EXHIBIT 3
STOCK OPTION AGREEMENT dated as of July 12, 1999, among
CDNOW, INC., a Pennsylvania corporation ("CDnow"),TIME WARNER
INC., a Delaware corporation ("Time Warner"), and SONY
CORPORATION OF AMERICA, a New York corporation ("Sony").
WHEREAS Time Warner, Sony, CDnow, Delaware Holdco Corporation, a
Delaware corporation and a wholly owned subsidiary of CDnow, Pennsylvania
Subsidiary, Inc., a Pennsylvania corporation and a wholly owned subsidiary of
Holdco, Delaware Sub I L.L.C., a Delaware limited liability company and a wholly
owned subsidiary of Holdco, and Delaware Sub II L.L.C., a Delaware limited
liability company and a wholly owned subsidiary of Holdco, propose to enter into
an Agreement of Merger and Contribution dated as of the date hereof (as the same
may be amended or supplemented, the "Merger Agreement"; capitalized terms used
but not defined herein shall have the meanings set forth in the Merger
Agreement), providing for, among other things, the merger of Pennsylvania Sub
with and into CDnow, with CDnow, as the surviving corporation in the Merger,
becoming a wholly owned subsidiary of Holdco; and
WHEREAS, as a condition and inducement to the willingness of Time
Warner and Sony to enter into the Merger Agreement, Time Warner and Sony have
requested that CDnow agree, and CDnow has agreed, to grant to Time Warner and
Sony the Option (as defined below).
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
SECTION 1. Grant of Option. Upon the terms and subject to the
conditions set forth herein, CDnow hereby grants to Time Warner and Sony (to be
shared equally by them) an irrevocable option (the "Option") to purchase up to
4,531,721 (as adjusted as set forth herein) shares (the "Option Shares") of
CDnow Common Stock at a cash purchase price per Option Share (the "Purchase
Price") equal to $17.9689.
SECTION 2. Exercise of the Option. (a) The Option may be exercised,
with respect to any or all the Option Shares, at any time or from time to time,
subject to the provisions of Section 2(c), after the occurrence of any event as
a result of which Time Warner and Sony are entitled to receive the Termination
Fee under Section 8.07(b) of the Merger Agreement (a "Purchase Event");
provided, however, that (i) except as provided in the last sentence of this
Section 2(a), the Option will terminate and be of no further
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force and effect upon the earliest to occur of (A) the Effective Time, (B) 90
days after the Termination Fee is paid pursuant to the Merger Agreement and (C)
the termination of the Merger Agreement in accordance with its terms prior to
the occurrence of a Purchase Event, unless, in the case of this clause (C), Time
Warner and Sony may have the right to receive the Termination Fee following such
termination upon the occurrence of certain events, in which case the Option will
not terminate until the later of (x) 90 days after the Termination Fee is paid
pursuant to the Merger Agreement and (y) the expiration of the period in which
Time Warner and Sony may have such right to receive the Termination Fee, and
(ii) any purchase of Option Shares upon exercise of the Option will be subject
to compliance with the HSR Act and obtaining or making of any consents,
approvals, orders, notifications, filings or authorizations, the failure of
which to have obtained or made would have the effect of making the issuance of
Option Shares to Time Warner or Sony illegal (the "Regulatory Approvals").
Notwithstanding the termination of the Option, Time Warner and Sony will be
entitled to purchase Option Shares if they have exercised the Option in
accordance with the terms hereof prior to the termination of the Option, and the
termination of the Option will not affect any rights hereunder which by their
terms do not terminate or expire prior to or as of such termination. For
avoidance of doubt, with respect to clause (A)(y) and (B)(y) of Section 8.07(b)
of the Merger Agreement, the relevant "Purchase Event" shall be deemed to occur
at the earliest of the time CDnow or any CDnow Subsidiary enters into an
Acquisition Agreement with respect to, or approves, recommends or consummates
the applicable CDnow Takeover Transaction.
