1
EXHIBIT 10.8
TAX BENEFIT RESTITUTION AGREEMENT
This Tax Benefit Restitution Agreement ("AGREEMENT"), dated as of
December , 1997, is made and entered into by and between Principal Mutual Life
Insurance Company, an Iowa mutual life insurance company ("MUTUAL"), and
Coventry Health Care, Inc., a Delaware corporation ("NEWCO").
WHEREAS, Mutual and Newco are parties to a Capital Contribution and
Merger Agreement (effective as of November 3, 1997, and amending and restating
the Capital Contribution and Share Exchange Agreement dated November 3, 1997)
(the "MERGER
AGREEMENT") of even date herewith;
WHEREAS, Section 7.1(h) of the Merger Agreement provides that Mutual
and Newco will enter into this Agreement as a condition precedent to the
effectiveness of the Merger Agreement;
WHEREAS, Mutual has filed its consolidated Federal income tax returns
on the basis that it is taxable under Part II of Subchapter L of the Code;
WHEREAS, Mutual is currently under audit by the Internal Revenue
Service, and the tax treatment of Mutual under Part II of Subchapter L of the
Code (the "CHARACTERIZATION ISSUE") is being questioned by the Internal Revenue
Service;
WHEREAS, Mutual intends to vigorously pursue the Characterization
Issue; and
WHEREAS, the parties hereto wish to provide for payments relating to
certain Tax Benefits, as set forth below,
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound,
the parties hereby agree as follows:
1. Definitions. Except as otherwise provided below, the capitalized
terms used in this Agreement shall have the meanings ascribed in the Merger
Agreement.
"Final Determination" shall mean (i) a decision, judgment,
decree or other order by the United States Tax Court or any other court of
competent jurisdiction, that has become final and unappealable, (ii) a closing
agreement under ss. 7121 of the Code or a comparable provision of any state,
local or foreign tax law that is binding against the Internal Revenue Service or
other Taxing Authority, (iii) any other final settlement with the Internal
Revenue Service or other Taxing Authority, or (iv) the expiration of an
applicable statute of limitations.
"Interest Rate" shall mean the rate in effect under ss.
6621(a)(1) of the Code as of the date on which an interest computation is made
under the terms of this Agreement.
1
2
"Mutual Group" shall mean the Mutual affiliated group, as
defined inss. 1504 of the Code.
"Newco Group" shall mean the Newco affiliated group, as
defined inss. 1504 of the Code.
"Principal Subsidiary Loss Carryover" shall mean the share of
the Mutual Group's consolidated net operating loss carryforward, as defined in
Treas. Reg. ss. 1.1502-21T, that is apportioned to an HMO Subsidiary as a result
of the execution of the Merger Agreement.
"Post-Closing Taxable Year" shall mean a Taxable Year that
begins after the Effective Time and the portion of 1998 that begins on the
Effective Time and ends on December 31, 1998.
"Tax" shall mean Federal income tax imposed under the Code and
any similar state income tax, whether denominated as a tax, a charge, or some
other designation, including all interest, within the meaning of ss. 6621(a)(1)
of the Code, payable to or received by Newco as a result of the use of any
Principal Subsidiary Loss Carryover in any Tax Return of the Newco Group.
"Tax Benefit" shall mean have the meaning ascribed to it
Section 2(b), below.
"Tax Benefit Amount" shall have the meaning ascribed to it
Section 2(d), below.
"Tax Return" shall mean a consolidated Federal income tax
return filed pursuant to the Code.
"Taxable Year" shall mean the period for which a Tax Return is
filed.
2. Obligation of Newco to Restore Tax Benefit to Principal.
a. For each Post-Closing Taxable Year until the Taxable Year
that includes the Final Determination of the Characterization Issue, Newco Group
shall file a protective claim for refund, claiming a deduction in each of its
Tax Returns, based on the allowance of the full amount of any Principal
Subsidiary Loss Carryover which could become available as a result of such Final
Determination, taking into account the limitation imposed by ss. 382 of the
Code. The filing of such a protective claim for refund shall be conditioned on
the receipt by the Newco Group from Mutual in a timely fashion of information
regarding the amount of any such Principal Subsidiary Loss Carryover and the
Taxable Year in which it arose, as well as any other information reasonably
required to file the protective claim. If the Newco Group (or any member
thereof) realizes a Tax Benefit in any Post-Closing Taxable Year from the
utilization of a Principal Subsidiary Loss Carryover which became available as a
result of the Final
2
3
Determination of the Characterization Issue, then Newco shall pay (or cause to
be paid) to Mutual an amount equal to the Tax Benefit so realized.
