EXECUTION COPY
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT
OF
[P-NEWCO],
A DELAWARE LIMITED LIABILITY COMPANY
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS..........................................................1
ARTICLE 2 FORMATION OF LIMITED LIABILITY COMPANY...............................7
2.1 Formation............................................................7
2.2 Name; Principal Place of Business....................................7
2.3 Registered Office and Registered Agent...............................7
2.4 Agreement; Effect of Inconsistencies With the Act or the Code........8
2.5 Business.............................................................8
2.6 Term.................................................................8
2.7 Qualification........................................................8
ARTICLE 3 MEMBERSHIP...........................................................8
3.1 Members..............................................................8
3.2 Representations and Warranties.......................................9
3.3 Incorporation of Representations and Warranties......................9
3.4 Resignation or Withdrawal of a Member...............................10
3.5 Effect of Certain Events on Membership..............................10
3.6 Restrictions on Transfers of Interests..............................10
3.7 No Authority as Agent...............................................10
ARTICLE 4 MANAGEMENT..........................................................11
4.1 Management of the Company by Management Committee...................11
4.2 Appointment of Management Committee.................................11
4.3 Responsibilities of the Management Committee........................12
4.4 Officers............................................................13
4.5 Liability of Committee Members and Officers.........................14
4.6 Records, Audits and Reports.........................................14
i
ARTICLE 5 CAPITAL CONTRIBUTIONS...............................................14
5.1 Initial Capital Contributions.......................................14
5.2 Percentage Interests................................................15
5.3 Working Capital Contributions.......................................15
5.4 Failure to Make Contributions.......................................15
5.5 Capital Accounts....................................................16
ARTICLE 6 DISTRIBUTIONS, ALLOCATIONS AND TAX MATTERS..........................16
6.1 Application of Gross Cash Proceeds..................................16
6.2 Allocation of Net Profits...........................................17
6.3 Allocation of Net Losses............................................17
6.4 General Rules for Allocations.......................................18
6.5 Special Allocations to Capital Accounts.............................18
6.6 Tax Allocations; Section 704(c) of the Code.........................19
6.7 Tax Matters Member..................................................20
6.8 Section 754 Election................................................20
6.9 Returns and Other Elections.........................................20
6.10 Partnership Tax Treatment...........................................20
ARTICLE 7 INDEMNIFICATION AND LIMITATION OF LIABILITY.........................20
7.1 Indemnification.....................................................20
7.2 Limitation of Liability.............................................22
7.3 Savings Clause......................................................22
ARTICLE 8 DISSOLUTION AND WINDING UP..........................................22
8.1 Dissolution.........................................................22
8.2 Winding Up..........................................................22
ii
8.3 Reversion of Rights.................................................23
8.4 Order of Payment Upon Liquidation...................................23
8.5 Antecedent Activities...............................................23
8.6 Limitations on Payments Made in Dissolution.........................23
8.7 Certificate of Cancellation.........................................23
8.8 Effect of Filing Certificate of Cancellation........................24
ARTICLE 9 MISCELLANEOUS.......................................................24
9.1 Amendment...........................................................24
9.2 Governing Law and Severability......................................24
9.3 Counterparts........................................................24
9.4 Titles and Subtitles................................................24
9.5 Notices.............................................................24
9.6 Entire Agreement....................................................25
9.7 Power of Attorney...................................................25
9.8 Related Party Transactions..........................................25
9.9 Dispute Resolution..................................................25
9.10 No Partition........................................................26
9.11 Bankruptcy..........................................................26
iii
LIMITED LIABILITY COMPANY
OPERATING AGREEMENT FOR
[P-NEWCO],
A DELAWARE LIMITED LIABILITY COMPANY
This Limited Liability Company Operating Agreement (this "Operating
Agreement") of [P-Newco], a Delaware limited liability company (the "Company"),
is made as of June 7, 2005, by and between PATRIOT SCIENTIFIC CORPORATION, a
Delaware corporation ("Patriot"), and TECHNOLOGY PROPERTIES LIMITED INC., a
California corporation ("TPL") (collectively, the "Members").
RECITALS
WHEREAS, Patriot has formed the Company as a limited liability company
under the Delaware Limited Liability Company Act, 6 Del. C. ss. 18-101, et seq.,
as amended (the "Act"), for the purposes of effecting the transactions
contemplated by the Master Agreement (as defined below);
WHEREAS, prior to the capital contributions and the issuance of the
Percentage Interests described in Article 5 hereof, Patriot has been the sole
member of the Company;
WHEREAS, the Members wish to enter into this Operating Agreement to
provide for the structure, governance and operation of the Company.
AGREEMENT
NOW THEREFORE, in consideration of the respective covenants and
promises contained herein and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto agree
as follows:
ARTICLE 1
DEFINITIONS
The following terms shall have the meanings set forth below for
purposes of this Operating Agreement:
"AAA" has the meaning set forth in Section 4.2(c).
"Act" means the Delaware Limited Liability Company Act.
"Active Potential Licensees" has the meaning set forth in Section 6.2
of the Master Agreement.
"Adjusted Capital Account Deficit" means, with respect to any Member
for any taxable year or other period, the deficit balance, if any, in such
Member's Capital Account as of the end of such year or other period, after
giving effect to the following adjustments: (a) credit to such Capital Account
any amounts that such Member is obligated to restore or is deemed obligated to
restore as described in the penultimate sentence of Treasury Regulation Section
1.704-2(g)(1) and in Treasury Regulation Section 1.704-2(i); and (b) debit to
such Capital Account the items described in Treasury Regulation Sections
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
"Adjusted Gross Cash Proceeds" means Gross Cash Proceeds minus TPL
Direct Reimbursable Expenses.
"Affiliate", with respect to any Person, means any other Person
directly or indirectly controlling, controlled by or under common control with,
such Person. For purposes of this Operating Agreement, "control" (including with
correlative meanings, the terms "controlling", "controlled by" or "under common
control with") as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities or by contract or otherwise.
"Annual Business Plan" means, for any Fiscal Year, the Company's annual
financial and operating plan and budget for such Fiscal Year as formally
approved by the Management Committee, as such financial and operating plan and
budget may be amended from time to time by the Management Committee.
"Antecedent Activities" means active negotiations with parties
identified as Active Potential Licensees pursuant to Section 6.2 of the Master
Agreement..
"Applicable Law" means any domestic or foreign, federal, state or local
statute, law, common law, ordinance, rule, administrative interpretation,
regulation, order, writ, injunction, directive, judgment, decree, permit or
other requirement of any Governmental Authority.
"Book Value" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(a) The initial Book Value of any asset contributed by a
Member to the Company shall be the gross fair market value of such asset (not
reduced by any associated liabilities), as agreed to by the contributing Member
and the Management Committee;
(b) The Book Value of the property of the Company shall be
adjusted to equal its gross fair market value, as determined by the Management
Committee, as of the following times: (i) the acquisition of an additional
Interest by any new or existing Member in exchange for more than a de minimis
Capital Contribution; (ii) the distribution by the Company to a Member of more
than a de minimis amount of property as consideration for an Interest; (iii) the
liquidation of the Company within the meaning of Treasury Regulations Section
1.704-1 (b)(2)(ii)(g); and (iv) any other instance in which such adjustment is
permitted under Treasury Regulation Section 1.704-1(b)(2)(iv); provided,
however, that adjustments pursuant to clauses (i), (ii), and (iv) above shall be
made only if the Management Committee reasonably determines that such
adjustments are necessary or appropriate to reflect the relative economic
interests of the Members in the Company; and
(c) The Book Value of any property distributed to a Member
shall be adjusted to equal the gross fair market value of such asset on the date
of distribution as determined by the Management Committee.
2
The Book Value of any property which has been established or adjusted to reflect
gross fair market value hereunder shall thereafter be adjusted by depreciation
as provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(g) and any other
adjustment to the value of such property other than depreciation or
amortization.
"Capital Account" means, with respect to any Member, the capital
account maintained by the Company for such Member in accordance with Section
5.5.
