Exhibit 2.01
FORM OF DISTRIBUTION AGREEMENT
between
CHOICE HOTELS INTERNATIONAL, INC.
(to be renamed Sunburst Hospitality Corporation)
and
CHOICE HOTELS FRANCHISING, INC.
(to be renamed Choice Hotels International, Inc.)
dated as of
___________, 1997
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Agreement") is made as of this ____
day of ________, 1997 between Choice Hotels International, Inc., a Delaware
corporation, to be renamed Sunburst Hospitality Corporation ("Choice") and
Choice Hotels Franchising, Inc., a Delaware corporation and wholly owned
subsidiary of Choice, to be renamed Choice Hotels International, Inc.
("Franchising").
RECITALS
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WHEREAS, Choice, directly and through subsidiaries, (i) acquires,
develops and owns hotels in the United States and engages in activities related
thereto (the "Real Estate Group Business"); (ii) owns and operates 14 hotels in
France, Germany and the United Kingdom and holds an equity ownership interest in
Friendly Hotel PLC, a corporation formed under the laws of ____________ (the
"European Hotel Business") and (iii) franchises hotels under the Clarion,
Quality, Comfort, Sleep Inn, Rodeway, Econo Lodge and Mainstay brands (the
"Choice Brands") and provides various services for its franchisees to strengthen
the Choice Brands, including the operation of a national reservations system for
the Choice Brands and the conducting of advertising and marketing activities on
behalf of franchisees of the Choice Brands (the "Franchising Business").
WHEREAS, Choice conducts the Franchising Business through Franchising
and its Subsidiaries;
WHEREAS, the Board of Directors of Choice has determined that it is in
the best interest of Choice and the stockholders of Choice to separate the
Franchising Business and the European Hotel Business from the Real Estate Group
Business through the distribution (the
"Distribution") to the holders of Choice Common Stock (as defined herein) all of
the outstanding shares of Franchising Common Stock (as defined herein).
WHEREAS, in order to effect such separation, Choice will transfer to
Franchising prior to the Distribution, the capital stock of the European Hotel
Subsidiary and certain other assets and liabilities relating principally to the
Franchising Business and the European Hotel Business, the Franchising Group and
the European Hotel Subsidiary not currently held by Franchising or a Franchising
Group Subsidiary and Franchising will transfer to Choice any assets and
liabilities relating principally to the Real Estate Group Business or the Real
Estate Group Subsidiaries not currently held by Choice or a Real Estate Group
Subsidiary, if any, (the "Preliminary Transfers").
WHEREAS, in connection with the Distribution, Choice and Franchising
have determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect the Distribution, and to set forth the
agreements that will govern certain matters following the Distribution.
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the parties hereby agree as follows:
I.
DEFINITIONS
Section 1.01. General.
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As used in this Agreement, the following terms shall have the
following meanings:
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Action: Any action, claim, suit, arbitration, inquiry, proceeding or
------
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: With respect to any specified Person, any other Person
---------
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" shall have meanings correlative to the foregoing.
Notwithstanding the foregoing, (i) the Affiliates of Choice shall not include
Franchising, the Franchising Group Subsidiaries or any other Person which
otherwise would be an Affiliate of Choice by reason of Choice's ownership of the
capital stock of Franchising prior to the Distribution or the fact that any
officer or director of Franchising or any of the Franchising Group Subsidiaries
shall also serve as an officer or director of Choice or any of the Real Estate
Group Subsidiaries, and (ii) the Affiliates of Franchising shall not include
Choice, the Real Estate Subsidiaries, or any other Person which otherwise would
be an Affiliate of Franchising by reason of Choice's ownership of the capital
stock of Franchising prior to the Distribution or the fact that any officer or
director of Franchising or any of the Franchising Group Subsidiaries shall also
serve as an officer or director of Choice or any of the Real Estate Group
Subsidiaries.
Agent: ChaseMellon Shareholder Services, L.L.C., as distribution
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agent appointed by Choice to distribute the Franchising Common Stock pursuant to
the Distribution.
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Amended Manor Care Agreements: The amendments to the Manor Care
-----------------------------
Agreements to be entered into among Manor Care, Choice and Franchising, as
applicable, in connection with the Distribution, substantially in the form
attached hereto as Exhibits A through E.
Assumed Financing Obligations: All Financing Obligations of Choice
-----------------------------
and its Subsidiaries set forth on the Franchising Pro Forma Balance Sheet.
Choice Amended Certificate: The Amendment to the Restated Certificate
--------------------------
of Incorporation of Choice for the purpose of, among other things, changing the
name of Choice to "Sunburst Hospitality Corporation."
Choice Board: The Board of Directors of Choice as it is constituted
------------
prior to the Distribution Date.
Choice Common Stock: The common stock, par value $.01 per share, of
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Choice.
Choice Pro Forma Balance Sheet: The Pro Forma Consolidated Balance
------------------------------
Sheet of Choice as of October __, 1997 attached hereto as Exhibit F.
Commission: The Securities and Exchange Commission.
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Conveyancing and Assumption Instruments: Collectively, the various
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agreements, instruments and other documents to be entered into to effect the
Preliminary Transfers and the assignment of assets and the assumption of
Liabilities contemplated by this Agreement and the Related Agreements in the
manner contemplated herein and therein.
Distribution Date: The date determined by the Choice Board as the
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date on which the Distribution shall be effected, which Distribution Date is
contemplated by the Choice Board to occur on or about October __, 1997.
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Distribution Record Date: The date established by the Choice Board as
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the date for taking a record of the Holders of record of Choice Common Stock
entitled to participate in the Distribution, which Distribution Record Date has
been established as [ ], 1997, subject to the fulfillment on or before
[ ], 1997 of certain conditions to the Distribution as
provided in Section 4.02.
Employee Benefits Administration Agreement: The Employee Benefits
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Administration Agreement between Franchising and Choice, which agreement shall
be entered into on or prior to the Distribution Date in substantially the form
attached hereto as Exhibit G.
Employee Benefits Allocation Agreement: The Employee Benefits and
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Other Employment Matters Allocation Agreement between Franchising and Choice,
which agreement shall be entered into on or prior to the Distribution Date in
substantially the form attached hereto as Exhibit H.
Exchange Act: The Securities Exchange Act of 1934, as amended.
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European Hotel Subsidiary: Quality Hotels of Europe, Inc., a
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[ ] corporation and direct, wholly owned subsidiary of Choice.
Financing Obligations: All (i) indebtedness for borrowed money, (ii)
---------------------
obligations evidenced by bonds, notes, debentures or similar instruments, (iii)
obligations under capitalized leases and deferred purchase arrangements, (iv)
reimbursement or other obligations relating to letters of credit or similar
arrangements, and (v) obligations to guarantee, directly or indirectly, any of
the foregoing types of obligations on behalf of others.
Form 10: The Registration Statement on Form 10 under the Exchange Act
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with respect to the Franchising Common Stock.
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Franchising Board: The Board of Directors of Franchising.
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Franchising Books and Records: The books and records (including
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computerized records) of Franchising and the Franchising Group Subsidiaries and
any other books and records of Choice's Subsidiaries which relate principally to
the Franchising Group, are necessary to conduct the Franchising Group Business,
or are required by law to be retained by Franchising or a Franchising Group
Subsidiary, including, without limitation, (i) all such books and records
relating to Franchising Group Employees, (ii) all files relating to any Action
being assumed by Franchising as part of the Franchising Group Liabilities, and
(iii) original corporate minute books, stock ledgers and certificates and
corporate seals, and all licenses, leases, agreements and filings, relating to
Franchising, the Franchising Group Subsidiaries or the Franchising Group
Business (but not including the Choice Books and Records, provided that
Franchising shall have access to, and have the right to obtain duplicate copies
of, the Choice Books and Records which pertain to the Franchising Group Business
in accordance with the provisions of Article VII).
Franchising Bylaws: The Restated Bylaws of Franchising, substantially
------------------
in the form of Exhibit I, to be in effect at the Distribution Date.
Franchising Certificate: The Restated Certificate of Incorporation of
-----------------------
Franchising, substantially in the form of Exhibit J, to be in effect at the
Distribution Date.
Franchising Common Stock: The common stock, $.01 par value per share,
------------------------
of Franchising.
Franchising Group: Franchising and the Franchising Group
-----------------
Subsidiaries, collectively.
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Franchising Group Assets: (i) All outstanding capital stock of the
------------------------
Franchising Group Subsidiaries; (ii) the Franchising Books and Records; (iii)
all of the assets expressly to be retained by, or assigned or allotted to,
Franchising or any of the Franchising Group Subsidiaries under this Agreement or
the Related Agreements; and (iv) any other assets of Choice and its Subsidiaries
used principally in the Franchising Group Business.
