LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF [P-NEWCO], A DELAWARE LIMITED LIABILITY COMPANY
EXECUTION
COPY
LIMITED
LIABILITY COMPANY
OF
[P-NEWCO],
A
DELAWARE LIMITED LIABILITY COMPANY
TABLE
OF CONTENTS
| Page | ||
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ARTICLE
1
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DEFINITIONS
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1
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ARTICLE
2
|
FORMATION
OF LIMITED LIABILITY COMPANY
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7
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2.1
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Formation
|
7
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2.2
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Name;
Principal Place of Business
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7
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2.3
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Registered
Office and Registered Agent
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7
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2.4
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Agreement;
Effect of Inconsistencies With the Act or the Code
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7
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2.5
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Business
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8
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2.6
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Term
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8
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2.7
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Qualification
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8
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ARTICLE
3
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MEMBERSHIP
|
8
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3.1
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Members
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8
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3.2
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Representations
and Warranties
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8
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3.3
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Incorporation
of Representations and Warranties
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9
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3.4
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Resignation
or Withdrawal of a Member.
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9
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3.5
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Effect
of Certain Events on Membership.
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10
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3.6
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Restrictions
on Transfers of Interests
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10
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3.7
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No
Authority as Agent
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10
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ARTICLE
4
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MANAGEMENT
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10
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4.1
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Management
of the Company by Management Committee
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10
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4.2
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Appointment
of Management Committee.
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11
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4.3
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Responsibilities
of the Management Committee
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12
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4.4
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Officers
|
13
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4.5
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Liability
of Committee Members and Officers
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14
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4.6
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Records,
Audits and Reports
|
14
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ARTICLE
5
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CAPITAL
CONTRIBUTIONS
|
14
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5.1
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Initial
Capital Contributions
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14
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5.2
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Percentage
Interests
|
15
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5.3
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Working
Capital Contributions.
|
15
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5.4
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Failure
to Make Contributions
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15
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5.5
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Capital
Accounts
|
15
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ARTICLE
6
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DISTRIBUTIONS,
ALLOCATIONS AND TAX MATTERS
|
16
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6.1
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Application
of Gross Cash Proceeds.
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16
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6.2
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Allocation
of Net Profits
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17
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6.3
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Allocation
of Net Losses
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17
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6.4
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General
Rules for Allocations
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17
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6.5
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Special
Allocations to Capital Accounts.
|
18
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6.6
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Tax
Allocations; Section704(c) of the Code.
|
19
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6.7
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Tax
Matters Member.
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19
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6.8
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Section754
Election
|
20
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6.9
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Returns
and Other Elections
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20
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6.10
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Partnership
Tax Treatment
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20
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i
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ARTICLE
7
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INDEMNIFICATION
AND LIMITATION OF LIABILITY
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20
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7.1
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Indemnification.
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20
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7.2
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Limitation
of Liability
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22
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7.3
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Savings
Clause
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22
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||
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ARTICLE
8
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DISSOLUTION
AND WINDING UP
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22
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8.1
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Dissolution
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22
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8.2
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Winding
Up
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22
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8.3
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Reversion
of Rights
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22
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8.4
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Order
of Payment Upon Liquidation
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23
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8.5
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Antecedent
Activities.
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23
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8.6
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Limitations
on Payments Made in Dissolution
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23
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8.7
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Certificate
of Cancellation
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23
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8.8
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Effect
of Filing Certificate of Cancellation
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23
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||
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ARTICLE
9
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MISCELLANEOUS
|
23
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9.1
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Amendment
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23
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9.2
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Governing
Law and Severability
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24
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9.3
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Counterparts
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24
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9.4
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Titles
and Subtitles
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24
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9.5
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Notices
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24
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9.6
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Entire
Agreement
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24
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9.7
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Power
of Attorney
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25
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9.8
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Related
Party Transactions
|
25
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9.9
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Dispute
Resolution
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25
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9.10
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No
Partition
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25
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9.11
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Bankruptcy
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26
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SCHEDULE
1 - INITIAL CAPITAL CONTRIBUTIONS
SCHEDULE
2 - PERCENTAGE INTERESTS
| EXHIBIT A - |
CONSENT
OF ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ TO LIMITED LIABILITY OPERATING AGREEMENT OF P-NEWCO,
A
DELAWARE LIMITED LIABILITY COMPANY
|
ii
LIMITED
LIABILITY COMPANY
[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.
§ 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:
“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).
1
“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.
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.
2
“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 Two Million Dollars ($2,000,000) payable by each of Patriot and TPL, in
the
aggregate amount of Four Million Dollars ($4,000,000), 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.
“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.
4
“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 May [27], 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);
(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
5
(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.
“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.
6
“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.
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
7
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.
|
▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
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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;
8
(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.
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.
9
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
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|
(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.
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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.
