EXHIBIT G
(TO MERGER AGREEMENT)
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GOVERNANCE AGREEMENT
BY AND AMONG
DELAWARE HOLDCO CORPORATION,
SONY MUSIC ENTERTAINMENT INC.,
WARNER MUSIC GROUP INC.,
AND
CERTAIN OTHER PARTIES
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Dated as of ______________, 1999
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TABLE OF CONTENTS
Page
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DEFINITIONS ............................................................................................2
ARTICLE 1
GOVERNANCE.................................................................................14
1.1 Board of Directors..............................................................14
1.2 Proxies.........................................................................16
1.3 Organizational Documents........................................................17
1.4 Approvals Required for Certain Action...........................................17
1.5 Conflicting Charter and By-Laws.................................................21
1.6 Liability Insurance.............................................................21
1.7 Business Plans; Budgets.........................................................21
ARTICLE 2
TRANSFERS OF STOCK.........................................................................22
2.1 Transfers of Stock..............................................................22
2.2 Right of First Offer............................................................23
2.3 Tag-Along Rights................................................................25
2.4 Certain Matters Relating to Transfers...........................................26
2.5 Automatic Transfer..............................................................26
2.6 Conversion......................................................................27
2.7 Legend..........................................................................27
ARTICLE 3
STANDSTILL; PURCHASE RIGHTS; REGISTRATION RIGHTS...........................................27
3.1 Purchaser Standstill Obligations................................................27
3.2 Purchase Rights.................................................................29
3.3 Registration Rights.............................................................29
ARTICLE 4
COVENANTS AND REPRESENTATIONS..............................................................30
4.1 Covenants of the Company........................................................30
4.2 Further Assurances and Additional Agreements....................................30
4.3 Representations and Warranties of the Purchasers................................30
4.4 Representations and Warranties of the Company...................................31
ARTICLE 5
MISCELLANEOUS..............................................................................32
5.1 Amendment.......................................................................32
5.2 Waiver..........................................................................32
5.3 Specific Performance............................................................32
5.4 Assignment......................................................................32
5.5 Notices.........................................................................32
5.6 Third Party Beneficiary.........................................................33
5.7 Term of Agreement...............................................................33
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5.8 Section Headings................................................................33
5.9 Choice of Law...................................................................33
5.10 Entire Agreement................................................................34
5.11 Severability....................................................................34
5.12 Cumulative Rights...............................................................34
5.13 Obligations.....................................................................34
5.14 Counterparts....................................................................34
EXHIBIT A - Form of Proxy
EXHIBIT B - Certificate of Incorporation
EXHIBIT C - By-Laws
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GOVERNANCE AGREEMENT
GOVERNANCE AGREEMENT (this "Agreement"), dated as of ___,
1999,(1) by and among SONY MUSIC ENTERTAINMENT INC., a Delaware corporation
("SONY MUSIC"), SONY MUSIC ENTERTAINMENT (CANADA) INC., a corporation organized
under the laws of Ontario ("SONY CANADA" and, together with SONY MUSIC, "SONY"),
WARNER MUSIC GROUP INC., a Delaware corporation ("WARNER MUSIC"), WARNER MUSIC
CANADA LTD., a corporation organized under the laws of Ontario ("WARNER
CANADA"), WCI RECORD CLUB INC., a Delaware corporation ("WARNER RECORD CLUB"
and, together with WARNER MUSIC and WARNER CANADA, "WARNER") and DELAWARE HOLDCO
CORPORATION, a Delaware corporation (the "Company").
A. The Company has authorized capital stock of ___________
shares, consisting of __,000,000 shares of Class A Common Stock, par value $0.01
per share (the "Class A Stock"), __,000,000 shares of Class B Common Stock, par
value $0.01 per share (the "Class B Stock" and, together with the Class A Stock,
the "Common Stock") and ______ shares of Preferred Stock, par value $0.01 per
share, of which one (1) share has been designated as a series of Special
Preferred Voting Stock, having an aggregate liquidation preference of $1.00 (the
"Special Voting Share").
B. This Agreement is being executed and delivered in
connection with, and as a condition to closing under, that certain Agreement of
Merger and Contribution (the "Merger Agreement"), dated as of July 12, 1999,
among the Company, Time Warner Inc., Sony Corporation of America, CDnow, Inc., a
Pennsylvania corporation ("CDnow") and certain other parties named therein.
Pursuant to the Merger Agreement, Time Warner Inc. and Sony Corporation of
America are causing, subject to the terms and conditions specified therein,
certain assets to be contributed, directly or indirectly, to the Company and
certain of its subsidiaries, including 3030809 Nova Scotia ULC, an unlimited
liability company formed under the laws of Nova Scotia, all of the common stock
of which is owned by the Company ("Canada Sub"). In exchange for such
contributions and as a result of the transactions contemplated by the Merger
Agreement, (i) Sony Music holds an aggregate of __,000,000 shares of the Class B
Stock; (ii) Sony Canada holds __________ shares of Class B Stock and __________
shares of Exchangeable Stock (as defined below); (iii) Warner Music holds an
aggregate of __,000,000 shares of the Class B Stock; (iv) Warner Canada holds
__________ shares of Class B Stock and __________ shares of Exchangeable Stock
(as defined below); (v) Warner Record Club holds an aggregate of _____ shares of
the Class B Stock and (vi) ___________________, a ___________________
("Trustee") holds the Special Voting Share for the benefit of Sony Canada and
Warner Canada in accordance with the terms of and conditions contained in the
Canadian Transaction Agreements (as defined below).
C. The parties hereto have agreed, inter alia, to make certain
provisions for the governance of the Company and to restrict the transfer of
their shares of Stock.
NOW, THEREFORE, in consideration of the covenants and
agreements herein, the parties hereto agree as follows:
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(1) This agreement will be attached as an exhibit to the Merger Agreement and
executed at Closing.
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DEFINITIONS
The following definitions shall apply equally to both the
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. All references herein to Articles, Sections, Exhibits and
Schedules shall be deemed to be references to Articles and Sections of, and
Exhibits and Schedules to, this Agreement unless the context shall otherwise
require. All Exhibits and Schedules attached hereto shall be deemed incorporated
herein as if set forth in full herein and, unless otherwise defined therein, all
terms used in any Exhibit or Schedule shall have the meaning ascribed to such
term in this Agreement. The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation". The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. Unless otherwise expressly provided herein, any agreement,
instrument or statute defined or referred to herein or in any agreement or
instrument that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statutes and references to all
attachments thereto and instruments incorporated therein. Capitalized terms used
in this Agreement but not otherwise defined herein shall have the respective
meanings ascribed thereto in the Merger Agreement or the Certificate (as defined
below), as applicable. All references to specific numbers of shares of Stock
contained in this Agreement shall be appropriately adjusted to take into account
any stock splits, stock dividends, subdivisions, reclassifications,
combinations, recapitalizations, or similar transactions involving such Stock,
including a stock dividend or distribution in the form of shares of such Stock
pursuant to the Certificate. As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate" of any Person shall mean any Person
controlling, Controlled by or under common Control with such Person.
For the purposes of this definition "Control," when used with respect
to any specified Person, shall mean the power to direct or cause the
direction of the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities or
partnership or other ownership interests, by contract or otherwise; and
the terms "Controlling" and "Controlled" shall have correlative
meanings. For purposes of this definition, the Company and its
Subsidiaries and Controlled Affiliates shall not be considered
Affiliates of either Purchaser. For the avoidance of doubt, a
"Controlled Affiliate" means, with respect to any Person, any Affiliate
of such Person that is directly or indirectly Controlled by such Person
(but shall not include any Controlled Affiliate of such Person's
Ultimate Parent unless such Controlled Affiliate is directly or
indirectly Controlled by such Person).
"Approved Business" shall have the meaning ascribed
thereto in the Certificate.
"Beneficial Ownership" shall have the meaning
ascribed to such term in Rule 13d-3, as in effect on the date hereof,
promulgated under the Exchange Act; "Beneficially Owned" "Owned
Beneficially", "Beneficially Own" and like terms shall have correlative
meanings.
"Board" means the Board of Directors of the Company.
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"Board Governance Actions" shall have the meaning
ascribed thereto in the Certificate.
"Business Day" shall mean any day except a Saturday,
Sunday or other day on which commercial banks in New York, New York,
are authorized by law to close.
"By-Laws" shall mean the By-Laws of the Company, as
may be amended from time to time in accordance with Section 1.4 hereof,
the Certificate and such By-Laws.
"Canadian Transaction Agreements" shall mean,
collectively, (a) the Master Canadian Transaction Agreement, dated as
of July 12, 1999, among Warner Canada, Sony Canada, The Columbia House
Company (Canada), Canada Sub and the Company (including the terms of
the Exchangeable Stock, attached thereto); (b) the Exchange Agreement,
dated as of the date of the Closing, among the Company, Warner Canada
and Sony Canada; (c) the Support Agreement, dated as of the date of the
Closing between the Company and Canada Sub; and (d) the Voting Trust
Agreement, dated as of the date of the Closing, among the Company,
Warner Canada, Sony Canada, Canada Sub and the Trustee, in each case as
the same may be amended, modified or supplemented from time to time in
accordance therewith.
"CEO" shall mean the chief executive officer of the
Company.
"Certificate" shall mean the Certificate of
Incorporation of the Company in effect at Closing, as may be amended
from time to time in accordance with Section 1.4 hereof and such
Certificate.
"Change in Control of the Company" shall mean any of
the following: (i) a merger, consolidation, exchange or other business
combination or transaction involving the Company if all of the
stockholders of the Company immediately prior to the effective date of
such merger, consolidation, exchange or other business combination or
transaction collectively have, as a result of such transaction,
Beneficial Ownership of voting securities representing less than 50% of
the Total Current Voting Power of the surviving corporation following
such merger, consolidation, exchange or other business combination or
transaction; (ii) an acquisition by any Person or 13D Group (other than
a Purchaser or a Controlled Affiliate of a Purchaser or a 13D Group in
which a Purchaser or a Controlled Affiliate of a Purchaser is a member)
of direct or indirect Beneficial Ownership of Voting Stock of the
Company representing 25% or more of the Total Current Voting Power of
the Company; (iii) a sale or other direct or indirect disposition of
all or substantially all the assets of the Company and its
Subsidiaries; or (iv) a liquidation or dissolution of the Company.
"Closing" shall have the meaning ascribed thereto in
the Merger Agreement.
"Club" shall have the meaning ascribed thereto in the
Merger Agreement.
"Consumer Price Index" means the Consumer Price Index
(all urban consumers -- all items) published by the Bureau of Labor
Statistics of the United States Department of Labor (or by any office
of the United States government succeeding to the functions of such
Bureau) for all U.S. cities.
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"Disinterested Stockholder" shall mean any holder of
shares of capital stock of the Company who is not an Interested
Stockholder.
"Disinterested Stockholder Approval" shall mean the
affirmative vote or written consent of Disinterested Stockholders
representing greater than 50% of the Total Current Voting Power of the
Company held by all Disinterested Stockholders, duly obtained in
accordance with the applicable provisions of the Certificate, By-laws
and applicable law.
"Encumber" shall mean mortgage, pledge, grant a
security interest in, grant any options on or other interests in,
hypothecate or otherwise encumber, or create any lien or other
restriction on, or agree to do any of the foregoing.
"Equity Security" has the meaning ascribed to such
term in Rule 405 promulgated under the Securities Act as in effect on
the date hereof, and in any event includes any interest or security
having the attendant right to vote for directors or similar
representatives and any interest or security convertible into or
exchangeable for any of the foregoing.
"Event of Automatic Conversion" shall have the
meaning ascribed thereto in the Certificate.
"Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
"Exchangeable Stock" means the exchangeable stock of
Canada Sub, each share of which is convertible, exercisable,
retractable, redeemable or exchangeable into or for one share of Class
B Stock (or, after an Event of Automatic Conversion, Class A Stock)
pursuant to the terms and conditions contained in the Canadian
Transaction Agreements.