Franchising Group Business: The Franchising Business and the European
--------------------------
Hotel Business, each as referenced in the recitals to this Agreement.
Franchising Group Employees: The meaning specified in the Employee
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Benefits Allocation Agreement.
Franchising Group Liabilities: (i) All of the Liabilities of the
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Franchising Group under, or to be retained or assumed by Franchising or any of
the Franchising Group Subsidiaries pursuant to, this Agreement or any of the
Related Agreements, including, without limitation, liabilities arising under the
securities or blue sky laws of the United States or of states or other political
subdivisions of the United States in connection with or related to, information
contained in or omitted from the Form 10 or the Proxy Statement; (ii) all
Liabilities for payment of outstanding drafts of Choice and its Subsidiaries
existing as of the Distribution Date; (iii) the Assumed Financing Obligations;
(iv) all Liabilities of Franchising and the Franchising Group Subsidiaries,
other than Liabilities transferred to Choice or to any Real Estate Group
Subsidiary in connection with the Distribution; and (v) all other Liabilities
arising out of, or in connection with, any of the Franchising Group Assets or
the Franchising Group Business; provided, however, that the Franchising Group
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Liabilities shall not include (i) any Financing Obligations of Choice or the
Real Estate Group Subsidiaries other than the Assumed Financing Obligations; and
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(ii) all claims, losses, damages, demands, costs, expenses or Liabilities for
any Tax (which shall be governed by Sections 5.06, 6.05 and 9.02 hereof and by
the Tax Sharing Agreement).
Franchising Group Policies: The [ ] Program effective
--------------------------
[ ], 199_ and any other Policies, current or past, which are owned or
maintained by or on behalf of Choice or any of its Affiliates or predecessors,
which by mutual agreement of Choice and Franchising, are to be assigned to
Franchising or to any Franchising Group Subsidiary.
Franchising Group Subsidiaries: All Subsidiaries of Franchising and
------------------------------
the European Hotel Subsidiary.
Franchising Pro Forma Balance Sheet: The Pro Forma Consolidated
-----------------------------------
Balance Sheet of Franchising as of October __, 1997 attached hereto as Exhibit
K.
Holders: The holders of record of Choice Common Stock as of the
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Distribution Record Date.
Insurance Administration: With respect to each Policy (including Self
------------------------
Insurance Programs), the accounting for premiums, retrospectively rated
premiums, defense cost, adjuster's fees, indemnity payments, deductibles and
retentions as appropriate under the terms and conditions of each of the
Policies; and the reporting to excess insurance carriers of any losses or claims
in accordance with Policy provisions, and the distribution of Insurance Proceeds
as contemplated by this Agreement.
Insurance Proceeds: Those moneys (i) received by an insured from an
------------------
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.
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Insured Claims: Those Liabilities that, individually or in the
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aggregate, are covered within the terms and conditions of any of the Policies
(including Self Insurance Programs), whether or not subject to deductibles, co-
insurance, uncollectability or retrospectively rated premium adjustments, but
only to the extent that such Liabilities are within applicable Policy limits,
including aggregates.
IRS: The Internal Revenue Service.
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IRS Ruling: The letter ruling issued by the IRS in response to the
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Ruling Request.
Liabilities: Any and all debts, liabilities and obligations, absolute
-----------
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, including all costs and expenses
relating thereto, and including, without limitation, those debts, liabilities
and obligations arising under any law, rule, regulation, Action, threatened
Action, order or consent decree of any governmental entity or any award of any
arbitrator of any kind, and those arising under any contract, commitment or
undertaking.
Manor Care: Manor Care, Inc., a Delaware corporation.
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Manor Care Agreements: Collectively, (i) the Employee Benefits and
---------------------
Other Matters Allocation Agreement dated as of November 1, 1996 between Choice
and Manor Care; (ii) Employee Benefits Administration Agreement dated as of
November 1, 1996 between Choice and Manor Care; (iii) Corporate Services
Agreement dated as of November 1, 1996 between Choice and Manor Care; (iv) Risk
Management Services Agreement dated as of November 1, 1996 between Choice and
Manor Care; and (v) Gaithersburg Lease Agreement dated as of November 1, 1996
between Choice and Manor Care.
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Manor Care Distribution Agreement: The Distribution Agreement dated
---------------------------------
October 31, 1996, by and between Choice and Manor Care.
New Agreements: The Employee Benefits Allocation Agreement; Employee
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Benefits Administration Agreement; Noncompetition Agreement; Strategic Alliance
Agreement; Tax Sharing Agreement; and Tax Administration Agreement.
Noncompetition Agreement: The Noncompetition Agreement between
------------------------
Franchising and Choice, which agreement shall be entered into on or prior to
the Distribution Date in substantially the form attached hereto as Exhibit L.
Person: Any individual, corporation, partnership, association, trust,
------
estate or other entity or organization, including any governmental entity or
authority.
Policies: Insurance policies and insurance contracts of any kind
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relating to the Franchising Group Business or the Real Estate Group Business as
conducted prior to the Distribution Date, including without limitation primary
and excess policies, comprehensive general liability policies, automobile,
aircraft and workers' compensation insurance policies, and self-insurance and
captive insurance company arrangements, including any "fronted policies" with
respect to Self Insurance Programs, together with the rights and benefits
thereunder.
Privileged Information: All information as to which Choice,
----------------------
Franchising or any of their Subsidiaries are entitled to assert the protection
of a Privilege.
Privileges: All privileges that may be asserted under applicable law
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including, without limitation, privileges arising under or relating to the
attorney-client relationship (including but not limited to the attorney-client
and work product privileges), the accountant-client privilege, and privileges
relating to internal evaluative processes.
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Proxy Statement: The Proxy Statement complying with Regulation 14A
---------------
under the Exchange Act dated August 15, 1997 circulated to the stockholders of
Choice for purposes of soliciting proxies approving the Distribution and certain
related matters.
Real Estate Books and Records: The books and records (including
-----------------------------
computerized records) of Choice and the Real Estate Group Subsidiaries and any
other books and records of Choice's Subsidiaries which relate principally to the
Real Estate Group, are necessary to conduct the Real Estate Group Business or
are required by law to be retained by Choice or a Real Estate Group Subsidiary,
including, without limitation, (i) all such books and records relating to Real
Estate Group Employees, (ii) all files relating to any Action being retained or
assumed by Choice as part of the Real Estate Group Liabilities, and (iii)
original corporate minute books, stock ledgers and certificates and corporate
seals, and all licenses, leases, agreements and filings, relating to Choice, the
Real Estate Group Subsidiaries or the Real Estate Group Business (but not
including the Franchising Books and Records, provided that Choice shall have
access to, and shall have the right to obtain duplicate copies of, the
Franchising Books and Records in accordance with the provisions of Article VII).
Real Estate Group: Choice and the Real Estate Group Subsidiaries,
-----------------
collectively.
Real Estate Group Assets: The assets of Choice and the Real Estate
------------------------
Group Subsidiaries including, without limitation, (i) the capital stock of the
Real Estate Group Subsidiaries; (ii) the Choice Books and Records; (iii) all of
the assets expressly to be retained by, or assigned or allocated to, Choice or
any of the Real Estate Group Subsidiaries under this Agreement or the Related
Agreements; and (iv) any other assets of Choice and its Subsidiaries not
composing Franchising Group Assets.
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Real Estate Group Business: The business conducted by the Real Estate
--------------------------
Group, as referenced in the recitals to this Agreement.
Real Estate Group Employees: The meaning specified in the Employee
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Benefits Allocation Agreement.
Real Estate Group Liabilities: (i) All of the Liabilities of Choice
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and the Real Estate Group Subsidiaries under, or to be retained or assumed by
Choice or any of the Real Estate Group Subsidiaries pursuant to, this Agreement
or any of the Related Agreements; (ii) any Financing Obligations of Choice and
its Subsidiaries not constituting Franchising Group Liabilities; (iii) all
Liabilities transferred to Choice or the Real Estate Group Subsidiaries in
connection with the Distribution; (iv) all claims, losses, damages, demands,
costs, expenses or Liabilities for Tax (which shall be governed by Sections
5.06, 6.05 and 9.02 hereof and by the Tax Sharing Agreement; (v) all other
Liabilities arising out of, or in connection with, any of the Real Estate Group
Assets or the Real Estate Group Business; and (vi) to the extent not otherwise
provided for, all other Liabilities of Choice and its Subsidiaries not
constituting Franchising Group Liabilities.