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 seventy-five percent (75%)
of
the Percentage Interests.
10
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 Judicial Arbitration
and
Mediation Service (“JAMS”)
in
Santa ▇▇▇▇▇ County, or the nearest county thereto, if necessary, for the
appointment of the Independent Manager, and JAMS 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 JAMS 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:
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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 seventy-two (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.
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(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.
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|
(ii)
|
Removal.
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. The
Independent Manager may be removed at any time, with or without cause,
by
written consent of the Members holding at least seventy-five percent
(75%)
of the Percentage Interests.
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|
(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.
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|
(iv)
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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.
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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 Two Million Dollars ($2,000,000), for an
aggregate Initial Working Capital Contribution of Four Million Dollars
($4,000,000).
(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
Eight
Million Dollars ($8,000,000), and then only to the extent necessary to bring
the
balance of the Working Capital Fund to Eight Million Dollars ($8,000,000),
provided,
however,
that
neither TPL nor Patriot shall be required to contribute more than Two Million
Dollars ($2,000,000) 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 One Million Dollars ($1,000,000) when due pursuant to Section 5.3,
ten
percent (10%) 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 twenty-five percent (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 twenty-five percent (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.
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:
15
|
(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.
(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;
|
16
|
(ii)
|
Next,
to the payment of any Company
Expenses;
|
|
(iii)
|
Next,
for the Working Capital Fund until the Working Capital Fund equals
Eight
Million Dollars ($8,000,000);
|
|
(iv)
|
Next,
|
|
(1)
|
for
payment to Patriot of an amount equal to ten percent (10%) of the
Gross
Cash Proceeds until Patriot shall have received Twenty Million Dollars
($20,000,000); and
|
|
(2)
|
for
payment to TPL of an amount equal to fifteen percent (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.
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.
17
(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).
(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.
18
(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.
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.
19
(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.
(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
20
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.
(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.
21
(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 seventy-five percent (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.
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.
22
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 (3) 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.
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 seventy-five percent (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.
23
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.
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.
24
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
fifteen (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 thirty (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 JAMS pursuant to its Comprehensive Arbitration Rules and
Procedures. 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. This clause shall
not preclude the parties from seeking provisional remedies in aid of
arbitration, including without limitation a temporary or preliminary injunctive
relief, from a court of appropriate jurisdiction. The arbitrator may, in the
award, allocate all or part of the costs of the arbitration, including the
fees
of the arbitrator and the reasonable attorneys’ fees of the prevailing
party.
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.
25
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 seventy-five percent (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
By:
___________________________________________________
Its:
___________________________________________________
|
|
|
TECHNOLOGY
PROPERTIES LIMITED INC., a California corporation
By:
___________________________________________________
▇▇▇▇▇▇
▇. ▇▇▇▇▇▇▇
Its:
___________________________________________________
Chairman
|
27
SCHEDULE
1
INITIAL
CAPITAL CONTRIBUTIONS
|
MEMBER
|
CONTRIBUTIONS
|
AGGREGATE
FAIR MARKET VALUE OF CONTRIBUTIONS
|
|
Patriot
Scientific Corporation
|
· P-Newco
License
· $2,000,000
|
|
|
Technology
Properties Limited Inc.
|
· T-Newco
License
· $2,000,000
|
SCHEDULE
1
SCHEDULE
2
PERCENTAGE
INTERESTS
|
MEMBER
|
PERCENTAGE
INTEREST
|
|
Patriot
Scientific Corporation
|
50%
|
|
Technology
Properties Limited Inc.
|
50%
|
SCHEDULE
2
EXHIBIT
A
CONSENT
OF ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
TO
LIMITED
LIABILITY OPERATING AGREEMENT
OF
P-NEWCO
A
DELAWARE LIMITED LIABILITY COMPANY
▇▇▇▇▇▇▇
▇. ▇▇▇▇▇ (“▇▇▇▇▇”) does hereby affirm and acknowledge that:
(a) ▇▇▇▇▇
has
read and reviewed the accompanying Limited Liability Company Operating Agreement
(the “P-Newco Operating Agreement”) for P-Newco, a Delaware Limited Liability
Company (“P-Newco”) and is familiar with the contents thereof;
(b) Technology
Properties Limited Inc., a California Corporation, has full power and authority
to enter into the P-Newco Operating Agreement insofar as it affects the
interests of ▇▇▇▇▇ in the microprocessor science and design patents set forth
on
Schedule 1 to the Master Agreement, to which ▇▇▇▇▇ is a party;
and
(c) ▇▇▇▇▇
consents to the P-Newco Operating Agreement.
IN
WITNESS WHEREOF, ▇▇▇▇▇ has executed this Consent as of the [__] day of
[__________], 2005.
▇▇▇▇▇▇▇
▇. ▇▇▇▇▇
________________________________________
EXHIBIT
A