(b) If Time Warner and Sony wish to exercise the Option, they may do
so by giving a joint written notice (an "Exercise Notice"; the date of such
notice being herein called the "Notice Date") to CDnow specifying the number of
Option Shares, if any, that are to be purchased pursuant to this Section 2(b),
the number of Option Shares, if any, with respect to which the Cash-Out Right
(as defined herein) is to be exercised pursuant to Section 6(c), the
denominations of the certificate or certificates evidencing the Option Shares
that are to be purchased pursuant to this Section 2(b) and a date (an "Option
Closing Date"), subject to the following sentence, not earlier than two trading
days, nor later than 10 trading days from the Notice Date for the closing of
such purchase (an "Option Closing"). Any Option Closing will be at an agreed
location and time in New York, New York on the applicable Option Closing Date or
at such later date as may be necessary so as to comply with the first sentence
of Section 2(a).
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(c) Notwithstanding anything to the contrary contained herein, any
exercise of the Option and purchase of Option Shares shall be subject to
compliance with applicable laws and regulations, which may prohibit the purchase
of all the Option Shares specified in the Exercise Notice without first
obtaining or making certain Regulatory Approvals. In such event, if the Option
is otherwise exercisable and Time Warner and Sony wish to exercise the Option,
the Option may be exercised in accordance with Section 2(b), and Time Warner and
Sony shall acquire the maximum number of Option Shares specified in the Exercise
Notice that Time Warner and Sony are then permitted to acquire under the
applicable laws and regulations, and if Time Warner and Sony thereafter obtain
the Regulatory Approvals to acquire the remaining balance of the Option Shares
specified in the Exercise Notice, then Time Warner and Sony shall be entitled to
acquire such remaining balance. CDnow agrees to use its reasonable efforts to
assist Time Warner and Sony in seeking any Regulatory Approvals.
In the event (i) Time Warner or Sony receives official notice that a
Regulatory Approval required for the purchase of any Option Shares will not be
issued or granted or (ii) such Regulatory Approval has not been issued or
granted within six months of the date of the Exercise Notice, Time Warner and
Sony shall have the right to exercise their Cash-Out Right pursuant to Section
6(c) with respect to the Option Shares for which such Regulatory Approval will
not be issued or granted or has not been issued or granted.
SECTION 3. Payment and Delivery of Certificates. (a) At any Option
Closing, Time Warner and Sony will each pay to CDnow in immediately available
funds by wire transfer to a bank account designated in writing by CDnow an
amount equal to one-half of the product of the Purchase Price multiplied by the
number of Option Shares to be purchased at such Option Closing.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), CDnow will deliver to
each of Time Warner and Sony certificates in the denominations designated by
Time Warner and Sony representing one-half of the Option Shares to be purchased
at such Option Closing, which Option Shares will be free and clear of all Liens.
If at the time of issuance of Option Shares pursuant to an exercise of the
Option, CDnow shall have issued any securities similar to rights under a
shareholder rights plan, then each Option Share issued pursuant to such exercise
will also represent such a corresponding right with terms substantially the same
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as and at least as favorable to Time Warner and Sony as are provided under any
such shareholder rights plan then in effect.
(c) Certificates for the Option Shares delivered at an Option
Closing will have typed or printed thereon a restrictive legend which will read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF JULY 12,
1999, A COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF CDNOW AT ITS
PRINCIPAL EXECUTIVE OFFICES."
It is understood and agreed that (i) the reference to restrictions arising under
the Securities Act in the above legend will be removed by delivery of substitute
certificate(s) without such reference if such Option Shares have been registered
pursuant to the Securities Act, such Option Shares have been sold in reliance on
and in accordance with Rule 144 under the Securities Act or Time Warner or Sony
has delivered to CDnow a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to CDnow and
its counsel, to the effect that such legend is not required for purposes of the
Securities Act and (ii) the reference to restrictions pursuant to this Agreement
in the above legend will be removed by delivery of substitute certificate(s)
without such reference if the Option Shares evidenced by certificate(s)
containing such reference have been sold or transferred in compliance with the
provisions of this Agreement under circumstances that do not require the
retention of such reference.
