Governance Agreement - drugstore.com inc., General Nutrition Cos. Inc. and General Nutrition Investment Co.
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DRUGSTORE.COM, INC.
GNC GOVERNANCE AGREEMENT
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This Governance Agreement (this "Agreement") is made as of the 17th day of
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June, 1999 by and among drugstore.com, inc., a Delaware corporation (the
"Company"), General Nutrition Companies, Inc., a Delaware corporation ("General
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Nutrition"), and General Nutrition Investment Company, an Arizona corporation
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("GNI", and together with General Nutrition,"GNC").
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RECITALS
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The Company and GNC have entered into a Series E Preferred Stock Purchase
Agreement (the "Series E Purchase Agreement") dated as of June 17, 1999,
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pursuant to which the Company will sell to GNI and GNI will purchase from the
Company shares of the Company's Series E Preferred Stock. The Company and GNC
wish to enter into this Agreement in order to set forth certain rights and
restrictions applicable to the Company and GNC in connection with the
transactions contemplated by the Purchase Agreement.
AGREEMENT
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The parties hereby agree as follows:
1. Standstill Agreement.
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1.1 No Increase of Ownership Interest. (a) At any time during the
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Standstill Period (defined below), except with the prior written consent of a
majority of the Company's Board of Directors (the "Board") (excluding the vote
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of any director appointed by GNC), none of GNC, any Affiliate (defined below) of
GNC or any 13D Group (defined below) of which GNC or any of its Affiliates is a
member shall in any manner acquire, agree to acquire or make any proposal to
acquire, directly or indirectly, beneficial ownership (defined below) of any
securities of the Company entitled to vote with respect to the election of any
directors of the Company ("Voting Securities"), any security convertible into,
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exchangeable for, or exercisable for, or that may become any Voting Securities
or any other right to acquire Voting Securities (such Voting Securities and
rights to acquire Voting Securities are collectively referred to herein as
"Securities"), if
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after such acquisition, the Voting Securities then beneficially owned by GNC
would represent more than the Threshold Percentage (defined below) of the
Company's then outstanding Voting Securities (assuming the conversion, exchange
and/or exercise of all convertible, exchangeable and exercisable securities then
beneficially owned by GNC); provided, however, that if at any time the Voting
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Securities beneficially owned by GNC shall represent less than or the same as
the Threshold Percentage, and, subsequently and solely as a result of the
Company's repurchases of Voting Securities or a recapitalization of all the
Company's capital stock, the Voting Securities beneficially owned by GNC shall
then represent more than the Threshold Percentage, then GNC shall not be deemed
in violation of this Section 1.1 for so long as GNC does not purchase or acquire
beneficial ownership of additional Voting Securities.
(b) The provisions of Section 1.1(a) shall not apply during the
pendency of a Standstill Suspension Period (defined below).
1.2 Definitions. For purposes of this Agreement, the following terms
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shall be defined as set forth below:
"Acquisition Agreement" means a definitive agreement between the
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Company and any Existing Investor or any other Person in respect of a
merger, consolidation, recapitalization, sale of assets or other business
combination transaction which, if consummated, (i) in the case of such an
agreement with an Existing Investor, would result (A) in such Existing
Investor beneficially owning in excess of 40% of the then Total Current
Voting Power (excluding a merger effected exclusively for the purpose of
changing the domicile of the Company) or (B) in 50% or more of the assets
of the Company being transferred to or controlled by an Existing Investor
or (ii) in the case of such an agreement with any other Person, would
result in a Change of Control Transaction.
"Affiliate" of any specified Person means any other Person directly or
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indirectly controlling or controlled by or under direct or indirect common
control with such specified Person.
"beneficial owner" has the meaning set forth in Rule 13d-3 under the
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Exchange Act, and the terms "beneficially own" and "beneficial ownership"
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have meanings correlative to the foregoing.
"Board" is defined in Section 1.1(a).