Real Estate Group Self Insurance Liabilities: All Liabilities arising
--------------------------------------------
under the Self Insurance Programs retained by Choice under the Agreement not
constituting a Franchising Self Insurance Liability.
[Real Estate Group Policies: The [ ] policy
--------------------------
effective [ ] and any other policies current or past, which are
owned or maintained by or on behalf of Choice or any of its Affiliates or
predecessors, which, by mutual agreement of Choice and Franchising are to be
assigned to Choice or to any Real Estate Group Subsidiary.]
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Real Estate Group Subsidiaries: All Subsidiaries of Choice, except
------------------------------
Franchising and the Franchising Group Subsidiaries.
Related Agreements: All of the agreements, instruments,
------------------
understandings, assignments or other arrangements set forth in writing, which
are entered into in connection with the transactions contemplated hereby,
including, without limitation: the Conveyancing and Assumption Instruments, the
Amended Manor Care Agreements, and the New Agreements.
Retained Cash Accounts: The bank accounts set forth on Schedule 2.07
----------------------
hereto, which accounts are in the name of First Choice Properties Corporation.
Ruling Request: The private letter ruling request filed by Choice
--------------
with the Internal Revenue Service on March __, 1997, as supplemented and amended
from time to time, with respect to certain tax matters relating to the
Distribution.
Self Insurance Programs: Those self-insured programs administered by
-----------------------
Choice for the benefit of its employees, properties and Franchising businesses,
including without limitation such programs that utilize "fronted policies."
Shared Policies: All Policies, current or past, which are owned or
---------------
maintained by or on behalf of Choice or any of its Subsidiaries or their
respective predecessors which relate to both the Real Estate Group Business and
the Franchising Group Business, other than the Real Estate Group Policies and
the Franchising Group Policies.
Strategic Alliance Agreement: The Strategic Alliance Agreement to be
----------------------------
entered into between Choice and Franchising substantially in the form attached
hereto as Exhibit M.
Subsidiary: With respect to any Person, (a) any corporation of which
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at least a majority in interest of the outstanding voting stock (having by the
terms thereof voting power
14
under ordinary circumstances to elect a majority of the directors of such
corporation, irrespective of whether or not at the time stock of any other class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly,
owned or controlled by such Person, by one or more Subsidiaries of such Person,
or by such Person and one or more of its Subsidiaries, or (b) any corporate or
non-corporate entity in which such Person, one or more Subsidiaries of such
Person, or such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has an ownership interest and
which is included in the consolidated financial reports of such Person
consistent with generally accepted accounting principles.
Tax: The meaning set forth in the Tax Sharing Agreement.
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Tax Administration Agreement: The Tax Administration Agreement
----------------------------
between Choice and Franchising pursuant to which such parties will provide to
the other certain tax administration services after the consummation of the
Distribution, which agreement shall be entered into on or prior to the
Distribution Date in substantially the form attached hereto as Exhibit N.
Tax Sharing Agreement: The Tax Sharing Agreement between Choice and
---------------------
Franchising pursuant to which such parties will provide for the allocation of
certain tax liabilities after the consummation of the Distribution, which
agreement shall be entered into on or prior to the Distribution Date in
substantially in the form attached hereto as Exhibit O.
Section 1.02. Terms Defined Elsewhere in Agreement.
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Each of the following terms is defined in the Section set forth
opposite such term:
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Term Section
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Choice Recitals
Choice Indemnities 5.01
Committee 9.14
Consents 4.01
Distribution Recitals
Dispute 9.14
Franchising Recitals
Indemnifiable Loss 5.01
Indemnifying Party 5.03
Indemnified Person 5.03
Information 7.02
Preliminary Transfers Recitals
Real Estate Group Recitals
Third-Party Claim 5.04
II.
TRANSFER OF ASSETS
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Section 2.01. Transfer of Assets to Franchising.
---------------------------------
Prior to the Distribution Date, Choice shall take or cause to be taken
all actions necessary to cause the transfer, assignment, delivery and conveyance
to Franchising or the Franchising Group Subsidiary designated by Franchising, of
all of Choice's and its Subsidiaries' right, title and interest in any
Franchising Group Assets held, on or prior to the Distribution Date, by Choice
or any Real Estate Group Subsidiary.
Section 2.02. Transfers of Assets from Franchising Group Subsidiaries
-------------------------------------------------------
to Choice or Real Estate Group Subsidiaries.
-------------------------------------------
Prior to the Distribution Date, Franchising shall take or cause to be
taken all action necessary to cause the transfer, assignment, delivery and
conveyance to Choice or the Real Estate Subsidiary designated by Choice, of all
of Franchising's and the Franchising Group
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Subsidiaries' right, title and interest in Real Estate Group Assets held, on or
prior to the Distribution Date by Franchising or one of the Franchising Group
Subsidiaries, if any.
Section 2.03. Transfers Not Effected Prior to the Distribution.
------------------------------------------------
To the extent that any transfers contemplated by this Article II shall
not have been fully effected on the Distribution Date, the parties shall
cooperate to effect such transfers as promptly as shall be practicable following
the Distribution Date. Nothing herein shall be deemed to require the transfer
of any assets or the assumption of any Liabilities which by their terms or
operation of law cannot be transferred or assumed; provided, however, that
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Choice and Franchising and their respective Subsidiaries and Affiliates shall
cooperate in seeking to obtain any necessary consents or approvals for the
transfer of all assets and Liabilities contemplated to be transferred pursuant
to this Article II. In the event that any such transfer of assets or
Liabilities has not been consummated effective as of the Distribution Date, the
party retaining such asset or Liability shall thereafter hold such asset in
trust for the use and benefit of the party entitled thereto (at the expense of
the party entitled thereto) and retain such Liability for the account of the
party by whom such Liability is to be assumed pursuant hereto, and take such
other actions as may be reasonably required in order to place the parties,
insofar as reasonably possible, in the same position as would have existed had
such asset been transferred or such Liability been assumed as contemplated
hereby. As and when any such asset or Liability becomes transferable, such
transfer and assumption shall be effected forthwith. The parties agree that,
except as set forth in this Section 2.03, as of the Distribution Date, each
party hereto shall be deemed to have acquired complete and sole beneficial
ownership over all of the assets, together with all rights, powers and
privileges incidental thereto, and shall be deemed to have assumed in
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accordance with the terms of this Agreement all of the Liabilities, and all
duties, obligations and responsibilities incidental thereto, which such party is
entitled to acquire or required to assume pursuant to the terms of this
Agreement.
Section 2.04. Cooperation Re: Assets.
-----------------------
In the case that at any time after the Distribution Date, Franchising
reasonably determines that any of the Real Estate Group Assets are essential for
the conduct of the Franchising Group Business, or Choice reasonably determines
that any of the Franchising Group Assets are essential for the conduct of the
Real Estate Group Business, and the nature of such assets makes it impracticable
for Franchising or Choice, as the case may be, to obtain substitute assets or to
make alternative arrangements on commercially reasonable terms to conduct their
respective businesses, and reasonable provisions for the use thereof are not
already included in the Related Agreements, then Franchising (with respect to
the Franchising Group Assets) and Choice (with respect to the Real Estate Group
Assets) shall cooperate to make such assets available to the other party on
commercially reasonable terms, as may be reasonably required for such party to
maintain normal business operations. However, (i) the usage of such assets by
the other party shall not materially interfere with the use of such assets by
the party holding such assets, and (ii) such assets shall be required to be made
available only until such time as the other party may reasonably obtain
substitute assets or make alternative arrangements on commercially reasonable
terms to permit it to maintain normal business operations.
Section 2.05. No Representations or Warranties; Consents.
------------------------------------------
Each of the parties hereto understands and agrees that no party hereto
is, in this Agreement, in any Related Agreement, or otherwise, representing or
warranting in any way (i) as
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to the value or freedom from encumbrance of, or any other matter concerning, any
assets of such party or (ii) as to the legal sufficiency to convey title to any
asset transferred pursuant to this Agreement or any Related Agreement. It is
also agreed and understood that there are no warranties, express or implied, as
to the merchantability or fitness of any of the assets either transferred to or
retained by the parties, as the case may be, and all such assets shall be "as
is, where is" and "with all faults" provided, however, that the absence of
warranties shall have no effect upon the allocation of Liabilities under this
Agreement and provided further that Franchising represents and warrants that,
prior to the Distribution Date, Franchising and the Franchising Group have
maintained their accounts payable and accounts receivable in a manner consistent
with the customary practices of the Franchising Group Business. Each party
hereto understands and agrees that no party hereto is, in this Agreement, in any
Related Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
amendatory agreements and the making of any filings or applications contemplated
by this Agreement, any Related Agreement or otherwise will satisfy the
provisions of any or all applicable laws or judgments or other instruments or
agreements relating to such assets. Notwithstanding the foregoing, the parties
shall use their good faith efforts to obtain all consents and approvals, to
enter into all reasonable amendatory agreements and to make all filings and
applications which may be reasonably required for the consummation of the
transactions contemplated by this Agreement and the Related Agreements, and
shall take all such further reasonable actions as shall be reasonably necessary
to preserve for each of the Franchising Group and the Real Estate Group, to the
greatest extent feasible, the economic and operational benefits of the
allocation of assets and liabilities provided for in this Agreement. In
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case at any time after the Distribution Date any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary or
desirable action.