"Fully-Diluted Basis" means, with respect to any
Purchaser, the aggregate number of shares of Class B Stock that would
be Beneficially Owned by such Purchaser and its Affiliates assuming all
shares of Exchangeable Stock Beneficially Owned by such Purchaser and
its Affiliates were converted, exercised, retracted, or exchanged into
or for Class B Stock (or, following an Event of Automatic Conversion,
Class A Stock) in accordance with the Canadian Transaction Agreements.
"Holding Period" means the period of time beginning
on Closing and ending on the third anniversary of Closing.
"HSR Act" shall mean the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust
Improvements Act of 1976, as amended.
"Indebtedness" shall mean at any particular time,
without duplication, (i) any indebtedness for borrowed money or issued
in substitution for or exchange of indebtedness for borrowed money,
(ii) any indebtedness evidenced by any note, bond, debenture or other
debt security, (iii) any indebtedness for the deferred purchase price
of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course
of business), (iv) any commitment by which a Person assures a creditor
against loss, (v) any indebtedness guaranteed in any manner by a Person
(including, without limitation, guarantees in the form of an agreement
to repur chase or reimburse) and (vi) any obligations under capitalized
leases with respect
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to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person
assures a creditor against loss.
"Independent Director" shall have the meaning set
forth under the rules of NASDAQ, so long as the Class A Stock is quoted
on NASDAQ and, thereafter, shall have the meaning set forth under the
rules of the principal U.S. or foreign securities exchange on which the
Class A Stock is listed or, if not listed on any such exchange, the
rules of NASDAQ or any securities exchange on which the Class A Stock
was last quoted or listed, as applicable.
"Interested Stockholder" shall mean a Purchaser or a
Controlled Affiliate of a Purchaser or a member of a 13D Group in which
a Purchaser or a Controlled Affiliate of a Purchaser is also a member.
"JO Employment Agreement" shall mean the employment
agreement, dated July 12, 1999 between ▇▇▇▇▇ ▇▇▇▇ and the Company, as
amended from time in accordance therewith and herewith.
"Market Value" means, as of any date of
determination, with respect to Marketable Securities, (a) the average
of the closing sale prices of such securities during the 20 trading
days immediately preceding such date of determination on the principal
U.S. or foreign securities exchange on which such securities are listed
(or, in the event no such sale price is reported on such day, the
average of the reported closing bid and asked prices for such day) or,
if such securities are not listed or primarily traded on any such
exchange, the average of the closing sale prices of such security
during the 20-day period preceding such date of determination on NASDAQ
or any comparable system then in use (or, in the event no such sale
price is reported on such day, the average of the reported closing bid
and asked prices for such day) or (b) in respect of a Small Offering,
the closing sale price of such securities on such date of determination
on the principal U.S. or foreign securities exchange on which such
securities are listed or primarily traded or, if such securities are
not listed or primarily traded on any such exchange, the closing sale
price of such securities on such date of determination on NASDAQ or any
comparable system then in use (or, in the event no such sale price is
reported on such day, the average of the reported closing bid and asked
prices for such day).
"Marketable Securities" shall mean any debt or Equity
Securities of a Person that are (or with respect to which depositary
receipts are) listed on a national securities exchange or quoted on
NASDAQ or any comparable system then in use during the applicable
period in which the Market Value of such securities is determined and
are freely tradeable under the Securities Act by the recipient thereof
(or are accompanied by registration rights comparable in all material
respects to those contained in the Registration Rights Agreement);
provided, that shares of Class B Stock shall be deemed Marketable
Securities and, for purposes of determining the Market Value thereof,
shall be deemed to have been converted into shares of Class A Stock
pursuant to the Certificate in accordance with an Event of Automatic
Conversion.
"Minimum Third Party Price" means, with respect to
any Offered Shares subject to a First Offer Notice, 100% of the Offer
Price stated in the First Offer Notice received by a Rightholder;
provided, that in the case of a Small Offering, the Minimum Third Party
Price shall mean the Market Value (as defined in clause (b) of such
definition (but using the actual sale price instead of the closing sale
price (or, in the event no such sale price is reported on the
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relevant day, the average of the closing bid and asked prices)) as of
the date of Transfer of such Offered Shares; provided, further, that
in the case of a Registration, the Minimum Third Party Price shall
mean 80% of the Offer Price stated in the First Offer Notice.
"NASDAQ" means The NASDAQ Stock Market.
"Nominating Committee" shall mean a committee of the
Board consisting of all directors other than the Independent Directors.
"Number of Class B Directors" shall have the meaning
ascribed thereto in the Certificate.
"Option Period" shall mean, with respect to any First
Offer, on or before the close of business on the twentieth (20th)
Business Day following receipt of the First Offer Notice by a
Rightholder; provided, that, notwithstanding anything to the contrary
herein, in the case of a Small Offering, the Option Period shall
terminate on the close of business on the second Business Day following
such receipt; provided, further, that, notwithstanding anything to the
contrary herein, with respect to any Tender, the Option Period shall
not extend beyond the second Business Day prior to the scheduled
expiration date of the relevant Third Party Tender Offer.
"Parent" shall mean, with respect to any Person, any
other Person that controls such Person directly or indirectly through
any Subsidiary of such other Person, or owns directly or indirectly
through any Subsidiary of such other Person more than 50% of the
outstanding common stock or outstanding Equity Securities ordinarily
entitled to vote of such Person; provided, however, that, for purposes
of this Agreement, an Ultimate Parent shall be deemed to have no
Parent.
"Permitted Affiliate Transfer" shall mean any direct
or indirect Transfer of Stock by a Purchaser to a Permitted Affiliate
Transferee pursuant to Section 2.1(b) hereof and otherwise made in
compliance with this Agreement (including Section 2.4 hereof).
"Permitted Affiliate Transferee" shall mean, with
respect to any Permitted Affiliate Transfer, any Transferee that is an
Affiliate of the Transferor.
"Person" shall mean an individual, firm, corporation,
limited liability company, partnership, trust, incorporated or
unincorporated association, joint venture, joint stock company,
government (or an agency or political subdivision thereof) or other
entity of any kind.
"Pro Rata Number" means, with respect to each of the
two Purchasers:
(i) If the Number of Class B Directors is eight
(8), the number set forth opposite the first applicable Relative
Class B Ownership Percentage for such Purchaser in the table
below:
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Pro Rata
Relative Class B Ownership Percentage Number
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Greater than or equal to 93.75% 8
Greater than 81.25% 7
Greater than or equal to 68.75% 6
Greater than 56.25% 5
Greater than or equal to 43.75% 4
Greater than 31.25% 3
Greater than or equal to 18.75% 2
Greater than 6.25% 1
6.25% or less 0
(ii) If the Number of Class B Directors is six
(6), the number set forth opposite the first applicable Relative
Class B Ownership Percentage for such Purchaser in the table
below:
Pro Rata
Relative Class B Ownership Percentage Number
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Greater than or equal to 91.67% 6
Greater than 75% 5
Greater than or equal to 58.33% 4
Greater than 41.67% 3
Greater than or equal to 25% 2
Greater than 8.33% 1
8.33% or less 0
(iii) If the Number of Class B Directors is
four (4), the number set forth opposite the first applicable
Relative Class B Ownership Percentage for such Purchaser in the
table below:
Pro Rata
Relative Class B Ownership Percentage Number
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Greater than or equal to 87.5% 4
Greater than 62.5% 3
Greater than or equal to 37.5% 2
Greater than 12.5% 1
12.5% or less 0
(iv) in any other event, zero.
"Purchaser Proposal" shall mean a bona fide proposal
by one or both Purchasers or any Controlled Affiliate of one or both
Purchasers (or any 13D Group that includes a Purchaser or any
Controlled Affiliate of a Purchaser) to purchase, exchange or otherwise
acquire, for cash or other consideration, 100% of the Total Current
Voting Power of the Company then in effect (other than shares of Voting
Stock owned by any Purchaser or any Affiliate of a Purchaser), whether
pursuant to a tender offer, merger, consolidation, exchange or other
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business combination or transaction; provided, that no Purchaser
Proposal may be consummated during the Standstill Period unless (i) in
the case of a tender or exchange offer, such Purchaser Proposal has
received Required Independent Director Approval and is conditioned upon
a majority of the Voting Stock held by Disinterested Stockholders being
tendered or exchanged and not withdrawn with respect to such offer and
(ii) in the case of any other Purchaser Proposal, such Purchaser
Proposal shall have either received Qualifying Stockholder Approval or
Required Independent Approval.
"Purchasers" shall mean, collectively, the Sony Group
and the Warner Group.
"Qualifying Fairness Opinion" shall mean an opinion
of a nationally recognized investment banking firm, in its customary
form, to the effect that the consideration to be received by (i) the
Disinterested Stockholders, in the case of Section 1.4(d)(iv) hereof or
(ii) the Company, in the case of Sections 1.4(d)(v) hereof, is fair
from a financial point of view.
"Qualifying Shares" shall mean shares of Common Stock
acquired by an Interested Stockholder from and after such time as such
Interested Stockholder shall have publicly disclosed an intention to
acquire all of the shares of Stock held by Disinterested Stockholders.
"Qualifying Stockholder Approval" shall mean the
affirmative vote or written consent of holders of capital stock of the
Company representing greater than 50% of the sum of Total Current
Voting Power of the Company held by (i) Disinterested Stockholders and
by (ii) Interested Stockholders in the form of Qualifying Shares, such
vote or written consent being duly obtained in accordance with the
applicable provisions of the Certificate, By-laws and applicable law.
"Recorded Music Business" shall mean, with respect to
a Purchaser, the recorded music business (including the Beneficial
Ownership of Stock) of such Purchaser and its Affiliates, other than
(a) the music publishing business and (b) in the case of the Sony
Group, any business conducted by Sony Music Entertainment (Japan) Inc.
and its Subsidiaries.
"Related Party" shall mean any holder of Voting Stock
representing more than 25% of the Total Current Voting Power of the
Company or a Related Party Affiliate of such holder.
"Related Party Affiliate" shall mean, with respect to
any Related Party, any other Person that directly or indirectly,
through one or more intermediaries, Controls, is Controlled by, or is
under common Control with, such first Person; provided that, for
purposes of this definition, any Person owning, directly or indirectly,
in excess of 25% of the Equity Securities (on a fully diluted basis) of
any other Person shall be deemed to Control such other Person.
"Related Party Agreement" shall mean any transaction
between the Company and a Related Party; provided, however, that the
following transactions will not be Related Party Agreements: any
transaction or series of related transactions, that (x) are in the
ordinary course of business and (y) are on arms'-length terms, provided
that the terms of such transaction are no more favorable to such
Related Party and its Related Party Affiliates than the terms of
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similar agreements then currently offered by or generally available
from the Company or its Affiliates.
"Relative Class B Ownership Percentage" means, with
respect to any Purchaser, a fraction (expressed as a percentage), the
numerator of which is the number of shares of Class B Stock
Beneficially Owned by such Purchaser on a Fully-Diluted Basis and the
denominator of which is the total number of issued and outstanding
shares of Class B Stock Beneficially Owned by both Purchasers on a
Fully-Diluted Basis.
"Relative Ownership Percentage" means, with respect
to any Purchaser, a fraction (expressed as a percentage), the numerator
of which is the percentage of Total Current Voting Power of the Company
Beneficially Owned by such Purchaser on a Fully-Diluted Basis and the
denominator of which is the percentage of Total Current Voting Power of
the Company Beneficially Owned by both Purchasers on a Fully-Diluted
Basis.
"Required Class B Director Approval" shall have the
meaning ascribed thereto in the Certificate.
"Required Purchaser Approval" shall mean the prior
written consent of each Purchaser (if any) owning at least _____ shares
of Class B Stock on a Fully-Diluted Basis.(2)
"Required Stockholder Approval" shall mean (a) in the
case of Sections 1.4(d)(i), (ii), (iii), and (v) hereof, Disinterested
Stockholder Approval, and (b) in the case of Section 1.4(d)(iv) hereof,
Qualifying Stockholder Approval.
"Securities Act" shall mean the Securities Act of
1933, as amended.