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"Change of Control Transaction" means (A) any Tender Offer, merger,
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consolidation, recapitalization, sale of assets or other business combination or
transaction pursuant to which either (i) the holders of the outstanding Voting
Securities immediately prior to such transaction would hold less than 50% of the
Total Current Voting Power immediately after such transaction or (ii) 50% or
more of the assets of the Company would be transferred to or controlled by a
third party not Affiliated with the Company, except in each case a merger
effected exclusively for the purpose of changing the domicile of the Company or
(B) any action by the stockholders of the Company that results in the directors,
who as of the Closing Date constitute the Board (the "Incumbent Board"), ceasing
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to constitute at least a majority of the Board (provided, however, that any
individual becoming a director subsequent to the Closing Date whose nomination
for election by the stockholders of the Company was approved by the vote of the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board).
"Closing Date" means the date of the closing of the purchase and sale under
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the Series E Purchase Agreement.
"Common Stock" means common stock, par value $0.001 per share, of the
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Company.
"control" when used with respect to any Person means the power to direct
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the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract, or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Existing Investors" means Amazon.com, Inc., Kleiner Perkins Caufield &
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Byers VIII, L.P. and Vulcan Ventures Incorporated, and their respective
Affiliates.
"Existing Investor Offer/Solicitation" means the commencement by an
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Existing Investor of (i) a Tender Offer to acquire, or as a result of which such
Existing Investor would beneficially own, in excess of 40% of the then Total
Current Voting Power or (ii) a Proxy Solicitation.
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"Investors' Rights Agreement" means the Fourth Amended and Restated
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Investors' Rights Agreement made as of May 18, 1999, as amended by the Addendum
thereto dated as of June 17, 1999, by and among the Company and the investors
listed on Exhibit A thereto.
"Person" means any individual, firm, corporation, partnership, limited
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liability company, trust, joint venture, or other entity.
"Proxy Solicitation" means a "solicitation" of "proxies" (as such terms are
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used in Regulation 14A under the Exchange Act) by a Person or 13D Group (which
is not made and does not include any of the Company, GNC or any Affiliate of the
Company or GNC (it being agreed that for purposes of this definition of Proxy
Solicitation an Existing Investor shall not be deemed an Affiliate of the
Company)) to effect a Change of Control Transaction.
"Qualified IPO" means an underwritten public offering by the Company of
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shares of its Common Stock pursuant to a registration statement under the
Securities Act, which results in gross proceeds in excess of $15,000,000 and the
public offering price of which is at least $10.00 per share (appropriately
adjusted for any stock split, dividend, combination or other recapitalization).
"GNC Controlled Entity" means any Person which is controlled by GNC.
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"Securities" is defined in Section 1.1(a).
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"Securities Act" means the Securities Act of 1933.
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"Standstill Period" means the period from the date of this Agreement until
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the earlier of (i) the tenth anniversary of the Closing Date and (ii) when the
Company shall (A) sell, convey, or otherwise dispose of all or substantially all
of its property or business or merge or consolidate with any other corporation
(other than a wholly owned subsidiary corporation) where the stockholders of the
Company own less than fifty percent (50%) of the voting power of the surviving
entity after such merger or consolidation or (B) effect any other transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Company is disposed of, except in each case a merger
effected exclusively for the purpose of changing the domicile of the Company.
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"Standstill Suspension Period" means any of the following periods:
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(i) the period from the eleventh business day after commencement of a
Third Party Offer/Solicitation until the withdrawal or termination thereof;
(ii) the period from commencement of an Existing Investor
Offer/Solicitation until the withdrawal or termination thereof;
(iii) the period of effectiveness of any material waiver by the Company
(including through a failure to enforce) of Section 3.1, 3.3 or 3.5 of the
Investors' Rights Agreement as and to the extent such sections apply to the
Existing Investors; and
(iv) the period from the execution by the Company of an Acquisition
Agreement until the termination thereof.
"Stock" is defined in Section 2.1.
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"Strategic Agreements" means the Main Agreement entered into as of June 17,
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1999 between the Company and General Nutrition, this Agreement, and the
Consignment Agreement entered into as of June 17, 1999 between the Company and
General Nutrition.