Section 2.06. Conveyancing and Assumption Instruments.
---------------------------------------
In connection with the Preliminary Transfers described in Article II
and Article III hereof, and the assignment of assets and the assumption of
Liabilities contemplated by any Related Agreements, the parties shall execute,
or cause to be executed by the appropriate entities, the Conveyancing and
Assumption Instruments in such forms as the parties shall reasonably agree. The
transfer of capital stock shall be effected by means of delivery of stock
certificates and executed stock powers and notation on the stock record books of
the corporation or other legal entities involved and, to the extent required by
applicable law, by notation on public registries.
Section 2.07. Cash Allocation; Cash Management.
--------------------------------
(a) Cash Allocation on the Distribution Date.
----------------------------------------
The allocation between Choice and Franchising of all domestic and
international cash bank balances, short-term investments and outstanding checks
and drafts of Choice and its Subsidiaries recorded per the books of Choice and
its Subsidiaries shall be in accordance with the following:
(i) all cash received in, and deposits of cash, checks, drafts or
short-term investments made to, depository accounts, other than the
Retained Cash Accounts, as of the close of [business on] the
Distribution Date shall be remitted to Franchising; and
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(ii) all cash in, and deposits of cash, checks, drafts or short-
term investments made to the Retained Cash Accounts as of the close of
[business on] the Distribution Date shall remain with Choice and the
Real Estate Group Subsidiaries.
All Liabilities for payment of outstanding checks or drafts drawn on
or prior to the Distribution Date on accounts allocated to Franchising shall be
paid by Franchising.
(b) Cash Management After the Distribution Date. All ▇▇▇▇▇ cash,
-------------------------------------------
depository and disbursement accounts of Choice (other than the Retained Cash
Accounts) on the Distribution Date shall be transferred to Franchising after the
allocations are made pursuant to this Section 2.07. Choice shall retain the
Retained Cash Accounts and shall establish and maintain a separate cash
management system and accounting records with respect to the Real Estate Group
Business effective as of 12:01 a.m. New York time on the day following the
Distribution Date.
(c) For purposes of this Section 2.07, the parties contemplate that
the Franchising Group Business and the Real Estate Group Business, including,
but not limited to, the administration of accounts payable and accounts
receivable, will be conducted in the ordinary course of business and consistent
with past practice prior the Distribution Date.
(d) For purposes of this Section 2.07, any disagreement or dispute
shall be resolved by the Chief Financial Officer of Franchising, which
resolution shall be binding and final upon each of the parties hereto and not
subject to further review.
21
Section 2.08. Agreements Between Choice and Franchising.
-----------------------------------------
On or prior to the Distribution Date, Choice and Franchising shall
enter into the New Agreements.
Section 2.09. Agreements Between Choice and/or Franchising and Manor
------------------------------------------------------
Care.
----
On or prior to the Distribution Date, Choice and/or Franchising and
Manor Care, as appropriate, shall enter into the Amended Manor Care Agreements.
III.
ASSUMPTION AND SATISFACTION OF LIABILITIES
------------------------------------------
Section 3.01. Assumption and Satisfaction of Liabilities.
------------------------------------------
Except as set forth in one or more of the Related Agreements,
effective as of and after the Distribution Date, (a) Franchising shall, and/or
shall cause the Franchising Group Subsidiaries to, assume, pay, perform and
discharge in due course all of the Franchising Group Liabilities, and (b) Choice
shall, and/or shall cause the Real Estate Group Subsidiaries to, assume, pay,
perform and discharge in due course all of the Real Estate Group Liabilities.
IV.
THE DISTRIBUTION
----------------
Section 4.01. Cooperation Prior to the Distribution.
-------------------------------------
(a) Franchising and Choice shall cooperate in preparing, filing with
the Commission and causing to become effective any registration statements or
amendments thereof which are appropriate to reflect the establishment of, or
amendments to, any employee benefit plans and other plans contemplated by the
Employee Benefits Allocation Agreement.
22
(b) Franchising and Choice shall take all such action as may be
necessary or appropriate under the securities or blue sky laws of states or
other political subdivisions of the United States in connection with the
transactions contemplated by this Agreement and the Related Agreements.
(c) Franchising and Choice shall use all reasonable efforts to obtain
any third-party consents or approvals necessary or desirable in connection with
the transactions contemplated hereby ("Consents").
--------
(d) Franchising and Choice will use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary or desirable under applicable law, to consummate the transactions
contemplated under this Agreement and the Related Agreements.
Section 4.02. Choice Board Action; Conditions Precedent to the
------------------------------------------------
Distribution.
------------
The Choice Board shall, in its sole discretion, establish the Record
Date and the Distribution Date and any appropriate procedures in connection with
the Distribution. In no event shall the Distribution occur unless the following
conditions shall have been satisfied:
(i) the transactions contemplated in Article II and Article
III shall have been consummated in all material respects;
(ii) the Franchising Board, comprised as contemplated by
Section 6.01, shall have been elected by Choice, as sole stockholder
of Franchising, and the Franchising Certificate and Franchising Bylaws
shall have been adopted and shall be in effect;
23
(iii) the Ruling Request shall have been granted in form and
substance satisfactory to the Choice Board, in its sole discretion and
the representations made to the IRS therein shall be true in all
material respects;
(iv) the Form 10 shall have been declared effective by the
Commission;
(v) Franchising and Choice shall have entered into the Related
Agreements to which they are a party and each of the transactions
contemplated by the Related Agreements to be consummated on or prior
to the Distribution Date shall have been consummated;
(vi) all necessary regulatory approvals and consents of third
parties shall have been received;
(vii) Franchising shall have obtained, or Choice shall have
obtained for Franchising, insurance (or binders therefor) providing
coverage to Franchising similar to the coverage provided by insurance
in place prior to the Distribution Date; and,
(viii) financing arrangements with respect to Choice and
Franchising satisfactory to the Choice Board in its sole discretion
shall be in place.
provided, however, that (x) any such condition may be waived by the Choice Board
-------- -------
in its sole discretion, and (y) the satisfaction of such conditions shall not
create any obligation on the part of Choice or any other party hereto to effect
the Distribution or in any way limit Choice's power
24
of termination set forth in Section 9.08 or alter the consequences of any such
termination from those specified in such Section.
Section 4.03. The Distribution.
----------------
On the Distribution Date, or as soon thereafter as practicable,
subject to the conditions and rights of termination set forth in this Agreement,
Choice shall deliver to the Agent a share certificate representing all of the
then outstanding shares of Franchising Common Stock owned by Choice, endorsed in
blank, and shall instruct the Agent to distribute to each Holder, on or as soon
as practicable following the Distribution Date, a certification, or if requested
by such Holder, a certificate, representing one share of Franchising Common
Stock for each share of Choice Common Stock so held. Franchising agrees to
provide all share certificates that the Agent shall require in order to effect
the Distribution.
V.
INDEMNIFICATION
---------------
Section 5.01. Indemnification by Choice.
-------------------------
Except as otherwise expressly set forth in a Related Agreement, Choice
shall indemnify, defend and hold harmless Franchising and each of the
Franchising Group Subsidiaries, and each of their respective directors,
officers, employees, agents and Affiliates and each of the heirs, executors,
successors and assigns of any of the foregoing (the "Franchising Indemnities")
-----------------------
from and against any and all losses, Liabilities, damages and expenses,
(including, without limitation, the reasonable costs and expenses of
investigation and reasonable attorney's fees and expenses in connection with any
or all such investigations or any and all Actions, or threatened Actions)
(collectively, "Indemnifiable Losses" and, individually, an "Indemnifiable
-------------------- -------------
25
Loss") incurred or suffered by any of the Franchising Indemnities and arising
----
out of or due to the failure or alleged failure of Choice, any Real Estate Group
Subsidiary, or any of their Affiliates to pay, perform or otherwise discharge in
due course any of the Real Estate Group Liabilities, or comply with the
provisions of Section 6.04. To the extent that counsel is provided to
Franchising under this Indemnification, such counsel shall be selected by Choice
and such counsel may include its in-house corporate counsel.