"Securities Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
"Sony Group" means, collectively, Sony and each of
its Permitted Affiliate Transferees that hold shares of Stock from time
to time in accordance herewith; provided, however, that for purposes of
exercising any rights of a Purchaser hereunder, all such Persons shall
be deemed to constitute a single Purchaser and the Sony Representative
shall have the sole power hereunder to exercise any right of the Sony
Group; provided, further, that from and after any Permitted Transfer by
any member of the Sony Group or any of its Affiliates in which the
Successor is not a Controlled Affiliate of the Ultimate Parent of the
Sony Group, any reference herein to Sony or its Affiliates shall be
deemed a reference to such Successor or its Affiliates (as the case may
be) for all purposes hereunder (including this definition).
"Sony Representative" shall mean one Person selected
by the Persons in the Sony Group holding a majority of all of the
shares of Stock held by the Sony Group on a Fully Diluted Basis, which
Person shall initially be Sony until such time as the Sony
Representative notifies the Company in writing of the identity of a
subsequent Sony Representative.
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(2) Number to represent 66 2/3% of the number of shares of Class B Stock and
Exchangeable Shares issued to each Purchaser in the merger (e.g., 25 of
37.5 shares).
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"Standstill Limit" shall mean 85% of the Total
Current Voting Power of the Company.
"Standstill Period" shall mean the period beginning
on the date hereof and ending on the occurrence of a Standstill
Termination Event.
"Standstill Reinstatement Event" shall mean the
occurrence of either of the following prior to the third anniversary of
the Closing: (i) withdrawal or termination of a Third Party Proposal at
any time during which a Purchaser Proposal is not then outstanding or
(ii) withdrawal, termination or material alteration of a Purchaser
Proposal other than an increase in price.
"Standstill Revised Limit" shall mean the percentage
of the Total Current Voting Power of the Company represented by all
shares of Voting Stock held by the Purchasers on a Fully Diluted Basis
as of the occurrence of a Standstill Reinstatement Event.
"Standstill Termination Event" shall mean the
earliest to occur of the following: (i) the third anniversary of the
Closing, (ii) a Change in Control of the Company, (iii) the
commencement or making of a Third Party Proposal, (iv) the commencement
or making of a Purchaser Proposal (provided that the making of a
Purchaser Proposal shall only relieve the Purchaser making such
proposal of its obligations under Section 3.1 hereof with respect to
such Purchaser Proposal) or (v) any Person who is not a Purchaser or an
Affiliate of a Purchaser or 13D Group in which a Purchaser or an
Affiliate of a Purchaser is a member has acquired any Voting Stock
which results in such Person or 13D Group owning or having the right to
acquire more than 10% of the Total Current Voting Power of the Company
unless such acquisition of shares by such Person or 13D Group was
approved by the Required Class B Director Approval; provided, however,
that upon a Standstill Reinstatement Event, the Standstill Termination
Event shall be deemed not to have occurred and the Standstill Period
shall be deemed to be reinstated except that, upon the third
anniversary of the Closing, the Standstill Period shall be permanently
terminated for all purposes hereunder; and provided further that, upon
a Standstill Reinstatement Event, if the Standstill Revised Limit is
greater than the Standstill Limit, then the Standstill Revised Limit
and not the Standstill Limit shall thereafter be deemed the Standstill
Limit for all purposes hereunder.
"Subsidiary" shall mean, with respect to any Person,
any corporation, partnership, limited liability company or other
business entity Controlled by such Person directly or indirectly
through one or more Subsidiaries of such Person or in which such Person
owns directly or indirectly through one or more other Subsidiaries of
such Person more than 50% of the outstanding Total Current Voting Power
of such Person.
"Stock" means Common Stock, Exchangeable Stock and/or
the Special Voting Share.
"Third Party" means any Person other than any member
of the Sony Group or the Warner Group (or any of their respective
Affiliates).
"Third Party Expiration Date" means with respect to
any Transfer of Offered Shares, the later of (a) one hundred and twenty
(120) days from the date of the First Offer Notice and (b) five (5)
days following expiration or waiver of any applicable waiting period
for such Transfer under the HSR Act; provided, however, that (a) with
respect to any Small Offering the Third Party Expiration
11
Date shall not be later than the third (3rd) Business Day following
expiration of the Option Period and (b) with respect to any Tender, the
Third Party Expiration Date shall not be earlier than the closing or
termination of the relevant Third Party Tender Offer.
"Third Party Proposal" shall mean a Third Party
Tender Offer or other bona fide proposal by a Third Party which, if
consummated, would result in a Change in Control of the Company.
"Third Party Tender Offer" shall mean a bona fide
public tender offer subject to the provisions of Regulation 14D when
first commenced (within the meaning of Rule 14d-2(a) of the rules and
regulations under the Exchange Act), by a Person or 13D Group (which is
not made by and does not include any of the Company, a Purchaser or any
Controlled Affiliate of any of such Persons) to purchase or exchange
for cash or Marketable Securities any Common Stock and which consists
of an offer to acquire 50% or more of the then Total Current Voting
Power of the Company.
"Total Current Voting Power" shall mean, with respect
to any corporation, partnership, limited liability company or other
business entity, the total number of votes which may be cast in an
election of members of the board of directors or comparable
representatives of such corporation, partnership, limited liability
company or other business entity in which all classes of every Equity
Security ordinarily entitled to vote in any election of members of the
board of directors or other comparable representatives of such entity
are entitled to vote in such election.
"Transfer" shall mean any transfer, sale, assignment,
pledge, lease, hypothecation, mortgage, gift or creation of security
interest, lien or trust (voting or otherwise) or other encumbrance or
other disposition, in whole or in part (whether by operation of law or
otherwise), including, without limitation, in connection with a merger,
consolidation or other transaction having a similar effect; provided
that a pledge or other encumbrance in favor of a financial institution
in connection with a bona fide incurrence of Indebtedness or other
extensions of credit shall not be deemed to constitute a Transfer
hereunder. Each of "Transferor" and "Transferee," respectively, shall
have correlative meanings.
"Ultimate Parent" shall mean with respect to any
Person, the Parent of such Person that is not a Subsidiary of any other
Person.
"Voting Stock" shall mean shares of the Common Stock,
the Special Voting Share and any other Equity Securities of the Company
ordinarily having the power to vote in an election of members of the
Board.
"Warner Group" means, collectively, Warner and each
of its Permitted Affiliate Transferees that hold shares of Stock from
time to time in accordance herewith; provided, however, that for
purposes of exercising any rights of a Purchaser hereunder, all such
Persons shall be deemed to constitute a single Purchaser and the Warner
Representative shall have the sole power hereunder to exercise any
right of the Warner Group; provided, further, that from and after any
Permitted Transfer by any member of the Warner Group or any of its
Affiliates in which the Successor is not a Controlled Affiliate of the
Ultimate Parent of the Warner Group, any reference herein to Warner or
its Affiliates shall be deemed a reference to such Successor or its
Affiliates (as the case may be) for all purposes hereunder (including
this definition).
12
"Warner Representative" shall mean one Person
selected by the Persons in the Warner Group holding a majority of all
of the shares of Stock held by the Warner Group on a Fully Diluted
Basis, which Person shall initially be Warner until such time as the
Warner Representative notifies the Company in writing of the identity
of a subsequent Warner Representative.
"13D Group" means any group of Persons formed for the
purpose of acquiring, holding, voting or disposing of Equity Securities
which would be required under Section 13(d) of the Exchange Act, and
the rules and regulations promulgated thereunder, to file a statement
on Schedule 13D (herein, a "13D Report") pursuant to Rule 13d-l(a) or a
Schedule 13G pursuant to Rule 13d-l(c) with the SEC as a "person"
within the meaning of Section 13(d)(3) of the Exchange Act if such
group "beneficially owned" Equity Securities representing more than 5%
of any class of Equity Securities then outstanding.
CROSS-REFERENCES
Definitions of the following terms may be found in the
following Sections of this Agreement:
Term Section
---- -------
Acceptance Notice...................................................... 3.2
Agreement.............................................................. Recitals
Annual Operating Budget................................................ 1.4(a)(xiii)
Approved Annual Budget................................................. 1.7(b)
Board.................................................................. Recitals
Business Plan.......................................................... 1.4(a)(xiii)
Buying Purchaser....................................................... 3.1(d)
Canada Sub............................................................. Recitals
CDnow.................................................................. Recitals
Chosen Court........................................................... 5.9
Class A Stock.......................................................... Recitals
Class B Director....................................................... 1.1(a)(i)
Class B Stock.......................................................... Recitals
Common Directors....................................................... 1.1(a)(iii)
Common Stock........................................................... Recitals
Company................................................................ Recitals
Default Budget......................................................... 1.7(c)
Designating Party...................................................... 1.1(e)
Exchangeable Stock..................................................... Recitals
Exercise Notice........................................................ 2.2(c)
Federal Bankruptcy Act................................................. 1.4(a)(iv)
First Offer............................................................ 2.2(a)
First Offer Notice..................................................... 2.2(b)
Initial Budget Plan.................................................... 1.7(a)
Inspecting Purchasers.................................................. 4.1(a)
Liens.................................................................. 2.2(e)
13
Term Section
----
Management Director..................................................... 1.1(a)
Merger Agreement........................................................ Recitals
New Issuance............................................................ 3.2
Offer Price............................................................. 2.2(b)
Offered Shares.......................................................... 2.2(a)
Offering Stockholder.................................................... 2.2(a)
Other Purchaser......................................................... 3.1(d)
Other Stockholder....................................................... 2.3(a)(ii)
Ownership Report........................................................ 3.1(c)
Permitted Transfer...................................................... 2.1(b)
Purchaser Common Director............................................... 1.1(b)(iii)
Registration............................................................ 2.2(b)
Registration Rights Agreement........................................... 3.3
Related Party Transaction............................................... 1.4(c)
Required Independent Approval........................................... 1.4(c)
Required Transferor..................................................... 2.5
Rightholder............................................................. 2.2(a)
Sellers................................................................. 2.3(c)
Significant Transaction................................................. 1.4(a)
Small Offering.......................................................... 2.2(b)
Special Voting Share.................................................... Recitals
Sony.................................................................... Recitals
Sony Canada............................................................. Recitals
Sony Music.............................................................. Recitals
Sony Director........................................................... 1.1(c)
Subscribed Number....................................................... 4.1(g)
Subscribed Shares....................................................... 4.1(g)
Successor............................................................... 2.1(b)(ii)
Tag-Along Offer......................................................... 2.3(b)
Tag Exercise Notice..................................................... 2.3(c)
Tender.................................................................. 2.2(b)
Transferor.............................................................. 2.3(a)
Transferor's Notice..................................................... 2.3(a)(ii)
Transferee Stockholder.................................................. 2.5
Trustee................................................................. Recitals
Unaudited Financials.................................................... 4.1(a)
Warner.................................................................. Recitals
Warner Canada........................................................... Recitals
Warner Music............................................................ Recitals
Warner Record Club...................................................... Recitals
Warner Director......................................................... 1.1(c)
14
ARTICLE 1
GOVERNANCE
1.1 Board of Directors.
(a) Number of Authorized Directors. Each of the
Purchasers and the Company agree that the Board shall consist of twelve (12)
directors, designated as follows:
(i) a number of directors (the "Class B
Directors") equal to the Number of Class B Directors, designated by the
Purchasers in accordance with Section 1.1(c) hereof and elected by a
plurality of the votes cast by the holders of the issued and
outstanding Class B Stock and the Special Voting Share, voting together
as a single class;
(ii) two (2) Independent Directors
designated by the Nominating Committee and elected by a plurality of
the votes cast by the holders of the issued and outstanding Stock,
voting together as a single class; and
(iii) a number of directors equal to the
difference between ten (10) and the Number of Class B Directors, which
directors (collectively, the "Common Directors") shall be nominated by
the Board and shall be elected by a plurality of the votes cast by the
holders of the issued and outstanding Stock, voting together as a
single class.