"Tender Offer" means a bona fide public offer subject to the provisions of
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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 and does not include any of the Company, GNC or any Affiliate of the
Company or GNC (it being agreed that for purposes of this definition of Tender
Offer an Existing Investor shall not be deemed an Affiliate of the Company)) to
purchase or exchange for cash or other consideration any Voting Securities.
"Third Party Offer/Solicitation" means the commencement by any Person other
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than an Existing Investor of (i) a Tender Offer to acquire, or as a result of
which such Person would beneficially own, 51% or more of the then Total Current
Voting Power or (ii) a Proxy Solicitation.
"13D Group" means any group of Persons formed for the purpose of acquiring,
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holding, voting or disposing of Securities which would be required under Section
13(d) of the Exchange Act, and the
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rules and regulations promulgated thereunder, to file a statement on
Schedule 13D pursuant to Rule 13d-1(a) or a Schedule 13G pursuant to Rule
13d-1(c) as a "person" within the meaning of Section 13(d)(3) of the
Exchange Act if such group beneficially owned Securities representing more
than 5% of any class of Securities then outstanding.
"Threshold Percentage" means 40.0%.
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"Total Current Voting Power" means, as of any date of determination,
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the total number of votes which may be cast in the election of members of
the Board of Directors of the Company if all Voting Securities are present
and vote.
"Voting Agreement" means the Third Amended and Restated Voting
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Agreement dated as of June 17, 1999.
"Voting Securities" is defined in Section 1.1(a).
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1.3 Notice of Voting Securities Purchases. GNC shall notify the
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Company as to any future acquisition of beneficial ownership of Voting
Securities, or rights thereto, within ten (10) business days after such action
in order for the Company to monitor compliance with the terms of this Agreement.
1.4 Other Restricted Activities. (a) At any time during the Standstill
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Period, except for the acquisition of Voting Securities up to the Threshold
Percentage by means of a tender offer, open market purchases, private purchases
or any other legally available means, or with the prior written consent of a
majority of the Board (excluding the vote of any director appointed by GNC)
neither GNC nor any Affiliate of GNC shall (i) propose to enter into, directly
or indirectly, any merger or other business combination involving the Company or
propose to purchase, directly or indirectly, a material portion of the assets of
the Company, (ii) make, or in any way participate, directly or indirectly, in
any "solicitation" of "proxies" (as such terms are used in Regulation 14A under
the Exchange Act) to vote or consent, or seek to advise or influence any Person
with respect to the voting of, or granting of a consent with respect to, any
Securities, (iii) deposit any Securities into a voting trust or subject any
Securities to any arrangement or agreement with any third party with respect to
the voting of such Securities (other than as contemplated by the Voting
Agreement), (iv) form, join or participate in any 13D Group, (v) otherwise act,
alone or in concert with others, to seek to control or influence the management
or policies of the Company, (vi) disclose
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any intention, plan or arrangement inconsistent with the foregoing or (vii)
advise, assist (including by knowingly providing or arranging financing for that
purpose) or encourage any other Person in connection with any of the foregoing.
GNC also agrees not to (and to cause its Affiliates not to) (x) request the
Company or any of its agents or representatives, directly or indirectly, to
amend or waive any provision of this Section 1.4(a) (including this sentence) or
(y) take any action which might require the Company to make a public
announcement regarding the possibility of a transaction with the Company
(excluding announcements relating to the Strategic Agreements); provided that
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this clause (y) shall not be deemed to prohibit GNC from communicating with the
Board so long as such communication is not intended to elicit a public response
by such Board. Nothing contained in this Section 1.4 shall be deemed to prevent
GNC from taking actions permitted under the Voting Agreement.
(b) The provisions of Section 1.4(a) shall not apply during the pendency
of a Standstill Suspension Period.
1.5 Voting Restrictions. During the Standstill Period, GNC shall take all
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action as may be required such that all Voting Securities beneficially owned by
GNC are voted at every meeting of the Company's stockholders and in any
solicitation of consents in lieu of any such meeting (a) in any election of
directors in favor of the nominees put forth and recommended by the Board, (b)
on any stockholder proposals made pursuant to Rule 14a-8 under the Exchange Act,
in accordance with the recommendation of a majority of the Board and (c) on all
proposed amendments to the Company's certificate of incorporation, other than
any amendment to the voting or other rights of the holders of the Common Stock
that is adverse to GNC, in accordance with the recommendation of a majority of
the Board.