Section 5.02. Indemnification by Franchising.
------------------------------
Except as otherwise expressly set forth in a Related Agreement,
Franchising shall indemnify, defend and hold harmless Choice and each of the
Real Estate Group Subsidiaries, and each of their respective directors,
officers, employees, agents and Affiliates and each of the heirs, executors,
successors and assigns of any of the foregoing (the "Choice Indemnities") from
------------------
and against any and all Indemnifiable Losses incurred or suffered by any of the
Choice Indemnities and arising out of or due to the failure or alleged failure
of Franchising, any Franchising Group Subsidiaries, or any of their Affiliates
to pay, perform or otherwise discharge in due course any of the Franchising
Group Liabilities or comply with the provisions of Section 6.04. To the extent
that counsel is provided to Choice under this Indemnification, such counsel
shall be selected by Franchising and such counsel may include its in-house
corporate counsel.
Section 5.03. Insurance Proceeds.
------------------
The amount which any party (an "Indemnifying Party") is or may be
------------------
required to pay to any other Person (an "Indemnified Person") pursuant to
------------------
Section 5.01 or Section 5.02 shall be reduced (including, without limitation,
retroactively) by any Insurance Proceeds or other amounts actually recovered by
or on behalf of such Indemnified Party in reduction of the related
26
Indemnifiable Loss. If an Indemnified Party shall have received the payment
required by this Agreement from an Indemnifying Party in respect of an
Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds,
or other amounts in respect of such Indemnifiable Loss as specified above, then
such Indemnified Party shall pay to such Indemnifying Party a sum equal to the
amount of such Insurance Proceeds or other amounts actually received.
Section 5.04. Procedure for Indemnification.
-----------------------------
(a) Except as may be set forth in a Related Agreement, if an
Indemnified Party shall receive notice or otherwise learn of the assertion by a
Person (including, without limitation, any governmental entity) who is not a
party to this Agreement or to any of the Related Agreements of any claim or of
the commencement by any such Person or its Affiliate of any Action with respect
to which an Indemnifying Party may be obligated to provide indemnification
pursuant to this Agreement (a "Third-Party Claim"), such Indemnified Party shall
-----------------
give such Indemnifying Party written notice thereof promptly after becoming
aware of such Third-Party Claim; provided, that the failure of any Indemnified
--------
Party to give notice as required by this Section 5.04 shall not relieve the
Indemnifying Party of its obligations under this Article V, except to the extent
that such Indemnifying Party is prejudiced by such failure to give notice. Such
notice shall describe the Third-Party Claim in reasonable detail, and shall
indicate the amount (estimated if necessary) of the Indemnifiable Loss that has
been or may be sustained by such Indemnified Party.
(b) An Indemnifying Party may elect to defend or to seek to settle
or compromise, at such Indemnifying Party's own expense and by such Indemnifying
Party's own
27
counsel, any Third-Party Claim, provided that the Indemnifying Party must
confirm in writing that it agrees that the Indemnified Party is entitled to
indemnification hereunder in respect of such Third-Party Claim. Within 30 days
of the receipt of notice from an Indemnified Party in accordance with
Section 5.04(a) (or sooner, if the nature of such Third-Party Claim so
requires), the Indemnifying Party shall notify the Indemnified Party of its
election whether to assume responsibility for such Third-Party Claim (provided
that if the Indemnifying Party does not so notify the Indemnified Party of its
election within 30 days after receipt of such notice from the Indemnified Party,
the Indemnifying Party shall be deemed to have elected not to assume
responsibility for such Third-Party Claim), and such Indemnified Party shall
cooperate in the defense or settlement or compromise of such Third-Party Claim.
After notice from an Indemnifying Party to an Indemnified Party of its election
to assume responsibility for a Third-Party Claim, such Indemnifying Party shall
not be liable to such Indemnified Party under this Article V for any legal or
other expenses (except expenses approved in advance by the Indemnifying Party)
subsequently incurred by such Indemnified Party in connection with the defense
thereof; provided, that if the defendants in any such claim include both the
--------
Indemnifying Party and one or more Indemnified Parties and in such Indemnified
Parties' reasonable judgment a conflict of interest between such Indemnified
Parties and such Indemnifying Party exists in respect of such claim, such
Indemnified Parties shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel (but not more
than one separate counsel reasonably satisfactory to the Indemnifying Party)
shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to
assume responsibility for a Third-Party Claim (which election may be made only
in the event of a good faith dispute that a claim
28
was inappropriately tendered under Section 5.01 or 5.02, as the case may be)
such Indemnified Party may defend or (subject to the following sentence) seek to
compromise or settle such Third-Party Claim. Notwithstanding the foregoing, an
Indemnified Party may not settle or compromise any claim without prior written
notice to the Indemnifying Party, which shall have the option within ten days
following the receipt of such notice (i) to disapprove the settlement and assume
all past and future responsibility for the claim, including reimbursing the
Indemnified Party for prior expenditures in connection with the claim, or
(ii) to disapprove the settlement and continue to refrain from participation in
the defense of the claim, in which event the Indemnifying Party shall have no
further right to contest the amount or reasonableness of the settlement if the
Indemnified Party elects to proceed therewith, or (iii) to approve the amount of
the settlement, reserving the Indemnifying Party's right to contest the
Indemnified Party's right to indemnity, or (iv) to approve and agree to pay the
settlement. In the event the Indemnifying Party makes no response to such
written notice from the Indemnity, the Indemnifying Party shall be deemed to
have elected option (ii).
(c) If an Indemnifying Party chooses to defend or to seek to
compromise any Third-Party Claim, the Indemnified Party shall make available to
such Indemnifying Party any personnel and any books, records or other documents
within its control or which it otherwise has the ability to make available that
are necessary or appropriate for such defense.
(d) Any claim on account of an Indemnifiable Loss which does not
result from a Third-Party Claim shall be asserted by written notice given by the
Indemnified Party to the applicable Indemnifying Party. Such Indemnifying Party
shall have a period of 15 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not
29
respond within such 15-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 15-day period or rejects such claim in whole
or in part, such Indemnified Party shall be free to pursue such remedies as may
be available to such party under applicable law or under this Agreement.
(e) In addition to any adjustments required pursuant to
Section 5.03, if the amount of any Indemnifiable Loss shall, at any time
subsequent to the payment required by this Agreement, be reduced by recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnified
Party to the Indemnifying Party.
(f) In the event of payment by an Indemnifying Party to any
Indemnified Party in connection with any Third-Party Claim, such Indemnifying
Party shall be subrogated to and shall stand in the place of such Indemnified
Party as to any events or circumstances in respect of which such Indemnified
Party may have any right or claim relating to such Third-Party Claim against any
claimant or plaintiff asserting such Third-Party Claim. Such Indemnified Party
shall cooperate with such Indemnifying Party in a reasonable manner, and at the
cost and expense of such Indemnifying Party, in prosecuting any subrogated right
or claim.
Section 5.05. Remedies Cumulative.
-------------------
The remedies provided in this Article V shall be cumulative and shall
not preclude assertion by any Indemnified Party of any other rights or the
seeking of any and all other remedies against any Indemnifying Party.
30
Section 5.06. After-Tax Indemnification Payments.
----------------------------------
Except as otherwise expressly provided herein or in a Related
Agreement, any indemnification payment made by any Indemnifying Party under this
Article V shall be computed by taking into account the value of any and all
applicable deductions, losses, credits, offsets or other items for Federal,
State or other Tax purposes attributable to the payment of the Indemnified
Losses by the Indemnified Party attributable to receipt of the indemnification
payment.
Section 5.07. Survival of Indemnities.
-----------------------
The obligations of each of Franchising and Choice under this Article V
shall survive the sale or other transfer by it of any assets or businesses or
the assignment by it of any Liabilities, with respect to any Indemnifiable Loss
of the other related to such assets, businesses or Liabilities.
VI.
CERTAIN ADDITIONAL MATTERS
--------------------------
Section 6.01. Franchising Board.
-----------------
Franchising and Choice shall take all actions which may be required to
appoint as officers and directors of Franchising those persons named in the
Form 10 (as may be altered or supplemented prior to the date hereof by the
Choice Board and the Franchising Board) to constitute, effective as of the
Distribution Date, the officers and the directors of Franchising.
Section 6.02. Resignations; Choice Board.