"Change of Control" means (a) the merger or consolidation of Patriot
with or into another corporation in which Patriot is not the surviving entity,
or a reverse triangular merger, or similar transaction, in which Patriot is the
surviving entity but the shares of Patriot's capital stock outstanding
immediately prior to the merger are converted into other property, whether in
the form of securities, cash, or otherwise, and as a result of which the
outstanding capital stock of Patriot prior to such transaction represents less
than a majority of the outstanding capital stock of Patriot or the acquirer or
successor following such transaction, (b) any sale or transfer of all or
substantially all of Patriot's assets to any other Person, or (c) the sale or
transfer of shares of Patriot's capital stock, warrants, options or instruments
convertible into capital stock of Patriot and as a result of which the
outstanding capital stock of Patriot on a fully diluted basis assuming
conversion of all outstanding instruments convertible into shares of Patriot's
capital stock prior to such transaction represents less than a majority of the
outstanding capital stock of Patriot or the acquirer or successor following such
transaction.
"Certificate of Formation" means the Certificate of Formation of the
Company as filed with the Secretary of State of the State of Delaware on June
[__], 2005, as the same may be amended or restated from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor federal tax statute enacted after the date of this
Operating Agreement.
"Commercialization Agreement" means that certain Commercialization
Agreement, dated as of the date hereof, by and among Patriot, TPL and the
Company.
"Company" has the meaning set forth in the Preamble.
"Company Expenses" means any direct operating expenses of the Company
as may be approved by the Management Committee, including any fees or other
compensation payable to the Managers or for expenses related to the preparation
of Company financial statements, tax reporting and the maintenance of a bank
account in the name of the Company, and other similar administrative expenses.
"Company Minimum Gain" means "partnership minimum gain" as defined in
Treasury Regulation Section 1.704-2(d).
"Damages" means all demands, claims, actions or causes of action,
assessments, losses (including reasonably foreseeable lost profits), damages,
costs, expenses, liabilities, judgments, awards, fines, sanctions, penalties,
charges and amounts paid in settlement (net of insurance proceeds and proceeds
from related third party indemnification, contribution or similar claims
actually received), including (a) interest at a rate equal to 200 basis points
above the prime rate, as in effect from time to time, of Citibank, N.A., on cash
disbursements in respect of any of the foregoing, compounded quarterly, from the
date each such cash disbursement is made until the Person incurring the same
shall have been indemnified in respect thereof, (b) reasonable costs, fees and
expenses of such Person's Representatives and (c) any reasonable costs, fees and
expenses incurred in connection with investigating, defending against, or
settling any such claims.
3
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean, with respect to the Initial Capital
Contributions, the fair market value of such asset as determined by the Members.
"Fiscal Year" means (i) any twelve (12) month period commencing on June
1 and ending on May 31, or (ii) any portion of the period described in clause
(i) of this sentence for which the Company is required to allocate Net Profits,
Net Losses and other items of Company income, gain, loss or deduction pursuant
to Article VI, as the case may be.
"Governmental Approval" means an authorization, consent, approval,
permit or license issued by, or a registration or filing with, any Governmental
Authority.
"Governmental Authority" means any foreign, domestic, federal,
territorial, state or local governmental authority, quasi-governmental
authority, instrumentality, court, government or self-regulatory organization,
commission, tribunal or organization or any regulatory, administrative or other
agency, or any political or other subdivision, department or branch of any of
the foregoing.
"Gross Cash Proceeds" means all cash proceeds received pursuant to
licenses, judgments, settlements and other payments with respect to the right to
make, have made, use, sell, and import products utilizing the MSD Patents.
"Indemnitees" means the Members, Managers, officers and employees of
the Company, as well as their respective Representatives, entitled to
indemnification by the Company pursuant to Article VII.
"Independent Manager" has the meaning set forth in Section 4.2(c).
"Initial Capital Contributions" has the meaning set forth in Section
5.1.
"Initial Working Capital Contribution" means the *** payable by
each of Patriot and TPL, in the aggregate amount of *** due upon the
execution of this Operating Agreement.
"JAMS" has the meaning set forth in Section 4.2(c).
"Liabilities" means, with respect to any Person, any liability or
obligation of such Person of any kind, character or description, whether known
or unknown, absolute or contingent, accrued or unaccrued, liquidated or
unliquidated, secured or unsecured, joint or several, due or to become due,
vested or unvested, executory, determined, determinable or otherwise and whether
or not the same is required to be accrued on the financial statements of such
Person or is disclosed on any schedule to the Master Agreement or this Operating
Agreement.
4
"Lien" means, with respect to any asset, any mortgage, title defect or
objection, lien, pledge, charge, security interest, hypothecation, restriction,
encumbrance or charge of any kind in respect of such asset.
"Liquidator" has the meaning set forth in Section 8.2.
"Management Committee" has the meaning set forth in Section 4.1.
"Manager" means a member of the Management Committee.
"Master Agreement" means that certain agreement, dated as of June 7,
2005, by and between Patriot and TPL.
"Member Minimum Gain" means the Company's "partner nonrecourse debt
minimum gain" as defined in Treasury Regulation Section 1.704-2(i)(2).
"Member Nonrecourse Debt" means "partner nonrecourse debt" as defined
in Treasury Regulation Section 1.704-2(b)(4).
"Member Nonrecourse Deductions" means "partner nonrecourse deductions"
as defined in Treasury Regulation Section 1.704-2(i)(2).
"Members" has the meaning set forth in the Preamble.
"MSD Patents" means those microprocessor science and design patents
identified on Schedule 1 to the Master Agreement.
"Net Cash Proceeds" has the meaning set forth in Section 6.1(a)(v).
"Net Profit" or "Net Loss" means, for any Accounting Period, the
amount, computed as of the last day thereof, of the net income or loss of the
Company determined in accordance with federal income tax principles (but without
requiring any items to be stated separately pursuant to Code Section 703), with
the following adjustments:
(a) Any income of the Company that is exempt from federal
income tax shall be included in the computation of Net Profit or Net Loss;
(b) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Treasury Regulations Section 1.704-l(b)(2)(iv)(i) shall be included in the
computation of Net Profit or Net Loss;
(c) Any adjustment in the Book Value of property in accordance
with this Agreement and pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(f) or (g) shall be taken into account as gain or loss from the
disposition of such asset for purposes of computing Net Profit or Net Loss (to
the extent such adjustment is not already reflected in the Capital Accounts of
the Members);
5
(d) In any situation in which an item of income, gain, loss or
deduction is affected by the adjusted tax basis of property, the Book Value of
the property shall be used in lieu of adjusted basis (notwithstanding that the
adjusted tax basis of such property may differ from its Book Value), and in lieu
of depreciation, amortization and other cost recovery deductions taken into
account in computing taxable income or loss, there will be taken into account
depreciation for the taxable year or other period as determined in accordance
with Treasury Regulation Section 1.704-1(b)(2)(iv)(g); and
(e) Any items of income, gain, deduction and loss specially
allocated pursuant to Section 6.6 of this Agreement shall not be considered in
determining Net Profit or Net Loss.
"Newco Licenses" means the P-Newco License and the T-Newco License.
"Nonrecourse Deductions" has the meaning set forth in Treasury
Regulation Section 1.704-2(b)(1).
"Operating Agreement" has the meaning set forth in the Preamble.
"Patriot" has the meaning set forth in the Preamble.
"Patriot Appointee" has the meaning set forth in Section 4.2(a).
"Percentage Interest" means a Member's percentage interest in the
Company, as such Percentage Interest may be adjusted from time to time pursuant
to the terms of this Operating Agreement.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, estate or other entity or
organization, including a Governmental Authority.
"P-Newco License" means that certain license agreement entered into
between Patriot and the Company.
"Proceedings" means any actions, suits, claims, hearings, arbitrations,
proceedings (public or private) or governmental investigations that have been
brought by or against any Governmental Authority or any other Person.
"Recovery Event" means the moment at which payment is actually received
by Patriot, TPL, or the Company as a result of or in connection with any
Antecedent Activities.
"Regulatory Allocations" are those allocations contained in Section
6.5.
"Representatives" means the officers, directors, employees, attorneys,
accountants, advisors, representatives and agents of a Person.