2. Sales by GNC.
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2.1 Transfer Restrictions. Notwithstanding any other provisions of this
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Agreement, during the Standstill Period, GNC shall not directly or indirectly
sell or otherwise transfer or dispose of any shares of the Company's capital
stock beneficially owned by GNC ("Stock"), or any interest therein, except as
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follows:
(i) to the Company;
(ii) to any GNC Controlled Entity which has agreed in writing with the
Company to be bound to the terms of this Agreement;
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(iii) (x) in a private placement exempt from the registration
requirements of the Securities Act, provided that GNC obtains an
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opinion of counsel stating that such sale, transfer or disposition is
exempt from the registration requirements of the Securities Act, or
(y) pursuant to a bona fide underwritten public offering or
shelf offering registered under the Securities Act;
provided, that in the case of each of clauses (x) and (y), to the
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knowledge of GNC after due inquiry, no single Person or 13D Group
would, as a result of such transfer, beneficially own more than 5% of
the Voting Securities;
(iv) pursuant to Rule 144 under the Securities Act;
(v) at any time, pursuant to any tender offer or exchange offer
subject to Regulation 14D under the Exchange Act which (x) is not opposed
by the Board within the time the Board is required, pursuant to the rules
and regulations promulgated under the Exchange Act, to advise stockholders
of the Company of its position on such offer or (y) if successful would
effect a Change of Control Transaction; or
(vi) at any time, pursuant to, or in connection with the
consummation of, any definitive agreement between the Company and any other
Person in respect of a merger, consolidation, recapitalization, sale of
assets or other business combination transaction.
2.2 Prohibited Transfers. Any attempt by GNC to sell, transfer or
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dispose of Stock or any interest therein in violation of this Section 2 shall be
void and the Company agrees it will not effect such a sale, transfer or
disposition nor will it treat any alleged transferee as the holder of such
Stock.
2.3 Legended Certificates. Each certificate representing shares of
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Stock now or hereafter owned by GNC shall be endorsed with the following legend
unless the applicable restrictions referenced below shall have lapsed by the
terms of the agreements in which such restrictions are contained (in which event
the relevant legend shall be removed from such certificate):
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE
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IS SUBJECT TO TRANSFER RESTRICTIONS SET FORTH IN A GOVERNANCE AGREEMENT
DATED AS OF JUNE 17, 1999, BETWEEN THE STOCKHOLDER AND THE CORPORATION.
COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE CORPORATION."
3. [Intentionally Omitted.]
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4. Pre-IPO Right.
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4.1 Right of First Offer. Subject to the terms and conditions
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specified in this Section 4.1, the Company hereby grants to GNC a right of first
offer with respect to future sales by the Company of its Shares (as hereinafter
defined).
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to GNC
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in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail or overnight
courier ("Notice") to GNC stating (i) its bona fide intention to offer such
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Shares, (ii) the number of such Shares to be offered, and (iii) the price and
terms, if any, upon which it proposes to offer such Shares.
(b) Within 15 calendar days after delivery of the Notice, GNC may
elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such Shares which equals the amount necessary for
GNC to maintain its equity percentage in the Company (calculated as the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities held by GNC as of the date of this Agreement (or if less, the number
then held by GNC) bears to the total number of shares of Common Stock then
outstanding.
(c) The right of first offer in this Section 4.1 shall not be
applicable (i) to the issuance or sale of capital stock (or options therefor) to
employees, consultants, officers or directors of the Company pursuant to stock
purchase or stock option plans or agreements approved by the Board (including
options granted prior to the date hereof), (ii) to the issuance of securities in
connection with bona fide acquisitions, mergers or similar transactions, (iii)
to the issuance of securities to financial institutions or lessors in
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connection with commercial credit arrangements, equipment financings or similar
transactions, (iv) to the issuance of securities in a public offering of
securities pursuant to a registration statement filed under the Securities Act,
(v) to the issuance of securities pursuant to the conversion or exercise of
options, warrants, notes, or other rights to acquire securities of the Company,
or (vi) to the issuance of securities pursuant to stock splits, stock dividends
or like transactions.