(b) Board Nominations. The Company and each Purchaser
shall use its best efforts, including without limitation, with respect to each
Purchaser, by voting or acting by written consent with respect to all shares of
Stock which it is entitled to vote or so act (and by directing the holder of the
Special Voting Share pursuant to the Canadian Transaction Agreements to vote or
act by written consent with respect to the Special Voting Share, with respect to
that number of votes it is entitled to so direct such holder pursuant to the
Canadian Transaction Agreements), to cause the Board to effect, the nomination
of the following individuals as Common Directors:
(i) JO, so long as the JO Employment Agreement provides
that JO shall serve as a director of the Company;
(ii) the CEO; and
(iii) from and after an Event of Automatic Conversion, two
individuals designated by the Purchasers, provided that the
Purchasers Beneficially Own in the aggregate at least ____
shares(3) of Class A Stock on a Fully-Diluted Basis (assuming
that every reference to "Class B Stock" in the definition of
"Fully-Diluted Basis" was replaced with "Class A Stock") (the
"Purchaser Common Directors").
(c) Purchaser Designations. With respect to the Class
B Directors, each Purchaser shall have the right to designate a number of such
Class B Directors as is equal to its Pro Rata Number; provided, however, that if
any Purchaser Transfers shares of Class B Stock or Exchangeable Stock to the
other Purchaser pursuant
----------------
(3) Number to represent 25% of the total number of shares of Class B Stock and
Exchangeable Shares issued in merger (e.g., 18.75 of 75 shares).
15
to Section 2.2 hereof, appropriate adjustment shall be made to each Purchaser's
Pro Rata Number so that each Purchaser will be entitled to designate the number
of directors it would have been entitled to designate had such shares been
transferred to a Third Party, after giving effect to any attendant reduction in
the Number of Class B Directors which would have resulted from such Transfer if
it had been made to a Third Party; provided, that, in no event shall a Transfer
between Purchasers cause a reduction in the Number of Class B Directors, and the
difference, if any, between (x) the Number of Class B Directors prior to such
transfer and (y) the sum of each Purchaser's Pro Rata Number as computed in this
sentence shall be added to the non-transferring Purchaser's Pro Rata Number.
With respect to the Purchaser Common Directors, if a Purchaser's Relative
Ownership Percentage is greater than 66-2/3%, such Purchaser shall have the
right to designate both Purchaser Common Directors; otherwise each Purchaser
shall have the right to designate one of the Purchaser Common Directors. The
directors so designated by the Sony Group and the Warner Group are referred to
herein as the "Sony Directors" and the "Warner Directors," respectively.
(d) Voting Agreement. Each Purchaser shall use its
best efforts, including, without limitation, by voting or acting by written
consent with respect to all shares of Stock which it is entitled to vote or so
act (and, to the extent the Special Voting Share would be entitled to vote
thereon, by directing the holder of the Special Voting Share pursuant to the
Canadian Transaction Agreements to vote or act by written consent with respect
to the Special Voting Share, with respect to that number of votes it is entitled
to so direct such holder pursuant to the Canadian Transaction Agreements), to
cause the Board at all times to be constituted in accordance with this Section
1.1, and the Company shall, at all times, use its best efforts to cause the Sony
Directors, the Warner Directors, the Independent Directors and the Common
Directors to be elected as directors of the Company.
(e) Removal; Vacancies. A majority of the Sony
Directors or the Sony Group shall be entitled at any time and for any reason (or
for no reason) to designate one or more Sony Directors for removal and each
Purchaser and the Company shall use its best efforts, including, without
limitation, in the case of each Purchaser, by voting or acting by written
consent with respect to all shares of Stock which it is entitled to vote or so
act (and, to the extent the Special Voting Share would be entitled to vote
thereon, by directing the holder of the Special Voting Share pursuant to the
Canadian Transaction Agreements to vote or act by written consent with respect
to the Special Voting Share, with respect to that number of votes it is entitled
to so direct such holder pursuant to the Canadian Transaction Agreements), to
cause any such removal. A majority of the Warner Directors or the Warner Group
shall be entitled at any time and for any reason (or for no reason) to designate
one or more Warner Directors for removal and each Purchaser and the Company
shall use its best efforts, including, without limitation, in the case of each
Purchaser, by voting or acting by written consent with respect to all shares of
Stock which it is entitled to vote or so act (and, to the extent the Special
Voting Share would be entitled to vote thereon by directing the holder of the
Special Voting Share pursuant to the Canadian Transaction Agreements to vote or
act by written consent with respect to the Special Voting Share, with respect to
that number of votes it is entitled to so direct such holder pursuant to the
Canadian Transaction Agreements), to cause any such removal. If for any reason a
vacancy is created on the Board by reason of the death, removal or resignation
of any Sony Director or Warner Director, each Purchaser and the Company shall
promptly take such action as is reasonably necessary, including, in the case of
each Purchaser, by voting or acting by written consent with respect to shares of
Stock which it is entitled to vote or so to act (and, to the extent the Special
Voting Share would be entitled to vote thereon, by directing the holder of the
Special Voting Share pursuant to the Canadian Transaction Agreements to vote or
act by written consent with respect to the Special Voting Share, with respect to
that number of votes it is entitled to so direct such holder pursuant to the
16
Canadian Transaction Agreements), to elect a director or directors designated by
the Sony Group or the Warner Group, respectively, to fill such vacancy or
vacancies. For the avoidance of doubt, no Purchaser shall vote to remove any
member of the Board designated in accordance with this Section 1.1 unless the
Person that designated such director (the "Designating Party") shall so vote or
otherwise consent, and, if the Designating Party shall so vote or otherwise
consent, the Purchasers shall likewise so vote. Any vacancy on the Board created
by resignation, removal, death or incapacity of any individual designated under
the foregoing provisions of this Section 1.1, shall be filled by an individual
designated by the Designating Party. Each of the Purchasers, by voting or acting
by written consent with respect to shares of Stock which it is entitled to vote
or so to act (and, to the extent the Special Voting Share would be entitled to
vote thereon, by directing the holder of the Special Voting Share pursuant to
the Canadian Transaction Agreements to vote or act by written consent with
respect to the Special Voting Share, with respect to that number of votes it is
entitled to so direct such holder pursuant to the Canadian Transaction
Agreements), shall vote in accordance with each new designation and no such
vacancy shall be filled in the absence of a new designation by the original
Designating Party. Notwithstanding anything herein to the contrary, for purposes
of this Section 1.1, "Person" shall include the Nominating Committee and the
Board. Notwithstanding anything to the contrary herein, but subject to the final
sentence of Section 5.1 hereof, each Purchaser shall refrain from seeking, and
shall vote against, any removal of ▇▇▇▇▇ ▇▇▇▇ from the Board so long as ▇▇. ▇▇▇▇
remains employed by the Company under the JO Employment Agreement.
1.2 Proxies.
(a) In furtherance of their respective obligations
under, and concurrently with the execution of this Agreement, the Purchasers are
entering into Irrevocable Proxies in the form of Exhibit A attached hereto,
pursuant to which:
(i) The Warner Group irrevocably constitutes
and appoints the Sony Group as its sole and exclusive and true and lawful agent
and attorney-in-fact, with full power of substitution, to vote or act by written
consent with respect to all shares of Stock which the Warner Group is entitled
to vote and to direct, to the extent the Special Voting Share would be entitled
to vote thereon, the holder of the Special Voting Share to vote or act by
written consent with respect to the Special Voting Stock, with respect to that
number of votes the Warner Group is entitled to so direct such holder pursuant
to the Canadian Transaction Agreements, with respect to the election or removal
of the Sony Directors;
(ii) The Sony Group irrevocably constitutes
and appoints the Warner Group as its sole and exclusive and true and lawful
agent and attorney-in-fact, with full power of substitution, to vote or act by
written consent with respect to all shares of Stock which the Sony Group is
entitled to vote and to direct, to the extent the Special Voting Share would be
entitled to vote thereon, the holder of the Special Voting Share to vote or act
by written consent with respect to the Special Voting Stock, with respect to
that number of votes the Sony Group is entitled to so direct such holder
pursuant to the Canadian Transaction Agreements, with respect to the election or
removal of the Warner Directors.
(b) In addition, each Purchaser agrees to vote its
shares of Stock in favor of the election as a director of the individuals
designated by the Board as Independent Directors or Common Directors in
accordance with this Agreement (including Section 1.1(e) hereof) and to vote its
shares for the removal as a director of any individual no longer so designated
by the Board as an Independent Director or a Common Director. Each Purchaser
hereby agrees to execute such additional documents as the other Purchaser may
reasonably request to effectuate such other Purchaser's rights
17
under the proxies granted pursuant to this Section 1.2. Each Purchaser intends
that the proxy granted to the other hereby shall be coupled with an interest
pursuant to this Agreement, and therefore that such proxy shall be irrevocable
so long as this Section 1.2 remains in effect pursuant to the terms of this
Agreement. Notwithstanding anything to the contrary herein, but subject to the
final sentence of Section 5.1 hereof, each Purchaser shall refrain from seeking,
and shall vote against, any removal of ▇▇▇▇▇ ▇▇▇▇ from the Board so long as ▇▇.
▇▇▇▇ remains employed by the Company under the JO Employment Agreement.
1.3 Organizational Documents. Attached hereto as Exhibits
B and C, respectively, are the Certificate and the By-Laws in effect as of the
Closing.