SECTION 4. Representations and Warranties of CDnow. CDnow hereby
represents and warrants to each of Time Warner and Sony as follows: CDnow has
taken all necessary corporate and other action to authorize and reserve and,
subject to the expiration or termination of any required waiting period under
the HSR Act, to permit it to issue, and, at all times from the date hereof until
the obligation to deliver Option Shares upon the exercise of the Option
terminates, shall have reserved for issuance, upon exercise of the Option,
shares of CDnow Common Stock necessary for Time Warner and Sony to exercise the
Option, and CDnow will take all necessary corporate action to authorize and
reserve
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for issuance all additional shares of CDnow Common Stock or other securities
which may be issued pursuant to Section 6 upon exercise of the Option. The
shares of CDnow Common Stock to be issued upon due exercise of the Option,
including all additional shares of CDnow Common Stock or other securities which
may be issuable upon exercise of the Option or any other securities which may be
issued pursuant to Section 6, upon issuance pursuant hereto, will be duly and
validly issued, fully paid and nonassessable and will be delivered free and
clear of all Liens, including any preemptive rights of any shareholder of CDnow.
SECTION 5. Representations and Warranties of Time Warner and Sony.
Each of Time Warner and Sony, severally and not jointly, hereby represents and
warrants to CDnow as to itself as follows: any Option Shares or other securities
acquired by it upon exercise of the Option will not be transferred or otherwise
disposed of except in a transaction registered, or exempt from registration,
under the Securities Act.
SECTION 6. Adjustment upon Changes in Capitalization, Etc. (a) In
the event of any change in CDnow Common Stock by reason of a stock dividend,
stock split, split-up, merger, recapitalization, combination, exchange of
shares, or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price thereof, will be adjusted
appropriately, and proper provision will be made in the agreements governing
such transaction, so that Time Warner and Sony will receive upon exercise of the
Option the number and class of shares or other securities or property that they
would have received in respect of CDnow Common Stock if the Option had been
exercised immediately prior to such event or the record date therefor, as
applicable.
Subject to Section 1, and without limiting the parties' relative
rights and obligations under the Merger Agreement, if any additional shares of
CDnow Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in the first sentence of this Section 6(a)) or if
the number of outstanding shares of CDnow Common Stock is reduced, then the
number of shares of CDnow Common Stock subject to the Option will be adjusted so
that, after such issuance or reduction, it equals 15% of the number of shares of
CDnow Common Stock then issued and outstanding, without giving effect to any
shares subject to or issued pursuant to the Option.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event
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that CDnow enters into an agreement (other than the Merger Agreement) (i) to
consolidate with or merge into any person and CDnow will not be the continuing
or surviving corporation in such consolidation or merger, (ii) to permit any
person to merge into CDnow and CDnow will be the continuing or surviving
corporation, but in connection with such merger, the shares of CDnow Common
Stock outstanding immediately prior to the consummation of such merger will be
changed into or exchanged for stock or other securities of CDnow or any other
person or cash or any other property, or the shares of CDnow Common Stock
outstanding immediately prior to the consummation of such merger will, after
such merger, represent less than 50% of the outstanding voting securities of the
merged company, or (iii) to sell or otherwise transfer all or substantially all
of its assets to any person then, and in each such case, CDnow shall cause the
agreement governing such transaction to make proper provision so that the Option
will, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option with
identical terms appropriately adjusted to acquire the number and class of shares
or other securities or property that Time Warner and Sony would have acquired in
respect of CDnow Common Stock if the Option had been exercised immediately prior
to such consolidation, merger, sale or transfer, or the record date therefor, as
applicable, and make any other necessary adjustments.