--------------------------
(a) Franchising shall cause all of its directors and Franchising
Group Employees to resign, effective as of the Distribution Date, from all
boards of directors or similar governing bodies of Choice or any of the Real
Estate Group Subsidiaries on which they serve,
31
and from all positions as officers or employees of Choice or any of the Real
Estate Group Subsidiaries in which they serve, except that (i) ▇▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇., and ▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ each shall serve as a director of
both Franchising and Choice and (ii) ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇. shall also serve as
Chairman of the board of directors of Franchising and of Choice. Choice shall
cause all of its directors and the Real Estate Group Employees to resign from
all boards of directors or similar governing bodies of Franchising or any of the
Franchising Group Subsidiaries on which they serve, and from all positions as
officers or employees of Franchising or any of the Franchising Group
Subsidiaries in which they serve, except to the extent specified in the
preceding sentence.
Section 6.03. Certificate and Bylaws.
----------------------
(a) On or prior to the Distribution Date, Franchising shall adopt
the Franchising Certificate and the Franchising Bylaws, and shall file the
Franchising Certificate with the Secretary of State of the State of Delaware.
Choice shall provide all necessary shareholder approvals for the Franchising
Certificate prior to the filing of the Franchising Certificate with the
Secretary of State of the State of Delaware.
(b) On or prior to the Distribution Date, Choice shall obtain all
necessary corporate approvals (including the approval by the holders of Choice
Common Stock) to the Choice Amended Certificate, and shall file the Choice
Amended Certificate with the Secretary of State of the State of Delaware.
Section 6.04. Certain Post-Distribution Transactions.
--------------------------------------
Each of Choice and Franchising shall, and shall cause each of their
respective Subsidiaries to, comply in all material respects with each
representation and statement made, or to be made, to any taxing authority in
32
connection with the IRS Ruling or any other ruling obtained, or to be obtained,
by Choice and Franchising acting together, from any such taxing authority with
respect to any transaction contemplated by this Agreement.
Section 6.05. Sales and Transfer Taxes.
------------------------
Choice and Franchising agree to cooperate to determine the amount of
sales, transfer or other taxes or fees, including, without limitation, all real
estate, patent, trademark and transfer taxes and recording fees payable in
connection with the transactions contemplated by the Agreement (the "Transaction
Taxes"). Choice agrees to file promptly and timely the returns for such
Transaction Taxes and Franchising will join in the execution of any such tax
returns or other documentation. Payment of all such Transaction Taxes shall be
the responsibility of Choice.
VII.
ACCESS TO INFORMATION AND SERVICES
Section 7.01. Provision of Corporate Records.
------------------------------
(a) Except as may otherwise be provided in a Related Agreement,
Choice shall arrange as soon as practicable following the Distribution Date, to
the extent not previously delivered in connection with the transactions
contemplated in Article II, for the transportation (at Franchising's cost) to
Franchising of the Franchising Books and Records in its possession, except to
the extent such items are already in the possession of Franchising or a
Franchising Group Subsidiary. The Franchising Books and Records shall be the
property of Franchising, but shall be available to Choice for review and
duplication until Choice shall notify Franchising in writing that such records
are no longer of use to Choice.
33
(b) Except as otherwise provided in a Related Agreement, Franchising
shall arrange as soon as practicable following the Distribution Date, to the
extent not previously delivered in connection with the transactions contemplated
in Article II, for the transportation (at Choice's cost) to Choice of the Choice
Books and Records in its possession, except to the extent such items are already
in the possession of Choice. The Choice Books and Records shall be the property
of Choice, but the Choice Books and Records that reasonably relate to the
Franchising Group Business shall be available to Franchising for review and
duplication until Franchising shall notify Choice in writing that such records
are no longer of use to Franchising.
Section 7.02. Access to Information.
---------------------
Except as otherwise provided in a Related Agreement, from and after
the Distribution Date, Choice shall afford to Franchising and its authorized
accountants, counsel and other designated representatives reasonable access
(including using reasonable efforts to give access to persons or firms
possessing information) and duplicating rights during normal business hours to
all records, books, contracts, instruments, computer data and other data and
information relating to pre-Distribution operations (collectively,
"Information") within Choice's possession insofar as such access is reasonably
-----------
required by Franchising for the conduct of its business, subject to appropriate
restrictions for classified or Privileged Information. Similarly, except as
otherwise provided in a Related Agreement, Franchising shall afford to Choice
and its authorized accountants, counsel and other designated representatives
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to Information within Franchising's possession, insofar as such access is
reasonably required by Choice for the conduct of its business, subject to
34
appropriate restrictions for classified or Privileged Information. Information
may be requested under this Article VII for the legitimate business purposes of
either party, including without limitation, audit, accounting, claims (including
claims for indemnification hereunder), litigation and tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations and for
performing this Agreement and the transactions contemplated hereby. The parties
hereby agree that Franchising shall also grant to Choice reasonable access to
the computer systems maintained by Franchising after the Distribution that
contain data and other information reasonably related to the Real Estate Group
Assets or the Real Estate Group Business, for purposes of review and retrieval
of such data (including the generation of reports containing such data).
Section 7.03. Production of Witnesses.
-----------------------
At all times from and after the Distribution Date, each of Franchising
and Choice shall use reasonable efforts to make available to the other, upon
written request, its and its Subsidiaries' officers, directors, employees and
agents as witnesses to the extent that such persons may reasonably be required
in connection with any Action.
Section 7.04. Reimbursement.
-------------
Except to the extent otherwise contemplated in any Related Agreement,
a party providing Information or witnesses to the other party under this
Article VII shall be entitled to receive from the recipient, upon the
presentation of invoices therefor, payments of such amounts, relating to
supplies, disbursements and other out-of-pocket expenses (at cost) and direct
and indirect expenses of employees who are witnesses or otherwise furnish
assistance (at cost), as may be reasonably incurred in providing such
Information or witnesses.
35
Section 7.05. Retention of Records.
--------------------
Except as otherwise required by law or agreed to in a Related
Agreement or otherwise in writing, each of Franchising and Choice may destroy or
otherwise dispose of any of the Information, which is material Information and
is not contained in other Information retained by Choice or Franchising, as the
case may be, at any time after the tenth anniversary of this Agreement, provided
that, prior to such destruction or disposal, (a) it shall provide no less than
90 or more than 120 days prior written notice to the other, specifying in
reasonable detail the Information proposed to be destroyed or disposed of and
(b) if a recipient of such notice shall request in writing prior to the
scheduled date for such destruction or disposal that any of the Information
proposed to be destroyed or disposed of be delivered to such requesting party,
the party proposing the destruction or disposal shall promptly arrange for the
delivery of such of the Information as was requested at the expense of the party
requesting such Information.
Section 7.06. Confidentiality.
---------------
Each of Choice and its Subsidiaries on the one hand, and Franchising
and its Subsidiaries on the other hand, shall hold, and shall cause its
consultants and advisors to hold, in strict confidence, all Information
concerning the other in its possession or furnished by the other or the other's
representatives pursuant to this Agreement (except to the extent that such
Information has been (i) in the public domain through no fault of such party or
(ii) later lawfully acquired from other sources by such party), and each party
shall not release or disclose such Information to any other person, except its
auditors, attorneys, financial advisors, rating agencies, bankers and other
consultants and advisors, unless compelled to disclose by judicial or
administrative process or, as reasonably advised by its counsel, by other
requirements of law, or
36
unless such Information is reasonably required to be disclosed in connection
with (x) any litigation with any third-parties or litigation between the Real
Estate Group and the Franchising Group, (y) any contractual agreement to which
the Real Estate Group or the Franchising Group are currently parties, or (z) in
exercise of either party's rights hereunder.
Section 7.07. Privileged Matters.
------------------
Franchising and Choice recognize that legal and other professional
services that have been and will be provided prior to the Distribution Date have
been and will be rendered for the benefit of both the Real Estate Group and the
Franchising Group and that both the Real Estate Group and the Franchising Group
should be deemed to be the client for the purposes of asserting all Privileges.
To allocate the interests of each party in the Privileged Information, the
parties agree as follows:
(a) Choice shall be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
which relates solely to the Real Estate Group, whether or not the Privileged
Information is in the possession of or under the control of Choice or
Franchising. Choice shall also be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
that relates solely to the subject matter of any claims constituting Real Estate
Group Liabilities, now pending or which may be asserted in the future, in any
lawsuits or other proceedings initiated against or by Choice, whether or not the
Privileged Information is in the possession of or under the control of Choice or
Franchising.