b. Newco shall make any payment required under this Section 2
to Mutual within thirty (30) days after the due date (including extensions) of
the Tax Return that reflects such utilization, provided that if such utilization
arises in connection with an audit or other examination of the Newco Group or
any member thereof, no such payment shall be due earlier than thirty (30) days
after the date on which such audit or other examination is finalized, and
provided further that if such utilization arises in connection with a claim for
refund or amended return filed by the Newco Group or any member thereof, no such
payment shall be due earlier than thirty (30) days after:
(1) the date on which the refund (or any portion
thereof) is received, to the extent that the Tax Benefit is received as a refund
of Taxes, or
(2) to the extent that the Tax Benefit is not
received as a refund of Taxes but is rather claimed as an item that reduces
liability for Taxes, the due date (including extensions) of the Tax Return that
reflects such liability for Taxes.
c. A Tax Benefit shall be deemed to have been realized on (i)
the date on which the Tax Benefit Amount (or any portion thereof), as provided
in Section 2(c) below, is received as a refund of Taxes or (ii) to the extent
that a Tax Benefit Amount is not received as a refund of Taxes but is rather
claimed as an item that reduces liability for Taxes, the due date (including
extensions) of the Tax Return that reflects such liability for Taxes.
d. The Tax Benefit Amount of the Newco Group (or any member
thereof) in any Post-Closing Taxable Year shall be equal to the excess of (i)
the Tax liability of the Newco Group (or member, if applicable) for such Taxable
Year, computed without regard to any such Principal Subsidiary Loss Carryover
which became available as a result of the Final Determination of the
Characterization Issue, over (ii) the actual Tax liability of the Newco Group
(or member, if applicable) for such Taxable Year. The computation of both the
Tax liability in (i), above, and the Tax liability in (ii), above, shall take
into account the alternative minimum tax under ss. 55 of the Code (and any
credits with respect thereto) and the limitation imposed by ss. 382 of the Code.
By the computation described in this Section 2(d), the parties intend that if
for any Taxable Year the total Principal Subsidiary Loss Carryovers exceed the
limitation imposed by ss. 382 of the Code, the determination of the Tax Benefit
Amount for such Taxable Year shall disregard any Principal Subsidiary Loss
Carryover attributable to such Final Determination of the Characterization Issue
to the extent that the total Principal Subsidiary Loss Carryovers exceed the
limitation imposed by ss. 382 of the Code.
3. Payments Relating to Tax Benefit. All payments made pursuant to
Section 2 hereof shall be made in immediately available funds. Except as
otherwise provided herein, any payment not made when due hereunder shall bear
interest at the Interest Rate from the due date until the date of actual
payment.
3
4
4. Notice of Principal Subsidiary Loss Carryovers. Within sixty (60)
days after the date of a Final Determination on the Characterization Issue,
Mutual shall notify Newco in writing of the amount of any Principal Subsidiary
Loss Carryovers, if any, that become available to any Principal Subsidiary as a
result of such Final Determination. For each Taxable Year thereafter, the Chief
Financial Officer of the Newco Group shall notify the Chief Financial Officer of
Mutual, within thirty (30) days after the Newco Group's Tax Return is filed for
each such year, of the amount, if any, of the Tax Benefit realized for such
Taxable Year.
5. Record Retention. Mutual and Newco shall each retain or cause to be
retained all Tax Returns and all books, records, schedules, workpapers, and
other documents relating to the origination and utilization of any Principal
Subsidiary Loss Carryovers until the expiration of the later of (i) all
applicable statutes of limitations (taking into account any waivers or
[Remainder of Page Intentionally Left Blank]
3a
5
extensions thereof), and (ii) any retention period required by law or pursuant
to any record retention agreement with the Internal Revenue Service. Mutual and
Newco shall notify each other in writing of any intended destruction, at least
thirty (30) days prior thereto, of any of the documents referred to in this
Section 5. A party giving such a notice under this Section 5 shall nonetheless
refrain from disposing of any of the materials referred to herein without first
having offered to transfer possession thereof to the notified party.
