity that does not qualify as an S corporation
shareholder. Any such transfer should be void.
(c) All transferees should be required to execute a copy of the
shareholders' agreement and agree to its terms.
(d) Realty, Mid Pines, and Cambridge Investments LLC cannot agree to join
in an S election because they do not qualify to be S corporation
shareholders. Nonetheless, they should agree that they will not
transfer their shares to persons that do not qualify as S corporation
shareholders, except that Mid Pines and Cambridge may make
distributions to their existing partners, which are not qualifying
subchapter S shareholders, on the condition that those partners
transfer the assets to persons who qualify as S corporation
shareholders. The shareholders' agreement, however, should not
require Realty to dispose of its stock to enable Sunburst to make an S
election until such time as the Company can provide reasonable
projections indicating that the excess of cash distributions with
respect to the Company shares currently owned by Realty over the
respective Realty-transferee shareholders' Company-related tax
liabilities for the following five-year period will exceed, in the
aggregate, the tax liabilities of Realty and its shareholders
triggered by Realty's disposition of the Company's shares.
(e) No shareholder should be able to pledge its stock as collateral for
any loan.
(f) No shareholder should be able to transfer its shares to any person,
trust or entity if to do so would cause the Company to have more than
75 shareholders. Any such transfer should be void.
(g) No more than 25 shareholders should be shareholders other than (i)
Xxxxxxx Xx., Xxxx, their estates and any trusts for their benefit,
their lineal descendants (including their estates and any trusts for
their benefit) and QTIP trusts for the
benefit of the spouse of a lineal descendant as long as a lineal
descendant is the trustee or (ii) entities controlled by the Xxxxxx
family (collectively, the "Xxxxxx Family"). This gives the Bainums
flexibility in their estate planning.
(h) Although not required to be counted under the statute and regulations,
option holders should be counted as shareholders for purposes of the
75 shareholder test so that the exercise of an option will not cause
the Company to have more than 75 shareholders. Option agreements must
specify that upon exercise the option holder/shareholder will be
required to sign the shareholders' agreement.
(i) No shareholder shall take any act that would adversely affect the
Company's ability to make an S election (or, once made, the Company's
ability to continue to qualify as an S corporation).
(j) If the Company's Board of Directors determines that it is in the
interest of the Company and shareholders to revoke the S election,
then all shareholders should consent to the revocation of the S
election.
(k) The shareholders should agree that they will take any actions
necessary and execute any consents necessary to obtain a ruling from
the Service under Section 1362(f) of the Internal Revenue Code in the
event that the Company's S corporation status is terminated
inadvertently.
(l) The shareholders should consent to any election to close the Company's
books if the Board of Directors determines such an election is in the
best interests of the Company and/or its shareholders.
(m) All shareholders that qualify as S corporation shareholders should
grant a power-of-attorney to Xxxxxxx Xxxxxx, Xx. (or if he is unable
to act, then Xxxxxxx Xxxxxx) to execute, on their behalf, an S
election or any consent required to be filed by the shareholder of an
S corporation. All actions taken pursuant to this power of attorney
shall be consistent with the terms of the shareholders' agreement and
approved by the Board of Directors.
2. Provisions Relating to the Sale of the Company.
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(a) The Xxxxxx Family should be provided with bring-along rights in the
event of the sale of their stock of the Company. This way, if the
Xxxxxx Family agrees to sell stock representing at least 50% of the
voting power of the Company, in the aggregate, to an unrelated third
party, everyone else also must sell if the Xxxxxx Family wants them to
sell.
(b) Stockholders should be provided with tag-along rights in the event of
a sale by the Xxxxxx Family of their stock of the Company. This way,
if the Xxxxxx Family agrees to sell stock representing at least 50% of
the voting power of the Company, in the aggregate, to an unrelated
third party, all stockholders will have the right to sell all of their
stock to the third party at the same price and on the same terms and
conditions as the sale by the Xxxxxx Family.
(c) All stockholders should be given "piggyback" registration rights with
respect to any public offering of equity securities by the Company,
other than (i) a registration on Form S-8 with respect to an employee
benefit plan, or (ii) a registration on Form S-4; provided, however,
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that if the public offering is a firm commitment underwriting, such
registration rights shall be subject to customary cutback by the
underwriters, including, in the case of the Company's initial public
offering, a full cutback.