(b) Franchising shall be entitled, in perpetuity, to control the
assertion or waiver of all Privileges in connection with Privileged Information
which relates solely to the
37
Franchising Group, whether or not the Privileged Information is in the
possession of or under the control of Choice or Franchising. Franchising shall
also be entitled, in perpetuity, to control the assertion or waiver of all
Privileges in connection with Privileged Information which relates solely to the
subject matter of any claims constituting Franchising Group Liabilities, now
pending or which may be asserted in the future, in any lawsuits or other
proceedings initiated against or by Franchising, whether or not the Privileged
Information is in the possession of or under the control of Choice or
Franchising.
(c) Franchising and Choice agree that they shall have a shared
Privilege, with equal right to assert or waive, subject to the restrictions in
this Section 7.07, with respect to all Privileges not allocated pursuant to the
terms of Sections 7.07(a) and (b). All Privileges relating to any claims,
proceedings, litigation, disputes, or other matters which involve both
Franchising and Choice or in respect of which both Franchising and Choice retain
any responsibility or liability under this Agreement, shall be subject to a
shared Privilege.
(d) No party may waive any Privilege which could be asserted under
any applicable law, and in which the other party has a shared Privilege, without
the consent of the other party, except to the extent reasonably required in
connection with any litigation with third-parties or as provided in subsection
(e) below. Consent shall be in writing, or shall be deemed to be granted unless
written objection is made within twenty (20) days after written notice upon the
other party requesting such consent.
(e) In the event of any litigation or dispute between a member of
the Real Estate Group and a member of the Franchising Group, either party may
waive a Privilege in which the other party has a shared Privilege, without
obtaining the consent of the other party,
38
provided that such waiver of a shared Privilege shall be effective only as to
the use of Information with respect to the litigation or dispute between the
Real Estate Group and the Franchising Group, and shall not operate as a waiver
of the shared Privilege with respect to third-parties.
(f) If a dispute arises between the parties regarding whether a
Privilege should be waived to protect or advance the interest of either party,
each party agrees that it shall negotiate in good faith, shall endeavor to
minimize any prejudice to the rights of the other party, and shall not
unreasonably withhold consent to any request for waiver by the other party. Each
party specifically agrees that it will not withhold consent to waiver for any
purpose except to protect its own legitimate interests.
(g) Upon receipt by any party of any subpoena, discovery or other
request which arguably calls for the production or disclosure of Information
subject to a shared Privilege or as to which the other party has the sole right
hereunder to assert a Privilege, or if any party obtains knowledge that any of
its current or former directors, officers, agents or employees have received any
subpoena, discovery or other requests which arguably calls for the production or
disclosure of such Privileged Information, such party shall promptly notify the
other party of the existence of the request and shall provide the other party a
reasonable opportunity to review the Information and to assert any rights it may
have under this Section 7.07 or otherwise to prevent the production or
disclosure of such Privileged Information.
(h) The transfer of the Franchising Books and Records and the Choice
Books and Records and other Information between Choice and its Subsidiaries and
Franchising and its Subsidiaries is made in reliance on the agreement of
Franchising and Choice, as set forth in
39
Sections 7.06 and 7.07, to maintain the confidentiality of Privileged
Information and to assert and maintain all applicable Privileges. The access to
information being granted pursuant to Sections 7.01 and 7.02 hereof, the
agreement to provide witnesses and individuals pursuant to Section 7.03 hereof
and the transfer of Privileged Information between Choice and its Subsidiaries
and Franchising and its Subsidiaries pursuant to this Agreement shall not be
deemed a waiver of any Privilege that has been or may be asserted under this
Agreement or otherwise.
VIII.
INSURANCE
---------
Section 8.01 Policies and Rights Included Within the Franchising
---------------------------------------------------
Group Assets.
------------
Without limiting the generality of the definition of the Franchising
Group Assets or the effect of Section 2.01, the Franchising Group Assets shall
include (a) any and all rights of an insured party under each of the Shared
Policies, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all injuries,
losses, liabilities, damages and expenses incurred or claimed to have been
incurred on or prior to the Distribution Date by any party in or in connection
with the conduct of the Franchising Group or, to the extent any claim is made
against Franchising, any of its Subsidiaries or the Franchising Group, and which
injuries, losses, liabilities, damages and expenses may arise out of insured or
insurable occurrences or events under one or more of the Shared Policies;
provided, however, that nothing in this clause shall be deemed to constitute (or
-------- -------
to reflect) the assignment of the Shared Policies, or any of them, to
Franchising and (b) the Franchising Group Policies.
Section 8.02. Post-Distribution Date Claims.
-----------------------------
(a) If, subsequent to the Distribution Date, any person, corporation,
firm or entity shall assert a claim against Franchising or any of its
Subsidiaries with respect to any
40
injury, loss, liability, damage or expense incurred or claimed to have been
incurred prior to the Distribution Date in, or in connection with, the conduct
of the Franchising Group Business or, to the extent any claim is made against
Franchising or any of its Subsidiaries, the Franchising Group Business, and
which injury, loss, liability, damage or expense may arise out of insured or
insurable occurrences or events under one or more of the Shared Policies, Choice
shall at the time such claim is asserted be deemed to assign, without need of
further documentation, to Franchising any and all rights of an insured party
under the applicable Shared Policy with respect to such asserted claim,
specifically including rights of indemnity and the right to be defended by or at
the expense of the insurer; provided, however, that nothing in this sentence
-------- -------
shall be deemed to constitute (or to reflect) the assignment of the Shared
Policies, or any of them, to Franchising.
(b) If, subsequent to the Distribution Date, any person, corporation,
firm or entity shall assert a claim against Choice or any of its Subsidiaries
with respect to any injury, loss, liability, damage or expense incurred or
claimed to have been incurred prior to the Distribution Date and which injury,
loss, liability, damage or expense may arise out of insured or insurable
occurrences or events under one or more of the Shared Policies, Franchising
shall at the time such claim is asserted be deemed to assign, without need of
further documentation, to Choice any and all rights of an insured party under
the applicable Shared Policy with respect to such asserted claim, specifically
including rights of indemnity and the right to be defended by or at the expense
of the insurer; provided, however, that nothing in this sentence shall be
-------- -------
deemed to constitute (or to reflect) the assignment of the Shared Policies, or
any of them, to Choice.
41
Section 8.03. Administration and Reserves.
---------------------------
(a) Notwithstanding the provisions of Article III, but subject to any
contrary provisions of any Related Agreement, from and after the Distribution
Date:
(i) Manor Care shall be responsible for, and comply with the
terms and conditions of the Amended Risk Management Services Agreement
with respect to, (a) the insurance administration of the Shared
Policies and (b) claims administration with respect to the Franchising
Group Liabilities and Real Estate Group Liabilities; provided, that
--------
the administration of the Shared Policies by Manor Care is in no way
intended to limit, inhibit, or preclude any right to insurance
coverage for any Insured Claim of a named insured under the Shared
Policies including, but not limited to Franchising or any of its
Subsidiaries or Affiliates;
(ii) Franchising shall be entitled to any reserves established
by Choice or any of its Subsidiaries, or the benefit of reserves held
by any insurance carrier, with respect to the Franchising Group
Liabilities; and
(iii) Choice shall be entitled to any reserves established by
Franchising or any of its Subsidiaries, or the benefit of reserves
held by any insurance carrier, with respect to the Real Estate Group
Liabilities.
(b) Insurance Premiums. Franchising shall have the right but not the
------------------
obligation to pay the premiums, to the extent that Choice does not pay premiums
with respect to Real Estate Group Liabilities (retrospectively rated or
otherwise), with respect to Shared Policies and the Real Estate Group Policies,
as required under the terms and conditions of the respective
42
Policies, whereupon Choice shall forthwith reimburse Franchising for that
portion of such premiums paid by Franchising as are attributable to the Real
Estate Group Liabilities. Choice shall provide continued coverage under its
director and officer liability insurance policy for a period of not less than
one year for acts which took place or were alleged to have taken place prior to
the Distribution Date covering persons who were directors and officers of Choice
prior to the Distribution Date. Fifty percent of the additional premiums, if
any, for such coverage shall be reimbursed by Franchising within 15 days of the
Distribution Date. Such coverage for director and officer liability insurance
shall not be discontinued by Choice without the consent of Franchising, which
consent shall not be unreasonably withheld.
(c) Allocation of Insurance Proceeds. Insurance Proceeds received
--------------------------------
with respect to claims, costs and expenses under the Policies shall be paid to
Franchising with respect to the Franchising Group Liabilities and to Choice with
respect to the Real Estate Group Liabilities. Payment of the allocable portions
of indemnity costs of Insurance Proceeds resulting from the liability policies
will be made to the appropriate party upon receipt from the insurance carrier.