6. Subsequent Transferees and Successors. Neither Newco nor any member
of the Newco Group shall transfer all or substantially all of its assets by way
of merger, consolidation, sale or otherwise unless the transferee expressly
assumes all of the obligations of the transferor under this Agreement or unless
prior to any such transfer, the transferor makes such other provisions for the
satisfaction of its obligations under this Agreement as shall be agreed to by
the other parties to this Agreement in their reasonable discretion. Provided
that the preceding sentence is complied with, any transferee of all or
substantially all of the assets of Newco or such member of the Newco Group shall
succeed to its transferor's rights under this Agreement.
7. Miscellaneous.
a. Effectiveness. This Agreement shall be effective from and
after the date hereof, provided, however, that this Agreement shall terminate
immediately upon a termination of the Merger Agreement in accordance with its
terms and thereafter this Agreement shall be of no further force and effect.
b. Entire Agreement. This Agreement and the Merger Agreement
contain the entire agreement among the parties hereto with respect to the
subject matter hereof.
c. Binding Effect: No Third Party Beneficiary. This Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors, legal representatives and permitted assigns. Nothing
expressed or implied in this Agreement is intended or shall be construed to
confer upon or give any Person other than Mutual and Newco any rights or
remedies or by reason of this Agreement or any transaction contemplated hereby.
d, Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable, the
enforceability of the remaining provisions hereof shall not in any way be
affected or impaired thereby.
e. Indulgences, etc. Neither the failure nor any delay on the
part of any party hereto to exercise any right under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right preclude any other further exercise of the same or any other right, nor
shall any waiver of any right with respect to any occurrence be construed as a
waiver of such right with respect to any other occurrence.
f. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
4
6
OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF, EXCEPT
WITH RESPECT TO MATTERS OF LAW CONCERNING THE INTERNAL CORPORATE AFFAIRS OF ANY
CORPORATE ENTITY WHICH IS A PARTY TO OR SUBJECT OF THIS AGREEMENT, AND AS TO
THOSE MATTERS THE LAW OF THE JURISDICTION UNDER WHICH THE RESPECTIVE ENTITY
DERIVES ITS POWERS SHALL GOVERN.
g. Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be made in the manner provided
in Section 9.3 of the Merger Agreement to a party at the address listed below
(or such other address as such party shall deliver to the other party by like
notice):
To Mutual: Principal Mutual Life Insurance Company
▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
Principal Mutual Life Insurance Company
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to: LeBoeuf, Lamb, ▇▇▇▇▇▇ & ▇▇▇▇▇▇, L.L.P.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Esq.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇.▇.
▇▇▇▇▇▇▇▇▇▇, ▇.▇. ▇▇▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
To Newco: Coventry Health Care, Inc.
▇▇▇▇ ▇. ▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to:
---------------------------------------
---------------------------------------
---------------------------------------
Facsimile:
-------------------
h. Waivers and Amendments; Non-Contractual Remedies; Preservation of
Remedies. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
executed and delivered by duly authorized officers of Newco and Mutual, or, in
the case of waiver, by the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege nor any single or partial exercise of any such right, power
or privilege, preclude any
5
7
further exercise thereof or the exercise of any such right, power or privilege.
The rights and remedies herein provided are cumulative and are not exclusive of
any rights or remedies that any party may otherwise have at law or in equity.
The rights and remedies of any party based upon, arising out of or otherwise in
respect of any inaccuracy in or breach of any covenant contained in this
Agreement shall in no way be limited by the fact that the act, omission,
occurrence or other state of facts upon which any claim of any such inaccuracy
or breach is based may also be the subject matter of any other representation,
warranty, covenant or agreement contained in this Agreement (or in any other
agreement between the parties) as to which there is no inaccuracy or breach.
i. Survival of Obligations. The agreements, covenants,
indemnifications and obligations contained in this Agreement shall survive the
consummation of the transactions contemplated by the Merger Agreement, and shall
expire only when claims arising therefrom are barred by all applicable statutes
of limitation (as may be extended from time to time).
j. Variations in Number and Gender. All terms used in this
Agreement, and any variations of such terms, refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
k. Counterparts. This Agreement may be executed in any number
of counterparts, each such counterpart being deemed to be an original
instrument, and all of such counterparts shall together constitute one and the
same instrument.
l. Headings. The section and paragraph captions herein are for
convenience or reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
[Remainder of page left intentionally blank]
6
8
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the parties hereto on the date first
hereinabove written.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By:
---------------------------------------
COVENTRY HEALTH CARE, INC.
By:
---------------------------------------
7