1.4 Approvals Required for Certain Action.
(a) Purchaser Approvals. The Company and each
Purchaser acknowledge and agree that the Company shall not be authorized,
without any Required Purchaser Approval (in addition to any approvals required
hereunder, pursuant to the Certificate or applicable law), to take, cause,
permit or authorize any of the following actions (each a "Significant
Transaction"), and any attempt to take or authorize any such Significant
Transaction without such Required Purchaser Approval shall be deemed void ab
initio:
(i) authorize, amend, alter or repeal any
provision of the Certificate (including resolutions of the Board
setting forth the terms of any class or series of capital stock) or
By-Laws;
(ii) authorize, issue or enter into any
agreement providing for the issuance (contingent or otherwise) of, or
reclassification of any security into any capital stock or other Equity
Securities (or any securities convertible into or exercisable or
exchangeable for any capital stock or other Equity Securities) of the
Company, other than pursuant to an employee stock option plan or other
benefit plan, which stock option or other benefit plan shall have
received any Required Purchaser Approval, or pursuant to the terms of
any Equity Securities issued in the transactions contemplated by the
Merger Agreement (including, without limitation, pursuant to the
Canadian Transaction Agreements);
(iii) subject to Section 253 of the DGCL,
authorize or enter into any merger, consolidation, reorganization,
amalgamation, recapitalization or other form of business combination
involving the Company or any direct or indirect sale or other
disposition of all or substantially all of the business or assets of
the Company;
(iv) authorize, permit or effect the
liquidation, dissolution or winding up in any form of transaction
(including, without limitation, any reorganization into partnership or
other non-corporate form) of the Company or the commencement by the
Company of a voluntary case or proceeding under title 11 of the United
States Code, 11 U.S.C. 'SS''SS' 101 et seq. (the "Federal Bankruptcy
Act") or any other similar federal or state law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent
(whether by action or inaction) by the Company, to the entry of a
decree or order for relief in respect of the Company, in an involuntary
case or proceeding under the Federal Bankruptcy Act or any other
similar federal or state law or to the commencement of any bankruptcy
or insolvency case or proceeding against the Company, or the filing by
the Company of a petition or answer or consent seeking reorganization
or relief under any applicable federal or state law, or the
18
consent by the Company to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company, or of any substantial part of the property of the Company, or
the making by the Company of an assignment for the benefit of
creditors, or the admission by the Company in writing of its inability
to pay its debts generally as they become due;
(v) authorize or approve the creation,
incurrence, guarantee, assumption or refinancing of Indebtedness by the
Company or any of its Subsidiaries in excess of an aggregate of
$5,000,000 outstanding at any one time in excess of the amount
permitted by the Approved Annual Budget then in effect;
(vi) except with respect to inventory sold
in the ordinary course of business, authorize, permit or effect the
sale, lease or other disposition of the assets of the Company or any of
its Subsidiaries in any transaction or series of transactions which are
valued, in the aggregate, in excess of $1,000,000;
(vii) directly or indirectly, declare or pay
any dividends or make any distributions upon any of the Company's
capital stock or other Equity Securities, other than dividends payable
solely in shares of Stock issued upon the outstanding shares of Stock
or pursuant to the Canadian Transaction Agreements;
(viii) other than pursuant to Section 2.2
hereof, redeem, purchase or otherwise acquire for cash (including by
merger or otherwise), any Equity Securities of the Company or any
warrants, options and rights or securities convertible into,
exchangeable or exercisable for any Equity Securities of the Company or
redeem or purchase for cash or make any cash payments with respect to
any stock appreciation rights or phantom stock plans of the Company
(excluding any such redemption, purchase or payment from any of the
Company's Subsidiaries), other than pursuant to an employee stock
option plan or other benefit plan, which stock option or other benefit
plan shall have received any Required Purchaser Approval, or pursuant
to the Canadian Transaction Agreements;
(ix) adopt any "poison pill," stockholder
rights plan, share purchase rights, or any amendment of, or redemption
or exchange of rights issued pursuant to such plan, or any other plan
or arrangement that could reasonably be expected to disadvantage any
holder of Class B Stock or Exchangeable Stock on the basis of the size
or duration of its shareholding, such that any such holder, or any of
its Affiliates, would be adversely affected;
(x) except as provided in Section 1.1,
authorize or effect any change in the number of directors constituting
the entire Board or the voting rights or classification of any members
of the Board or form, disband or delegate any matter to (or appoint,
suspend or remove any director to or from) any committee of the Board;
(xi) authorize or enter into any Related
Party Agreement, or amend, modify or grant any waiver or consent under
any such Related Party Agreement, including this Agreement, the JO
Employment Agreement, the Merger Agreement, the Canadian Transaction
Agreements and the other agreements contemplated thereby;
19
(xii) select, appoint (including a renewal
of such appointment at the expiration of any applicable term), remove
or approve the terms of employment (including compensation) of any
individual serving as, or performing the functions generally associated
with, (i) the CEO, (ii) the chief financial officer of the Company,
(iii) the general counsel of the Company, (iv) the chief executive
officer of any division or Subsidiary of the Company or (v) the chief
technology officer of the Company;
(xiii) authorize or approve (or modify or
amend) the annual financial and operating budget of the Company (the
"Annual Operating Budget") and the business plan of the Company (the
"Business Plan"), or any transaction that would result in a material
deviation from any Approved Annual Budget or Business Plan;
(xiv) authorize or approve or effect any
material change in the Company's business direction, including, without
limitation, the Company's conducting any business not directly related
to the Approved Business and any activities reasonably related thereto;
(xv) enter into any agreement, arrangement
or understanding with any other Person, including, without limitation,
the acquisition of an equity or ownership interest in, or any security
of, or assets (other than in the ordinary course of business) or
business from, any Person (other than a wholly-owned Subsidiary of the
Company), the consideration (including assumption of debt) for which is
valued in excess of $1,000,000 ($5,000,000 in the case of acquisitions;
provided that any acquisition with consideration in excess of
$1,000,000 but less than $5,000,000 shall also be subject to the
receipt of Required Purchaser Approval unless previously approved by
the Board);
(xvi) engage or dismiss the Company's
independent public accountants (whether in connection with the audit of
financial statements or otherwise) or legal counsel;
(xvii) enter into any agreement, arrangement
or understanding to do any of the foregoing;
(xviii) authorize, permit or effect any
exercise by the Company or any of its Subsidiaries of its rights under
the Canadian Transaction Agreements to cause the exchange, retraction
or redemption of outstanding Exchangeable Stock for Common Stock; or
(xix) do, permit or cause any of the
foregoing with respect to a Subsidiary of the Company.
(b) Class B Director Approvals. The Company and each
Purchaser acknowledges and agrees that, until the occurrence of an Event of
Automatic Conversion, the Company shall not be authorized, without the Required
Class B Director Approval (in addition to any approvals required hereunder,
pursuant to the Certificate or applicable law), to take, cause, permit or
authorize any of the Board Governance Actions and any attempt to take or
authorize any such action without the Required Class B Director Approval shall
be deemed void ab initio.
(c) Independent Director Approval. The Company and
each Purchaser acknowledges and agrees that the Company shall not be authorized,
without the approval or ratification of a majority (but not less than two (2))
of the Independent
20
Directors who are not also Class B Directors (such approval or ratification
being referred to herein as "Required Independent Approval") (in addition to any
approvals required hereunder, pursuant to the Certificate or applicable law), to
take, cause, permit or authorize any of the following actions, and any attempt
to take or authorize any such action without such approval shall be deemed void
ab initio (unless ratified at the next meeting of the Board by Required
Independent Approval which, for this purpose, shall be determined without giving
effect to the vote of any Independent Director elected to office following the
time such action was taken if such Independent Director was elected to fill a
vacancy resulting from the removal without cause of an Independent Director in
office at the time such action was taken):
(i) amend, alter or repeal Sections 6, 10,
11 or 14 (or, to the extent incorporated in any such Section, the
relevant definitions contained in Section 3) of the Certificate or any
provision of the By-laws that would have the effect of permitting any
action otherwise prohibited by such Sections of the Certificate; or
(ii) amend, alter or repeal any provision of
this Agreement (except for Sections 1.1(c), 2.2 (other than (x) the
definition of "Holding Period" or (y) any other change that is
materially adverse to the Company), 2.3 or 3.1(d) (other than the last
sentence thereof) or the Strategic Commitments Letter (other than de
minimis modifications in the case of the Strategic Commitments Letter).
(d) Required Stockholder Approval. Except as
permitted in Sections 1.4(d)(iv) and (v) below, the Company and each Purchaser
acknowledges and agrees that the Company shall not be authorized, without
Required Stockholder Approval (in addition to any other approvals required
hereunder, pursuant to the Certificate or applicable law), to take, cause,
permit or authorize any of the following actions, and any attempt to take or
authorize any such action without such approval shall be deemed void ab initio:
(i) any amendment to Section 6(b)(ii) of the
Certificate in any manner that is disproportionately adverse to holders
of Class A Stock;
(ii) authorize, issue or enter into any
agreement (other than the Canadian Transaction Agreements) providing
for any issuance of Class B Stock (contingent or otherwise) or
reclassification of any security into any shares of Class B Stock (or
any securities convertible into or exercisable or exchangeable for
shares of Class B Stock) except pursuant to the Canadian Transaction
Agreements or pursuant to Sections 6(b)(ii) or 6(c) of the Certificate;
or
(iii) any amendment to Section 1.4(c),
1.4(d) or 3.1 hereof, to the definition of "Holding Period" to the
extent relevant in Article 2 hereof or to Article 2 hereof to the
extent that any such amendment would have the effect of expanding the
definition of "Permitted Transfer";
(iv) the consummation of a merger,
consolidation, reorganization or other business combination, including
by way of the sale of all or substantially all of the assets of the
Company, with, to or into an Interested Stockholder; provided, however,
that such Required Stockholder Approval shall not be so required with
respect to the consummation of any such transaction as to which a
Qualifying Fairness Opinion has been obtained; or
21
(v) issuance of any shares of Preferred
Stock or other Equity Securities (other than (x) pursuant to the
Certificate (but only to the extent holders of Class A Stock are
entitled to receive the same security on a per share basis as the
holders of Class B Stock) and (y) pursuant to the Canadian Transaction
Agreements) to an Interested Stockholder; provided, however, that such
Required Stockholder Approval shall not be so required with respect to
the consummation of any such issuance as to which a Qualifying Fairness
Opinion has been obtained.
1.5 Conflicting Charter and By-Laws. The Company and each
Purchaser agree to use its best efforts, including, without limitation, in the
case of each Purchaser, by voting or acting by written consent with respect to
all shares of Stock which it is entitled to vote or so act (and by directing the
holder of the Special Voting Share, pursuant to the Canadian Transaction
Agreements to vote or act by written consent with respect to the Special Voting
Share, to the extent such Purchaser is entitled to so direct such holder
pursuant to the Canadian Transaction Agreements), to ensure that the Certificate
and By-Laws of the Company facilitate and do not at any time prohibit the
actions contemplated by, or otherwise conflict with, this Agreement.
1.6 Liability Insurance. The Purchasers and the Company hereby
acknowledge and agree that it is in the best interests of the Company to
establish and maintain an officers' and directors' liability insurance policy,
and each Purchaser hereby covenants and agrees to take, or cause to be taken,
all action necessary or appropriate (including, but not limited to, action at a
meeting of the stockholders of the Company or pursuant to a written consent
thereof) to cause the Company to obtain and maintain an officers' and directors'
liability insurance policy covering all officers and directors that is
reasonably acceptable in all respects to a majority of the members of the Board
designated by each of the Purchasers.
1.7 Business Plans; Budgets.
(a) The Purchasers and the Company hereby agree to
negotiate in good faith with respect to, and to use commercially reasonable
efforts to develop, a detailed financial and operating budget of the Company
that is applicable to the period commencing with the first month following the
date hereof through December 31, 2002 (the "Initial Budget Plan").
(b) Prior to September 30th of each calendar year, the
CEO shall prepare (or cause to be prepared) the Annual Operating Budget for the
following calendar year and shall present to the Board and the Purchasers such
Annual Operating Budget for approval. An "Approved Annual Budget" shall mean the
then current Annual Operating Budget that is approved by the Board and with
respect to which the Required Purchaser Approval has been obtained or, if no
Annual Operating Budget is so approved by the Board and the Purchasers for any
calendar year, (i) in the case of the Annual Operating Budget for 2000, 2001 or
2002 the budget for such year as set forth in the Initial Budget Plan, and (ii)
in the case of the Annual Operating Budget for any year after 2002, the terms of
Section 1.7(c) shall govern. Each Purchaser acknowledges and agrees that any
failure to affirmatively veto an Annual Operating Budget presented to it for
approval as aforesaid within twenty (20) Business Days of such presentment shall
be deemed an approval by such Purchaser of such Annual Operating Budget for
purposes of Section 1.4 and this Section 1.7.
(c) If approval of any proposed Annual Operating Budget
for any year after 2002 is withheld or delayed for any reason, the most recent
Approved Annual Budget shall be the Approved Annual Budget for such year, as
adjusted based on a business-as-usual assumption (as adjusted, the "Default
Budget"), for (i) inflation
22
based on the change in the Consumer Price Index from September 30th of the
calendar year for which such Approved Annual Budget was initially adopted to
September 30th of the current calendar year, (ii) salary and benefit increases
granted in the ordinary course of business consistent with past practice and
(iii) increases in capital expenditures due to ongoing projects (including
contractual commitments and cost escalation provisions), until an Annual
Operating Budget for the current calendar year is approved.
(d) Notwithstanding anything to the contrary herein, an
Annual Operating Budget must be submitted to a Purchaser for approval pursuant
to this Section 1.7 only in the event that such Purchaser owns ___ shares of
Class B Stock (on a Fully-Diluted Basis).(4)
ARTICLE 2
TRANSFERS OF STOCK
2.1 Transfers of Stock.
(a) Except as otherwise permitted in this Article 2
or, after expiration of the Holding Period, in Section 3.3 hereof, (i) no
Purchaser shall, and each Purchaser shall cause its direct and indirect
Affiliates not to, Transfer, directly or indirectly, all or any Stock; (ii) no
Purchaser shall and each Purchaser shall cause its direct and indirect Parents
not to, issue or Transfer any Equity Securities of such Purchaser or of any of
its direct or indirect Controlling or Controlled Affiliates (other than its
Ultimate Parent) and (iii) no Purchaser shall, and each Purchaser shall cause
its direct and indirect Affiliates not to, subject any Stock to any arrangement
or agreement with any Third Party (other than the Canadian Transaction
Agreements) with respect to the voting of Stock or exercising rights hereunder
or under the Certificate or otherwise act in concert with any Third Party for
the purpose of holding, voting or disposing of Stock or exercising rights
hereunder or under the Certificate (any action in this clause (iii) being deemed
a Transfer of Stock), it being understood that any such Transfer or issuance
described in clauses (i) through (iii) above will be deemed to constitute a
Transfer of Stock by such Stockholder in violation of this Agreement, shall be
void ab initio and the Company shall not recognize or be bound by any such
Transfer or issuance. Without limiting the generality of the foregoing, the
rights of a Stockholder hereunder are personal to it and, other than pursuant to
a Transfer in compliance with the provisions of this Agreement, no Purchaser
shall (and each Purchaser shall cause its Affiliates not to) enter into any
agreement, arrangement or understanding, written or oral, pursuant to which it
shall transfer, or otherwise grant to or provide any Person, directly or
indirectly, with any of its rights or interests under this Agreement.