4.2 Termination of Covenants. The covenants set forth in Section 4.1
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shall terminate and be of no further force or effect (i) upon the consummation
of a Qualified IPO, or (ii) when the Company shall (A) sell, convey, or
otherwise dispose of all or substantially all of its property or business or
merge or consolidate with any other corporation (other than a wholly-owned
subsidiary corporation) where the stockholders of the Company own less than
fifty percent (50%) of the voting power of the surviving entity after such
merger or consolidation or (B) effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of, provided that this subsection (ii) shall not apply to a
merger effected exclusively for the purpose of changing the domicile of the
Company.
5. Miscellaneous.
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5.1 Successors and Assigns. This Agreement and each party's rights
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and obligations hereunder shall not be assigned without the prior written
consent of the other party; provided, that in connection with a transfer
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pursuant to Section 2.1(ii), no consent of the Company shall be required but GNC
shall cause the transferee to agree in writing with the Company to be bound to
(and receive the benefit of) GNC's rights and obligations under this Agreement.
Except as otherwise provided in this Agreement, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
5.2 Amendments and Waivers. Any term of this Agreement may be amended
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or waived only with the written consent of the Company and GNC, or that of their
respective permitted successors and assigns. Any amendment or waiver effected in
accordance with this
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paragraph shall be binding upon the Company, GNC and any of their permitted
successors and assigns.
5.3 Notices. Unless otherwise provided, any notice required or permitted
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by this Agreement shall be in writing and shall be deemed given upon delivery,
when delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party's address or fax number as set forth below or as subsequently
modified by written notice, and if to the Company, with a copy to the General
Counsel of the Company at the address of the Company set forth below and, if to
GNC, with a copy to the General Counsel of GNC at the address of GNC set forth
below.
5.4 Severability. If any term or other provision of this Agreement is
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invalid, illegal or incapable of being enforced by any rule or law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
5.5 Governing Law. This Agreement and all acts and transactions pursuant
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hereto shall be governed, construed and interpreted in accordance with the laws
of the State of Delaware, without giving effect to principles of conflicts of
laws.
5.6 Counterparts. This Agreement may be executed in two or more
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counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.7 Titles and Subtitles. The titles and subtitles used in this Agreement
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are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
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5.8 Enforcement. The parties agree that irreparable damage would occur in
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the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York or Delaware state
court or any Federal court located in the State of New York or the State of
Delaware, this being in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties hereto (a) consents to
submit itself to the personal jurisdiction of any New York or Delaware state
court or any Federal court located in the State of New York or the State of
Delaware in the event any dispute arises out of this Agreement, (b) agrees that
it will not attempt to deny or defeat such personal jurisdiction by motion or
other request for leave from any such court, (c) agrees that it will not bring
any action relating to this Agreement in any court other than any New York or
Delaware state court or any Federal court sitting in the State of New York or
the State of Delaware and (d) waives any right to trial by jury with respect to
any action related to or arising out of this Agreement.
5.9 Effectiveness. This Agreement shall become effective only
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concurrently with the Closing (as defined in the Series E Purchase Agreement).
This Agreement shall automatically terminate concurrently with any termination
of the Series E Purchase Agreement pursuant to Section 7.16 thereof. Upon such
termination, this Agreement shall become void and of no further effect.
[Signature Page Follows]
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The parties have executed this Governance Agreement as of the date first
written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter M. Neupert
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Name: Peter M. Neupert
Title: President and CEO
Address: 13920 SE Eastgate Way,
Suite 300
Bellevue, WA 98005
GENERAL NUTRITION:
GENERAL NUTRITION COMPANIES, INC.
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By: /s/ James M. Sander
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Name: James M. Sander
Title: Vice President
Address:
GNI:
GENERAL NUTRITION
INVESTMENT COMPANY
By: /s/ James M. Sander
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Name: James M. Sander
Title: Vice President