(d) In the event that the Company sells any additional equity securities,
all shareholders shall have a right of first offer to purchase their
pro rata share of such securities prior to the sale by the Company
other than pursuant to the right of first offer. Any such securities
not subscribed for by shareholders pursuant to this right may be sold
by the Company for a period of 90 days at the same price and upon the
same terms as contained in the offer to shareholders. This right of
first offer shall not apply to shares sold by the Company (i) to
management as part of a management compensation plan, (ii) in
connection with any merger, acquisition or similar transaction with a
third party that is not an affiliate of the Xxxxxx Family, or (iii) as
part of a Qualifying IPO.
(e) Xxxxxxx Xxxxxx, Xx. (or if he is unable to act, then Xxxxxxx Xxxxxx)
should be provided with a power-of-attorney from the other
shareholders to execute any documents reasonably requested by a buyer
of the stock of the Company. All actions taken pursuant to this power
of attorney shall be consistent with the terms of the shareholders'
agreement and approved by the Board of Directors.
(f) Xxxxxxx Xxxxxx, Xx. (or if he is unable to act, then Xxxxxxx Xxxxxx)
should be provided with a power-of-attorney to consent to an election
under Section 338(h)(10) of the Internal Revenue Code in the event of
a sale of the stock of the Company. A 338(h)(10) election allows an S
corporation and its shareholders to treat the sale of the S
corporation's stock as a sale of the S corporation's assets, and
provides the purchaser with an increased tax basis for the assets.
The tax cost to the shareholders is that some portion of their gain
may be ordinary gain rather than capital gain. Purchasers will often
pay a premium for the 338(h)(10) election, so if the premium exceeds
the tax cost, the Company
should be in a position to make the election without having to
negotiate with any minority shareholders. All actions taken pursuant
to this power of attorney must be consistent with the terms of the
shareholders' agreement and approved by the Board of Directors.
3. Provisions Relating to Buy/Sell and Right of First Refusal.
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(a) The shareholders' agreement should contain customary buy/sell and
right of first refusal provisions. The Xxxxxx Family understands that
this agreement will not provide them with any rights to put their
stock to the Company, nor is there any obligation on the part of the
Company to buy their stock. The terms of the buy/sell and rights of
first refusal should include the following:
(i) In the case of purchases by the Company or existing shareholders
from members of the Xxxxxx Family or their successors or
transferees, no more than two-thirds of the purchase price can be
payable, at the purchaser's option, in the form of a note, and
any such note shall have a fair market interest rate and a term
not to exceed five years and shall be secured by the stock sold.
However, in the case of purchases by the Company or existing
shareholders when they are matching a bona fide third-party
offer, the applicable purchase terms shall match the offer of the
third party. In the case of all other purchases, the purchase
price should be payable in cash. If, after the death of any
Xxxxxx Family member, his or her executor or trustee wants to
make a sale of stock under the shareholders' agreement pursuant
to Treas. Reg. (S) 53.4941(d)-1(b)(3), so that the sale will not
constitute self-dealing and any note may be held by a private
foundation, the fair market value of the combination of cash and
the note must equal the fair market value of the stock.
(ii) Except as described in (iii) and (iv) below, for purchases that
are subject to the purchase options in the shareholders'
agreement but that do not have third parties establishing the
price, the purchase price of a share of the Company's stock shall
be equal to the Appraised Value, as determined pursuant to
Attachment A to this memo, divided by the fully diluted number of
shares of the Company's stock then outstanding. Each
determination of the Appraised Value shall be effective for the
following twelve-month period. For purchases that are subject to
the purchase options in the shareholders' agreement and that do
have third parties establishing the price, the price and terms of
the purchase
pursuant to the shareholders' agreement shall be the same as the
price and terms of the third party offer.
(iii) The purchase price for purchases by the Company or existing
shareholders from public charities will be negotiated on an
arm's length basis. In the event the seller requires an
appraisal to support that the agreed-upon price represents the
fair market value of the stock, that appraiser shall be selected
and paid by the seller.
(iv) If, after the death of any Xxxxxx Family member, his or her
executor or trustee wants to make any sale of stock to the
Company or existing shareholders under the shareholders'
agreement, including a sale pursuant to Treas. Reg. (S)
53.4941(d)-1(b)(3), so that the sale will not constitute self-
dealing and a private foundation can hold the note, the purchase
price will be negotiated on an arm's length basis. In the event
the seller requires an appraisal to support that the agreed-upon
price represents the fair market value of the stock, that
appraiser shall be selected and paid by the seller.
(b) The Company should have right of first refusal with respect to any
proposed purchase or sale of a shareholders' stock that is subject to
the right of first refusal (see (e) below). If the Company does not
buy, then the remaining shareholders can purchase the stock based on
the pro rata ownership of the purchasing shareholders.