(b) Notwithstanding subsection (a) hereof, the
following direct or indirect Transfers or issuances of Stock or other Equity
Securities (each, a "Permitted Transfer") shall be expressly permitted
hereunder, subject to compliance with the further provisions of this Article 2:
(i) any Transfer or issuance of Stock or
other Equity Securities between the Ultimate Parent of any Purchaser or
any of its direct or indirect Controlled Affiliates, on the one hand,
and the Ultimate Parent of the other Purchaser or any of its direct or
indirect Controlled Affiliates on the other hand;
----------------
(4) Number to be same as Required Purchaser Approval threshold.
23
(ii) any Transfer or issuance by a Purchaser
or any of its Affiliates of Stock or other Equity Securities; provided,
that all of the Stock that was Beneficially Owned by such Purchaser or
any of its Affiliates before giving effect to such Transfer or issuance
is, after giving effect to such Transfer or issuance, Beneficially
Owned by one or more Controlled Affiliates (each, a "Successor") of the
Ultimate Parent of either (A) such Purchaser or (B) the Person or
Persons that Beneficially Own and conduct the Recorded Music Business
that was Beneficially Owned and conducted by such Purchaser and its
Affiliates immediately prior to such Transfer or issuance;
(iii) any Transfer or issuance by a
Purchaser or any of its Affiliates in connection with a merger,
reorganization, recapitalization or other form of business combination
of the Company or any other Significant Transaction (including
redemptions or repurchases by the Company); provided that such
transaction has been approved in accordance with Section 1.4 hereof; or
(iv) any Transfer or issuance of
Exchangeable Shares permitted or contemplated pursuant to the Canadian
Transaction Agreements.
For the avoidance of doubt, nothing contained in this Article
2 shall prohibit the Transfer or issuance of Equity Securities of any Affiliate
of a Purchaser which is not either (x) a Controlled or a Controlling Affiliate
of such Purchaser or (y) an Affiliate of such Purchaser that Beneficially Owns
Stock.
2.2 Right of First Offer.
(a) Notwithstanding Section 2.1(a), in connection
with a Third Party Tender Offer or following expiration of the Holding Period,
either Purchaser may Transfer, directly or indirectly, any or all of its Stock
(the "Offered Shares"), provided that, unless such Transfer is a Permitted
Transfer, such Purchaser (collectively with its Affiliates, the "Offering
Stockholder") shall first offer (the "First Offer") to sell the Offered Shares
to the other Purchaser (such other Purchaser is referred to herein as the
"Rightholder") in accordance with this Section 2.2 and otherwise in compliance
with this Agreement (other than Section 2.1 hereof).
(b) The Offering Stockholder shall send written
notice of the First Offer (the "First Offer Notice") to the Company and the
Rightholder, which First Offer Notice shall (i) state that the Offering
Stockholder proposes to effect a Transfer of shares of Stock and the number of
the Offered Shares and (ii) contain a copy of the terms and conditions of the
First Offer (including, without limitation, the purchase price for the Offered
Shares, which shall be payable by the Rightholder solely in cash (the "Offer
Price")). In the event that the Offering Stockholder shall not have delivered
another First Offer Notice pursuant to this Section 2.2 within one hundred and
eighty (180) days prior to the delivery of such First Offer Notice then if (x)
the Market Value of such Offered Shares in such First Offer as of the close of
business on the date of the First Offer Notice is less than $10,000,000 (a
"Small Offering") or (y) the Offering Stockholder has requested demand or
incidental registration of the Offered Shares pursuant to the Registration
Rights Agreement ("Registration"), then the Offering Stockholder may elect to
offer the Offered Shares at Market Value as of the close of business on the date
of the First Offer Notice, by including a statement of such election in the
First Offer Notice, whereupon the Market Value of such Offered Shares on such
date shall be considered the Offer Price. In the event that the Offering
Stockholder desires to Transfer the Offered Shares pursuant to a Third Party
Tender Offer (such proposed Transfer being referred to herein as a "Tender"),
then the Offering Stockholder shall so notify the Rightholder in the First Offer
Notice, which must be received by the Rightholder at least ten (10) Business
Days prior to the scheduled expiration or termination of such Third Party
24
Tender Offer. Upon receipt of a First Offer Notice, the Rightholder shall be
entitled to purchase the Offered Shares upon the terms and conditions set forth
in the First Offer Notice. A Rightholder electing to purchase Offered Shares
shall be entitled to purchase all, but not less than all, of the Offered Shares
for the Offer Price.
(c) The right of First Offer shall be exercisable by
delivery of written notice of exercise (an "Exercise Notice") to the Offering
Stockholder (with a copy to the Company) within the Option Period. If a
Rightholder shall fail to respond to the Offering Stockholder within the Option
Period, such failure shall be regarded as a rejection of the First Offer by such
Person. Upon the failure by a Rightholder to exercise its right of First Offer,
the Company shall, subject to receipt of the Required Purchaser Approval, be
entitled to purchase all, but not less than all, of the Offered Shares for the
Offer Price, so long as the Company has delivered an Exercise Notice to such
effect within the Option Period.
(d) In the event that any proposed Transfer of
Offered Shares would also require the Offering Stockholder to make a Tag-Along
Offer to a Rightholder pursuant to this Section 2.2, the Exercise Notice
required to be given under Section 2.2(c) shall also specify whether the
Rightholder wishes to exercise its Tag-Along Rights as set forth in Section
2.3.
(e) The closing of any purchase of Offered Shares by
a Rightholder or the Company, as the case may be, under this Section 2.2 shall
be held at the principal office of the Company as promptly as practicable, but
in any event on or before the sixtieth (60th) day following delivery of the
First Offer Notice to the Rightholder (or such later time as may be necessary to
comply with the HSR Act and other applicable laws) or at such other time and
place as the parties to the transaction may agree. At such closing, the Offering
Stockholder shall deliver certificates representing the Offered Shares being
purchased by the Rightholder or the Company, as the case may be, duly endorsed
for Transfer and accompanied by all requisite stock transfer taxes, if any, and
such shares shall be free and clear of any liens, claims, options, charges,
encumbrances or rights of others arising through the action or inaction of the
Offering Stockholder (other than those arising hereunder) (collectively,
"Liens") and the Offering Stockholder shall so represent and warrant, and
further represent and warrant that it is the record and Beneficial Owner of all
such shares, with full authority and power to Transfer such shares. The
Rightholder or the Company, as the case may be, shall deliver to the Offering
Stockholder at such closing the Offer Price payable in cash by wire transfer at
an account designated in writing by the Offering Stockholder. At such closing,
the parties to the transaction shall execute and/or deliver such additional
documents as are otherwise necessary or appropriate to effectuate the Transfer
of the Offered Shares.
(f) Notwithstanding anything to the contrary
contained in this Section 2.2, if the Rightholder or the Company, as the case
may be, rejects the First Offer or does not consummate such purchase of Offered
Shares within the period specified in Section 2.2(e), the Offering Stockholder
may Transfer to any Third Party, subject to the provisions of Section 2.3 and
the provisions in this Section 2.2(f), all, but not less than all, of the
Offered Shares (i) for a purchase price that is no lower than the Minimum Third
Party Price, payable in any combination of cash or Marketable Securities (having
a Market Value as of the second (2nd) Business Day immediately preceding the
date of the First Offer Notice equal to the portion of the purchase price not
paid in cash) and (ii) upon terms and conditions no more favorable to such Third
Party than those stated in the First Offer Notice; provided, however, that such
Transfer is bona fide and made on or before the Third Party Expiration Date. If
such sale is not consummated on or before the Third Party Expiration Date, the
restrictions provided for in this Section 2.2 shall again become effective, and
no Transfer of shares may be made thereafter without again
25
offering the same to the Rightholder in accordance with the terms and conditions
of this Agreement.
2.3 Tag-Along Rights.
(a) (i) If, at any time following the expiration of
the Holding Period, any Purchaser desires to Transfer (other than
pursuant to a (A) Permitted Transfer, (B) Small Offering, (C) Tender or
(D) Registration) to any Person, directly or indirectly, in one or a
series of related Transfers, more than ___ shares(5) of Stock) in a
single transaction or series of related transactions (each such
Transferring Stockholder and its Affiliates is collectively referred to
in this Section 2.3 as a "Transferor"), such Transferor shall comply
with the requirements of this Section 2.3.
(ii) Each Transferor shall, prior to
making any such Transfer, first notify the other Purchaser (an "Other
Stockholder") of such Transfer and otherwise comply with the
requirements of this Section 2.3 and such notice (the "Transferor's
Notice") shall (x) specify the proposed Transferee thereof (if known),
the number of shares of Stock proposed to be Transferred and the amount
of consideration proposed to be received therefor and (y) contain the
Tag-Along Offer. The Transferor's Notice required to be given pursuant
to this Section 2.3 shall be included in a First Offer Notice given
pursuant to Section 2.2.
(b) The Transferor shall offer (the "Tag-Along
Offer") to include in the proposed Transfer a number of shares of Stock
designated by the Other Stockholder not to exceed the number of shares of Stock
that bears the same proportion to the total of such Other Stockholder's
Beneficial Ownership of shares of Stock (on a Fully-Diluted Basis) that the
number of shares of Stock to be sold by the Transferor bears to its total
Beneficial Ownership of shares of Stock (on a Fully-Diluted Basis), and the
Tag-Along Offer shall be conditioned upon the Transferor consummating a Transfer
on substantially the terms described in the Transferor's Notice to the
Transferee (if known) named in the Transferor's Notice on substantially the
terms described in such notice; provided that the Transferor shall not be
obligated to consummate any such Transfer.
(c) The Tag-Along Offer right shall be exercisable by
delivery of written notice of exercise (the "Tag Exercise Notice") to the
Transferor, with a copy to the Company (which shall be made in the Exercise
Notice required by Section 2.2(c)) on or before the twentieth (20th) Business
Day following receipt by the Other Stockholder of the Transferor's Notice. An
Other Stockholder that (i) accepts the First Offer, (ii) does not indicate its
desire to exercise the Tag-Along Offer rights pursuant to a Tag Exercise Notice
(including as provided in Section 2.2(c)) or (iii) fails to provide such a Tag
Exercise Notice, shall be deemed to have waived its rights under this Section
2.3 (for purposes only of the particular Transfer described in the Transferor's
Notice). The Transferor may and, if the Transferor Transfers its shares, the
Other Stockholder that has not waived its rights under this Section 2.3 (the
Transferor and the accepting Other Stockholder being hereinafter sometimes
called "Sellers") shall, unless the Other Stockholder shall have accepted the
First Offer, Transfer the shares described in the Transferor's Notice and the
shares included by such Other Stockholder pursuant to the Tag-Along Offer to the
proposed Transferee, in accordance with substantially the terms of such Transfer
set forth in the Transferor's Notice, so long as such Transfer is at a price at
least equal to that stated in the Transferor's Notice and occurs on or before
the later of
----------------
(5) Number to represent 50% of shares of Class B Stock and Exchangeable Shares
issued to each Purchaser in the merger (e.g., 18.75 of 37.5 shares).