(c) If, at any time during the period commencing on a Purchase Event
and ending on the termination of the Option in accordance with Section 2, Time
Warner and Sony jointly send to CDnow an Exercise Notice indicating an election
to exercise their right (the "Cash-Out Right") pursuant to this Section 6(c),
then CDnow shall pay to each of Time Warner and Sony on the Option Closing Date,
in exchange for the cancelation of the Option with respect to such number of
Option Shares as Time Warner and Sony specify in the Exercise Notice, an amount
in cash equal to one half of such number of Option Shares multiplied by the
difference between (i) the average closing price, for the 10 trading days
commencing on the 12th trading day immediately preceding the Notice Date, per
share of CDnow Common Stock as reported on Nasdaq (or, if not listed on Nasdaq,
as reported on any other national securities exchange or national securities
quotation system on which the CDnow Common Stock is listed or quoted) and (ii)
the Purchase Price. Notwithstanding the termination of the Option, Time Warner
and Sony will be entitled to exercise their rights pursuant to this Section 6 if
they have exercised such rights in accordance with this Section 6 prior to the
termination of the Option. If, prior to the time at which
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the Cash-Out Right is exercised pursuant to this Section 6(c), Time Warner and
Sony shall have received a Termination Fee pursuant to clause (A), (B) or (C) of
Section 8.07(b) of the Merger Agreement, the number of Option Shares in respect
of which the Cash-Out Right may be exercised shall be reduced to the extent
necessary such that the amount of cash payable by CDnow under this Section 6(c),
together with the aggregate amount of any Termination Fee previously received by
Time Warner and Sony under Section 8.07(b) of the Merger Agreement, shall not
exceed $25 million (in the case of a Termination Fee described in clause (A) of
Section 8.07(b)) or $31 million (in the case of a Termination Fee described in
clause (B) or (C) of Section 8.07(b)). For the avoidance of doubt, Time Warner
and Sony shall continue to be entitled to purchase in accordance with Section 3
any Option Shares specified in the Exercise Notice in respect of which the
Cash-Out Right may not be exercised as a result of the application of the
previous sentence.
7. Registration Rights. CDnow will, if requested by Time Warner
and/or Sony (individually as to one registration each and jointly as to the
third registration) at any time and from time to time within three years of the
exercise by Time Warner and Sony of the Option, as expeditiously as possible
prepare and file a total of up to three registration statements under the
Securities Act if such registration is necessary in order to permit the sale or
other disposition of any or all shares of securities that have been acquired by
or are issuable to Time Warner and Sony upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by Time
Warner and Sony, including "shelf" registration statements under Rule 415 under
the Securities Act or any successor provision, and CDnow will use its best
efforts to qualify such shares or other securities under any applicable state
securities laws. Each of Time Warner and Sony agrees to use reasonable efforts
to cause, and to cause any underwriters of any sale or other disposition to
cause, any sale or other disposition pursuant to such registration statement to
be effected on a widely distributed basis so that upon consummation thereof no
purchaser or transferee will own beneficially more than 4.9% of the
then-outstanding voting power of CDnow. CDnow will use reasonable efforts to
cause each such registration statement to become effective, to obtain all
consents or waivers of other parties which are required therefor and to keep
such registration statement effective for such period not in excess of 180
calendar days from the day such registration statement first becomes effective
as may be reasonably necessary to effect such sale or other disposition. The
obligations of CDnow hereunder to file a registration statement and to maintain
its
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effectiveness may be suspended for up to 60 calendar days in the aggregate if
the CDnow Board shall have determined that the filing of such registration
statement or the maintenance of its effectiveness would require premature
disclosure of material nonpublic information that would materially and adversely
affect CDnow or otherwise interfere with or adversely affect any pending or
proposed offering of securities of CDnow or any other material transaction
involving CDnow. Any registration statement prepared and filed under this
Section 7, and any sale covered thereby, will be at CDnow's expense (which shall
include all registration filing fees, printing expenses and fees and
disbursements of counsel to CDnow), except for underwriting discounts or
commissions, brokers' fees and the fees and disbursements of counsel to Time
Warner and Sony related thereto. Each of Time Warner and Sony will provide all
information regarding itself reasonably requested by CDnow for inclusion in any
registration statement to be filed hereunder. If, during the time periods
referred to in the first sentence of this Section 7, CDnow effects a
registration under the Securities Act of CDnow Common Stock for its own account
or for any other shareholders of CDnow (other than on Form S-4 or Form S-8, or
any successor form), it will allow Time Warner and Sony the right to participate
in such registration, and such participation will not affect the obligation of
CDnow to effect demand registration statements for Time Warner and Sony under
this Section 7; provided that, if the managing underwriters of such offering
advise CDnow in writing that in their opinion the number of shares of CDnow
Common Stock requested to be included in such registration exceeds the number
which can be sold in such offering, CDnow will include the shares requested to
be included therein by Time Warner and Sony pro rata with the shares intended to
be included therein by CDnow. In connection with any registration pursuant to
this Section 7, CDnow, on the one hand, and Time Warner and Sony (severally and
not jointly), on the other, will provide the other and any underwriter of the
offering with customary representations, warranties, covenants, indemnification
and contribution in connection with such registration.
8. Transfers. The Option Shares may not be sold, assigned,
transferred, or otherwise disposed of except (i) in an underwritten public
offering as provided in Section 7 or (ii) to any purchaser or transferee who
would not, to the knowledge of Time Warner or Sony, as applicable, after
reasonable inquiry immediately following such sale, assignment, transfer or
disposal, beneficially own more than 4.9% of the then-outstanding voting power
of CDnow; provided, however, that each of Time Warner and Sony shall be
permitted to (i) sell any Option Shares if such sale is
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made pursuant to a tender or exchange offer that has been approved or
recommended by a majority of the members of the CDnow Board and (ii) transfer
any Option Shares to any of its affiliates.
9. Listing. If CDnow Common Stock or any other securities to be
acquired upon exercise of the Option are then listed on Nasdaq (or any other
national securities exchange or national securities quotation system), CDnow,
upon the request of Time Warner and Sony, will promptly file an application to
list the shares of CDnow Common Stock or other securities to be acquired upon
exercise of the Option on Nasdaq (or any such other national securities exchange
or national securities quotation system) and will use reasonable efforts to
obtain approval of such listing as promptly as practicable.
10. Loss or Mutilation. Upon receipt by CDnow of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancelation of this
Agreement, if mutilated, CDnow will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered will constitute an
additional contractual obligation on the part of CDnow, whether or not the
Agreement so lost, stolen, destroyed, or mutilated shall at any time be
enforceable by anyone.
11. Miscellaneous. (a) Expenses. Except as otherwise provided in
this Agreement or in the Merger Agreement, each of the parties hereto will bear
and pay all costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated hereunder, including fees and expenses of its
own financial consultants, investment bankers, accountants and counsel.
(b) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(c) Notice. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or sent by
overnight courier (providing proof of delivery) to Time Warner, Sony or CDnow in
accordance with Section 11.02 of the Merger Agreement (or at such other address
for a party as shall be specified by like notice).
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(d) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to 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".
(e) Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement. This
Agreement shall become effective against Time Warner and Sony when one or more
counterparts have been signed by both Time Warner and Sony and delivered to
CDnow. This Agreement shall become effective against CDnow when one or more
counterparts have been executed by CDnow and delivered to Time Warner and Sony.
Each party need not sign the same counterpart.
(g) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(i) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (ii) except for the last sentence of Section 7, is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
(h) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof.
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(i) Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties without the prior
written consent of the other parties; provided, however, that each of Time
Warner and Sony may assign its rights, interests and obligations under this
Agreement to any affiliate thereof that is a party to the Transactions, without
the prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
(j) Enforcement. The parties agree that irreparable damage would
occur and that the parties would not have any adequate remedy at law 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 the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York state court, or any
Federal court located in the State of New York, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (i) consents to submit itself to the personal jurisdiction
of any New York state court or any Federal court located in the State of New
York in the event any dispute arises out of this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that it will not bring any
action relating to this Agreement in any court other than a New York state court
or any Federal court sitting in the State of New York and (iv) waives any right
to trial by jury with respect to any claim or proceeding related to or arising
out of this Agreement or any transaction contemplated hereby.
(k) Further Assurances. In the event of any exercise of the Option
by Time Warner and Sony, CDnow and Time Warner and Sony will execute and deliver
all other documents and instruments and take all other actions that may be
reasonably necessary in order to consummate the transactions provided for by
such exercise.
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IN WITNESS WHEREOF, each party has cause this Agreement to be signed
by its officers thereunto duly authorized as of the day and year first written
above.
TIME WARNER INC.,
by /s/ XXXXXXX X. XXXXXXXX
------------------------------
Name: XXXXXXX X. XXXXXXXX
Title: Executive Vice President and
Chief Financial Officer
SONY CORPORATION OF AMERICA,
by /s/ XXXXXX XXXXXXXX
------------------------------
Name: XXXXXX XXXXXXXX
Title: Chairman and
Chief Executive Officer
CDNOW, INC.,
by /s/ XXXXX XXXX
------------------------------
Name: XXXXX XXXX
Title: President and
Chief Executive Officer