In the event that the aggregate limits on any Policies are exceeded, the parties
agree to provide an equitable allocation of Insurance Proceeds received after
the Distribution Date based upon their respective bona fide claims. The parties
agree to use their best efforts to cooperate with respect to insurance matters.
Section 8.04. Agreement for Waiver of Conflict and Shared Defense.
---------------------------------------------------
In the event that Insured Claims of both Franchising and Choice exist relating
to the same occurrence, Franchising and Choice agree to jointly defend and to
waive any conflict of interest necessary to the conduct of that joint defense.
Nothing in this paragraph shall be construed to limit or
43
otherwise alter in any way the indemnity obligations of the parties to this
Agreement, including those created by this Agreement, by operation of law or
otherwise.
IX.
MISCELLANEOUS
-------------
Section 9.01. Complete Agreement; Construction.
--------------------------------
This Agreement, including the Schedules and Exhibits and the Related
Agreements and other agreements and documents referred to herein, shall
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. Notwithstanding
any other provisions in this Agreement to the contrary, in the event and to the
extent that there shall be a conflict between the provisions of this Agreement
and the provisions of the Related Agreements, then the Related Agreements shall
control.
Section 9.02. Tax Sharing Agreement; After-Tax Payments.
-----------------------------------------
(a) Other than as provided in this Section 9.02 and Sections 5.06 and
6.05, this Agreement shall not govern any Tax, and any and all claims, losses,
damages, demands, costs, expenses, liabilities, refunds, deductions, write-offs,
or benefits relating to Taxes shall be exclusively governed by the Tax Sharing
Agreement or the Tax Administration Agreement.
(b) If, at the time Franchising is required to make any payment to
Choice under this Agreement, Choice owes Franchising any amount under the Tax
Sharing Agreement, then such amounts shall be offset and the excess shall be
paid by the party liable for such excess. Similarly, if, at the time Choice is
required to make any payment to Franchising under this Agreement, Franchising
owes Choice any amount under the Tax Sharing Agreement, then such amounts shall
be offset and the excess shall be paid by the party liable for such excess.
44
Section 9.03. Expenses.
--------
Except as specifically provided in this Agreement or in a Related
Agreement, all costs and expenses incurred in connection with the preparation,
execution, delivery and implementation of this Agreement and with the
consummation of the transactions contemplated by this Agreement shall be paid by
the party incurring the expense. The determination of who has incurred an
expense shall be made by the Chief Financial Officer of Franchising, which
determination shall be binding and final upon each of the parties hereto and not
subject to further review. In addition, it is understood and agreed that
[ ] shall pay the legal, filing, accounting, printing and other accountable
and out-of-pocket expenditures in connection with the preparation, printing and
filing of the Form 10 and the Proxy Statement.
Section 9.04. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland, without regard to the principles of conflicts
of laws thereof.
Section 9.05. Notices.
-------
All notices and other communications hereunder shall be in writing and
shall be delivered by hand or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such other
addresses for a party as shall be specified by like notice) and shall be deemed
given on the date on which such notice is received:
To Franchising:
Choice Hotels Franchising, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: General Counsel
45
To Choice:
Choice Hotels International,. Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: General Counsel
Section 9.06. Amendments.
----------
This Agreement may not be modified or amended except by an agreement
in writing signed by the parties.
Section 9.07. Successors and Assigns.
----------------------
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties and their respective successors and
permitted assigns.
Section 9.08. Termination.
-----------
This Agreement may be terminated and the Distribution abandoned at any
time prior to the Distribution Date by and in the sole discretion of the Choice
Board without the approval of Franchising's or of Choice's stockholders. In the
event of such termination, no party shall have any liability to any other party
pursuant to this Agreement.
Section 9.09. Subsidiaries.
------------
Each of the parties hereto shall cause to be performed, and hereby
guarantees the performance of, all actions, agreements and obligations set forth
herein to be performed by any Subsidiary of such party which is contemplated to
be a Subsidiary of such party on and after the Distribution Date.
46
Section 9.10. No Third-Party Beneficiaries.
----------------------------
Except for the provisions of Article VI relating to Indemnities, this
Agreement is solely for the benefit of the parties hereto and their respective
Subsidiaries and Affiliates and should not be deemed to confer upon third-
parties any remedy, claim, claim of action or other right in excess of those
existing without reference to this Agreement.
Section 9.11. Titles and Headings.
-------------------
Titles and headings to sections herein are inserted for the
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
Section 9.12. Exhibits and Schedules.
----------------------
The Exhibits and Schedules shall be construed with and as an integral
part of this Agreement to the same extent as if the same had been set forth
verbatim herein.
Section 9.13. Legal Enforceability.
--------------------
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof. Any such prohibition or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such provision in any other
jurisdiction. Without prejudice to any rights or remedies otherwise available
to any party hereto, each party hereto acknowledges that damages would be an
inadequate remedy for any breach of the provisions of this Agreement and agrees
that the obligations of the parties hereunder shall be specifically enforceable.
47
Section 9.14. Arbitration of Disputes.
-----------------------
(a) Any dispute, controversy or disagreement ("Dispute") between the
Parties related to the obligations of the parties under this Agreement in
respect to which an amicable resolution cannot be reached shall be submitted for
mediation to a committee made up of an equal number of non-common members of
each company's Board of Directors ("Committee"). If the parties are unable to
reach an amicable resolution of a Dispute within thirty days after submission to
the Committee, then, to the maximum extent allowed by law, the Dispute shall be
submitted and resolved by final and binding arbitration in Baltimore, Maryland
administered by JAMS-Endispute in accordance with JAMS-Endispute's rules of
practice then in effect or such other procedures as the parties may agree upon;
provided, however, that any party may seek injunctive relief and enforcement of
any award rendered pursuant to the arbitration provisions of this Section 9.14
by bringing a suit in any court of competent jurisdiction. Any award issued as
a result of such arbitration shall be final and binding between the parties
thereto and shall be enforceable by any court having jurisdiction over the party
against whom enforcement was sought and application may be made to such court
for judicial acceptance of the award and order of enforcement. The fees and
expenses of arbitration (including reasonable attorneys' fees) shall be paid by
the party that does not prevail in such arbitration.
(b) Attorneys' Fees. If any party to this Agreement brings an action
---------------
to enforce its rights under this Agreement, the prevailing party shall be
entitled to recover its costs and expenses, including without limitation
reasonable attorneys' fees, incurred in connection with such action, including
any appeal of such action.
48
(c) Nothing contained in this Section 9.14 shall limit or restrict in
any way the right or power of a party at any time to seek injunctive relief in
any court and to litigate the issues relevant to such request for injunctive
relief before such court (i) to restrain the other party from breaching this
Agreement or (ii) for specific enforcement of this Section 9.14. The parties
agree that any legal remedy available to a party with respect to a breach of
this Section 9.14 will not be adequate and that, in addition to all other legal
remedies, each party is entitled to an order specifically enforcing this Section
9.14.
(d) The Parties hereby consent to the jurisdiction of the federal
courts located in the State of Maryland for all purposes under this Agreement.
(e) Neither party nor the arbitrators may disclose the existence or
results of any arbitration under this Agreement or any evidence presented during
the course of the arbitration without the prior written consent of both parties,
except as required to fulfill applicable disclosure and reporting obligations,
or as otherwise required by law.
Section 9.15. Prompt Payment.
--------------
Where the terms of this Agreement require payment of an amount "as
promptly as possible," "as soon as practicable," or "as soon as possible,"
following a specified event, occurrences or date, such payment shall be made
within five (5) business days of such event, occurrence or date.
49
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
CHOICE HOTELS INTERNATIONAL, INC.
By:
----------------------------
Title:
-------------------------
CHOICE HOTELS FRANCHISING, INC.
By:
----------------------------
Title:
-------------------------
50
INDEX OF EXHIBITS
Exhibit A Amended Employee Benefits Allocation Agreement
Exhibit B Amended Employee Benefits Administration Agreement
Exhibit C Amended Corporate Services Agreement
Exhibit D Amended Risk Management Services Agreement
Exhibit E Amended Gaithersburg Lease
Exhibit F Choice Pro Forma Balance Sheet
Exhibit G Employee Benefits Administration Agreement
Exhibit H Employee Benefits Allocation Agreement
Exhibit I Franchising Bylaws
Exhibit J Franchising Certificate
Exhibit K Franchising Pro Forma Balance Sheet
Exhibit L Noncompetition Agreement
Exhibit M Strategic Alliance Agreement
Exhibit N Tax Administration Agreement
Exhibit O Tax Sharing Agreement
51
Schedule 2.07
Retained Cash Accounts
----------------------
[To be added]
52