(c) Xxxxxxx Xxxxxx, Xx. (or if he is unable to act, then Xxxxxxx Xxxxxx)
should be provided with a power-of-attorney to execute any documents
necessary to perfect a transfer of shares pursuant to the
shareholders' agreement. All actions taken pursuant to this power of
attorney shall be consistent with the terms of the shareholders'
agreement and approved by the Board of Directors.
(d) The Company and the shareholders agree to cooperate in obtaining the
approval of the probate court in the event that any Xxxxxx Family
member wants to make a sale of stock under the shareholders' agreement
pursuant to Treas. Reg. (S) 53.4941(d)-1(b)(3), so that the sale will
not constitute self-dealing and a private foundation can hold the
note. Any direct expenses incurred shall be the responsibility of the
selling party.
(e) Subject to restrictions described above that relate to S corporation
status, members of the Xxxxxx Family must be free to transfer to the
following persons without triggering the right of first refusal: (i)
other members of the
Xxxxxx Family and (ii) public charities identified by the Xxxxxx
Family. In addition, the following transactions should not be subject
to the right of first refusal: (i) a sale of up to 25,000 shares of
stock by Xxxxxxx Xxxxxx, Xx. to Xxx Xxxxxx, (ii) a sale of up to
25,000 shares by Xxx Xxxxxx to any other stockholder, and (iii) a
transfer from one existing shareholder to another existing
shareholder.
(f) No transfers of the Company's stock to a private foundation should be
permitted.
(g) Upon the death, permanent disability or termination of employment of
any member of the management group (a "Qualifying Event"), if the
management shareholder elects, another shareholder may purchase the
shares of the management shareholder for such price and upon such
terms as the seller and purchaser may agree. If such election is not
made before the time when the Company has the obligation to repurchase
the shares, the Company shall repurchase the shares of the management
shareholder for cash per share in an amount equal to the Appraised
Value as determined pursuant to Attachment A to this Memorandum,
divided by the fully diluted number of shares of the Company's stock
then outstanding.
(h) Upon the death of Xxx Xxxxxx, the Company shall repurchase up to
25,000 of her shares upon the terms provided in the preceding
paragraph. Xxx. Xxxxxx shall not have the right at any time to
transfer or give her shares to anyone other than an existing
shareholder or the Company.
(i) In the event that the Company is unable to purchase stock from a
member of the management group due to restrictions imposed by any of
the Company's lenders, then the Company shall purchase the stock from
the member of the management group as soon as the restriction imposed
by the lender terminates. The per share purchase price for any such
purchase shall be equal to the Appraised Value as determined pursuant
to Attachment A to this Memorandum, divided by the fully diluted
number of shares of the Company's stock then outstanding, as though
the purchase took place in the year that it would have taken place had
there been no lender's restriction. The Company or acquiring
shareholders shall pay interest on the purchase price at the then
current borrowing rate of the Company for the period from the date the
stock would have been sold to the Company in the absence of the
lenders' restriction through the date of actual settlement; in no
case, however, shall such interest accrue before the maturity date of
Chase Term Loan Number 2, as such date may be extended from time to
time.
(j) No transfers of Company stock by management will be permitted other
than (i) upon a Qualifying Event, (ii) upon specific Board approval or
(iii) a transfer to another existing shareholder.
4. Provisions Relating to Company Operations.
-----------------------------------------
(a) All employment and option arrangements must conform to the single-
class-of-stock regulations of Section 1361 of the Internal Revenue
Code.
(b) In the event that the Company converts to an S corporation, the
shareholders' agreement should provide for quarterly distributions to
shareholders. Distributions shall be determined at the highest
individual Maryland income tax rate added to the highest individual
federal income tax rate (after giving effect to the state deduction)
and will be calculated based on the amount and character of the income
anticipated to flow to the shareholders from the Company on its annual
tax Forms K-1.
(c) The Company should agree not to do anything that would jeopardize the
Company's S election unless the Company's Board of Directors has
expressly agreed to revoke the S election.
