Governance Agreement - drugstore.com inc. and Rite Aid Corp.
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DRUGSTORE.COM, INC.
RITE AID 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"), and Rite Aid Corporation, a Delaware corporation ("Rite Aid").
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RECITALS
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The Company and Rite Aid have entered into a Series E Preferred Stock
Purchase Agreement (the "Series E Purchase Agreement") dated as of June 17,
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1999, pursuant to which the Company will sell to Rite Aid and Rite Aid will
purchase from the Company shares of the Company's Series E Preferred Stock. The
Company and Rite Aid wish to enter into this Agreement in order to set forth
certain rights and restrictions applicable to the Company and Rite Aid 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 Rite Aid), none of Rite Aid, any Affiliate (defined
below) of Rite Aid or any 13D Group (defined below) of which Rite Aid 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
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convertible into, 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 after such acquisition, the Voting Securities then
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beneficially
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owned by Rite Aid 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 Rite Aid); provided, however,
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that if at any time the Voting Securities beneficially owned by Rite Aid 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 Rite Aid shall then represent more than the Threshold
Percentage, then Rite Aid shall not be deemed in violation of this Section 1.1
for so long as Rite Aid 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 to
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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
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under 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
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direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract, or
otherwise; and the terms "controlling" and "controlled" have meanings
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correlative to the foregoing.
"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
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terms are 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, Rite Aid
or any Affiliate of the Company or Rite Aid (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
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of 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).
"Rite Aid Controlled Entity" means any Person which is controlled by
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Rite Aid.
"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
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until 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
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effected exclusively for the purpose of changing the domicile of the
Company.
"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 this Agreement, the Rite Aid Main
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Agreement and the Pharmacy Supply and Services Agreement (each as defined
in the Series E Purchase Agreement).
"Tender Offer" means a bona fide public offer subject to the
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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 and does not include any of the
Company, Rite Aid or any Affiliate of the Company or Rite Aid (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
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other 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
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acquiring, holding, voting or
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disposing of 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 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. Rite Aid 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
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Standstill 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 Rite Aid) neither Rite Aid nor any Affiliate of Rite Aid 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)
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otherwise act, alone or in concert with others, to seek to control or influence
the management or policies of the Company, (vi) disclose 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. Rite Aid 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 this clause (y) shall not
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be deemed to prohibit Rite Aid 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 Rite Aid from
taking actions permitted under the Voting Agreement or Section 3 of this
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, Rite Aid shall
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take all action as may be required such that all Voting Securities beneficially
owned by Rite Aid 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 Rite Aid, in accordance with the recommendation of a
majority of the Board.
2. Sales by Rite Aid.
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2.1 Transfer Restrictions. Notwithstanding any other provisions of this
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Agreement, during the Standstill Period, Rite Aid shall not directly or
indirectly sell or otherwise transfer or dispose of any shares of the Company's
capital stock beneficially owned by Rite Aid ("Stock"), or any interest therein,
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except as follows:
(i) to the Company;
(ii) to any Rite Aid Controlled Entity which has agreed in writing
with the Company to be bound to the terms of this Agreement;
(iii) (x) in a private placement exempt from the registration
requirements of the Securities Act, provided that Rite Aid 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 knowledge
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of Rite Aid 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 Rite Aid 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
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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 Rite Aid 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 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. Board Representation.
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3.1 Designation of Director. On the first business day following the
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termination of Rite Aid's rights under Section 1(d) of the Voting Agreement
pursuant to Section 3.1(b) thereof, the Company will cause the Board to
nominate, recommend and solicit proxies (if necessary) for election to the Board
of one person designated by Rite Aid; provided, that this obligation shall be
deemed fulfilled in the event a Rite Aid designated director is already sitting
on the Board at such time. Thereafter, in the event of a vacancy in such Rite
Aid Board seat, or in any Board election in which the Rite Aid designated
director is up for re-election, the Company will cause the vacancy to be filled
with a Rite Aid designated director or will cause such Rite Aid designated
director to be included on the slate of directors proposed by the Board at such
election and cause the Board to recommend and solicit proxies (if necessary) in
favor of such Rite Aid designated director. Notwithstanding any of the
foregoing, the Company's obligations under this Section 3 will terminate on the
earliest of:
(x) the date Rite Aid ceases to beneficially own at least 5% of the
then-outstanding shares of Common Stock;
(y) the date of termination of all of the Strategic Agreements; and
(z) when the Company shall sell, convey, or otherwise dispose of all
or substantially all of its
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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, provided that this
subsection (z) shall not apply to a merger effected exclusively for the
purpose of changing the domicile of the Company.
3.2 Designation of an Observer. At any time prior to the termination
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of all of the Strategic Agreements or the occurrence of an event described in
clause (z) of Section 3.1, Rite Aid shall be entitled to designate a nonvoting
observer who shall be entitled to attend any meeting of the Board which a Rite
Aid designated director does not attend and who, at any time when there is not a
Rite Aid designated director on the Board, shall be provided (i) notice of all
meetings of the Board (concurrent with the delivery of such notice to
directors), (ii) notice of any action that the Board may take by written consent
(concurrent with the delivery of such notice to directors) and (iii) promptly
delivered copies of all minutes and other records of action by, and all written
information furnished to the Board.
3.3 Conflicts. Notwithstanding the foregoing, no Rite Aid Board
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observer shall be permitted to attend any Board meeting (or any portion thereof)
at which discussions relate to matters which the General Counsel of the Company
determines could be subject to the attorney/client privilege.
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 Rite Aid 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
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Rite Aid in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail or overnight
courier ("Notice") to Rite Aid 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.
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(b) Within 15 calendar days after delivery of the Notice, Rite Aid 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
Rite Aid 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 Rite Aid as of the date of this Agreement (or if less, the
number then held by Rite Aid) 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 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.
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5. Miscellaneous.
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5.1 Successors and Assigns. This Agreement and each party's rights and
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obligations hereunder shall not be assigned without the prior written consent of
the other party; provided, that in connection with a transfer pursuant to
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Section 2.1(ii), no consent of the Company shall be required but Rite Aid shall
cause the transferee to agree in writing with the Company to be bound to (and
receive the benefit of) Rite Aid'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 Rite Aid, or that of
their respective permitted successors and assigns. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon the Company,
Rite Aid and any of their permitted successors and assigns.
5.3 Notices. Unless otherwise provided, any notice required or
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permitted 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 Rite Aid, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP,
New York, NY 10022-3897 (telephone: (212) 735-3000; telecopy: (212) 735-2000),
Attention: Nancy Lieberman.
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
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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
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pursuant 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
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Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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,
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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
RITE AID:
RITE AID CORPORATION
By: /s/ Elliot S. Gerson
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Name: Elliot S. Gerson
Title:
Address: 30 Hunter Lane
Camp Hill, PA 17011