26
one hundred and twenty (120) days after the date the Transferor's Notice was
received by the Other Stockholder or the date which is five days after the
expiration or waiver of any waiting period applicable to such proposed Transfer
pursuant to the HSR Act. If such Transfer is not consummated within such period,
the restrictions in this Section 2.3 shall again become effective and no such
Transfer may be made without again providing the Other Stockholder with
Tag-Along Offer rights in accordance herewith. The price per share (which shall
be payable solely in cash and/or Marketable Securities) for sales of Stock made
pursuant to this Section 2.3 shall be the same for the Transferor and the Other
Stockholder accepting the Tag-Along Offer, and such accepting Other Stockholder
shall be subject, on an individual and not joint or several basis, to the same
representations and warranties (but only to the best of its knowledge with
respect to matters related to the Company), covenants, indemnities, holdbacks
and escrow provisions, if any, and any similar components of the Tag-Along Offer
to which the Transferor is subject; provided that to the extent the Sellers are
required to provide indemnities in connection with the Transfer of their shares,
no Seller shall be required to provide indemnification that would result in an
aggregate liability to such Seller in excess of such Seller's proceeds from the
sale of its shares of Stock pursuant to this Section 2.3 and such indemnities
shall be made by the Sellers individually and not jointly or severally;
provided, further, that no Seller shall be required to provide agreements or
covenants surviving the closing of the Transfer other than indemnities or other
similar monetary obligations not restricting or otherwise affecting the conduct
of business by a Seller or any of its Affiliates. All fees and expenses incurred
by the parties (including, without limitation, with respect to financial
advisors, accountants and counsel to the Sellers) in connection with a Transfer
pursuant to this Section 2.3 shall be borne by the party incurring such fees and
expenses.
(d) The provisions of this Section 2.3 shall not
apply to Transfers to a Rightholder pursuant to their exercise of their
respective rights pursuant to Section 2.2 or Section 3.3.
2.4 Certain Matters Relating to Transfers. Notwithstanding
anything to the contrary in this Agreement, (a) prior to an event resulting in a
Permitted Affiliate Transferee no longer being such, the relevant Purchaser
shall cause the Permitted Affiliate Transferee to Transfer (provided that the
provisions of Sections 2.2 and 2.3 shall not apply to such Transfer) the shares
of Stock back to such Purchaser (or another Permitted Affiliate Transferee
thereof) and (b) any direct or indirect Transfer or issuance of Stock or other
Equity Securities otherwise permitted or required by this Agreement: (i) shall
be in compliance with federal and state securities laws, including, without
limitation, the Securities Act, and if the Company reasonably requests, the
Transferor of any Stock shall deliver to the Company an opinion, reasonably
satisfactory to the Company, of counsel to the Transferor as to such compliance;
and (ii) in case of a Permitted Transfer, each Permitted Affiliate Transferee
and Successor, as the case may be, shall agree to take and hold such Stock,
subject to this Agreement and to all the obligations, restrictions, terms and
conditions of this Agreement (including, without limitation, Section 1.2) and
shall have executed and delivered to the other parties hereto an appropriate
instrument pursuant to which it agrees to be bound by, and that any Stock so
transferred will be subject to the terms of, this Agreement.
2.5 Automatic Transfer. If an Offering Stockholder (a
"Required Transferor") is required to Transfer shares of Stock to the other
Purchaser (the "Transferee Stockholder") pursuant to this Agreement and the
Required Transferor is unable or unwilling to Transfer such shares of Stock on
or prior to the closing date for such Transfer, then, on such closing date, upon
payment of the purchase price therefor by the Transferee Stockholder to the
Company to hold in a segregated account for the benefit of the Required
Transferor and compliance by the Transferee Stockholder with the remaining terms
of such Transfer, the shares of Stock owned by the Required
27
Transferor shall automatically, with no further action required to be taken by
the Company or any other Person (including the Required Transferor), be
transferred to the Transferee Stockholders who have paid the purchase price
therefor to the Company to hold in a segregated account. Thereafter, the
Transferee Stockholder (upon payment of such purchase price to the Company to
hold in a segregated account) shall be deemed to be the holder of record of the
number of shares of Stock of the Required Transferor which such Transferee
Stockholder is entitled to purchase under this Agreement notwithstanding that
certificates representing such shares of Stock shall not then be actually
delivered to such Transferee Stockholder. Upon notice from the Company, the
Required Transferor (or its legal representative) shall promptly surrender to
the Transferee Stockholder, at the Company's principal office, certificates
representing the shares of Stock so Transferred, duly endorsed in blank or
accompanied by proper instruments of Transfer. Each Purchaser hereby appoints
the Secretary of the Company as attorney-in-fact for such Purchaser with the
power to execute such documents and take such other action to provide for the
Transfer of the shares of Stock owned by such Purchaser in accordance with this
Section 2.5. In addition, the Secretary of the Company is hereby authorized to
Transfer such shares of Stock on the books of the Company in accordance with
this Agreement and without regard to the surrender of certificates representing
such shares held by any Required Transferor. Any such certificates not
surrendered as required by this Agreement shall become null and void upon such
Transfer. Any amounts paid by a Transferee Stockholder to the Company for the
benefit of a Required Transferor that remain unclaimed at the end of two years
from the date of payment may, to the extent permitted by law, be retained by the
Company and applied in the sole discretion of the Company.
2.6 Conversion. Each Purchaser and the Company agree not to
cause or permit the conversion of any share of Class B Stock pursuant to Section
6 (d)(ii) of the Certificate except in connection with the closing of a Transfer
of such shares to a Third Party or to the Company in compliance with this
Agreement.
2.7 Legend. Certificates evidencing shares of Stock owned by
the Purchasers shall bear the following legend:
"The sale, assignment, transfer, gift, pledge, encumbrance and voting
of any of the stock represented by this certificate is subject to the
terms of a certain Governance Agreement, dated as of ________ __, 1999,
among DELAWARE HOLDCO CORPORATION (the "Company"), SONY MUSIC
ENTERTAINMENT INC., WARNER MUSIC GROUP INC. and certain other parties
named therein, a copy of which may be inspected at the Company's
principal office. The stock represented by this certificate has not
been registered under the Securities Act of 1933, as amended (or
applicable state securities laws), and may not be transferred except
pursuant to an effective registration statement or an exemption from
compliance with the requirements of such act."
ARTICLE 3
STANDSTILL; PURCHASE RIGHTS; REGISTRATION RIGHTS
3.1 Purchaser Standstill Obligations.
(a) Notwithstanding anything to the contrary
contained herein and only during the Standstill Period, no Purchaser or 13D
Group of which such Purchaser or any of its Controlled Affiliates is a member
shall, directly or indirectly, acquire Voting Stock or authorize or make a
tender offer, exchange offer or other offer therefor, if the effect of such
acquisition or offer would be to increase the percentage of
28
Total Current Voting Power of the Company represented by all shares of Voting
Stock Beneficially Owned by both Purchasers or 13D Groups of which such
Purchasers or their respective Controlled Affiliates are members collectively,
on a Fully Diluted Basis, to more than the Standstill Limit, provided that, the
foregoing shall not prohibit a Purchaser and/or any of its Controlled Affiliates
from making or consummating a Purchaser Proposal during the Standstill Period.
(b) A Purchaser shall not be deemed to have violated
its obligations under this Section 3.1 by virtue of any increase in the
aggregate percentage of the Total Current Voting Power of the Company
represented by shares of Voting Stock Beneficially Owned by such Purchaser or
its Affiliates on a Fully Diluted Basis if such increase is the result of a
recapitalization of the Company, a repurchase of securities by the Company or
other actions taken by the Company or any of the Company's Affiliates that have
the effect of reducing the Total Current Voting Power of the Company and such
recapitalization, repurchase or other action by the Company was approved by
Required Independent Approval (in addition to any other approval required
hereunder).
(c) During the Standstill Period, each Purchaser
shall notify the Company and the other Purchaser of any acquisition of
Beneficial Ownership of Voting Stock by such Purchaser or its Controlled
Affiliates (other than pursuant to the Merger Agreement, the Canadian
Transaction Agreements or an exercise of a Purchaser's rights set forth in
Section 3.2 hereof) promptly after each such acquisition and in any event not
more than five (5) Business Days thereafter. Each such notice (an "Ownership
Report") shall contain a statement of the total number of shares of Voting Stock
Beneficially Owned by such Purchaser or any 13D Group of which such Purchaser or
any of its Controlled Affiliates is a member. For purposes of this Section 3.1,
(i) each Purchaser shall rely upon the last Ownership Report or 13D Report of
the other Purchaser (whichever is more recent), and (ii) any acquisition by a
Purchaser otherwise in violation of this Section 3.1 shall be deemed permitted
hereunder if such acquisition would have been permitted had the other
Purchaser's Beneficial Ownership of Voting Stock been as reported in such
Ownership Report or 13D Report of such other Purchaser at the time of such
acquisition. In the event a Purchaser or its Controlled Affiliates obtains
Voting Stock and fails to satisfy its obligations under this Section 3.1(c) and,
thereafter, the other Purchaser or its Controlled Affiliates acquires Voting
Stock in excess of the Standstill Limit that, but for the provisions of clause
(ii) of the preceding sentence, would have been prohibited under this Section
3.1, then the Purchaser and its Controlled Affiliates that so failed to satisfy
its obligations under this Section 3.1(c) shall not be permitted to vote (for
purposes of approving a transaction contemplated under Section 1.4(d)(iv)) that
number of shares of Voting Stock equal to the number of shares of Voting Stock
by which the Standstill Limit was so exceeded at the record date for determining
stockholders entitled to vote thereon.
(d) During the Standstill Period, each Purchaser
(together with its Affiliates, a "Buying Purchaser") shall, if the other
Purchaser owns at least _______ shares(6) of Class B Stock on a Fully-Diluted
Basis (such other Purchaser being referred to as the "Other Purchaser"), notify
the Other Purchaser at least five (5) Business Days prior to the acquisition
during any six-month period by such Buying Purchaser or 13D Group of which such
Buying Purchaser or any of its Controlled Affiliates is a member of Beneficial
Ownership of Voting Stock representing 1% or more of the Total Current Voting
Power of the Company, which notice shall specify the amount and type of Voting
Stock to be acquired and the proposed terms and conditions of such acquisition.
The Buying Purchaser and the Other Purchaser will cooperate in good faith and
shall use
----------------
(6) Number to represent 66 2/3% of the shares of Class B Stock and Exchangeable
Shares issued to each Purchaser in the merger (25 of 37.5 shares).
29
commercially reasonable efforts to provide the Other Purchaser with the
opportunity to purchase Voting Stock at the same price and time and on the same
basis as the Buying Purchaser in order that the Relative Ownership Percentage of
each Purchaser immediately prior to such acquisition is maintained after giving
effect to such acquisition. Nothing in this Section 3.1(d) shall in any way
diminish the obligations of the Purchasers in the foregoing provisions of this
Section 3.1.
3.2 Purchase Rights. Subject to Section 3.1, each Purchaser
shall have a right to purchase or subscribe to any shares of any class of
capital stock or other Equity Securities of the Company as set forth herein. The
Company shall give each of the Purchasers at least thirty (30) days' prior
written notice of the proposed issuance of any capital stock or other Equity
Securities by the Company (each a "New Issuance") (other than capital stock to
be issued in connection (i) with an employee stock option plan that is approved
by the Board or (ii) an acquisition or other strategic transaction approved by
the Board, so long as not more than twenty-five percent (25%) of the fair market
value (as determined by the Board) of the consideration for such issuance is
cash or Marketable Securities). Such notice shall specify the number and class
of securities to be issued, the rights, terms and privileges thereof and the
price at which such securities will be issued. By written notice (the
"Acceptance Notice") to the Company given within fifteen (15) days of being
notified of such New Issuance, each Purchaser shall be entitled to purchase that
percentage of the New Issuance determined by dividing (a) the total number of
shares of Class B Stock Beneficially Owned by such Purchaser (on a Fully-
Diluted Basis) by (b) the total number of shares of Class B Stock then
Beneficially Owned (on a Fully-Diluted Basis) by the number of Purchasers
participating in such purchase; provided, however, that no Purchaser shall have
any right to purchase securities pursuant to this Section 3.2 if, prior to a
sale of securities to such Purchaser pursuant to this Section 3.2, such
securities would be required to be registered under the Securities Act. If a
Purchaser does not fully subscribe for the number or amount of shares of capital
stock or other Equity Securities that it is entitled to purchase (or that it
would otherwise have been entitled to purchase but for the proviso to the
preceding sentence) pursuant to this Section 3.2, then the other Purchaser
participating in such purchase to the full extent provided for in the preceding
sentence shall have the right to purchase that percentage of the New Issuance
not so subscribed for.