6
"Securities Act" means the Securities Act of 1933, as amended.
"Tax Matters Member" means that Member appointed by the Management
Committee with the power to manage and control, on behalf of the Company, any
administrative proceeding at the Company level with the Internal Revenue Service
relating to the determination of any item of Company income, gain, loss,
deduction or credit for federal income tax purposes.
"T-Newco" means a newly formed Delaware limited liability company,
wholly owned by TPL.
"T-Newco License" means that certain license agreement entered into
between TPL and T-Newco.
"TPL" has the meaning set forth in the Preamble.
"TPL Appointee" has the meaning set forth in Section 4.2(b).
"TPL Direct Reimbursable Expenses" has the meaning set forth in Section
4.2 of the Commercialization Agreement.
"Transfer" has the meaning set forth in Section 3.6.
"Treasury Regulations" means the proposed, temporary and final
regulations promulgated under the Code in effect as of the date of filing the
Certificate of Formation and the corresponding sections of any regulations
subsequently issued that amend or supersede those regulations.
"Working Capital Contribution" means the amount payable to the Company
each Fiscal Year by each of the Members for the Company's working capital
requirements pursuant to Section 5.3
"Working Capital Fund" means the fund containing the Company's working
capital to be maintained pursuant to Section 5.3(b).
ARTICLE 2
FORMATION OF LIMITED LIABILITY COMPANY
2.1 Formation. Patriot caused the Certificate of Formation of the
Company to be filed with the Delaware Secretary of State on June [__], 2005.
2.2 Name; Principal Place of Business. Unless and until amended in
accordance with this Operating Agreement and the Act, the name of the Company is
"[__________]". The principal place of business of the Company shall be such
place or places as the Management Committee from time to time determines.
2.3 Registered Office and Registered Agent. The Company's initial
registered office shall be at the office of its registered agent at ▇▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, and the name of its initial
registered agent at such address shall be National Registered Agents, Inc. The
registered agent may be changed from time to time by filing the address of the
new registered office and/or the name of the new registered agent with the
Secretary of State of the State of Delaware pursuant to the Act.
7
2.4 Agreement; Effect of Inconsistencies With the Act or the Code. It
is the express intention of the Members that this Operating Agreement, together
with the Exhibits and Schedules, shall be the sole source of agreement of the
parties with respect to the structure, governance and the operation of the
Company and, except to the extent a provision of this Operating Agreement
expressly incorporates federal income tax rules by reference to sections of the
Code or Treasury Regulations or is expressly prohibited or ineffective under the
Act, this Operating Agreement shall govern the structure and operation of the
Company, even when inconsistent with, or different than, the provisions of the
Act or any other law or rule. To the extent that any provision of this Operating
Agreement is prohibited or ineffective under the Act, this Operating Agreement
shall be deemed to be amended to the smallest degree possible in order to make
this Operating Agreement effective under the Act in accordance with the intent
of the parties. In the event the Act is subsequently amended or interpreted in
such a way to make any provision of this Operating Agreement that was formerly
invalid valid, such provision shall be considered to be valid from the effective
date of such interpretation or amendment. Each of the Members shall be entitled
to rely on the provisions of this Operating Agreement, and none of the Members
shall be liable to the Company or to any of the other Members for any action or
refusal to act taken in good faith reliance on the terms of this Operating
Agreement. The Members hereby agree that the duties and obligations imposed on
the Members as such shall be those set forth in this Operating Agreement, which
is intended to govern the relationship among and between the Company and the
Members, notwithstanding any provision of the Act or common law to the contrary.
2.5 Business. The purpose of the Company is to engage in any activity
for which a limited liability company may be organized under the Act.
2.6 Term. The term of the Company commenced upon the filing of the
Certificate of Formation with the Delaware Secretary of State on June [__], 2005
and shall continue until the Company's dissolution in accordance with Article
VIII of this Operating Agreement.
2.7 Qualification. The Management Committee shall cause the Company to
be qualified or registered, if and to the extent required, under the applicable
laws of any jurisdiction in which such registration may be required, and shall
be authorized to execute, deliver and file any certificates and documents
necessary to effect such qualification or registration.
ARTICLE 3
MEMBERSHIP
3.1 Members. The names and addresses of the Members are as follows:
Patriot Scientific Corporation ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Technology Properties Limited Inc. ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇.,
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
8
3.2 Representations and Warranties. Each Member hereby represents and
warrants to the Company and the other Member as follows:
(a) Such Member is either an individual or a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation with all requisite corporate power and authority to own, lease and
operate its properties and assets and to carry on its business as now conducted;
(b) Such Member has all requisite power and authority to execute
and deliver this Operating Agreement and to perform its obligations hereunder.
The execution and delivery by such corporate Member of this Operating Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on its part. This Operating
Agreement has been duly executed and delivered by such Member and constitutes
the legal, valid and binding obligations of such Member, enforceable against it
in accordance with its terms, except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally;
(c) The execution, delivery and performance by such Member of this
Operating Agreement and the consummation of the transactions contemplated hereby
do not and will not (i) violate the certificate of incorporation or bylaws of
such Member, in each case as amended through the date hereof, (ii) conflict
with, result in a breach of or constitute (or, with the giving of notice or
lapse of time, or both, constitute) a default under, or require the approval or
consent of any Person pursuant to, any material agreement, instrument or other
document to which such Member is a party or by which it or its properties or
assets is bound or (iii) violate any material provision of any statute, rule or
regulation applicable to such Member or binding on it or any of its assets or
(iv) except as set forth in the Newco Licenses, result in the creation or
imposition of any Lien on the MSD Patents.
(d) Such Member is acquiring its Percentage Interest for investment
purposes and not with a view to the resale or distribution thereof;
(e) Such Member understands and acknowledges that such Member's
Percentage Interest has not been registered under the Securities Act or any
state securities or blue sky laws and may not be sold unless registered under
the Securities Act and qualified under applicable state securities or blue sky
laws or such sale is made pursuant to an exemption from such registration and
qualification requirements;
(f) The limitations on Transfer contained in Section 3.6 create an
economic risk that such Member is capable of bearing; and
(g) Such Member is a "United States person" within the meaning of
Section 7701(a)(30) of the Code.
3.3 Incorporation of Representations and Warranties. Each of Patriot
and TPL hereby reaffirms the representations and warranties made by such Member
in the Master Agreement as if such representations and warranties were set forth
fully herein.
9
3.4 Resignation or Withdrawal of a Member.
(a) No Member shall resign from membership in the Company or
withdraw their interest in the capital of the Company, except (i) in connection
with the dissolution of the Company pursuant to the provisions of Article VIII
or (ii) with the prior written consent of all of the other Members.
(b) The resignation of a Member shall not (i) relieve such Member
of any of its covenants, agreements, duties, obligations or liabilities under
this Operating Agreement whether arising prior to, on, or after the date of such
resignation (including, without limitation, any contingent obligations based on
acts or omissions occurring, or liabilities or obligations incurred, prior to,
on or after the date of such resignation) or (ii) directly or indirectly result
in the termination of, or relieve such Member (or any Affiliate thereof) of, or
otherwise affect, any of the covenants, agreements, duties, obligations or
liabilities of such Member (or any Affiliate thereof) under any other agreement
to which such Member is a party.
3.5 Effect of Certain Events on Membership.
(a) Bankruptcy, Foreclosure, or Other Similar Event. In the event
of a Member's bankruptcy, or the foreclosure upon or other similar proceeding
with respect to that Member's interest in the MSD Patents or that Member's
Percentage Interest:
(i) any and all rights that Member may have under Section 4.2
of this Operating Agreement shall automatically terminate; and
(ii) any and all rights that Member may have under Sections
2.2.1 and 2.2.2 of the P-Newco License or T-Newco License, as the case may be,
shall automatically and without further action by any of the parties thereto be
irrevocably transferred to the Company.
(b) Change of Control. In the event of a Change of Control of
Patriot or TPL:
(i) any and all rights Patriot or TPL may have under Section
4.2 of this Operating Agreement, as the case may be, shall automatically
terminate; and
(ii) Patriot or TPL's rights under Sections 2.2.1 and 2.2.2 of
the P-Newco License or T-Newco License, as the case may be, shall automatically
and without further action by any of the parties thereto be irrevocably
transferred to the Company.
3.6 Restrictions on Transfers of Interests. Except as provided in
Section 5.4, no Member shall sell, assign, pledge, mortgage or otherwise dispose
of or transfer (a "Transfer") its Percentage Interest in the Company, whether in
whole or in part, without the consent of the Management Committee, which consent
may be withheld for any or for no reason.
3.7 No Authority as Agent. Except as may be authorized by the
Management Committee, or as set forth in the Commercialization Agreement, no
Member shall have the authority in its or his capacity as a Member to enter into
any transaction on behalf of the Company or to otherwise bind the Company.
10
ARTICLE 4
MANAGEMENT
4.1 Management of the Company by Management Committee. The business
and affairs of the Company shall be managed by a management committee (the
"Management Committee") consisting of three (3) Managers, which number may not
be changed without the written consent of the Members holding at least 75% of
the Percentage Interests.
4.2 Appointment of Management Committee.
(a) Patriot Appointment. Patriot shall have the right to appoint
one (1) Manager to the Management Committee (the "Patriot Appointee").
(b) TPL Appointment. TPL shall have the right to appoint one (1)
Manager to the Management Committee (the "TPL Appointee").
(c) Independent Manager. The Patriot Appointee and the TPL
Appointee shall work together in good faith to appoint a mutually acceptable
third Manager (the "Independent Manager"). In the event that the Patriot
Appointee and the TPL Appointee are unable to appoint a mutually acceptable
Manager within 10 days of the resignation or removal of the Independent Manager,
either party may apply to the American Arbitration Association ("AAA") in Santa
▇▇▇▇▇ County, or the nearest county thereto, if necessary, for the appointment
of the Independent Manager, and the AAA shall select the Independent Manager
from a list of no more than three persons submitted by each party. All costs
associated with the selection of the Independent Manager by the AAA pursuant to
this Section 4.2(c) shall be paid by the Company.
(d) Term of Service. Each Manager (other than the Independent
Manager) will serve until his or her death or resignation from the Management
Committee, or until his or her removal from the Management Committee by the
Member who appointed him or her. The Independent Manager shall serve a five (5)
year term (subject to earlier removal as provided below).
(e) Initial Managers.The initial Managers are as follows:
Patriot Appointee ▇▇▇▇▇ ▇. ▇▇▇▇
TPL Appointee ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Independent Manager ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
(f) Meetings; Place of Meetings; Telephonic Participation.
Meetings of the Management Committee may be held at such times and places within
or without the State of Delaware as the Management Committee may from time to
time designate or as shall be designated by the Manager or Managers calling the
meeting in the notice or waiver of notice of any such meeting. Regular meetings
of the Management Committee shall be held not less than once during every
calendar quarter. Special meetings of the Management Committee shall be held
whenever called by one or more Managers. Notice of the time, place and purpose
of each such special meeting shall be sent by facsimile transmission or
electronic mail or be delivered personally or mailed to and received by each
Manager not less than 72 hours before the time at which the meeting is to be
held. Notice of any meeting of the Management Committee shall not be required to
be given to any Manager who waives such notice in writing or who is present at
such meeting, except a Manager who shall attend such meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. At the request
of any Manager, any or all Managers may participate telephonically in any
meeting of the Management Committee so long as all persons participating in the
meeting can hear each other, and such participation shall constitute presence in
person at such meeting. Any action required or permitted to be taken at any
meeting of the Management Committee may be taken without a meeting, without
prior notice and without a vote, if a consent in writing (including by
electronic transmission as permitted by Section 18-302 of the Act), setting
forth the action so taken, shall be signed or delivered by all Managers. Such
written (or electronically transmitted) consent shall be filed with the minutes
of proceedings of the Management Committee.
11
(g) Quorum. Two (2) Managers must be present at a meeting of
the Management Committee to establish a quorum for the transaction of business.
(h) Majority Vote. All actions to be taken by the Management
Committee shall require the affirmative vote of at least two (2) of the three
(3) Managers.
(i) Resignation; Removal; Vacancies; Compensation.
(i) Resignation. A Manager may resign at any time by giving
written notice to the Members. The resignation of a Manager shall take effect
upon receipt of such notice or at such later time as shall be specified in the
notice. Unless otherwise specified in the notice, the acceptance of the
resignation shall not be necessary to make it effective.
(ii) Removal.
(A) Removal of the Patriot and TPL Appointees. The
Patriot Appointee to the Management Committee may be removed only by Patriot,
with or without cause. The TPL Appointee to the Management Committee may be
removed only by TPL, with or without cause.
(B) Removal of the Independent Manager.
(1) The Independent Manager may be removed at any
time by written consent of the Members holding at lease 75% of the Percentage
Interests.
(2) The Independent Manager many be removed by
either Patriot or TPL at any time for cause, provided, however that a decision
by either Patriot or TPL to remove the Independent Manager for cause pursuant to
this provision shall be deemed a dispute that must be resolved pursuant to
Section 9.9 hereof, and the Independent Manager may not be removed unless and
until such dispute has been resolved pursuant to Section 9.9. For purposes of
this provision, the term "cause" includes, but is not limited to:
(a) the Independent Manager's
insubordination, fraud, disloyalty, dishonesty, willful misconduct, or gross
negligence in the performance of the Independent Manager's duties under this
Operating Agreement;
(b) the Independent Manager's commission of
a crime against the Company or violation of any law, order, rule, or regulation
pertaining to the Company's business;
(c) the Independent Manager's inability,
whether due to death, disability, or other reason, to perform the job functions
and responsibilities in accordance with reasonable performance standards; and
(d) demonstrable favoritism toward the views
of one of the Members of the Management Committee, rather than the strategic
principles articulated in the then current Annual Business Plan.
(iii) Vacancies. Vacancies on the Management Committee shall
be filled by the Member who originally appointed the vacating Manager, or, in
the case of the Independent Manager, pursuant to Section 4.2(c) of this
Operating Agreement.
(iv) Compensation. No Manager other than the Independent
Manager (in the Members' discretion) shall be eligible to receive separate
compensation from the Company for his or her services on the Management
Committee; provided, however, that the Managers shall be reimbursed by the
Company for the reasonable and actual costs incurred in attending and
participating in any meetings of the Management Committee and other costs and
expenses reasonably related to fulfilling the duties and obligations of a
Manager hereunder.
4.3 Responsibilities of the Management Committee. The Management
Committee shall have the responsibility, on behalf of the Company:
12
(a) To approve the Annual Business Plan, as well as any
modifications thereto.
(b) To make any distributions to Members pursuant to Article VI.
(c) To make any filings with any Governmental Authority on
behalf of the Company.
(d) To purchase liability and other insurance to protect the
Company's properties and business and to purchase liability insurance to
indemnify or otherwise protect the Members, Managers, officers and employees of
the Company.
(e) To make certain decisions regarding tax matters pursuant
to the terms of this Operating Agreement.
(f) To approve the execution by TPL pursuant to the
Commercialization Agreement of any license agreement, infringement claim
settlement or other agreement with respect to the MSD Patents, the proposed
terms of which do not fall within the guidelines for allowable license
agreements and infringement claim settlements set forth in Exhibit C to the
Commercialization Agreement.
(g) To approve any modifications, amendments or waivers of the
Commercialization Agreement, and any of the license or other agreements referred
to therein to which the Company is a party.
(h) To take or authorize such other actions on behalf of the
Company as are consistent with Applicable Law and the fiduciary duties of the
Managers and the Members.
4.4 Officers. The Company shall have a President and Treasurer and
such other officers as the Management Committee may determine. Any officer
except the President and the Treasurer may hold more than one office
concurrently. Except as set forth herein, the officers shall serve at the
pleasure of the Management Committee. The Management Committee may determine a
reasonable compensation to be paid to each officer so appointed. The officers
shall exercise such powers as shall be determined or delegated from time to time
by the Management Committee.
(a) President. The Company shall have a President with primary
responsibility for and active charge of the management and supervision of the
Company's business and affairs. The President may execute in the name of the
Company license agreements, settlement agreements, checks and other similar
documents and instruments to the extent that such execution is consistent with
and in furtherance of the Annual Business Plan, as well as such other documents
and instruments otherwise authorized for execution by the Management Committee.
For as long as the Commercialization Agreement is in effect, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
shall be President of the Company.
(b) Treasurer. The Company shall have a Treasurer as the
principal financial officer and principal accounting officer of the Company who
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Company. The initial treasurer shall be [__________].
13
4.5 Liability of Committee Members and Officers. The Managers and the
officers shall not be liable to the Company or to any Member for any Damages
suffered or sustained by the Company or any Member, as the case may be, unless
the Damage results from the fraud, deceit, gross negligence, willful misconduct,
breach of fiduciary duty, a knowing violation of law by a specific Manager or
officer or a material breach of such Manager's or officer's obligations under
this Operating Agreement, in which event only the Manager or officer who engaged
in such conduct or behavior (and no other Manager or officer) shall be liable
for the full extent of Damages suffered or sustained to the full extent
permitted pursuant to this Agreement or provided by Applicable Law.
4.6 Records, Audits and Reports. At the expense of the Company, proper
and complete records and books of account shall be kept or shall be caused to be
kept by the Management Committee (or a designee thereof) in which shall be
entered fully and accurately all transactions and other matters relating to the
Company's business in the detail and completeness customary and usual for
businesses of the type engaged in by the Company. The books and records shall at
all times be maintained at the principal executive offices of the Company and
shall be open to the inspection and examination of the Members or their duly
authorized agents during business hours. At a minimum, the Company shall keep at
its principal place of business:
(a) A current list of the full name and last known business,
residence or mailing address of each Member and Manager;
(b) A copy of the Certificate of Formation and all amendments
thereto, together with executed copies of any powers of attorney pursuant to
which any amendment has been executed;
(c) Copies of the Company's federal, state and local income
tax returns and reports, if any, for the four most recent years;
(d) A copy of this Operating Agreement, as amended to date,
any correspondence relating to any Member's obligation to contribute cash,
property or services, and copies of any financial statements of the Company for
the three most recent years; and
(e) Minutes of every meeting of the Management Committee, or
any written consents of the Managers obtained in lieu of a meeting.
The Management Committee shall maintain and preserve, during the term
of the Company and for a period of five years thereafter, all accounts, books
and other relevant Company documents.
ARTICLE 5
CAPITAL CONTRIBUTIONS
5.1 Initial Capital Contributions. Concurrently with the execution
hereof, Patriot and TPL shall enter into the P-Newco License, TPL and T-Newco
shall enter into the T-Newco License, T-Newco shall merge with and into the
Company and each of the Members shall make the capital contributions set forth
on Schedule 1 hereto (collectively, the "Initial Capital Contributions"). The
Initial Capital Contributions to the Company of each Member shall be deemed to
have a Fair Market Value as set forth opposite such Member's name on Schedule 1
hereto.
14
5.2 Percentage Interests. Upon making its Initial Capital
Contribution, and as a result of the merger contemplated by the Merger Agreement
(as defined in the Master Agreement), TPL shall be issued Percentage Interests
in the Company such that Patriot will no longer be the sole Member of the
Company and the Members shall have the Percentage Interests set forth on
Schedule 2 hereto. Percentage Interests shall for all purposes be personal
property. A Member has no interest in specific property of the Company.
5.3 Working Capital Contributions.
(a) Initial Working Capital Contribution. On the date hereof,
Patriot and TPL shall each make an Initial Working Capital Contribution to the
Company of *** for an aggregate Initial Working Capital Contribution
of *** .
(b) Future Working Capital Contributions. At any time during the
Fiscal Year at the discretion of the Management Committee, Patriot and TPL shall
be obligated to make Working Capital Contributions in equal amounts in order to
maintain a Working Capital Fund of not more than *** and then only to the
extent necessary to bring the balance of the Working Capital Fund to ***
provided, however, that neither TPL nor Patriot shall be required to contribute
more than *** in any Fiscal Year.
Except as provided in this Section 5.3, no Member shall be obligated to
make any contribution of capital to the Company.
5.4 Failure to Make Contributions. The failure of Patriot or TPL to
make Working Capital Contributions when due pursuant to Section 5.3 shall result
in the following adjustments to that Member's Percentage Interest:
(a) For each One Dollar ($1) that is not contributed by Patriot or
TPL when due pursuant to Section 5.3, one hundred thousandth of a percent
(0.00001%) of the outstanding Percentage Interests of the Company shall be
deducted from that Member's Percentage Interest and transferred to the other
Member. As an example, if a Member failed to contribute *** when due
pursuant to Section 5.3, *** of the outstanding Percentage Interests of
the Company would be deducted from that Member's Percentage Interest and
transferred to the other Member.
(b) In the event that Patriot's Percentage Interest falls below
25%, Patriot shall lose the right to appoint the Patriot Appointee pursuant to
Section 4.2(a), and TPL shall have the right to appoint the Patriot Appointee,
such that TPL shall have the right to appoint two (2) of the three (3) Managers.
In the event that TPL's Percentage Interest falls below 25%, TPL shall lose the
right to appoint the TPL Appointee pursuant to Section 4.2(b), and Patriot shall
have the right to appoint the TPL Appointee, such that Patriot shall have the
right to appoint two (2) of the three (3) Managers.
15
5.5 Capital Accounts. A separate Capital Account shall be established
and maintained for each Member.
(a) Each Member's Capital Account will be increased by:
(i) The Initial Capital Contribution by the Member to the
Company pursuant to Section 5.1;
(ii) The Working Capital Contributions by the Member to the
Company pursuant to Section 5.3; and
(iii) Each Member's pro rata allocation of the Company's and
each Member's contributions to the Working Capital Fund.
(b) Each Member's Capital Account will be decreased by:
(i) The amount of Net Cash Proceeds distributed to the
Member by the Company;
(ii) The Fair Market Value of property distributed to the
Member by the Company; and
(iii) Allocations to the Member of Net Losses.
(c) The manner in which Capital Accounts are to be maintained
pursuant to this Section 5.5 is intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations promulgated thereunder.
If, in the opinion of the Management Committee after consultation with the
Company's accountants, the manner in which Capital Accounts are to be maintained
pursuant to the preceding provisions of this Section 5.5 should be modified to
comply with Section 704(b) of the Code and the Treasury Regulations thereunder,
then, notwithstanding anything to the contrary contained in the preceding
provisions of this Section 5.5, the method in which Capital Accounts are
maintained shall be so modified without any approval of the Management
Committee; provided, however, that any change in the manner of maintaining
Capital Accounts shall not materially alter the economic agreement between the
Members.
(d) No Member shall have any liability to restore all or any
portion of a deficit balance in the Member's Capital Account.
ARTICLE 6
DISTRIBUTIONS, ALLOCATIONS AND TAX MATTERS
6.1 Application of Gross Cash Proceeds.
16
(a) Application of Gross Cash Proceeds. Within sixty (60) days
after the close of each of the Company's fiscal quarters, the Company shall
apply and distribute Gross Cash Proceeds in accordance with the following
schedule of priorities:
(i) First, for the payment to TPL (or, in the case of any
payment to satisfy the obligations of the Company under Section 4.2 of the
Commercialization Agreement, directly to the Person identified by TPL) in
satisfaction of the Company's payment obligations under Sections 4.2 and 4.3 of
the Commercialization Agreement;
(ii) Next, to the payment of any Company Expenses;
(iii) Next, for the Working Capital Fund until the Working
Capital Fund equals *** ;
(iv) Next,
(a) for payment to Patriot of an amount equal to 10% of
the Gross Cash Proceeds until Patriot shall have received Twenty Million Dollars
($20,000,000); and
(b) for payment to TPL of an amount equal to 15% of the
Adjusted Gross Cash Proceeds minus any amounts previously advanced to TPL (and
not previously credited against payments to TPL hereunder) pursuant to Section
4.3 of the Commercialization Agreement; and
(v) Finally, the remaining Gross Cash Proceeds (such
remaining amount, the "Net Cash Proceeds") to the Members according to their
respective Percentage Interests.
In the event that funds sufficient to satisfy the payments
required to be made pursuant to subsections (iv)(a) and (iv)(b) above are
unavailable, such payment obligations shall be pari passu, and any unpaid
amounts thereof shall be paid from Gross Cash Proceeds subsequently received by
the Company.
(b) Distribution of Company Property. Company property shall
be distributed only pursuant to Article VIII.
(c) Withholdings. All amounts withheld pursuant to the Code or
any provisions of state or local tax law with respect to any payment or
distribution to the Members from the Company shall be treated as amounts
distributed to the relevant Members pursuant to this Section 6.1.
6.2 Allocation of Net Profits. Subject to the provisions of Sections
6.4 and 6.5, Net Profits for any Fiscal Year or other period shall be allocated
to the Members according to their Percentage Interests.
6.3 Allocation of Net Losses. Subject to the provisions of Sections
6.4 and 6.5, Net Losses for any Fiscal Year or other period shall be allocated
to the Members according to their Percentage Interests.
17
6.4 General Rules for Allocations. The rules of this Section 6.4 shall
govern all allocations under this Article:
(a) Except as otherwise provided in this Operating Agreement,
an allocation of Net Profits or Net Losses shall be treated as an allocation
between the Members of the same share of each item of income, gain, loss and
deduction that is taken into account in computing such Net Profits or Net
Losses, as the case may be.
(b) If any Member is deemed to have received imputed income with
respect to any property licensed or otherwise made available to the Company
pursuant to this Operating Agreement, the corresponding imputed expenses to the
Company arising out of such arrangement shall be specially allocated to such
Member.
(c) For purposes of determining the Net Profits or Net Losses
allocable to any period, the Net Profits and Net Losses shall be determined on a
daily, monthly or other basis, as determined by the Management Committee using
any permissible method under Section 706 of the Code and the Treasury
Regulations promulgated thereunder.
6.5 Special Allocations to Capital Accounts.
(a) Notwithstanding anything to the contrary contained in this
Article 6, if there is a net decrease in Company Minimum Gain or in any Member
Minimum Gain during any taxable year or other period, prior to any other
allocation pursuant hereto, such Member shall be specially allocated items of
income and gain for such year (and, if necessary, subsequent years) in an amount
and manner required by Treasury Regulation Sections 1.704-2(f) or 1.704-2(i)(4).
The items to be so allocated shall be determined in accordance with Treasury
Regulation Section 1.704-2.
(b) Nonrecourse Deductions for any taxable year or other
period shall be allocated (as nearly as possible) under Treasury Regulation
Section 1.704-2 to the Members, pro rata in proportion to their respective
Percentage Interests.
(c) Any Member Nonrecourse Deductions for any taxable year or
other period shall be allocated to the Member that made, or guaranteed or is
otherwise liable with respect to the loan to which such Member Nonrecourse
Deductions are attributable in accordance with principles under Treasury
Regulation Section 1.704-2(i).
(d) Any Member who unexpectedly receives an adjustment,
allocation or distribution described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) which causes or increases a negative balance
in his or its Capital Account shall be allocated items of income and gain
sufficient to eliminate such increase or negative balance caused thereby, as
quickly as possible, to the extent required by such Treasury Regulation.
(e) No allocation or loss or deduction shall be made to any
Member if, as a result of such allocation, such Member would have an Adjusted
Capital Account Deficit. Any such disallowed allocation shall be made to the
Members entitled to receive such allocation under Treasury Regulation Section
1.704 in proportion to their respective Percentage Interests. If losses or
deductions are reallocated under this subsection 6.5(e), subsequent allocations
of income and losses (and items thereof) shall be made so that, to the extent
possible, the net amount allocated under this subsection 6.5(e) equals the
amount that would have been allocated to each Member if no reallocation had
occurred under this subsection 6.5(e).
18
(f) For purposes of Section 752 of the Code and the Treasury
Regulations thereunder, excess nonrecourse liabilities (within the meaning of
Treasury Regulations Section 1.752-3(a)(3)) shall be allocated to the Members
pro rata in proportion to their respective Percentage Interests.
(g) The allocations contained in Sections 6.5(a), 6.5(c), 6.5(d)
and 6.5(e) (the "Regulatory Allocations") are intended to comply with certain
requirements of Treasury Regulation Sections 1.704-1 and 1.704-2. The Regulatory
Allocations shall be taken into account in allocating Net Profit and Net Loss
and other items of income, gain, loss and deduction among the Members so that to
the extent possible, the allocations contained in this Agreement other than the
Regulatory Allocations and the Regulatory Allocations made to each Member shall
equal the net amount that would have been allocated to each Member had the
Regulatory Allocations not occurred. The Management Committee shall take account
of the fact that certain of the Regulatory Allocations will occur at a period in
the future for purposes of applying this Section 6.5(g).
6.6 Tax Allocations; Section 704(c) of the Code.
(a) Except as otherwise provided in this Section 6.6, for
income tax purposes, each item of income, gain, loss, and deduction of the
Company shall be allocated among the Members in accordance with the manner in
which the equivalent items of Net Profits and Net Losses were allocated under
the preceding sections of this Article VI.
(b) In the event the Book Value of a Company asset differs from
its adjusted federal income tax basis, then all allocations of income, gain,
loss and deduction with respect to such asset shall take into account any
variation between the adjusted tax basis of such asset and its Book Value. Such
allocations shall be made under the principles of Sections 704(b) and 704(c) of
the Code and the Treasury Regulations thereunder and are intended to eliminate,
to the extent possible, disparities that otherwise exist between the balances of
the Members' Capital Accounts, as maintained by the Company, and such balances
had the Capital Accounts been maintained in accordance with tax accounting
principles. It is intended, for example, that any taxable gain recognized by the
Company upon the disposition of property contributed by a Member to the Company
shall be allocated to the contributing Member to the extent that the property's
initial Book Value exceeded its adjusted income tax basis on the date of the
contribution, with any excess taxable gain being allocated to the Members
(including the contributing Member) in a manner that coincides with the
corresponding allocation of "book" gain. Any elections, accounting conventions
or other decisions relating to such allocations shall be made by the Management
Committee in a manner that (i) reasonably reflects the purposes and intention of
this Operating Agreement, and (ii) complies with Sections 704(b) and 704(c) of
the Code and the Treasury Regulations thereunder. The Management Committee shall
determine the method set forth in Treasury Regulation Section 1.704-3c to be
used for allocating such terms.
19
6.7 Tax Matters Member.
(a) At such time as it deems necessary, the Management Committee shall
elect the "Tax Matters Member" of the Company for purposes of Section 6231(a)(7)
of the Code. The Tax Matters Member shall have the power to manage and control,
on behalf of the Company, any administrative proceeding at the Company level
with the Internal Revenue Service relating to the determination of any item of
Company income, gain, loss, deduction or credit for federal income tax purposes.
(b) The Tax Matters Member shall, within ten (10) days of the receipt
of any notice from the Internal Revenue Service in any administrative proceeding
at the Company level relating to the determination of any Company item of
income, gain, loss, deduction or credit, mail a copy of such notice to the other
Members.
6.8 Section 754 Election. The Tax Matters Member may, in its
discretion, make, on behalf of the Company, an election in accordance with
Section 754 of the Code so as to adjust the basis of Company property in the
case of a distribution of property within the meaning of Section 734 of the
Code, and in the case of a transfer of a Member's Percentage Interest within the
meaning of Section 743 of the Code. Each Member shall, upon the request of the
Tax Matters Member, furnish such information as the Tax Matters Member shall
deem necessary or appropriate to give effect to such election.
6.9 Returns and Other Elections. The Chief Financial Officer shall
cause the preparation and timely filing all tax returns required to be filed by
the Company pursuant to the Code and all other tax returns deemed necessary and
required in each jurisdiction in which the Company does business. Copies of
those returns, or pertinent information from the returns, shall be furnished to
the Members within a reasonable time after the end of the Company's fiscal year.
All elections permitted to be made by the Company under federal or state laws
shall be made by the Chief Financial Officer, provided that the Management
Committee may direct the Chief Financial Officer to make or refrain from making
any tax election.
6.10 Partnership Tax Treatment. The Members expect and intend that the
Company shall be treated as a partnership for all federal and state income tax
purposes, and the Members agree that they will not: (a) take a position on any
federal, state, local or other tax return, or otherwise assert a position,
inconsistent with such expectation and intent; or (b) elect for the Company to
be treated as an association for tax purposes or do any other act or thing which
could cause the Company to be treated as other than a partnership for federal
income tax purposes.
ARTICLE 7
INDEMNIFICATION AND LIMITATION OF LIABILITY
7.1 Indemnification.
(a) To the fullest extent permitted by the Act and by law, the
Members, Managers, officers and employees of the Company, as well as their
respective Representatives (collectively, "Indemnitees") shall, in accordance
with this Section 7.1, be indemnified, protected, held harmless and defended by
the Company from and against any and all Damages and Liabilities by reason of
their management of, or involvement in, the affairs of the Company, or rendering
of advice or consultation with respect thereto, or which relate to the Company,
its properties, business or affairs, if such Indemnitee acted in good faith and
in a manner such Indemnitee reasonably believed to be in, or not opposed to, the
best interests of the Company.
20
(b) If any Indemnitee shall believe that such Indemnitee is
entitled to indemnification pursuant to this Article 7 in respect of any Damages
or Liabilities, such Indemnitee shall give the Company prompt written notice
thereof. Any such notice shall set forth in reasonable detail and to the extent
then known the basis for such claim for indemnification. The failure of such
Indemnitee to give notice of any claim for indemnification promptly shall not
adversely affect such Indemnitee's right to indemnity hereunder except to the
extent that such failure adversely affects the right of the Company to assert
all reasonable defenses to such claim. Each such claim for indemnity shall
expressly state that the Company shall have only the thirty (30) calendar day
period referred to in the next sentence to dispute or deny such claim. The
Company shall have thirty (30) calendar days following its receipt of such
notice either (y) to acquiesce in such claim and the responsibility to indemnify
the Indemnitee in respect thereof in accordance with the terms of this Article 7
by giving such Indemnitee written notice of such acquiescence or (z) to object
to the claim by giving such Indemnitee written notice of the objection. If the
Company does not object thereto within such thirty (30) calendar day period, the
Company shall be deemed to have acquiesced in such claim and the responsibility
to indemnify the Indemnitee in respect thereof in accordance with the terms of
this Article 7.
(c) In connection with any claim which may give rise to indemnity
under this Article 7 resulting from or arising out of any claim or Proceeding
against an Indemnitee by a Person that is not a party hereto, the Company may
(unless such Indemnitee elects not to seek indemnity hereunder for such claim),
upon written notice sent at any time to the relevant Indemnitee, assume the
defense of any such claim or Proceeding if the Company with respect to such
claim or Proceeding acknowledges to the Indemnitee the Indemnitee's right to
indemnity pursuant hereto in respect of the entirety of such claim (as such
claim may have been modified through written agreement of the parties or
arbitration hereunder) and provide assurances, reasonably satisfactory to such
Indemnitee, that the Company will be financially able to satisfy such claim in
full if such claim or Proceeding is decided adversely. The Company shall select
counsel reasonably acceptable to such Indemnitee to conduct the defense of such
claim or Proceeding, shall take all steps reasonably necessary in the defense or
settlement thereof and shall at all times diligently and promptly pursue the
resolution thereof. If the Company shall have assumed the defense of any claim
or Proceeding in accordance with this Section 7, the Company shall not (without
the written consent of each Indemnitee) consent to a settlement of, or the entry
of any judgment arising from, any such claim or Proceeding, unless such
settlement or order shall provide for the unconditional release of all
Indemnitees. If the Company has so elected to assume the defense, each
Indemnitee shall be entitled to participate in (but not control) the defense of
any such action, with its own counsel and at its own expense. Each Indemnitee
shall, and shall cause each of its Representatives to, cooperate fully with the
Company in the defense of any claim or Proceeding being defended by the Company
pursuant to this Section 7. If the Company does not assume the defense of any
claim or Proceeding resulting therefrom in accordance with the terms of this
Section 7, such Indemnitee may defend against such claim or Proceeding in such
manner as it may deem appropriate, provided that the Indemnitee may not settle
such claim or Proceeding without the written consent of the Company (which
consent shall not be unreasonably withheld or delayed), and provided further
that the Company shall be obligated to pay Indemnitee's attorneys' fees and
costs promptly as they are incurred in the defense of such claim or Proceeding.
21
(d) The indemnification provided by this Section 7.1 shall not
be deemed to be exclusive of any other rights to which any Person may be
entitled under any agreement, or as a matter of law, or otherwise, both as to
action in a Person's official capacity and to action in another capacity.
(e) The Management Committee shall have power to purchase and
maintain insurance on behalf of the Company, the Managers, the Members,
officers, employees or agents of the Company and any other Indemnitees at the
expense of the Company, against any liability asserted against or incurred by
them in any such capacity whether or not the Company would have the power to
indemnify such Persons against such liability under the provisions of this
Operating Agreement.
7.2 Limitation of Liability. The debts, obligations and liabilities of
the Company shall be solely the debts, obligations and liabilities of the
Company; and, except as provided under the Act, no Manager or Member shall be
obligated personally for any such debt, obligation or liability of the Company
solely by reason of being a Manager or Member of the Company.
7.3 Savings Clause. If this Article 7 or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, the Company
shall nevertheless indemnify and hold harmless each Indemnitee or any other
person indemnified pursuant to this Article 7 as to costs, charges and expenses
(including, without limitation, reasonable attorneys' fees), judgments, fines
and amounts paid in settlement with respect to any action, suit or proceeding,
whether civil, criminal, administrative or investigative, to the full extent
permitted by any applicable portion of this Article 7 that shall not have been
invalidated and to the fullest extent permitted by applicable law.
ARTICLE 8
DISSOLUTION AND WINDING UP
8.1 Dissolution. The Company shall be dissolved, its assets shall be
disposed of, and its affairs wound up on the first to occur of the following:
(a) The written agreement of Members holding at least 75% of the
Percentage Interests to dissolve the Company; or
(b) The entry of a decree of judicial dissolution under Section
18-802 of the Act.
Except for the foregoing, the Company shall not dissolve on the
occurrence of any other event.
8.2 Winding Up. Upon the occurrence of any event specified in Section
8.1, the Management Committee promptly shall notify each of the Members, and the
Company shall continue solely for the purpose of, and immediately begin the
process of, winding up its affairs in an orderly manner, liquidating its assets,
and satisfying the claims of its creditors. The Management Committee shall
promptly appoint a Person to act as the liquidator of the Company (the
"Liquidator") who shall be responsible for overseeing the winding up and
liquidation of the Company pursuant to the terms of this Operating Agreement.
The Liquidator shall give written notice of the commencement of winding up by
mail to all known creditors and claimants whose addresses appear on the records
of the Company.
22
8.3 Reversion of Rights. Upon the occurrence of any event specified in
Section 8.1, or upon the valid termination of the Commercialization Agreement by
the Company, all of the rights granted by each of Patriot and TPL to the Company
pursuant to the P-Newco License and T-Newco License, respectively, shall
immediately and without further action by any of the parties thereto revert in
their entirety to each of Patriot and TPL, respectively.
8.4 Order of Payment Upon Liquidation. Immediately after the reversion
of rights contemplated by Section 8.3 above, payment shall be made in the manner
contemplated by Section 6.1.
8.5 Antecedent Activities.
(a) The occurrence of any Recovery Event within twelve (12) months
of a Termination Event, as defined in Section 6.2 of the Commercialization
Agreement, shall entitle each of the Members to payment of the proceeds of such
Recovery Event in accordance with Section 6.1.
(b) The entitlements set forth in Section 8.5(a) shall vest in
the Members without further action. All proceeds and incidents of any such
Recovery Event shall be transferred by the Member receiving such proceeds within
three Business Days (as defined in the Master Agreement) after receipt of such
proceeds directly into an independent escrow account approved by Patriot and TPL
for distribution pursuant to the terms of this Operating Agreement and the joint
instructions of Patriot and TPL.
8.6 Limitations on Payments Made in Dissolution. Each Member shall only
be entitled to look to the assets of the Company for the return of its Initial
Capital Contribution, Working Capital Contribution and positive Capital Account
balance and shall have no recourse for its Initial Capital Contribution, Working
Capital Contribution, positive Capital Account balance and/or share of Gross
Cash Proceeds (upon dissolution or otherwise) against the Management Committee
or any other Member in the event the assets of the Company remaining after
payment of or due provision for all debts, liabilities and obligations of the
Company are insufficient to return such Member's Initial Capital Contribution
and positive Capital Account balance.
8.7 Certificate of Cancellation. When all debts, liabilities and
obligations have been paid and discharged or adequate provisions have been made
therefor and all of the remaining property and assets have been distributed to
the Members, a certificate of cancellation shall be executed in duplicate and
verified by all three (3) Managers, which certificate shall set forth the
information required by the Act. Duplicate originals of the certificate of
cancellation shall be delivered to the Secretary of State of the State of
Delaware.
23
8.8 Effect of Filing Certificate of Cancellation. Upon the issuance of
the certificate of cancellation, the existence of the Company shall cease. The
Management Committee shall have the authority to distribute any Company property
discovered after dissolution and take such other action as may be necessary on
behalf of and in the name of the Company.
ARTICLE 9
MISCELLANEOUS
9.1 Amendment. The Management Committee shall have the duty and
authority to amend the Certificate of Formation as and to the extent necessary
to reflect any and all changes or corrections necessary or appropriate as a
result of any action taken by the Members in accordance with the terms of this
Operating Agreement. Members holding at least 75% of the Percentage Interests
shall have the authority to amend this Operating Agreement. Notwithstanding
anything to the contrary set forth herein, neither the Management Committee nor
the Members may amend the Certificate of Formation or this Operating Agreement
to decrease the Percentage Interest of a Member, increase the Working Capital
Contributions of a Member or the liability of a Member with respect to the
Company without the consent of each Member affected thereby.
9.2 Governing Law and Severability. This Operating Agreement shall, in
all respects, be construed in accordance with and governed by the laws of the
State of Delaware as applied to agreements among Delaware residents entered into
and to be performed entirely within Delaware. If any provision of this Operating
Agreement becomes or is deemed invalid, illegal or unenforceable in any
jurisdiction by reason of the scope, extent or duration of its coverage, then
such provision shall be deemed amended to the extent necessary to conform to
applicable law so as to be valid and enforceable or, if such provision cannot be
so amended without materially altering the intention of the parties, then such
provision shall be stricken and the remainder of this Operating Agreement shall
continue in full force and effect. Should there ever occur any conflict between
any provision contained in this Operating Agreement and any present or future
statute, law, ordinance or regulation contrary to which the parties have no
legal right to contract, the latter shall prevail, but the provision of this
Operating Agreement affected thereby shall be curtailed and limited only to the
extent necessary to bring it into compliance with the law. All the other terms
and provisions of this Operating Agreement shall continue in full force and
effect without impairment or limitation.
9.3 Counterparts. This Operating Agreement may be executed
simultaneously in multiple counterparts and by facsimile, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
9.4 Titles and Subtitles. The headings of this Operating Agreement are
inserted for convenience only and shall not constitute a part of this Operating
Agreement in construing or interpreting any provision hereof.
9.5 Notices. All notices and other communications required or
permitted under this Operating Agreement shall be delivered to the parties at
the address appearing on the books of Company, or at such other address that
they designate by notice to all other parties in accordance with this section.
All notices and communications shall be deemed to have been received unless
otherwise set forth herein: (a) in the case of personal delivery, on the date of
such delivery; (b) in the case of facsimile transmission, on the date on which
the sender receives confirmation by facsimile transmission that such notice was
received by the addressee, provided that a copy of such transmission is
additionally sent by mail as set forth in (d) below; (c) in the case of
overnight air courier, on the second business day following the day sent, with
receipt confirmed by the courier; and (d) in the case of mailing by first class
certified or registered mail, postage prepaid, return receipt requested, on the
fifth business day following such mailing.
24
9.6 Entire Agreement. This Operating Agreement, as well as the
Stipulated Final Judgment, Master Agreement, Commercialization Agreement and
Newco Licenses, constitutes the entire agreement and understanding of the
parties with respect to the terms and conditions of the transactions referred to
herein and therein and supersede all prior and contemporaneous agreements and
understandings, oral or written, between the parties relating to such subject
matter, other than as provided herein and therein.
9.7 Power of Attorney. By signing this Operating Agreement, each
Member designates and appoints the Management Committee as their true and lawful
attorney, in his name, place and ▇▇▇▇▇, to make, execute, sign and file such
instruments, documents or certificates which may from time to time be required
by the laws of the United States of America and the State of Delaware and any
political subdivision thereof or any other state or political subdivision in
which the Company shall do business to carry out the purposes of this Operating
Agreement, except where such action requires the express approval of a Member
hereunder. The Management Committee shall provide to the Members copies of all
documents executed pursuant to the power of attorney contained in this Section
9.7.
9.8 Related Party Transactions. The Company shall not, without the
approval of the Management Committee, engage in any loans, leases, contracts or
other transactions with any Manager, officer or key employee of the Company, any
member of any such person's immediate family, including the parents, spouse,
children and other relatives of any such person, or any Person controlled by
such person, with the exception of the payments to be made to TPL pursuant to
Article IV of the Commercialization Agreement.
9.9 Dispute Resolution. All rights and obligations under this Operating
Agreement shall be resolved as if all persons and all transactions related to
this Operating Agreement had their legal residence, situs, and employment in
Santa ▇▇▇▇▇ County, California. Within 15 days after written notice of the
dispute, members of the most senior management of the parties shall meet and
exercise their best efforts to resolve any dispute under this Operating
Agreement. If the dispute is not resolved to the mutual satisfaction of the
parties within 30 days after such notice, the Company, Patriot and TPL shall
submit such dispute to expedited binding arbitration before a single arbitrator.
The arbitration shall be administered by the AAA. Judgment on the award,
including without limitation injunctive relief, may be entered in any court
having jurisdiction. All costs related to such arbitration shall be paid in
advance by the Company, including the cost of translating into English all
discoverable materials, and of providing contemporaneous translation of all live
testimony. All performances due hereunder by the Company, Patriot and TPL shall
continue unabated throughout the entire process and a final adjudication in
accordance with the terms hereof has been made from which no appeal or review
can be undertaken.
25
9.10 No Partition. No Member nor any legal successor of a Member shall
have the right to partition the property of the Company or any part thereof or
interest therein, or to file a complaint or institute any proceeding at law or
in equity to partition the property of the Company or any part thereof or
interest therein. Each Member, for such Member and such Member's legal
successor, hereby waives any such rights. The Members intend that, during the
term of this Operating Agreement, the rights of the Members and their successors
in interest, as among themselves, shall be governed solely by the terms of this
Operating Agreement and by the Act.
9.11 Bankruptcy. Neither the Management Committee, nor any Manager or
Member of the Company, shall be permitted to file a bankruptcy petition on
behalf of the Company unless the filing of the bankruptcy petition shall first
have been approved in writing by Members holding at least 75% of the Percentage
Interests of the Company.
[signature page follows]
26
IN WITNESS WHEREOF, the parties hereto have executed this Operating
Agreement as of the day and year first above written.
PATRIOT SCIENTIFIC CORPORATION,
a Delaware corporation
/s/ ▇▇▇▇▇ ▇. ▇▇▇▇
--------------------------
By: ▇▇▇▇▇ ▇. ▇▇▇▇
Its: Director
TECHNOLOGY PROPERTIES LIMITED INC.,
a California corporation
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-------------------------------
By: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Its: Chairman