(d) Xxx Xxxxxxxx of the Company's legal staff indicated that the Company
will issue "restricted stock" to certain employees (i.e., stock that
is subject to vesting over time). Generally, S corporations can issue
restricted stock without causing a problem under the single-class-of-
stock rules in Section 1361 of the Internal Revenue Code. If the
recipient of the restricted stock makes an election under Section
83(b) of the Internal Revenue Code, then the restricted stock will be
treated as outstanding for all purposes. If no such election is made,
then the restricted stock will not be treated as outstanding until the
stock has vested. For purposes of counting the 75 shareholders as
well as for determining the fully diluted number of shares outstanding
in performing appraisals under this Agreement, the Company should
treat holders of restricted stock as shareholders owning the full
amount of restricted stock granted to them regardless of whether or
not a Section 83(b) election has been made or the stock has vested.
5. Amendment.
---------
The shareholders' agreement should be amendable with the approval of
stockholders representing two thirds of the voting power of the Company;
provided, however, that in the event an amendment to the shareholders' agreement
-------- -------
is proposed that would result in a material loss
of economic rights for the management stockholders, the two-thirds majority of
the voting power must include a majority of the voting power held by management
stockholders.
Attachment A
1. As used herein, "Appraised Value" means the fair market value of the
Company, as an entity, determined on a multiple of the operating EBITDA of the
Company less all liabilities of the Company (including preferred stock of the
Company or any of the Company's subsidiaries).
The operating EBITDA shall be calculated using the audited financial statements
of the Company for the fiscal year in which the repurchase election is made and
shall specifically exclude (i) gain or loss from the sale of hotels, (ii) income
or loss from discontinued operations, and (iii) any other extraordinary items,
in each case as determined in accordance with generally accepted accounting
principles.
The appropriate multiple of the Company shall be determined by an appraiser
selected as outlined in Section 2 below. The multiple shall be based on the
marketplace and general economic conditions prevailing at the fiscal year-end
for the fiscal year in which the repurchase election is made.
2. The Appraised Value shall be determined as follows: within thirty (30) days
following the end of the fiscal year in which a repurchase election is made, the
Company and the Selling Shareholder shall each exchange a list of nationally
recognized investment banking firms. The Company and the selling shareholder
shall then choose one firm that appears on both lists to perform the appraisal
(the "Primary Firm"). If the Primary Firm is agreed upon by both parties, that
firm's appraisal shall be the final appraisal.
If the Company and the selling shareholder cannot agree on one investment
banking firm, then each shall choose one investment banking firm and those two
investment banking firms shall each prepare an appraisal. The appraisals shall
be combined and the arithmetic average computed, which shall be the final
appraisal unless either appraised valued differs from the arithmetic average by
more than five percent (5%), in which case the two investment banking firms
shall choose a Third Firm. In this instance, the Third Firm shall determine the
final appraisal.
The Company and the selling shareholder shall each pay the fees and
expenses of their own investment banking firm. The Company shall pay the fees
and expenses of the Primary Firm and the Third Firm. The appraisal determined
to be the final appraisal shall be conclusive and binding upon the parties
absent fraud or manifest error.
SCHEDULE A: SHAREHOLDERS
Name of Restricted
Shareholder Owned Shares Stock Options
Realty Investment Company, 1,189,289 -- --
Inc.
The Xxxxxxx Xxxxxx 2,011,636 -- --
Declaration of Trust
Dated May 23, 1995
The Xxxx X. Xxxxxx 266,237 -- --
Declaration of Trust
Dated May 23, 1995
The Xxxxxxx X. Xxxxxx 669,349 -- --
Declaration of Trust
Dated December 20, 1996
The Xxxxxxx X. Xxxxxx, Xx. 874,729 -- --
Declaration of Trust
Dated March 13, 1996
The Xxxxx Xxxxxx 635,457 -- --
Declaration of Trust
Dated March 13, 1997
The Xxxxxxx Xxxxxx 655,457 -- --
Irrevocable Grantor Trust
Mid Pines Associates 593,209 -- --
Limited Partnership
Cambridge Investment 85,000 -- --
Company, LLC
Xxxxxxx Xxxxxx 2,745 3200 000
Xxxxxxx X. Xxxxxx, Xx. 18,135 -- 95,001
Xxxxxxx X. Xxxxxx 424 -- --
Xxxxx Xxxxxx 31,500 -- --
Xxxxx X. XxxXxxxxxxx 303,986 301,252 106,253
Xxxxx X. Xxxxxx 160,339 158,895 --
Xxxxxx X. Xxxxxxxx 48,622 47,835 --
Xxxxxxx Xxxxxxx 91,272 90,180 24,045
Xxxxxxx Xxxxxx 113,085 112,029 --
Total 7,750,471 713,391 226,162
=============== =============== ===============
Schedule 1.1(b)
---------------
None.
Schedule 1.1(c)
---------------
None.