3.3 Registration Rights. The Company has granted to each of
the Purchasers certain registration rights with respect to the Stock owned by
them on the terms set forth in the Registration Rights Agreement dated as of the
date hereof among the parties hereto (the "Registration Rights Agreement")
substantially in the form contemplated by the Merger Agreement.
ARTICLE 4
COVENANTS AND REPRESENTATIONS
4.1 Covenants of the Company.
(a) Information and Inspection Rights. The Company
shall deliver to each Purchaser that owns at least ___ shares(7) of Class B
Stock on a Fully-Diluted Basis (each such Purchaser, an "Inspecting Purchaser")
(i) annual audited consolidated balance sheets and the related statements of
income and cash flows (or the equivalent) within 60 days after the end of each
fiscal year; (ii) unaudited quarterly
--------
(7) Number to represent 25% of shares of Class B Stock and Exchangeable Shares
issued to each Purchaser in the merger (e.g., 9.375 of 37.5 shares).
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consolidated balance sheets, related statements of income and cash flows and any
other statements routinely prepared and delivered to the Board (the "Unaudited
Financials") within 30 days of the end of each fiscal quarter; (iii) monthly
Unaudited Financials within 30 days of the end of each month; and (iv) the
Annual Operating Budget within 60 days prior to the end of each fiscal year.
Each Inspecting Purchaser and its respective agents shall be entitled, during
normal business hours, to inspect all of the facilities, properties, books,
records, contracts and commitments of the Company and its Subsidiaries and the
Company shall make its officers available to the Purchasers and their respective
agents, as such may reasonably request from time to time. In addition, the
Company shall deliver to each Purchaser copies of the Company's Forms 10-K,
10-Q, 8-K (as filed with the SEC), annual reports to shareholders of the Company
and any other schedules, registrations or other statements, forms or reports
promptly after such documents are filed with the SEC. The Company shall file all
reports required to be filed by it under the Securities Act and the Securities
Exchange Act and the rules and regulations adopted by the SEC thereunder.
(b) Subsidiary Boards. The Company shall take all
action necessary to ensure that the board of directors (or similar governing
body) of each Subsidiary of the Company shall be, and shall form committees that
are, identical, with respect to authority and qualifications of members, to
those of the Board and its committees, respectively.
4.2 Further Assurances and Additional Agreements. Subject to
the terms and conditions of this Agreement, each party hereto agrees to use its
reasonable commercial efforts to cause the terms and conditions of this
Agreement to be satisfied, and to take, or cause to be taken, all action and to
do, or cause to be done, all things necessary, proper or advisable under
applicable law to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, including cooperating fully with
the other parties, by providing information and making all necessary filings in
connection with, among other things, the HSR Act and the rules and regulations
promulgated thereunder.
4.3 Representations and Warranties of the Purchasers. Each
Purchaser hereby represents and warrants to each other party hereto that:
(a) it is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and it has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder;
(b) its execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate actions on the
part of such Purchaser, and upon execution and delivery by such Purchaser, and
assuming due execution and delivery by the other parties hereto, this Agreement
will constitute the legal, valid and binding obligation of the Purchaser
enforceable against such Purchaser in accordance with its terms; and
(c) neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, by such
Purchaser will, except as disclosed in the Merger Agreement, (i) conflict with
or violate any provision of its Certificate of Incorporation or By-Laws, (ii)
violate, conflict with or constitute (or with notice or lapse of time or both
constitute) a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of, or result in
the creation of any encumbrance upon any of its property pursuant to the terms
of, any note, bond, lease, mortgage, indenture, members agreement, license or
other instrument or any other material agreement, instrument or obligation to
which such
31
Purchaser is a party or by which it or any of its properties or assets may be
bound or affected, (iii) violate any law, statute, rule or regulation, or any
judgment, order, award, writ, injunction or decree of any court, arbitrator,
administrative agency or governmental body, applicable to such Purchaser or any
of its properties or assets, or (iv) require any filing, declaration or
registration with, or permit, consent or approval of, or the giving of notice
to, any public or governmental authority or other third party; excluding from
the foregoing clauses (i) through (iv) such conflicts, violations, breaches,
defaults, accelerations, filings, declarations, registrations, permits,
consents, approvals and notices, the absence of which, either singularly or in
the aggregate are not material.
4.4 Representations and Warranties of the Company. The Company
hereby represents and warrants to each other party hereto that:
(a) it is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, and has the corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder;
(b) its execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate action on the part
of the Company, and upon execution and delivery by it, and assuming due
execution and delivery by each of the other parties hereto, this Agreement will
constitute the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms; and
(c) neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby by the
Company will, except as disclosed in the Merger Agreement, (i) conflict with or
violate any provision of its Certificate or By-Laws, (ii) violate, conflict with
or constitute (or with notice or lapse of time or both constitute) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of, or result in the creation of any
encumbrance upon any of its property pursuant to the terms of, any note, bond,
lease, mortgage, indenture, members agreement, license or other instrument or
any other material agreement, instrument or obligation to which the Company is a
party or by which it or any of its properties or assets may be bound or
affected, (iii) violate any law, statute, rule or regulation, or any judgment,
order, award, writ, injunction or decree of any court, arbitrator,
administrative agency or governmental body, applicable to the Company or any of
its properties or assets, or (iv) require any filing, declaration or
registration with, or permit, consent or approval of, or the giving of notice
to, any public or governmental authority or other third party; excluding from
the foregoing clauses (i) through (iv) such conflicts, violations, breaches,
defaults, accelerations, filings, declarations, registrations, permits,
consents, approvals and notices, the absence of which, either singularly or in
the aggregate are not material.
ARTICLE 5
MISCELLANEOUS
5.1 Amendment. Subject to receipt of any approvals required
under Section 1.4, any provision of this Agreement may be amended or waived if,
but only if, such amendment or waiver is in writing and signed, in the case of
an amendment, by each Purchaser and, other than with respect to any amendment to
Section 1.1(c) or Sections 2.2 (other than the definition of "Holding Period"),
2.3, or 3.1(d) (other than the last sentence thereof), the Company or in the
case of a waiver, by the parties against whom the waiver is to be effective.
Notwithstanding the foregoing, no amendment to Sections 1.1(b)(i), 1.1(d),
1.1(e), 1.2(b) or 5.6 hereof, or this Section 5.1, that adversely
32
affects the parties' obligations with respect to the nomination, election or
removal of ▇▇▇▇▇ ▇▇▇▇ as a member of the Board shall be effective without the
prior written approval of ▇▇. ▇▇▇▇ (who shall be deemed to be a third party
beneficiary hereof, solely with respect to such obligations and this sentence).
Nothing contained in this Agreement shall in any way diminish the authority or
discretion of the Board in making any decision with respect to the termination
or continuation of ▇▇. ▇▇▇▇'▇ employment.
5.2 Waiver. No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise of
any right, power or privilege.
5.3 Specific Performance. The parties recognize that the
obligations imposed on them in Articles 1, 2 and 3 of this Agreement are
special, unique and of extraordinary character, and that in the event of breach
by any party, damages will be an insufficient remedy; consequently, it is agreed
that the parties hereto shall be entitled to specific performance (in addition
to damages) as a remedy for the enforcement of such provisions, without proving
damages or the posting of any bond, including, an injunction, restraining order
or other equitable relief to prevent or remedy any breach of this Agreement. No
party shall raise any argument as to the sufficiency of money damages as a
remedy for breach of such provisions.
5.4 Assignment. Except as otherwise provided herein and
subject to Article 2 hereof, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of the parties hereto; provided, however, that this Agreement may not be
assigned by the Company without the prior written consent of the Purchasers,
except that the Company may assign its rights herein to any duly approved
successor to all or substantially all of its assets (by merger or otherwise).
Any purported assignment made in violation of this Agreement shall be void and
of no force and effect.
5.5 Notices. Any and all notices, consents, offers,
acceptances, or any other communication provided for herein shall be sufficient
if given in writing and deemed received when delivered by first class,
registered or certified mail, postage prepaid or overnight courier or hand
delivery, or when sent by facsimile transmission (confirmed by facsimile machine
report) which shall be addressed, or sent, as follows:
The Company:
Delaware Holdco Corporation
[Address]
Telecopy: ____________
Attention: with a copy to the General Counsel
any member of Sony Group:
Sony Music Entertainment Inc.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telecopy: ____________
Attention: General Counsel
With a copy to:
33
any member of Warner Group:
Warner Music Group Inc.
▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telecopy: ________________
Attention: General Counsel
With a copy to:
And in the case of any other party hereto, such address as such
party shall specify upon becoming party hereto or bound hereby;
or, in each case, such other address or telecopy number as the party shall
specify to the Company and the other parties hereto.
5.6 Third Party Beneficiary. Nothing in this Agreement,
express or implied, is intended or shall confer upon any Person (other than the
parties hereto and their permitted successors and assigns and, to the extent set
forth in the penultimate sentence of Section 5.1 hereof, ▇▇▇▇▇ ▇▇▇▇) any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
5.7 Term of Agreement. This Agreement shall become effective
upon the execution and delivery hereof and, except with respect to Section
1.1(b) (iii), the penultimate sentence of Sections 1.1(c), 1.2 and 3.3, Article
5, and the relevant definitions therein, shall terminate upon the occurrence of
an Event of Automatic Conversion.
5.8 Section Headings. Headings contained in this Agreement are
inserted only as a matter of convenience and in no way define, limit or extend
the scope or intent of this Agreement or any provisions hereof.
5.9 Choice of Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
the agreement made and to be performed entirely within such state. Each party
hereto agrees that it shall bring any action or proceeding in respect of any
claim arising out of or related to this Agreement or the transactions contained
in or contemplated by this Agreement, whether in tort or contract or otherwise
or at law or in equity, exclusively in the State Courts of Delaware or the
federal district court located in Delaware (the "Chosen Courts") and (i)
irrevocably submits to the exclusive jurisdiction of the Chosen Courts, (ii)
waives any objection to laying venue in any such action or proceeding in the
Chosen Courts and (iii) waives any objection that the Chosen Courts is an
inconvenient forum or does not have jurisdiction over any party hereto.
5.10 Entire Agreement. This Agreement (including the Exhibits
and Schedules attached hereto) contains the entire understanding of the parties
hereto with respect to the subject matter hereof and thereof and supersedes all
prior agreements, discussions and understandings with respect to such subject
matter.
5.11 Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provisions were omitted; provided, however, if any particular
provision is deemed invalid or unenforceable, the parties hereto will work
together in good faith to enter into alternative arrangements reasonably
acceptable to the parties designed to preserve the rights and benefits intended
to be provided by any such provision.
34
5.12 Cumulative Rights. The rights of each party under this
Agreement are cumulative and in addition to all other rights or remedies that
any party may otherwise have at law or in equity.
5.13 Obligations. For the avoidance of doubt, the parties
expressly acknowledge and agree that each Purchaser's obligations under this
Agreement, including without limitation Section 3.1, are separate and individual
in nature and are not joint and several. In no event shall a Purchaser be held
responsible for a breach by the other Purchaser of this Agreement, including
without limitation Section 3.1.
5.14 Counterparts. This Agreement may be executed by the
parties hereto on separate counterparts and such counterparts will be deemed to
be one and the same instrument. The parties hereto confirm that any facsimile
copy of the other party's executed counterpart of this Agreement (or its
signature page thereof) will be deemed to be an executed original thereof.
35
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
DELAWARE HOLDCO CORPORATION
By:_________________________________
Name:
Title:
SONY MUSIC ENTERTAINMENT INC.
By:_________________________________
Name:
Title:
SONY MUSIC ENTERTAINMENT (CANADA)
INC.
By:_________________________________
Name:
Title:
36
WARNER MUSIC GROUP INC.
By:_________________________________
Name:
Title:
WARNER MUSIC CANADA LTD
By:_________________________________
Name:
Title:
WCI RECORD CLUB INC.
By:_________________________________
Name:
Title:
The undersigned ____________________________, in its capacity as
Trustee, hereby acknowledges and agrees that the Special Voting Share is subject
to the restrictions contained in the foregoing Agreement.
TRUSTEE
By:____________________________________ Date:______________________
Name:
Title: