STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), dated as of September 5, 2018, is entered into by and among (i) Turning Point Brands, LLC, a Delaware limited liability company ("Buyer"), (ii) Pegasus Real Estate Investment Group, LLC, a Florida limited liability company ("Pegasus"), David Epstein, a Florida resident ("Epstein"), Milander Investments, LLC, a Delaware limited liability company ("Milander"), David Herrera, a Florida resident ("Herrera"), David Mardini, a Florida resident ("Mardini"), John M. Scott, a New York resident ("Scott"), Martin Flumenbaum, a New York resident ("Flumenbaum"), Elizabeth McColm, a New York resident ("McColm"), Robert Schumer, a New York resident ("Schumer"), Daniel Kramer, a New York resident ("Kramer"), Durlan Bergnes, a Florida resident ("Bergnes"), Angelo Bonvino, a New York resident ("Bonvino"), John Lange, a Hong Kong resident ("Lange") and Mark Wlazlo, a New Jersey resident ("Wlazlo") (each of Pegasus, Epstein, Milander, Herrera, Mardini, Scott, Flumenbaum, McColm, Schumer, Kramer, Bergnes, Bonvino, Lange, and Wlazlo, a "Shareholder" and, collectively, the "Shareholders"), (iii) IVG Holdings S Corporation, a Delaware corporation ("Seller") and (iv) Nicolas Molina, as Seller's Representative.
RECITALS
WHEREAS, International Vapor Group, LLC, a Delaware limited liability company (the "Company"), the successor by statutory conversion under Delaware law to International Vapor Group, Inc. (the "Conversion"), directly and indirectly through wholly-owned subsidiaries, is engaged in the business of designing, manufacturing, marketing and selling certain e-liquids, mods, tanks, and electronic cigarette products (collectively, the "Products");
WHEREAS, Shareholders owned all of the issued and outstanding shares of common stock, par value $0.001 of the Company prior to the exchange of such shares (the "Exchange") for stock of Seller, which Exchange shall occur prior to Closing;
WHEREAS, after the consummation of the Exchange, Seller will hold all of the issued and outstanding equity of the Company;
WHEREAS, the consummation of the Conversion, which shall occur immediately after the Exchange, caused the Company to be converted into a limited liability company wholly-owned by Seller.
WHEREAS, Shareholders and Seller desire to sell to Buyer, and Buyer wishes to purchase from Seller, all of the issued and outstanding Shares (i.e., the 100% membership interest in the Company held by Seller after the Restructuring), subject to the terms and conditions set forth herein;
WHEREAS, in connection with the Restructuring, several subsidiaries of the Company that were operating in corporate form were also converted through statutory conversions into limited liability companies; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
The following terms have the meanings specified or referred to in this Article I:
"Acquisition Proposal" has the meaning set forth in Section 5.03(a).
"Action" means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.
"Affiliate" of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. The term "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
"Agreement" has the meaning set forth in the preamble.
"Allocation Schedule" has the meaning set forth in Section 6.05(b).
“Assumed Indebtedness” means the existing Company Indebtedness represented by the following:
(a) Single Sided Lease Agreements - $1 Purchase Option, Agreement Numbers 301-0225015-001, 301-0225015-002, 301-0225015-003, 301-0225015-004, 301-0225015-005, 301-0225015-006, 301-0225015-007 and 301-0225015-008, dated April 21, 2015, April 27, 2016, October 28, 2016, May 19, 2017, December 4, 2017, March 22, 2018, [undated] and [undated], respectively, by and between the Company and Wells Fargo Equipment Finance, Manufacturer Services Group.
(b) Premium Finance Agreement with Premium Advance Corporation dated January 26, 2018.
"Balance Sheet" has the meaning set forth in Section 3.06.
"Balance Sheet Date" has the meaning set forth in Section 3.06.
"Basket" has the meaning set forth in Section 8.04(a).
"Benefit Plan" has the meaning set forth in Section 3.20(a).
“Bonused Employees” means those employees of the Target Companies receiving a bonus payment from Seller relating to the transactions contemplated by this Agreement, as listed on Exhibit J.
"Business Day" means any day except Saturday, Sunday or any other day on which commercial banks located in New York, New York are authorized or required by Law to be closed for business.
"Buyer" has the meaning set forth in the preamble.
"Buyer Indemnitees" has the meaning set forth in Section 8.02.
“Buyer Parent” means Turning Point Brands, Inc., a Delaware corporation which is the sole member of Buyer.
"Buyer Parent Common Stock" has the meaning set forth in Section 2.02(a).
"Buyer Parent Note" has the meaning set forth in Section 2.02(b).
"Buyer Tax Act" means any action not in the ordinary course of business and not specifically contemplated by and agreed to under this Agreement which is taken or made effective by Buyer or any of its Affiliates (including the Target Companies) after the Closing which directly or indirectly increases Taxes of any Target Company, Seller or Shareholders for any Pre-Closing Tax Period.
"Buyer's Accountants" means RSM US LLP.
"Cap" has the meaning set forth in Section 8.04(a).
"CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq.
"Closing" has the meaning set forth in Section 2.05.
"Closing Adjustments" means the adjustments to the Purchase Price described in Section 2.04(a).
"Closing Date" has the meaning set forth in Section 2.05.
"Closing Indebtedness Certificate" means a certificate executed by the Chief Financial Officer of the Company certifying on behalf of the Company an itemized list of all outstanding Indebtedness as of the Closing Date and the Person to whom such outstanding Indebtedness is owed and an aggregate total of such outstanding Indebtedness.
"Closing Payment" has the meaning set forth in Section 2.02(c).
"Closed Retail Locations" has the meaning set forth in Section 5.16.
"Closing Transaction Expenses Certificate" means a certificate executed by the Chief Financial Officer of the Company, certifying the amount of Transaction Expenses remaining unpaid as of the Closing Date (including an itemized list of each such unpaid Transaction Expense with a description of the nature of such expense and the person to whom such expense is owed).
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" has the meaning set forth in Section 3.03(a).
"Company" has the meaning set forth in the Recitals.
"Company Intellectual Property" means all Intellectual Property that is owned or held for use by the Target Companies.
"Company IP Agreements" mean all licenses, sublicenses, consent to use agreements, settlements, coexistence agreements, covenants not to sue, permissions and other Contracts (including any right to receive or obligation to pay royalties or any other consideration), whether written or oral, relating to Intellectual Property to which a Target Company is a party, beneficiary or otherwise bound.
"Company IP Registrations" mean all Company Intellectual Property that is subject to any issuance registration, application or other filing by, to or with any Governmental Authority or authorized private registrar in any jurisdiction, including registered trademarks, domain names and copyrights, issued and reissued patents and pending applications for any of the foregoing.
"Company Subsidiaries" has the meaning set forth in Section 3.04.
"Compiled Financial Statements" has the meaning set forth in Section 3.06.
"Confidential Information" has the meaning set forth in Section 5.07(d).
"Consent Judgment" means the Prop 65 Center for Environmental Health Consent Judgement.
"Contract Consents" has the meaning set forth in Section 3.09(c).
"Contracts" mean all contracts, leases, deeds, mortgages, Franchise Agreements, licenses, instruments, notes, commitments, undertakings, indentures, joint ventures and all other agreements, commitments and legally binding arrangements, whether written or oral.
"Covered Communications" has the meaning set forth in Section 11.14.
"Current Assets" means cash and cash equivalents, accounts receivable, refundable deposits, inventory, and all other current assets, but excluding (a) deferred Tax assets, and (b) receivables from any Affiliates of a Target Company, directors, employees, officers or stockholders and any of their respective Affiliates; in each case determined in accordance with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule).
"Current Liabilities" means accounts payable, accrued Taxes and accrued expenses determined in accordance with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule), but excluding any deferred Tax liabilities, Transaction Expenses and the current portion of any Indebtedness (including Assumed Indebtedness) of the Company, and excluding any outstanding balances on Target Company credit cards (in an aggregate amount not exceeding $32,339, which was the balance of such credit cards which was outstanding at May 31, 2018 but was not included on the May 31, 2018 balance sheet). Current Liabilities shall include the employer portion of any withholding obligation under Section 2.06 and/or with respect to a direct or indirect distribution of any portion of the Purchase Price to the Bonused Employees.
"Data Room" means the electronic data room established by the Shareholders in connection with this transaction.
"Developers" mean all Persons that have signed an area development agreement with a Target Company granting a Developer the right to develop two or more Franchised Outlets.
"Direct Claim" has the meaning set forth in Section 8.05(c).
"Disclosure Schedules" mean the Disclosure Schedules delivered by Shareholders and Buyer concurrently with the execution and delivery of this Agreement.
"Disputed Amounts" has the meaning set forth in Section 2.04(c)(iii).
"Dollars or $" means the lawful currency of the United States.
"Effective Time" has the meaning set forth in Section 2.05.
"Effective Time Balance Sheet" has the meaning set forth in Section 2.04(a)(i).
"Effective Time Working Capital" means: (a) the Current Assets of the Company, minus (b) the Current Liabilities of the Company, determined as of the Effective Time, but with pro forma adjustments to reflect the impact which the transactions contemplated by this Agreement have on the Company’s Working Capital as measured on the Closing Date (e.g., any amount payable to a taxing authority with respect to compensation paid out of the Purchase Price).
"Effective Time Working Capital Statement" has the meaning set forth in Section 2.04(b)(ii).
"E.O. 11246" has the meaning set forth in Section 3.21(e).
each of "Employment Agreement" and "Employment Agreements" has the meaning set forth in Section 2.03(b)(ii).
"Encumbrance" means any charge, claim, community property interest, pledge, condition, equitable interest, lien (statutory or other), option, security interest, mortgage, easement, encroachment, right of way, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership.
"Environmental Claim" means any Action, Governmental Order, lien, fine, penalty, or, as to each, any settlement or judgment arising therefrom, by or from any Person alleging liability of whatever kind or nature (including liability or responsibility for the costs of enforcement Actions, investigations, cleanup, governmental response, removal or remediation, natural resources damages, property damages, personal injuries, medical monitoring, penalties, contribution, indemnification and injunctive relief) arising out of, based on or resulting from: (a) the presence, Release of, or exposure to, any Hazardous Materials; or (b) any actual or alleged non-compliance with any Environmental Law or term or condition of any Environmental Permit.
"Environmental Law" means any applicable Law, and any Governmental Order or binding agreement with any Governmental Authority: (a) relating to pollution (or the cleanup thereof) or the protection of natural resources, endangered or threatened species, human health or safety, or the environment (including ambient air, soil, surface water or groundwater, or subsurface strata); or (b) concerning the presence of, exposure to, or the management, manufacture, use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, production, disposal or remediation of any Hazardous Materials. The term "Environmental Law" includes, without limitation, the following (including their implementing regulations and any state analogs): the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq.; the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et seq.; the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act of 1976, as amended, 15 U.S.C. §§ 2601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq.; the Clean Air Act, 42 U.S.C. §§ 7401 et seq.; and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. §§ 651 et seq.
"Environmental Notice" means any written directive, notice of violation or infraction, or notice respecting any Environmental Claim relating to actual or alleged non-compliance with any Environmental Law or any term or condition of any Environmental Permit.
"Environmental Permit" means any Permit, letter, clearance, consent, waiver, closure, exemption, decision or other action required under or issued, granted, given, authorized by or made pursuant to Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.
"ERISA Affiliate" means all employers (whether or not incorporated) that would be treated together with the Company or any of its Affiliates as a "single employer" within the meaning of Section 414 of the Code.
"Estimated Closing Indebtedness" has the meaning set forth in Section 2.04(a)(i).
"Estimated Closing Statement" has the meaning set forth in Section 2.04(a)(i).
"Estimated Effective Time Working Capital" has the meaning set forth in Section 2.04(a)(i).
"FDA" means the United States Food and Drug Administration.
"FDA Deeming Regulations" mean the final rule published by the FDA pursuant to The Family Smoking Prevention and Tobacco Control Act and entitled "Deeming Tobacco Products To Be Subject to the Federal Food, Drug, and Cosmetic Act, as amended by the Family Smoking Prevention and Tobacco Control Act; Restrictions on the Sale and Distribution of Tobacco Products and Required Warning Statements for Tobacco Products."
"FDD" has the meaning set forth in Section 3.26(c).
"Financial Statements" has the meaning set forth in Section 3.06.
"FPR(s)" has the meaning set forth in Section 3.26(d).
"Franchise" has the meaning set forth in Section 3.26(a).
"Franchise Agreement" has the meaning set forth in Section 3.26(a).
"Franchised Outlet" has the meaning set forth in Section 3.26(a).
"Franchisee" means an authorized franchisee of any Target Company that has the right to offer, sell or distribute goods or services under a franchise or license agreement with such Target Company for the operation of the franchisee's business using a name, mark or similar commercial symbol of a Target Company.
"Fundamental Representations" has the meaning set forth in Section 8.01.
"GAAP" means United States generally accepted accounting principles in effect from time to time, as applied consistent with the Company's historical accounting policies and practices.
"Government Contracts" has the meaning set forth in Section 3.09(a)(viii).
"Governmental Authority" means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.
"Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.
"Hazardous Materials" means: (a) any material, substance, chemical, waste, product, derivative, compound, mixture, solid, liquid, mineral or gas, in each case, whether naturally occurring or manmade, that is hazardous, acutely hazardous, toxic, or words of similar import or regulatory effect under Environmental Laws; and (b) any petroleum or petroleum-derived products, radon, radioactive materials or wastes, asbestos in any form, lead or lead-containing materials, urea formaldehyde foam insulation, and polychlorinated biphenyls.
"Highly-Sensitive Personal Information" means (i) a Person's government-issued identification number (including Social Security number, driver's license number, or state-issued identification number); (ii) financial account number, credit card number, debit card number, or credit report information, with or without any required security code, access code, personal identification number, or password that would permit access to an individual’s financial account; and (iii) biometric, genetic, health, medical, or medical insurance data.
"Indebtedness" means, without duplication and with respect to any Target Company, all of the following obligations: (a) obligations for borrowed money; (b) obligations for the deferred purchase price of property or services (including past acquisitions), (c) obligations for capitalized leases in accordance with GAAP (d) obligations evidenced by notes, bonds, debentures or other similar instruments, (e) obligations under any interest rate, currency swap or other hedging agreement or arrangement; (f) obligations of others secured by an Encumbrance on any asset of any Target Company; (g) obligations under any letter of credit, banker's acceptance or similar credit transactions or for which any Target Company assures a credit against loss; (h) obligations under conditional sale or other title retention Contracts; (i) obligations with respect to vendor advances or any other advances made to any Target Company; (j) obligations for unpaid Taxes due prior to the Closing Date; (k) except with respect to accrued payroll expenses included as a Current Liabilities in the calculation of Effective Time Working Capital, obligations to any Affiliates, managers, employees or equityholders of any of the Target Companies and any of their respective Affiliates, other than lease obligations in respect of the Real Property; (l) guarantees made by any Target Company on behalf of any third party in respect of obligations of the kind referred to in the foregoing clauses (a) through (k); and (m) any accrued interest, fees, expenses or penalties in respect of any of the foregoing, including prepayment penalties, termination fees, reimbursements, indemnities, letters of credit and bankers' acceptances and consent fees, "breakage" costs, "break fees" or similar payments or contractual charges. The term "Indebtedness" does not include Current Liabilities included in the calculation of Effective Time Working Capital.
"Indemnified Party" has the meaning set forth in Section 8.05.
"Indemnifying Party" has the meaning set forth in Section 8.05.
"Independent Accountant" has the meaning set forth in Section 2.04(c)(iii).
"Information Systems" has the meaning set forth in Section 3.18(e).
"Institutional Shareholders" means those Shareholders listed on Exhibit F.
"Insurance Policies" has the meaning set forth in Section 3.16.
"Intellectual Property" means all intellectual property and industrial property rights and assets, and all rights, interests and protections that are associated with, similar to, or required for the exercise of, any of the foregoing, however arising, pursuant to the Laws of any jurisdiction throughout the world, whether registered or unregistered, including any and all: (a) trademarks, service marks, trade names, brand names, logos, trade dress, design rights and other similar designations of source, sponsorship, association or origin, together with the goodwill connected with the use of and symbolized by any of the foregoing; and all registrations, applications and renewals for any of the foregoing; (b) internet domain names, whether or not trademarks, registered in any top-level domain by any authorized private registrar or Governmental Authority; web addresses; web pages; websites and related content; accounts with Twitter, Facebook and other social media companies and the content found thereon and related thereto; and URLs; (c) works of authorship, expressions, designs and design registrations, whether or not copyrightable, including copyrights, author, performer, moral and neighboring rights; and all registrations, applications for registration and renewals of such copyrights; (d) inventions; discoveries; trade secrets, as defined in Title 18 of the United States Code on the Closing Date of this Agreement, including 18 U.S.C. § 1839 and applicable state law; business and technical information and know-how; databases; data collections and other confidential and proprietary information and all rights therein; (e) patents (including all reissues, divisionals, provisionals, continuations and continuations-in-part, re-examinations, renewals, substitutions and extensions thereof); patent applications; and other patent rights and any other Governmental Authority-issued indicia of invention ownership (including inventor's certificates, petty patents and patent utility models); (f) software and firmware, including data files, source code, object code, application programming interfaces, architecture, files, records, schematics, computerized databases and other related specifications and documentation; and (g) recipes, formulas and flavors for e-liquids.
"Interim Balance Sheet" has the meaning set forth in Section 3.06.
"Interim Balance Sheet Date" has the meaning set forth in Section 3.06.
"Knowledge of Shareholders" or "Shareholders' Knowledge" or any other similar knowledge qualification, means the actual and constructive knowledge of Nicolas Molina or David Epstein after reasonable investigation. For purposes of this definition, "constructive knowledge" means what a person should have known in the ordinary course of performing his services for the Target Company.
"Law" means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, other requirement or rule of law of any Governmental Authority.
"Liabilities" means any liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise.
"Losses" means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties, fines, costs or expenses of whatever kind, including reasonable attorneys' fees and the cost of enforcing any right to indemnification hereunder and the cost of pursuing any insurance providers; provided, however, that "Losses" shall not include punitive damages, except in the case of fraud or to the extent actually awarded to a Governmental Authority or other third party.
“Major Shareholders” means those Shareholders who are not Institutional Shareholders (i.e., Pegasus, Epstein and Herrera).
"Material Adverse Effect" means any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, results of operations, condition (financial or otherwise) or assets of the Company and the other Target Companies as a whole, or (b) the ability of Shareholders to consummate the transactions contemplated hereby on a timely basis; provided, however, that "Material Adverse Effect" shall not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to: (i) general economic or political conditions; (ii) conditions generally affecting the industries in which the Target Companies operate; (iii) any changes in financial or securities markets in general; (iv) acts of war (whether or not declared), armed hostilities or terrorism, or the escalation or worsening thereof; (v) any action required by this Agreement, except pursuant to Section 3.05 and Section 5.08; (vi) any changes in accounting rules, including GAAP; or (vii) the public announcement, pendency or completion of the transactions contemplated by this Agreement; provided further, however, that any event, occurrence, fact, condition or change referred to in clauses (i) through (iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition or change has a materially disproportionate effect on the Target Companies compared to other participants in the industries in which the Target Companies conduct their businesses.
"Material Contracts" has the meaning set forth in Section 3.09(a).
"Material Customers" has the meaning set forth in Section 3.15(a).
"Material Suppliers" has the meaning set forth in Section 3.15(b).
"Multiemployer Plan" has the meaning set forth in Section 3.20(c).
"NASAA" has the meaning set forth in Section 3.26(c).
“Obsolete” inventory means (i) any inventory item that has been put on clearance at a price above its cost and at least 10% of the original clearance quantity has not been sold in the most recent month, (ii) any inventory item currently on clearance where the item’s cost exceeds the item’s clearance price and at least 10% of the original clearance quantity has been sold in the most recent month and (iii) any inventory item currently on clearance where the item’s cost exceeds the item’s clearance price and at least 10% of the original clearance quantity has not been sold in the most recent month. For all purposes of this Agreement, the dollar amount of Obsolete inventory under clauses (i) and (iii) above is the balance of inventory on hand multiplied by the item’s cost; and under clause (ii) above is the balance of the inventory on hand multiplied by the excess of the item’s cost over the most recent clearance price of the last sold item.
"Organizational Documents" means (a) the articles or certificate of incorporation and the bylaws of a corporation; (b) the certificate of formation and operating agreement of a limited liability company; (c) the partnership agreement and any statement of the partnership of a general partnership; (d) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (e) any charter or similar document adopted or filed in connection with the creation, formation or organization of a Person; and (f) any amendment to any of the foregoing.
"PEO Employees" means any individual engaged by a Target Company pursuant to a contractual relationship with a professional employer organization, staffing company, or similar third-party entity.
"Permits" means all permits, licenses, franchises, approvals, authorizations, registrations, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Authorities.
"Permitted Encumbrances" has the meaning set forth in Section 3.10(a).
"Person" means an individual, corporation, partnership, joint venture, limited liability company, Governmental Authority, unincorporated organization, trust, association or other entity.
"Personal Information" means information provided to a Target Company by or at the direction of a customer, information which is created or obtained by a Target Company on behalf of a customer, or information to which access was provided to a Target Company by or at the direction of a customer, in the course of a Target Company's business that: (i) identifies or can be used to identify an individual (including, without limitation, names, signatures, addresses, telephone numbers, email addresses, and other unique identifiers); or (ii) can be used to authenticate an individual (including, without limitation, employee identification numbers, government-issued identification numbers, passwords or PINs, user identification and account access credentials or passwords, financial account numbers, credit report information, student information, biometric, health, genetic, medical, or medical insurance data, answers to security questions, and other personal identifiers), in case of both subclauses (i) and (ii), including, without limitation, all Highly-Sensitive Personal Information. A customer's business contact information is not by itself deemed to be Personal Information.
"Post-Closing Adjustments" means the adjustments to the Purchase Price described in Sections 2.04(b) and 2.04(c).
"Post-Closing Tax Period" means any taxable period of a Target Company beginning after the Closing Date.
"Pre-Closing Tax Period" means any taxable period of a Target Company ending on or before the Closing Date.
"Pro Rata Share" means, with respect to each Shareholder, the percentage set forth opposite such Shareholder's name on Exhibit A.
"Product Warranty Claims" means any notice, Action or claim for or based upon breach of product warranty, strict liability in tort, negligent design, negligent manufacture of product, design defects, negligent provision of services, or any other allegation of material liability, including or resulting in product recalls, arising from the materials, design, testing, manufacture, packaging, labeling (including instructions for use), documentation or sale of products by a Target Company (other than warranty service and repair claims in the ordinary course of business not material in amount or significance).
"Product Warranty Issues" means reports, claims, notices, and problems regarding any defects, non-conformities, alleged defects, alleged incidents, alleged non-conformities, and similar product liability issues that relate to any of the services or Products manufactured and/or sold by the Target Companies or products of the Target Companies sold by any franchisee or retailer.
"Products" has the meaning set forth in the Recitals.
"Purchase Price" has the meaning set forth in Section 2.02.
"Qualified Benefit Plan" has the meaning set forth in Section 3.20(c).
"Real Property" means all real property owned, leased or subleased by the Target Companies, together with all buildings, structures and facilities located thereon.
"Rebates" mean "rebates" as defined for purposes of the FDD and applicable Law with respect to Franchises in the United States.
"Registration Laws" has the meaning set forth in Section 3.26(c)
"Release" means any actual or threatened release, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, abandonment, disposing or allowing to escape or migrate into or through the environment (including, without limitation, ambient air (indoor or outdoor), surface water, groundwater, land surface or subsurface strata or within any building, structure, facility or fixture).
"Representative" means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.
"Resolution Period" has the meaning set forth in Section 2.04(c)(ii).
"Restricted Business" means the design, manufacture, marketing, advertising, sale, distribution, retailing (including without limitation online retailing and business to consumer online) and promotion of electronic nicotine delivery systems (ENDS), including without limitation, vaporizers, tanks and mods, e-liquids, electronic cigarettes, and related accessories (but specifically excluding any of the above items for use with cannabis or hemp products).
“Restricted Shareholders” has the meaning set forth in Section 5.07(a).
"Restriction Period" has the meaning set forth in Section 5.07(a).
"Restructuring" means the formation of Seller as a newly-formed Delaware corporation, the contribution by the Shareholders of all of the equity of the Company to Seller, the conversion of the Company from a Delaware corporation to a Delaware limited liability company, which prior to the Closing the Seller will file an election to have the Company be treated as a disregarded entity for federal income tax purposes, and the conversion of each of the U.S. domestic Target Companies that was a corporation into a limited liability company.
"Review Period" has the meaning set forth in Section 2.04(c)(i).
"Rule 144" has the meaning set forth in Section 2.07(a).
"SEC" has the meaning set forth in Section 3.01(c).
"Section 503" has the meaning set forth in Section 3.21(e).
"Securities Exchange Agreement" means the Securities Exchange Agreement by and among Standard General Master Fund, L.P. (“Standard General”), Standard Diversified, Inc. (“Standard Diversified”), the Shareholders and Seller's Representative in the form attached hereto as Exhibit K.
"Security Breach" means (i) any act or omission that compromises either the security, confidentiality, or integrity of Personal Information or the physical, technical, administrative, or organizational safeguards that relate to the protection of the security, confidentiality, or integrity of Personal Information, or (ii) receipt of a complaint in relation to the privacy and data security practices of the Target Companies. Without limiting the foregoing, a compromise shall include any unauthorized access to or disclosure or acquisition of Personal Information.
"Seller" has the meaning set forth in the Recitals.
"Seller’s Accountants" means Kaufman, Rosin & Co., P.A.
"Seller’s Counsel" has the meaning set forth in Section 11.14.
"Shareholders' Guaranties" has the meaning set forth in Section 5.12.
"Seller Indemnitees" has the meaning set forth in Section 8.03.
"Seller's Representative" means Nicolas Molina.
"Seller's Representative's Fund" means $500,000.
"Shares" represents the 100% equity interest in the Company held by Seller immediately prior to the consummation of the transactions contemplated by this Agreement, and which may after the Restructuring be referred to in the Company's organizational documents as "shares", "membership interests" or "units", but in all cases represents the successor equity interests to shares of common stock of the Company prior to its conversion into a Delaware limited liability company.
"Shareholder" and "Shareholders" has the meaning set forth in the preamble.
"Statement of Objections" has the meaning set forth in Section 2.04(c)(ii).
"Subsidiaries" mean, with respect to any Person, any corporation, limited liability company, association, partnership, joint venture, or other business or corporate entity, enterprise or organization which is directly or indirectly (through one or more intermediaries) controlled by or owned fifty percent (50%) or more by such Person.
"Supplemental Disclosure Schedules" mean the updated Disclosure Schedule containing disclosures that have occurred after the date of this Agreement and that are delivered by Buyer and Shareholders no later than two Business Days prior to the Closing Date.
"Target Companies" mean the Company and all Company Subsidiaries and "Target Company" means one of the Target Companies.
"Target Working Capital" means $5,975,075.
"Tax" or "Taxes" means all federal, state, local, foreign and other income, gross receipts, sales, use, production, ad valorem, transfer, franchise, registration, profits, license, lease, service, service use, withholding, payroll, employment, unemployment, estimated, excise, severance, environmental, stamp, occupation, premium, property (real or personal), real property gains, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties.
"Tax Authority" means any Governmental Authority having jurisdiction over the imposition, assessment or collection of any Tax.
"Tax Claim" has the meaning set forth in Section 6.06(c).
"Tax Make-Whole Payment" shall mean $84,000, which, based upon the calculation performed by Seller’s Accountants, the parties agree is the amount of incremental Taxes of Seller and/or Shareholders payable as a result of the transactions contemplated hereby resulting solely and directly from the structuring of the transactions contemplated by this Agreement for Tax purposes as an asset acquisition, including the amount of incremental Taxes triggered by and resulting from the payment of the Tax Make-Whole Payment itself.
"Tax Return" means any return, declaration, report, claim for refund, information return or statement or other document relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof, in each case, which has been filed or submitted or that is required to be filed with or submitted to any Tax Authority.
"Territory" means worldwide.
"Third Party Claim" has the meaning set forth in Section 8.05(a).
"Transaction Documents" mean this Agreement, the Disclosure Schedules, the Employment Agreements, the Buyer Parent Note, the Securities Exchange Agreement and the other agreements, instruments and documents required to be delivered at Closing.
"Transaction Expenses" means all directly related fees and expenses incurred by the Target Companies, Seller, Seller's Representative or the Shareholders at or prior to the Closing in connection with Transaction Documents, and the performance and consummation of the transactions contemplated by this Agreement, including without limitation, (i) success fees, transaction fees, severance fees or compensation, commissions, legal and accounting expenses, broker fees and other amounts payable by any of the Target Companies to third parties in connection with the transactions contemplated by this Agreement (including, without limitation, any sale bonuses payable by the Target Companies to their employees), and (ii) legal, accounting and other expenses of the Target Companies, Seller, Seller's Representative or the Shareholders arising out of the transactions contemplated by this Agreement that are charged to or payable by any of the Target Companies.
"Undisputed Amounts" has the meaning set forth in Section 2.04(c)(iii).
"Union" has the meaning set forth in Section 3.21(b).
"VEVRAA" has the meaning set forth in Section 3.21(e).
"WARN Act" means the federal Worker Adjustment and Retraining Notification Act of 1988, and similar state, local and foreign laws related to plant closings, relocations, mass layoffs and employment losses.
ARTICLE II
PURCHASE AND SALE
Section 2.01 Purchase and Sale. Subject to the terms and conditions set forth herein, at the Closing, Seller shall sell, convey, assign and transfer to Buyer, and Buyer will purchase from Seller, all of the right, title, and interest of Seller in and to the Shares, free and clear of all Encumbrances, for the consideration specified in Section 2.02.
Section 2.02 Purchase Price. The aggregate purchase price for the Shares shall be Twenty-Four Million Dollars ($24,000,000), subject to the working capital adjustment pursuant to Section 2.04 (the "Purchase Price"). In addition, Buyer will pay the Tax Make-Whole Payment. The Purchase Price and the Tax Make-Whole Payment will be paid as follows:
(a) $5,000,000 in the form of 153,079 shares of Buyer Parent common stock ("Buyer Parent Common Stock") to a Seller account designated by Seller's Representative to Buyer; immediately thereafter to be exchanged at the direction of the Seller's Representative for Standard Diversified common shares pursuant to the Securities Exchange Agreement. Buyer shall cause Buyer Parent to issue the Buyer Parent Common Stock pursuant to this Section 2.02(a);
(b) $4,000,000 (subject to post-Closing adjustment pursuant to Section 2.04(a)(iii)) in the form of an unsecured promissory note of Buyer Parent, as maker, in the form attached hereto as Exhibit G (the "Buyer Parent Note"), with principal and all accrued interest payable to Seller through an account designated by Seller's Representative on behalf of Seller. The Buyer Parent Note will accrue interest at the rate of 6% per annum, with all principal and accrued interest payable on the date 18 months after the Closing Date, subject to the terms of such Buyer Parent Note (for the avoidance of doubt, the Seller shall maintain ownership of, and shall not transfer or distribute to Seller’s Representative and/or the Shareholders, the Buyer Parent Note, until such date as the Buyer Parent Note shall have been paid in full; except that if the Seller shall liquidate prior to such date, the Buyer Parent Note shall be distributed to the Seller’s Representative);
(c) the $84,000 Tax Make-Whole Payment shall be paid in cash, by wire transfer of immediately available funds to an account of Seller designated by Seller's Representative to Buyer. The Shareholders, the Seller's Representative, and Seller hereby agree that they have independently confirmed that $84,000 is an acceptable and agreed-upon amount to be paid by Buyer as a Tax Make-Whole Payment, and upon the making of such Tax Make-Whole Payment by Buyer, each of the Shareholders, the Seller's Representative and Seller hereby release Buyer from and against any further liability, claim, obligation or expense arising out of or associated with any obligations of Buyer under this Agreement with respect to the determination of the amount or calculation of the Tax Make-Whole Payment; and
(d) the $15,000,000 balance of the Purchase Price, after adjustment for the amounts set forth in clauses (a) and (b) above (the "Closing Payment"), shall be paid in cash, by wire transfer of immediately available funds to an account of Seller designated by Seller's Representative to Buyer. The Closing Payment shall be reduced by (i) the Seller's Representative's Fund amount which is to be retained by the Seller's Representative and administered pursuant to the terms of Section 10.01, and (ii) an amount equal to the aggregate Transaction Expenses and Indebtedness paid pursuant to Section 2.03(c), and shall be further subject to the following adjustments:
(A) pursuant to Section 2.04(a) (the Closing Adjustments); and
(B) Section 2.04(c)(vi) (the Post-Closing Adjustments).
Section 2.03 Transactions to be Effectuated at the Closing.
(a) At the Closing, Buyer shall deliver:
(i) to the account(s) designated by the Seller's Representative, the Buyer Parent Common Stock and the Closing Payment;
(ii) the Employment Agreements (as described below) executed by Buyer;
(iii) the Buyer Parent Note;
(iv) the Securities Exchange Agreement executed by Standard General and Standard Diversified, and
(v) the other Transaction Documents and all other agreements, documents, instruments or certificates required to be delivered by Buyer at or prior to the Closing pursuant to Section 7.03 of this Agreement.
(b) At the Closing, the Seller's Representative shall deliver to Buyer:
(i) stock certificates evidencing the Shares, free and clear of all Encumbrances, duly endorsed in blank or accompanied by stock powers or other instruments of transfer duly executed in blank, with all required stock transfer tax stamps affixed thereto (or other evidence of ownership satisfactory to Buyer);
(ii) Employment Agreements, substantially in the form of Exhibit C, executed by each of Nicolas Molina, David Shield, Lisa Pena, Matt Nahaanee, Cortni Lewis, Anthony Yockey, David Epstein, Alyssa Alvarez and Marc Waxman (each, an "Employment Agreement" and collectively, the "Employment Agreements"));
(iii) the Securities Exchange Agreement, executed by Seller, the Shareholders and Seller's Representative;
(iv) the other Transaction Documents and all other agreements, documents, instruments or certificates required to be delivered by Seller at or prior to the Closing pursuant to Section 7.02 of this Agreement; and
(v) documentation evidencing the Restructuring, in form and content satisfactory to Buyer.
(c) At the Closing, Buyer shall pay, on behalf of the Target Companies or Seller, the following amounts:
(i) any Indebtedness of the Company (other than the Assumed Indebtedness) not paid or satisfied prior to Closing, by wire transfer of immediately available funds to the accounts and in the amounts specified on the Closing Indebtedness Certificate; and
(ii) any Transaction Expenses unpaid at Closing, by wire transfer of immediately available funds to the accounts and in the amounts specified on the Closing Transaction Expenses Certificate.
(d) At the Closing, certificates representing the shares of Buyer Parent Common Stock to be issued pursuant to Section 2.02(a) will be deemed to have been delivered to Seller electronically through Buyer's transfer agent.
Section 2.04 Purchase Price Adjustment.
(a) Closing Adjustments.
(i) Not less than one Business Day prior to the Closing, Seller's Representative shall prepare and deliver to Buyer a statement (the "Estimated Closing Statement") setting forth his good faith estimate of (A) Closing Indebtedness other than Assumed Indebtedness (the "Estimated Closing Indebtedness") and (B) Effective Time Working Capital (the "Estimated Effective Time Working Capital"), which statement will be calculated in the manner consistent with the Target Companies' Financial Statements and prior periods, and which will contain an estimated consolidated balance sheet of the Target Companies as of the Effective Time (without giving effect to the transactions contemplated herein other than the payment of Indebtedness contemplated by Section 2.03(c)), calculations of Estimated Closing Indebtedness and Estimated Effective Time Working Capital, and a certificate of an officer of the Company that the Estimated Closing Statement was prepared (x) in accordance with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule) applied using the same accounting methods, practices, principles, policies and procedures, with consistent classifications, judgments and valuation and estimation methodologies that were used in the preparation of the Interim Balance Sheet for the most recent fiscal year end and (y) as if such Estimated Closing Statement was being prepared as of a fiscal year end.
(ii) If the Estimated Effective Time Working Capital is between 90% and 110% of Target Working Capital, then there will be no increase or decrease in the Closing Payment with respect to Target Working Capital and the Closing Adjustment, and the Closing Payment will be decreased by the amount, if any, of Estimated Closing Indebtedness. If Estimated Effective Time Working Capital is greater than 110% of Target Working Capital, then the Closing Payment will be adjusted as follows: the Closing Payment will be increased by the amount of the Estimated Effective Time Working Capital in excess of 110% of Target Working Capital and decreased by the Estimated Closing Indebtedness. If Estimated Effective Time Working Capital is less than 90% of Target Working Capital, then the Purchase Price will be adjusted as follows: the Purchase Price will be decreased by the amount by which Estimated Effective Time Working Capital falls below 90% of Target Working Capital and further decreased by the Estimated Closing Indebtedness.
(iii) If the calculations set forth in this paragraph result in a reduction in the Purchase Price, then the principal balance of the Buyer Parent Note shall be reduced by the amount of the Closing Payment reduction.
(iv) If the calculations set forth in this paragraph result in an increase in the amount of the Purchase Price, then the Company may either distribute cash equal to the increase immediately prior to Closing to Seller or if such amount is not distributed prior to Closing, then the Closing Payment will be increased by such amount.
(b) Post-Closing Adjustments.
(i) Not more than 60 days after the Closing, Seller's Representative shall prepare and deliver to Buyer an unaudited, internally prepared balance sheet of the Company as of the Effective Time (without giving effect to the transactions contemplated herein) (the "Effective Time Balance Sheet"). Buyer agrees to make available to Seller's Representative, upon reasonable request of Seller's Representative post-closing, any books, records, and systems of the Company as reasonably necessary for Seller's Representative to prepare such Effective Time Balance Sheet.
(ii) Within 30 days of Buyer's receipt of the Effective Time Balance Sheet from Seller's Representative, Buyer shall prepare and deliver to Seller's Representative a statement setting forth its own calculation of Effective Time Working Capital and Closing Indebtedness, which statement shall be calculated in the manner set forth on Exhibit B attached hereto and shall contain an unaudited, internally prepared balance sheet of the Company as of the Effective Time (without giving effect to the transactions contemplated herein), a calculation of Effective Time Working Capital (the "Effective Time Working Capital Statement") and a certificate of the Chief Financial Officer of Buyer that the Effective Time Working Capital Statement was prepared in accordance with Exhibit B and otherwise with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule) and this Agreement, a calculation of the Post-Closing Adjustment, and a calculation of Closing Indebtedness.
(c) Examination and Review.
(i) Examination. After receipt of the Effective Time Working Capital Statement, Seller's Representative shall have 30 days (the "Review Period") to review the Effective Time Working Capital Statement and the Buyer’s calculation of the Post-Closing Adjustment. During the Review Period, Seller's Representative and Seller’s Accountants shall have full access to the books and records of the Target Companies, the personnel of, and work papers prepared by, Buyer and/or Buyer's Accountants to the extent that they relate to the Effective Time Working Capital Statement and/or the Post-Closing Adjustment and to such historical financial information (to the extent in Buyer's possession) relating to the Effective Time Working Capital Statement and/or the Post-Closing Adjustment as Seller's Representative may reasonably request for the purpose of reviewing the Effective Time Working Capital Statement and/or the Post-Closing Adjustment and to prepare a Statement of Objections (defined below), provided, that such access shall be in a manner that does not interfere with the normal business operations of Buyer or the Target Companies.
(ii) Objection. On or prior to the last day of the Review Period, Seller's Representative may object to the Effective Time Working Capital Statement and/or the Post-Closing Adjustment by delivering to Buyer a written statement setting forth Seller's Representative's objections in reasonable detail, indicating each disputed item or amount and the basis for Seller's Representative's disagreement therewith (the "Statement of Objections"). If Seller's Representative fails to deliver the Statement of Objections before the expiration of the Review Period, the Effective Time Working Capital Statement and the Post-Closing Adjustment, as the case may be, reflected in the Effective Time Working Capital Statement shall be deemed to have been accepted by Seller and the Shareholders. If Seller's Representative delivers the Statement of Objections before the expiration of the Review Period, Buyer and Seller's Representative shall negotiate in good faith to resolve such objections within 30 days after the delivery of the Statement of Objections (the "Resolution Period"), and, if the same are so resolved within the Resolution Period, the Effective Time Working Capital Statement and/or the Post-Closing Adjustment with such changes as may have been previously agreed in writing by Buyer and Seller's Representative, shall be final and binding.
(iii) Resolution of Disputes. If Seller's Representative and Buyer fail to reach an agreement with respect to all of the matters set forth in the Statement of Objections and/or the Post-Closing Adjustment before expiration of the Resolution Period, then any amounts remaining in dispute ("Disputed Amounts" and any amounts not so disputed, the "Undisputed Amounts") shall be submitted for resolution to an impartial nationally recognized firm of independent certified public accountants, other than Seller’s Accountants or Buyer's Accountants, whom Buyer and Seller's Representative shall appoint by mutual agreement (the "Independent Accountant"), and the Independent Accountant, acting as an expert and not an arbitrator, shall resolve the Disputed Amounts only and make any adjustments to the Post-Closing Adjustment, as the case may be, and the Effective Time Working Capital Statement. The parties hereto agree that all adjustments shall be made without regard to materiality. The Independent Accountant shall only decide the specific items under dispute by the parties and their decision for each Disputed Amount must be within the range of values assigned to each such item in the Effective Time Working Capital Statement and/or the Post-Closing Adjustment and the Statement of Objections, respectively.
(iv) Fees of the Independent Accountant. The fees and expenses of the Independent Accountant shall be paid by Seller and/or the Shareholders, on the one hand, and by Buyer, on the other hand, based upon the percentage that the amount actually contested but not awarded to Seller or Buyer, respectively, bears to the aggregate amount actually contested by Seller and Buyer.
(v) Determination by Independent Accountant. The Independent Accountant shall make a determination as soon as practicable within 30 days (or such other time as the parties hereto shall agree in writing) after their engagement, and their resolution of the Disputed Amounts and their adjustments to the Effective Time Working Capital Statement and/or the Post-Closing Adjustment shall be conclusive and binding upon the parties hereto.
(vi) Payments of Post-Closing Adjustment. The final amount of the Post-Closing Adjustment shall take account of the effect on the Purchase Price of any previously-implemented Closing Adjustment. Except as otherwise provided herein, any payment of the Post-Closing Adjustment, together with interest calculated as set forth below, shall (A) be a reduction or an addition of Purchase Price; (B) be due (x) within 45 Business Days of acceptance of the applicable Effective Time Working Capital Statement or (y) if there are Disputed Amounts, then all undisputed amounts within 45 Business Days of Seller's Representative's delivery of the Statement of Objections and all Disputed Amounts within five Business Days of the resolution described in clause (v) above; and (C) with respect to cash payments of the Post-Closing Adjustment, be paid by wire transfer of immediately available funds to such account as is directed by Buyer or Seller's Representative. The amount of any Post-Closing Adjustment shall bear interest from and including the Closing Date to and including the date of payment at a rate per annum equal to 6%. Such interest shall be calculated daily on the basis of a 365-day year and the actual number of days elapsed.
(d) Adjustments for Tax Purposes. Any payments made pursuant to Section 2.04 shall be treated as an adjustment to the Purchase Price by the parties for Tax purposes, unless otherwise required by Law.
Section 2.05 Closing. Subject to the terms and conditions of this Agreement, the purchase and sale of the Shares contemplated hereby shall take place at a closing (the "Closing") to be held on the date hereof, at such time and place as Seller's Representative and Buyer may mutually agree upon in writing (the day on which the Closing takes place being the "Closing Date"). The parties agree that for financial accounting and business purposes, the Closing shall be effective as of 12:01 a.m. Eastern Time on the September 1, 2018 (the "Effective Time"). Alternatively, the parties may agree to conduct the Closing remotely through the exchange of executed Transaction Documents via electronic mail or facsimile.
Section 2.06 Withholding Tax. Buyer and the Company shall be entitled to deduct and withhold from the Purchase Price all Taxes that Buyer and the Target Companies are required to deduct and withhold under any provision of Tax Law. All such withheld amounts shall be treated as delivered to Seller hereunder. Notwithstanding the preceding, Seller shall be responsible for withholding any amounts to be paid out of the Purchase Price consideration as bonuses or W-2 compensation to employees of the Target Companies, including without limitation any amounts paid or distributed to the Bonused Employees and any withholding obligation arising out of any transfer of stock to a Bonused Employee at any time after Closing, including the employer portion of any W-2 wages payable to any taxing authority. Seller's Representative and Seller shall include in the computation of Estimated Working Capital as a Current Liability any amount payable to a taxing authority with respect to compensation paid out of the Purchase Price. For the avoidance of doubt, any Tax deductions or other Tax benefits arising out of the payment of such amounts to the employees and such taxing authorities shall be retained by Seller, rather than transferred to Buyer.
Section 2.07 Buyer Parent Common Stock.
(a) All Buyer Parent Common Stock issued pursuant to this Agreement shall be unregistered shares and shall be "restricted securities" under Rule 144 promulgated under the Securities Act ("Rule 144") and the Shareholders and Seller acknowledge that the sale of the Buyer Parent Common Stock shall be subject to Rule 144 transfer restrictions.
(b) Notwithstanding the foregoing, the Buyer Parent Common Stock shall, immediately following the Closing, be exchanged for shares of common stock of Standard Diversified pursuant to the Securities Exchange Agreement.
(c) The parties acknowledge that no shares of Buyer Parent Common Stock will be issued or distributed to non-accredited investors, and Shareholders, Seller and Seller's Representative agree that consideration payable pursuant to this Agreement shall be allocated and distributed so as to avoid the issuance or distribution of Buyer Parent Common Stock to non-accredited investors. Except in accordance with federal and state securities laws, Shareholders, Seller and Seller's Representative agree that similar transfer restrictions will apply to any shares for which the Buyer Parent Common Stock is exchanged in accordance with and as contemplated in the Securities Exchange Agreement.
(d) Certificates representing Buyer Parent Common Stock shall include a legend evidencing the restrictions on transfer set forth in this Section 2.07, or if shares of Buyer Parent Common Stock are issued in electronic format, such shares shall be issued by the Transfer Agent subject to the notation of such applicable transfer restrictions.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS
Except as set forth in the correspondingly numbered Section of the Disclosure Schedules, the Shareholders represent and warrant to Buyer that the statements contained in this Article III are true and correct as of the date hereof (provided, however, that each Institutional Shareholder is making only those representations and warranties which are set forth in Sections 3.01, 3.05, 3.22(o), and 3.24 and, in each case, such representations and warranties are being made only with respect to itself or himself, and not with respect to the Company, any Target Company or any other Seller).
Section 3.01 Representations regarding Seller, the Shareholders and Seller’s Shares.
(a) Each Shareholder has full power, capacity and authority to enter into this Agreement and the other Transaction Documents to which such Shareholder is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by each Shareholder, and (assuming due authorization, execution and delivery by Buyer) this Agreement constitutes a legal, valid and binding obligation of such Shareholder enforceable against such Shareholder in accordance with its terms. When each other Transaction Document to which such Shareholder is or will be a party has been duly executed and delivered by such Shareholder (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of such Shareholder enforceable against it in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.01(a)), will not result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any material obligation or loss of any material benefit under any provision of the charter documents or material contract of any Shareholder.
(b) The Buyer Parent Common Stock to be received by the Seller’s Representative on behalf of each Shareholder will be immediately exchanged for shares of Standard Diversified Common Stock held by Standard General pursuant to the Securities Exchange Agreement.
(c) Buyer has delivered to Seller's Representative for distribution to Seller and the Shareholders a reasonable time before the date of this Agreement true and complete copies of Buyer's (i) Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the "SEC"); (ii) all periodic reports on Form 8-K filed with the SEC since December 31, 2017 to the date hereof; and (iii) all Forms 10-Q filed with the SEC since December 31, 2017 to the date hereof. Each Shareholder, or a representative thereof, has received a draft of this Agreement and has confirmed that all documents, books and records pertaining to such Shareholder's investment in Buyer Parent Common Stock and requested by Seller's Representative or such Seller have been made available.
(d) Each Shareholder is an experienced investor in securities and acknowledges that it bears the complete economic risk of its investment and has such knowledge and experience in financial or business matters that such Shareholder is capable of evaluating the merits and risks of the investment in Buyer Parent Common Stock. Except for Bergnes, each Shareholder is an "accredited investor" within the meaning of Rule 501(a) promulgated under the Securities Act.
(e) Each Shareholder and Seller acknowledges that he or it has been advised to seek his or its own tax and legal advice in connection with this Agreement, including with respect to the treatment of the transactions contemplated by this Agreement for Federal, foreign, state and local income tax purposes and the treatment of Seller and Shareholders for tax purposes in connection therewith. Each Shareholder and Seller acknowledges that none of the parties to this Agreement has (i) made any representations and warranties to him or it or to any of the other parties hereto regarding the treatment of the transactions contemplated by this Agreement for Federal, foreign, state or local tax purposes, or (ii) provided any tax opinion or advice regarding the treatment of the transactions contemplated by this Agreement for Federal, foreign, state or local tax purposes or the treatment of the Shareholders or Seller for tax purposes in connection therewith.
(f) The execution and delivery of this Agreement by any of Seller or the Shareholders that is a business entity, and the performance by such Shareholder or Seller of its obligations under this Agreement have been duly authorized by all necessary action on the part of such party (including by any managing body of such party). No Shareholder or Seller is required to give any notice to, make any filing or registration with, or obtain any authorization, waiver, license, consent, or approval of any Governmental Authority or third party in connection with the execution and delivery of this Agreement by Seller and the Shareholders and the performance by Seller and Shareholders of their respective obligations hereunder or the consummation of the transactions contemplated by this Agreement (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.01(f)).
(g) Immediately prior to the Restructuring, each Shareholder was the true and lawful owner of, and had good and valid title to, the shares of Company common stock representing by such Shareholder's certificates and as set forth on Exhibit A, free and clear of all Encumbrances (other than limitations on transfers imposed by applicable securities laws). In the Restructuring, each Shareholder transferred good and valid title to the shares of Company common stock represented by such Shareholder's certificates and listed on Exhibit A to Seller, free and clear of all Encumbrances (other than limitations on transfers imposed by applicable securities laws). Immediately prior to the Closing, Seller is the true and lawful owner of, and had good and valid title to, the Shares representing by all of the Shareholders' certificates, free and clear of all Encumbrances (other than limitations on transfers imposed by applicable securities laws). Upon consummation of the transactions contemplated by this Agreement, Buyer shall hold good and valid title to all of the Shares, free and clear of all Encumbrances. No Shareholder is an individual resident of any state that is subject to community property laws.
(h) Each Shareholder and Seller acknowledges that the Buyer Parent Common Stock issued to Seller shall not be registered under the Securities Act at the time of issuance, and as such shall constitute "restricted securities" within the meaning of Rule 144 and, unless sold pursuant to an effective registration statement, the Buyer Parent Common Stock shall be available for sale in the public market only in compliance with Rule 144. Seller and the Shareholders understand that in connection with exchanging Shares for Buyer Parent Common Stock, such party agrees that it will not transfer or dispose of any Buyer Parent Common Stock unless and until, if requested by Buyer, such party shall have furnished to Buyer (at the expense of such party or its transferee) a customary opinion of counsel or other evidence, reasonably satisfactory to Buyer, to the effect that such transfer may be made without restrictions under the Securities Act (provided, however, that the foregoing shall not apply to the exchange of Buyer Parent Common Stock for Standard Diversified Common Stock pursuant to the Securities Exchange Agreement). Each Shareholder and Seller further understands that this Agreement places additional restrictions on the transfer of Buyer Parent Common Stock. Certificates representing the Buyer Parent Common Stock shall bear a legend substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN A STOCK PURCHASE AGREEMENT DATED SEPTEMBER 5, 2018, A COPY OF WHICH IS MAINTAINED IN THE OFFICE OF THE SECRETARY OF THE CORPORATION.
Section 3.02 Organization, Authority and Qualification of the Company. The Company is limited liability company, duly organized, validly existing and in good standing under the Laws of the state of Delaware and has full entity power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on its business as it has been and is currently conducted. Section 3.02 of the Disclosure Schedules sets forth each jurisdiction in which the Company is licensed or qualified to do business, and the Company is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business as currently conducted makes such licensing or qualification necessary. All entity actions taken by the Company in connection with this Agreement and the other Transaction Documents will be duly authorized on or prior to the Closing. Seller's Representative has made available to Buyer in the Data Room copies of all Organizational Documents of the Company as currently in effect and those of its predecessor corporation.
Section 3.03 Capitalization.
(a) Immediately prior to the effectiveness of the Restructuring, the authorized capital stock of the Company consisted of one million (1,000,000) shares of common stock, par value $0.001, of which 50,000 shares were issued and outstanding. All of such shares had been duly authorized, were validly issued, fully paid and non-assessable, and were owned of record and beneficially, free and clear of all Encumbrances, by the Shareholders set forth on Exhibit A. In the Restructuring, pursuant to the terms of a Plan of Reorganization and Capitalization Agreement, all of the Shareholders contributed their Company shares to the Seller in exchange for an equal number of shares of Seller common stock.
(b) Following the effectiveness of the Restructuring, the Company has 50,000 issued and outstanding limited liability company membership interests (the “Shares” hereunder), all of which are being sold pursuant to this Agreement. All of such Shares have been duly authorized, are validly issued, fully paid and non-assessable, and are owned of record and beneficially, free and clear of all Encumbrances. Upon consummation of the transactions contemplated by this Agreement, Buyer shall own all of such Shares, free and clear of all Encumbrances.
(c) All of the Shares were issued in compliance with applicable Laws. None of the Shares were issued in violation of any agreement, arrangement or commitment to which any Seller or the Company is a party or is subject to or in violation of any preemptive or similar rights of any Person.
(d) There are no outstanding or authorized options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the capital stock of the Company or obligating any Shareholder, Seller or the Company to issue or sell any shares of capital stock of, or any other interest in, the Company. Except as set forth on Section 3.03 of the Disclosure Schedule, the Company does not have outstanding or authorized any stock appreciation, phantom stock, profit participation or similar rights. Except as set forth on Section 3.03 of the Disclosure Schedule, there are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the Shares.
Section 3.04 Organization, Authority and Qualification of the Company Subsidiaries. Section 3.04 of the Disclosure Schedules sets forth a complete list of all of the Subsidiaries of the Company ("Company Subsidiaries"). Each such Company Subsidiary is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is duly qualified as a foreign entity in all jurisdictions in which it is required to be so qualified. Except as set forth on Section 3.04 of the Disclosure Schedules, the Company does not presently have any other Subsidiaries or, directly or indirectly, own, control or have any interest in any shares or other ownership interest in any other Person. The Company Subsidiaries are wholly-owned Subsidiaries of the Company, and as of Closing, each such [U.S. domestic] Company Subsidiary shall be a limited liability company. There are no outstanding or authorized options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the equity interests of such Company Subsidiaries or obligating Seller or any of the Target Companies to issue or sell any of the equity interests of, or any other interest in, any of the Company Subsidiaries. None of the Company Subsidiaries has any outstanding or authorized any stock appreciation, phantom stock, profit participation or similar rights. There are no voting trusts, members' agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the equity interests of the Company Subsidiaries.
Section 3.05 No Conflicts; Consents. The execution, delivery and performance by Seller and the Shareholders of this Agreement and the other Transaction Documents to which they are a party, and the consummation of the transactions contemplated hereby and thereby (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.05), do not and will not: (a) conflict with or result in a violation or breach of, or default under, any provision of the Organizational Documents of any of the Target Companies; (b) conflict with or result in a violation or breach of any provision of any Law or Governmental Order applicable to any Seller or any of the Target Companies; (c) except as a result of the Restructuring or as set forth in Section 3.05 of the Disclosure Schedules, require the consent, notice or other action by any Person under, conflict with, result in a violation or breach of, constitute a default or an event that, with or without notice or lapse of time or both, would constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate, modify or cancel any Contract to which any Seller or any of the Target Companies is a party or by which any Seller or any of the Target Companies are bound or to which any of their respective properties and assets are subject (including any Material Contract) or any Permit affecting the properties, assets or business of the Target Companies; or (d) result in the creation or imposition of any Encumbrance other than Permitted Encumbrances on any properties or assets of any of the Target Companies. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to any Seller or any of the Target Companies in connection with the execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.05).
Section 3.06 Financial Statements. Complete copies of the Company's unaudited, compiled consolidated financial statements consisting of the balance sheet of the Company as at December 31, 2017 and the related statements of income and retained earnings, stockholders' equity and cash flow for the year then ended (the "Compiled Financial Statements"), and the unaudited balance sheet of the Company as at May 31, 2018, as to which the Company's accountants have performed certain agreed-upon procedures (the "Interim Balance Sheet," and together with the Compiled Financial Statements, the "Financial Statements"), have been delivered to Buyer. The Financial Statements have been prepared in accordance with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule) applied on a consistent basis throughout the period and on the dates reflected in both the Compiled Financial Statements and the Interim Balance Sheet collectively, subject, in the case of the Interim Balance Sheet, to normal and recurring year-end adjustments (the effect of which will not be materially adverse) and the absence of notes (that, if presented, would not differ materially from those presented in the Compiled Financial Statements). The Financial Statements are based on the books and records of the Target Companies, and fairly present the consolidated financial condition of the Target Companies as of the respective dates they were prepared and the results of the operations of the Target Companies for the periods indicated. The balance sheet of the Company as of December 31, 2017, is referred to herein as the "Balance Sheet" and the date thereof as the "Balance Sheet Date" and May 31, 2018 is referred to herein as the "Interim Balance Sheet Date." The Company maintains a standard system of accounting established and administered in accordance with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule) . No Target Company is a party to or otherwise involved in any "off-balance sheet arrangements" (as defined in Item 303 of Regulation S-K under the Securities Exchange Act of 1934, as amended).
Section 3.07 Undisclosed Liabilities. To the Knowledge of the Shareholders (which for the purpose of this Section 3.07 only, means the actual and constructive knowledge of Nicolas Molina, David Epstein and David Shield, the Company’s Chief Financial Officer), no Target Company has any liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise, of a type which would be required to be set forth in the body of a balance sheet prepared in accordance with GAAP on and as of the date hereof ("Liabilities"), except (a) those which are adequately reflected or reserved against in the Balance Sheet as of the Balance Sheet Date, and (b) those which have been incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date and which are not, individually or in the aggregate, material in amount.
Section 3.08 Absence of Certain Changes, Events and Conditions. Except as set forth in Section 3.08 of the Disclosure Schedules or as contemplated with respect to the Restructuring, since the Interim Balance Sheet Date, and other than in the ordinary course of business consistent with past practice, there has not been, with respect to the any of the Target Companies, any:
(a) event, occurrence or development that has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;
(b) amendment of any of the Organizational Documents of such entity;
(c) split, combination or reclassification of any shares of the capital stock or equity interests, as applicable, of such entity;
(d) issuance, sale or other disposition of any of the capital stock or equity interests, as applicable, of such entity, or grant of any options, warrants or other rights to purchase or obtain (including upon conversion, exchange or exercise) any of the capital stock or equity interests, as applicable, of such entity;
(e) declaration or payment of any dividends or distributions on or in respect of any of the capital stock or equity interests, as applicable, of such entity or redemption, purchase or acquisition of the capital stock or equity interests, as applicable, of such entity;
(f) material change in any method of accounting or accounting practice of the Company, except as required by GAAP or as disclosed in the notes to the Financial Statements;
(g) material change in the Target Companies' cash management practices and the policies, practices and procedures of the Target Companies with respect to collection of accounts receivable, establishment of reserves for uncollectible accounts, accrual of accounts receivable, inventory control, prepayment of expenses, payment of trade accounts payable, accrual of other expenses, deferral of revenue and acceptance of customer deposits;
(h) entry into any Contract, or any amendment or modification of any Contract, that would constitute a Material Contract;
(i) entry into any Contract that would constitute a Franchise Agreement;
(j) incurrence, assumption or guarantee of any indebtedness for borrowed money except unsecured current obligations and Liabilities incurred in the ordinary course of business consistent with past practice;
(k) transfer, assignment, sale or other disposition of any of the assets shown or reflected in the Balance Sheet or cancellation of any debts or entitlements;
(l) transfer, assignment or grant of any license or sublicense of any material rights under or with respect to any Company Intellectual Property or Company IP Agreements;
(m) material damage, destruction or loss (whether or not covered by insurance) to its property;
(n) any capital investment in, or any loan to, any other Person;
(o) acceleration, termination, material modification to or cancellation of any material Contract (including, but not limited to, any Material Contract) to which a Target Company is a party or by which it is bound;
(p) any material capital expenditures;
(q) imposition of any Encumbrance upon any of the Target Companies' properties, capital stock, equity interests or assets, tangible or intangible;
(r) (i) grant of any bonuses, whether monetary or otherwise, or increase in any wages, salary, severance, pension or other compensation or benefits in respect of its current or former employees, officers, directors, independent contractors or consultants, other than as provided for in any written agreements or required by applicable Law, and except for normal and customary increases in wages and salaries not to exceed eight percent, (ii) change in the terms of employment for any employee or any termination of any employees for which the aggregate costs and expenses exceed $10,000, or (iii) action to accelerate the vesting or payment of any compensation or benefit for any current or former employee, officer, director, independent contractor or consultant;
(s) hiring or promoting any person as or to (as the case may be) an officer or hiring or promoting any employee below officer except to fill a vacancy in the ordinary course of business;
(t) adoption, modification or termination of any: (i) employment, severance, retention or other agreement with any current or former employee, officer, director, independent contractor or consultant, (ii) Benefit Plan or (iii) collective bargaining or other agreement with a Union, in each case whether written or oral;
(u) any loan to (or forgiveness of any loan to), or entry into any other transaction with, any of its stockholders or current or former directors, officers and employees;
(v)�� entry into a new line of business or abandonment or discontinuance of existing lines of business;
(w) adoption of any plan of merger, consolidation, reorganization, liquidation or dissolution or filing of a petition in bankruptcy under any provisions of federal or state bankruptcy Law or consent to the filing of any bankruptcy petition against it under any similar Law;
(x) purchase, lease or other acquisition of the right to own, use or lease any property or assets for an amount in excess of $10,000, individually (in the case of a lease, per annum) or $25,000 in the aggregate (in the case of a lease, for the entire term of the lease, not including any option term), except for purchases of inventory or supplies in the ordinary course of business consistent with past practice;
(y) acquisition by merger or consolidation with, or by purchase of a substantial portion of the assets or stock of, or by any other manner, any business or any Person or any division thereof;
(z) action by the Company to make, change or rescind any Tax election, amend any Tax Return or take any position on any Tax Return, take any action, omit to take any action or enter into any other transaction that would have the effect of increasing the Tax liability or reducing any Tax asset of the Company in respect of any Post-Closing Tax Period; or
(aa) any Contract to do any of the foregoing, or any action or omission that would result in any of the foregoing.
Section 3.09 Material Contracts.
(a) Section 3.09(a) of the Disclosure Schedules lists each of the following Contracts of a Target Company (such Contracts, together with all Contracts concerning the occupancy, management or operation of any Real Property (including without limitation, brokerage contracts) listed or otherwise disclosed in Section 3.10(b) of the Disclosure Schedules and all Company IP Agreements set forth in Section 3.12(b) of the Disclosure Schedules, being "Material Contracts"):
(i) each Contract of a Target Company involving aggregate consideration in excess of $25,000 and which, in each case, cannot be cancelled by the Company without penalty or without more than 30 days' notice;
(ii) all Contracts that require a Target Company to purchase its total requirements of any product or service from a third party or that contain "take or pay" provisions;
(iii) all Contracts that provide for the indemnification by a Target Company of any Person or the assumption of any Tax, environmental or other Liability of any Person;
(iv) all Contracts that relate to the acquisition or disposition of any business, a material amount of stock or assets of any other Person or any real property (whether by merger, sale of stock, sale of assets or otherwise);
(v) all broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising Contracts to which a Target Company is a party;
(vi) all employment agreements and Contracts with independent contractors or consultants (or similar arrangements) to which a Target Company is a party and which are not cancellable without material penalty or without more than 30 days' notice;
(vii) except for Contracts relating to trade receivables, all Contracts relating to indebtedness (including, without limitation, guarantees) of a Target Company;
(viii) all Contracts with any Governmental Authority to which a Target Company is a party ("Government Contracts");
(ix) all Contracts that limit or purport to limit the ability of a Target Company to compete in any line of business or with any Person or in any geographic area or during any period of time;
(x) any Contracts to which a Target Company is a party that provide for any joint venture, partnership or similar arrangement by such Target Company;
(xi) all Contracts between or among a Target Company on the one hand and Seller or any Shareholder or any Affiliate of Seller or any Shareholder (other than a Target Company) on the other hand;
(xii) all collective bargaining agreements or Contracts with any Union to which a Target Company is a party;
(xiii) all Contracts with any Franchisee.
(xiv) all Contracts with any affiliate marketer or any other lead generation company; and
(xv) any other Contract that is material to a Target Company and not previously disclosed pursuant to this Section 3.09.
(b) Each Material Contract is valid and binding on the applicable Target Company in accordance with its terms and is in full force and effect. None of the Target Companies or, to Shareholders' Knowledge, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under), or has provided or received any notice of any intention to terminate, any Material Contract to which it is a party. No event or circumstance has occurred that, with notice or lapse of time or both, would constitute an event of default under any Material Contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of any benefit thereunder. Complete and correct copies of each Material Contract (including all modifications, amendments and supplements thereto and waivers thereunder) have been made available by Seller's Representative to Buyer in the Data Room.
(c) No prior consent of any party to a Material Contract is required for the consummation by Seller and the Shareholders of the transactions contemplated hereby (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.09(c)) to be in compliance with the provisions of such Material Contract or to avoid the loss of any right under or the incurrence of any obligation under, such Material Contract, other than those consents listed on Section 3.05 of the Disclosure Schedules (the "Contract Consents").
(d) No Target Company is a party to a Contract with LG Chem, Ltd. or any of its Affiliates, and as such no Target Company is in breach of any such Contract.
Section 3.10 Title to Assets; Real Property.
(a) Except as set forth on Section 3.10 of the Disclosure Schedules, Target Companies have good title to all of their properties and assets, including without limitation, all leasehold interests. No Target Company owns or has ever owned any Real Property. A Target Company has a valid leasehold interest in, all Real Property and personal property and other assets reflected in the Compiled Financial Statements or acquired after the Balance Sheet Date, other than properties and assets sold or otherwise disposed of in the ordinary course of business consistent with past practice since the Balance Sheet Date. All of the Target Companies' properties and assets (including leasehold interests) are free and clear of Encumbrances except for the following (collectively referred to as "Permitted Encumbrances"):
(i) those items set forth in Section 3.10(a) of the Disclosure Schedules;
(ii) liens for Taxes not yet due and payable;
(iii) mechanics, carriers', workmen's, repairmen's or other like liens arising or incurred in the ordinary course of business consistent with past practice or amounts that are not delinquent and which are not, individually or in the aggregate, material to the respective businesses of the Target Companies;
(iv) easements, rights of way, zoning ordinances and other similar encumbrances affecting Real Property which are not, individually or in the aggregate, material to the respective businesses of the Target Companies;
(v) statutory landlord's liens; or
(vi) liens arising under original purchase price conditional sales contracts and equipment leases with third parties entered into in the ordinary course of business consistent with past practice which are not, individually or in the aggregate, material to the respective businesses of the Target Companies.
(b) Section 3.10(b) of the Disclosure Schedules lists (i) the street address of each parcel of Real Property; (ii) if such property is leased or subleased by the Company, the landlord under the lease, the rental amount currently being paid, and the expiration of the term of such lease or sublease for each leased or subleased property; and (iii) the current use of such property. With respect to leased Real Property, Seller's Representative has delivered or made available to Buyer in the Data Room true, complete and correct copies of any leases affecting the Real Property. No Target Company is a sublessor or grantor under any sublease or other instrument granting to any other Person any right to the possession, lease, occupancy or enjoyment of any leased Real Property. The use and operation of the Real Property in the conduct of the Target Companies' respective businesses do not violate in any material respect any Law, covenant, condition, restriction, easement, license, permit or agreement. No material improvements constituting a part of the Real Property encroach on real property owned or leased by a Person other than a Target Company. There are no Actions pending nor, to Shareholders' Knowledge, threatened against or affecting the Real Property or any portion thereof or interest therein in the nature or in lieu of condemnation or eminent domain proceedings.
Section 3.11 Sufficiency of Assets. The buildings, plants, structures, furniture, fixtures, machinery, equipment, vehicles and other items of tangible personal property currently owned or leased by a Target Company, together with all other properties and assets of the Target Companies, are sufficient for the continued conduct of the Target Companies' respective businesses after the Closing in substantially the same manner as conducted prior to the Closing and constitute all of the rights, property and assets necessary to conduct the businesses of the Target Companies as currently conducted. Notwithstanding anything to the contrary contained herein, the parties have agreed that immediately prior to the Closing, title to and physical possession of the desktop computers utilized by Nicolas Molina and David Epstein shall be transferred to such persons, and shall not be included in the assets of the Target Companies; provided, however, that any Company Intellectual Property or confidential or trade secret information, if any, shall be removed to the satisfaction of Buyer from such computers prior to their transfer.
Section 3.12 Intellectual Property.
(a) Section 3.12(a) of the Disclosure Schedules lists all (i) Company IP Registrations and (ii) Company Intellectual Property, including software, that are not registered but that are material to the Target Companies' businesses or operations. All required filings and fees related to the Company IP Registrations have been timely filed with and paid to the relevant Governmental Authorities and authorized registrars, and all Company IP Registrations are otherwise in good standing. Seller's Representative has made available to Buyer in the Data Room with true and complete copies of file histories, documents, certificates, office actions, excluding any attorney work product, related to all Company IP Registrations.
(b) Section 3.12(b) of the Disclosure Schedules lists all Company IP Agreements. Seller's Representative has made available to Buyer in the Data Room true and complete copies of all such Company IP Agreements, including all modifications, amendments and supplements thereto and waivers thereunder. Each Company IP Agreement is valid and binding on the Company in accordance with its terms and is in full force and effect. Neither the Company nor, to Shareholders' Knowledge, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under), or has provided or received any notice of breach or default of or any intention to terminate, any Company IP Agreement.
(c) Except as set forth in Section 3.12(c)(i) of the Disclosure Schedules, the Target Companies are the sole and exclusive legal and beneficial, and with respect to the Company IP Registrations, record owners of all right, title and interest in and to the Company Intellectual Property, and, to the Shareholders' Knowledge, have the valid right to use all other Intellectual Property used in or necessary for the conduct of the Target Companies' current businesses or operations, in each case, free and clear of Encumbrances other than Permitted Encumbrances. Without limiting the generality of the foregoing, except as set forth on Section 3.12(c)(ii) of the Disclosure Schedules, each Target Company entered into written agreements with every current and former employee of such Target Company, and with every current and former independent contractor, who had access to or involvement in the creation of such Target Company's Company Intellectual Property whereby such employees and independent contractors (i) assign to such Target Company any ownership interest and right they may have in its Company Intellectual Property; and (ii) acknowledge such Target Company's exclusive ownership of all of its Company Intellectual Property. Seller's Representative has provided Buyer with true and complete copies of all such agreements.
(d) The consummation of the transactions contemplated hereunder (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.12(d)), will not result in the loss or impairment of or payment of any additional amounts with respect to, nor require the consent of any other Person in respect of, the Target Companies' right to own, use or hold for use any Intellectual Property as owned, used or held for use in the conduct of the Target Companies' businesses or operations as currently conducted.
(e) To the Shareholders' Knowledge, the Target Companies' rights in the Company Intellectual Property are valid, subsisting and enforceable. The Target Companies have taken reasonable steps to maintain the Company Intellectual Property and to protect and preserve the confidentiality of all trade secrets included in the Company Intellectual Property.
(f) To the Shareholders' Knowledge, the conduct of the Target Companies' businesses as currently and formerly conducted, and the Products, processes and services of the Target Companies, have not infringed, misappropriated, diluted or otherwise violated, and do not and will not infringe, dilute, misappropriate or otherwise violate the Intellectual Property or other rights of any Person. To the Shareholders' Knowledge, no Person has infringed, misappropriated, diluted or otherwise violated, or is currently infringing, misappropriating, diluting or otherwise violating, any Company Intellectual Property.
(g) There are no Actions (including any oppositions, interferences or re-examinations) settled, pending or, to Shareholders' Knowledge, threatened (including in the form of offers to obtain a license): (i) alleging any infringement, misappropriation, dilution or violation of the Intellectual Property of any Person by any Target Company; (ii) challenging the validity, enforceability, registrability or ownership of any Company Intellectual Property or any Target Company's rights with respect to any Company Intellectual Property; or (iii) by any Target Company or any other Person alleging any infringement, misappropriation, dilution or violation by any Person of the Company Intellectual Property. No Target Company is subject to any outstanding or prospective Governmental Order (including any motion or petition therefor) that does or would restrict or impair the use of any Company Intellectual Property.
Section 3.13 Inventory. All inventory of the Target Companies, whether or not reflected in the Balance Sheet, consists of a quality and quantity usable and salable in the ordinary course of business consistent with past practice, except for Obsolete, damaged, defective or slow-moving items that have been written off or written down to fair market value or for which adequate reserves have been established. Except as set forth on Section 3.13(a) of the Disclosure Schedules, all such inventory is owned by the Target Companies free and clear of all Encumbrances, and no inventory is held on a consignment basis. The quantities of each item of inventory (whether raw materials, work-in-process or finished goods) are not excessive, but are reasonable in the present circumstances of the Target Companies.
Section 3.14 Accounts Receivable. The accounts receivable reflected on the Interim Balance Sheet and the accounts receivable arising after the date thereof (a) have arisen from bona fide transactions entered into by the Target Companies involving the sale of goods or the rendering of services in the ordinary course of business consistent with past practice; and (b) constitute only valid, and, to the Shareholders' Knowledge, undisputed claims of the Target Companies not subject to claims of set-off or other defenses or counterclaims other than normal cash discounts accrued in the ordinary course of business consistent with past practice. The reserve for bad debts shown on the Interim Balance Sheet or, with respect to accounts receivable arising after the Interim Balance Sheet Date, on the accounting records of the Target Companies have been determined in accordance with GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule), consistently applied, subject to normal year-end adjustments and the absence of disclosures normally made in footnotes.
Section 3.15 Customers and Suppliers.
(a) Section 3.15(a) of the Disclosure Schedules sets forth (i) each customer who has paid aggregate consideration to the Company for goods or services rendered in an amount greater than or equal to $100,000 for the most recent fiscal year (collectively, the "Material Customers"); and (ii) the amount of consideration paid by each Material Customer during such period. Except as set forth in Section 3.15(a) of the Disclosure Schedules, the Target Companies have not received any notice, and have no reason to believe, that any of its Material Customers has ceased, or intends to cease after the Closing, to use its goods or services or to otherwise terminate or materially reduce its relationship with a Target Company.
(b) Section 3.15(b) of the Disclosure Schedules sets forth (i) the Company's top 25 suppliers based upon the amount of consideration the Company has paid to such suppliers for goods or services rendered for the most recent fiscal year (collectively, the "Material Suppliers"); and (ii) the amount of purchases from each Material Supplier during such period. Except as set forth in Section 3.15(b) of the Disclosure Schedules, the Target Companies have not received any notice, and have no reason to believe, that any of its Material Suppliers has ceased, or intends to cease, to supply goods or services to a Target Company or to otherwise terminate or materially reduce its relationship with a Target Company.
Section 3.16 Insurance. Section 3.16 of the Disclosure Schedules sets forth a true and complete list of all current policies or binders of fire, liability, product liability, umbrella liability, real and personal property, workers' compensation, vehicular, directors' and officers' liability, fiduciary liability and other casualty and property insurance maintained by the Target Companies or any of their Affiliates and relating to the assets, business, operations, employees, officers and directors of the Target Companies (collectively, the "Insurance Policies") and true and complete copies of such Insurance Policies have been made available to Buyer in the Data Room. None of the Shareholders, Seller, the Target Companies, nor any of their Affiliates has received any written notice of cancellation of, premium increase with respect to, or alteration of coverage under, any of such Insurance Policies. All premiums due on such Insurance Policies have either been paid or, if due and payable prior to Closing, will be paid prior to Closing in accordance with the payment terms of each Insurance Policy. The Insurance Policies do not provide for any retrospective premium adjustment or other experience-based liability on the part of the Target Companies. All such Insurance Policies (a) are valid and binding in accordance with their terms; (b) to the Shareholders' Knowledge, are provided by carriers who are financially solvent; and (c) have not been subject to any lapse in coverage. Except as set forth on Section 3.16 of the Disclosure Schedules, there are no claims related to the business of the Target Companies pending under any such Insurance Policies as to which coverage has been questioned, denied or disputed or in respect of which there is an outstanding reservation of rights. The Insurance Policies are of the type and in the amounts customarily carried by Persons conducting businesses similar to the Target Companies and are sufficient for compliance with all applicable Laws and Contracts to which a Target Company is a party or by which it is bound. Except with respect to the Restructuring, as to which no representation is being made pursuant to this Section 3.16: (a) Such Insurance Policies are in full force and effect on the date hereof; and (b) None of Seller, the Shareholders, the Target Companies or any of their Affiliates is in default under, or has otherwise failed to comply with, in any material respect, any provision contained in any such Insurance Policy.
Section 3.17 Legal Proceedings; Governmental Orders.
(a) There are no Actions pending or, to Shareholders' Knowledge, threatened (i) against or by a Target Company affecting any of its properties or assets or otherwise relating to the business of a Target Company (or by or against Seller, a Shareholder or any Affiliate thereof and relating to a Target Company or the business of a Target Company); or (ii) against or by a Target Company, Seller, the Shareholders or any Affiliate of Seller or a Shareholder that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement. To the Shareholders' Knowledge, no event has occurred or circumstances exist that may give rise to, or serve as a basis for, any such Action.
(b) There are no outstanding Governmental Orders and no unsatisfied judgments, penalties or awards against or affecting a Target Company or any of its properties or assets.
(c) Section 3.17 of the Disclosure Schedules identifies and describes all Product Warranties Issues relating to the services or Products of the Target Companies and to Shareholders' Knowledge, Target Companies' Products sold by franchisees or retailers. Except as set forth on Section 3.17 of the Disclosure Schedule, no Target Company has received notice of a Product Warranty Claim with respect to a Product or service of the Target Companies or products of any other manufacturer, and to the Shareholders' Knowledge, there are no Product Warranty Claims with respect to the Target Companies' Products or services, and there is no basis for any such claim (disregarding warranty and repair claims in the ordinary course of business not material in amount or significance) and no event has occurred or circumstance exists that (with or without notice or lapse of time) could result in any such liability or recall.
(d) To the Shareholders’ Knowledge, all of the services rendered by the Target Companies (whether directly or indirectly through independent contractors) have been performed, and all the Products sold by the Target Companies have been sold, in each case in conformity with all express warranties and with all applicable contractual obligations, and none of the Target Companies have any Liability for replacement or repair or for other damages relating to or arising from any such services or Products, except for amounts incurred in the ordinary course of business which are immaterial individually and in the aggregate. The Seller's Representative has made available to the Buyer copies of all Target Company contracts with customers which contain warranty, indemnity or similar provisions.
(e) Except as disclosed on Section 3.17 of the Disclosure Schedules, there is no claim, nor to the Shareholders' Knowledge the basis of any claim, against the Target Companies for injury to person or property of employees or third Persons suffered as a result of the manufacture, sale or distribution of any Product or the performance of any service by the Target Companies or any predecessor of the Target Companies. Except as disclosed on Section 3.17 of the Disclosure Schedule, there is no pending or, to the Shareholders' Knowledge, threatened investigation against any of the Target Companies with respect to any Products produced by or services rendered by the Target Companies or any predecessor of the Target Companies.
(f) The Target Companies have completely satisfied any and all financial obligations and, to the Shareholders’ Knowledge, all other obligations, under the Consent Judgment.
Section 3.18 Compliance with Laws; Permits. Except with respect to the Restructuring, as to which no representation is being made pursuant to this Section 3.18:
(a) The Target Companies have been, and are currently, in material compliance with all Laws applicable to them or their respective businesses, properties or assets, including any Laws relating to product safety, product responsibility, product liability or defective products, including without limitation, the FDA Deeming Regulations.
(b) All Permits required for the Target Companies to conduct their respective businesses have been obtained by them and are valid and in full force and effect. All fees and charges with respect to such Permits as of the date hereof have been paid in full. Section 3.18(b) of the Disclosure Schedules lists all current Permits issued to the Target Companies, including the names of the Permits and their respective dates of issuance and expiration. To the Shareholders' Knowledge, no event has occurred that, with or without notice or lapse of time or both, would reasonably be expected to result in the revocation, suspension, lapse or limitation of any Permit set forth in Section 3.18(b) of the Disclosure Schedules.
(c) The Seller's Representative has made available to Buyer in the Data Room true and complete copies of (i) all information and correspondence relating to the Target Companies' and the Products' compliance with FDA regulations and requirements and (ii) all material correspondence and other communications between the Target Companies and the FDA.
(d) Except as set forth on Section 3.18(d) of the Disclosure Schedules, each of the Target Companies has used its reasonable best efforts to comply in all material respects with all applicable Law, contractual obligations and its privacy policies relating to the collection, storage, use, disclosure and transfer of any personally identifiable information collected by or on behalf of it, and has taken all measures required by applicable Law to protect and maintain the confidential nature of such personally identifiable information. Seller's and the Shareholders' execution, delivery and performance of this Agreement and any ancillary agreement contemplated hereby will comply with all applicable Law relating to privacy. No member of the Target Companies has received a written notice of a complaint regarding its collection, use or disclosure of personally identifiable information.
(e) Each of the Target Companies has implemented and maintained, consistent with industry standard practices and its contractual and other obligations to other Persons, all reasonable security and other reasonable measures necessary to protect all computers, networks, software and systems used in connection with the operation of the Target Companies' business (the "Information Systems") from viruses and unauthorized access, use, modification, disclosure or other misuse. The Seller's Representative has provided to Buyer all of its disaster recovery and security plans, and procedures relating to the Target Companies' Information Systems. Except as set forth on Section 3.18(e) of the Disclosure Schedule, to the Shareholders' Knowledge, there have been no unauthorized intrusions or breaches of the security of the Target Companies' Information Systems.
(f) The Target Companies have provided Buyer with true and correct copies of all material communications (written or otherwise) to Franchisees relating to compliance with FDA regulations and other regulatory requirements, including without limitation, any communications that included a reference to or analysis by the law firm Michael Best.
(g) The Target Companies have fully disclosed to Buyer in writing any youth related communications from the FDA or other regulatory bodies.
Section 3.19 Environmental Matters.
(a) To the Shareholders' Knowledge, the Target Companies are currently and have been in compliance with all Environmental Laws and have not, and no Target Company has received from any Person any: (i) Environmental Notice or Environmental Claim; or (ii) written request for information pursuant to Environmental Law, which, in each case, either remains pending or unresolved, or is the source of ongoing obligations or requirements as of the Closing Date.
(b) Except with respect to the Restructuring, as to which no representation is being made pursuant to this Section 3.19(b): The Target Companies have obtained and are in material compliance with all Environmental Permits (each of which is disclosed in Section 3.19(b) of the Disclosure Schedules) necessary for the ownership, lease, operation or use of the businesses or assets of the Target Companies and all such Environmental Permits are in full force and effect and shall be maintained in full force and effect by the Target Companies through the Closing Date in accordance with Environmental Law, and neither any Shareholder nor any Target Company is aware of any condition, event or circumstance that might reasonably be expected to prevent or impede, after the Closing Date, the ownership, lease, operation or use of the businesses or assets of the Target Companies as currently carried out. With respect to any such Environmental Permits, to the extent any such transfer is necessary as a result of the transactions contemplated by this Agreement, the Seller's Representative has undertaken, or will undertake prior to the Closing Date, all reasonable measures necessary to facilitate transferability of the same, and to the Shareholders' Knowledge, there exists no condition, event or circumstance that might prevent or impede the transferability of the same, nor have they received any Environmental Notice or written communication regarding any material adverse change in the status or terms and conditions of the same.
(c) No real property currently or formerly owned, operated or leased by the Company is listed on, or, to the Shareholders' Knowledge, has been proposed for listing on, the National Priorities List (or CERCLIS) under CERCLA, or any similar state list.
(d) To the Shareholders' Knowledge, there has been no Release of Hazardous Materials in contravention of Environmental Law with respect to the businesses or assets of the Target Companies or any real property currently or formerly owned, operated or leased by the Target Companies, and neither the Target Companies nor any Shareholder has received an Environmental Notice that any real property currently or formerly owned, operated or leased in connection with the businesses of the Target Companies (including soils, groundwater, surface water, buildings and other structure located on any such real property) has been contaminated with any Hazardous Material which could reasonably be expected to result in an Environmental Claim against, or a violation of Environmental Law or term of any Environmental Permit by, Seller, a Shareholder or the Target Companies.
(e) Section 3.19(e) of the Disclosure Schedules contains a complete and accurate list of all active or abandoned aboveground or underground storage tanks owned or operated by the Target Companies.
(f) Section 3.19(f) of the Disclosure Schedules contains a complete and accurate list of all off-site Hazardous Materials treatment, storage, or disposal facilities or locations used by the Target Companies or Shareholders and any predecessors as to which the Target Companies may retain liability, and none of these facilities or locations has been placed or proposed for placement on the National Priorities List (or CERCLIS) under CERCLA, or any similar state list, and neither any Shareholder nor any Target Company has received any Environmental Notice regarding potential liabilities with respect to such off-site Hazardous Materials treatment, storage, or disposal facilities or locations used by the Target Companies.
(g) Each hazmat employee (as defined in 49 CFR 171.8) has received the training required by 49 CFR, §§700-704 and each such employee that has transported Hazardous Materials on behalf of a Target Company has done so in a manner consistent with such training and in compliance with Law.
(h) Neither any Shareholder nor any Target Company has retained or assumed, by contract or, to Shareholders' Knowledge, operation of Law, any liabilities or obligations of third parties under Environmental Law.
(i) The Seller's Representative has provided or otherwise made available to Buyer in the Data Room and listed in Section 3.19(i) of the Disclosure Schedules: (i) any and all environmental reports, studies, audits, records, sampling data, site assessments, risk assessments, economic models and other similar documents with respect to the businesses or assets of the Target Companies or any currently or formerly owned, operated or leased real property which are in the possession or control of the Shareholders or a Target Company related to compliance with Environmental Laws, Environmental Claims or an Environmental Notice or the Release of Hazardous Materials; and (ii) any and all material documents concerning planned or anticipated capital expenditures required to reduce, offset, limit or otherwise control pollution and/or emissions, manage waste or otherwise ensure compliance with current or future Environmental Laws (including, without limitation, costs of remediation, pollution control equipment and operational changes).
(j) As of the Closing Date and to the Shareholders' Knowledge, there is no conditions, event or circumstance concerning the Release or regulation of Hazardous Materials that might, after the Closing Date, prevent, impede or materially increase the costs associated with the ownership, lease, operation, performance or use of the businesses or assets of the Target Companies as currently carried out.
Section 3.20 Employee Benefit Matters.
(a) Section 3.20(a) of the Disclosure Schedules contains a true and complete list of each pension, benefit, retirement, compensation, employment, consulting, profit-sharing, deferred compensation, incentive, bonus, performance award, phantom equity, stock or stock-based, change in control, retention, severance, vacation, paid time off, welfare, fringe-benefit and other similar agreement, plan, policy, program or arrangement (and any amendments thereto), in each case whether or not reduced to writing and whether funded or unfunded, including each "employee benefit plan" within the meaning of Section 3(3) of ERISA, whether or not tax-qualified and whether or not subject to ERISA, which is or has been maintained, sponsored, contributed to, or required to be contributed to by a Target Company for the benefit of any current or former employee, officer, director, retiree, independent contractor or consultant of a Target Company or any spouse or dependent of such individual, or under which a Target Company or any of its ERISA Affiliates has or may have any Liability (as listed on Section 3.20(a) of the Disclosure Schedules, each, a "Benefit Plan"). The Company has separately identified in Section 3.20(a) of the Disclosure Schedules each Benefit Plan that contains a change in control provision.
(b) With respect to each Benefit Plan, the Seller's Representative has made available to Buyer in the Data Room accurate, current and complete copies of each of the following, to the extent applicable: (i) where the Benefit Plan has been reduced to writing, the plan document together with all amendments; (ii) where the Benefit Plan has not been reduced to writing, a written summary of all material plan terms; (iii) where applicable, copies of any trust agreements or other funding arrangements, custodial agreements, insurance policies and contracts, administration agreements and similar agreements, and investment management or investment advisory agreements, now in effect or required in the future as a result of the transactions contemplated by this Agreement or otherwise; (iv) copies of any summary plan descriptions, summaries of material modifications, employee handbooks and any other written communications (or a description of any oral communications) relating to any Benefit Plan; (v) in the case of any Benefit Plan that is intended to be qualified under Section 401(a) of the Code, a copy of the most recent determination, opinion or advisory letter from the Internal Revenue Service; (vi) in the case of any Benefit Plan for which a Form 5500 is required to be filed, a copy of the two most recently filed Forms 5500, with schedules and financial statements attached; (vii) actuarial valuations and reports related to any Benefit Plans with respect to the two most recently completed plan years; (viii) the most recent nondiscrimination tests performed under the Code; and (ix) copies of material notices, letters or other correspondence from the Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation or other Governmental Authority relating to the Benefit Plan.
(c) Each Benefit Plan and related trust (other than any multiemployer plan within the meaning of Section 3(37) of ERISA (each a "Multiemployer Plan")) has been established, administered and maintained materially in accordance with its terms and in material compliance with all applicable Laws (including ERISA and, the Code and any applicable local Laws). Each Benefit Plan that is intended to be qualified under Section 401(a) of the Code (a "Qualified Benefit Plan") is so qualified and has received a favorable and current determination letter from the Internal Revenue Service, or with respect to a prototype plan, can rely on an opinion letter from the Internal Revenue Service to the prototype plan sponsor, to the effect that such Qualified Benefit Plan is so qualified and that the plan and the trust related thereto are exempt from federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and nothing has occurred that could reasonably be expected to adversely affect the qualified status of any Qualified Benefit Plan. To Shareholders' Knowledge, nothing has occurred with respect to any Benefit Plan that has subjected or could reasonably be expected to subject the Target Companies or any of their ERISA Affiliates or, with respect to any period on or after the Closing Date, Buyer or any of its Affiliates, to a penalty under Section 502 of ERISA or to tax or penalty under Section 4975 of the Code. All benefits, contributions and premiums relating to each Benefit Plan have been timely paid in accordance with the terms of such Benefit Plan and all applicable Laws and accounting principles, and all benefits accrued under any unfunded Benefit Plan have been paid, accrued or otherwise adequately reserved to the extent required by, and in accordance with, GAAP (with the exceptions set forth on Section 3.06 of the Disclosure Schedule).
(d) Neither the Target Companies nor any of their ERISA Affiliates has (i) incurred or reasonably expects to incur, either directly or indirectly, any material Liability under Title I or Title IV of ERISA or related provisions of the Code or applicable local Law relating to employee benefit plans; (ii) failed to timely pay premiums to the Pension Benefit Guaranty Corporation; (iii) withdrawn from any Multiemployer Plan; or (iv) engaged in any transaction which would give rise to liability under Section 4069 or Section 4212(c) of ERISA.
(e) With respect to each Benefit Plan (i) no such plan is a Multiemployer Plan; (ii) no such plan is a "multiple employer plan" within the meaning of Section 413(c) of the Code or a "multiple employer welfare arrangement" (as defined in Section 3(40) of ERISA); (iii) no Action has been initiated by the Pension Benefit Guaranty Corporation to terminate any such plan or to appoint a trustee for any such plan; (iv) no such plan is subject to the minimum funding standards of Section 412 of the Code or Title IV of ERISA, and none of the assets of the Target Companies or any ERISA Affiliate is, or may reasonably be expected to become, the subject of any lien arising under Section 302 of ERISA or Section 412(a) of the Code; and (v) no "reportable event," as defined in Section 4043 of ERISA, has occurred with respect to any such plan.
(f) Each Benefit Plan can be amended, terminated or otherwise discontinued by a Target Company before the Closing in accordance with its terms, or after the Closing in accordance with its terms, without material Liability to Buyer, the Target Companies or any of their Affiliates, other than contributions owed in due course or ordinary administrative expenses typically incurred in a termination event. No Target Company has a commitment or obligation and has not made any representations to any employee, officer, director, independent contractor or consultant, whether or not legally binding, to adopt, amend, modify or terminate any Benefit Plan or any collective bargaining agreement, in connection with the consummation of the transactions contemplated by this Agreement or otherwise.
(g) Other than as required under Section 601 et. seq. of ERISA or other applicable Law, no Benefit Plan provides post-termination or retiree welfare benefits to any individual for any reason, and neither the Target Companies nor any of their ERISA Affiliates has any Liability to provide post-termination or retiree welfare benefits to any individual or ever represented, promised or contracted to any individual that such individual would be provided with post-termination or retiree welfare benefits.
(h) There is no pending or, to Shareholders' Knowledge, threatened Action relating to a Benefit Plan (other than routine claims for benefits), and no Benefit Plan has within the three years prior to the date hereof been the subject of an examination or audit by a Governmental Authority or the subject of an application or filing under or is a participant in, an amnesty, voluntary compliance, self-correction or similar program sponsored by any Governmental Authority.
(i) There has been no amendment to, announcement by Seller, the Shareholders, the Target Companies or any of their Affiliates relating to, or change in employee participation or coverage under, any Benefit Plan or collective bargaining agreement that would increase the annual expense of maintaining such plan above the level of the expense incurred for the most recently completed fiscal year with respect to any director, officer, employee, independent contractor or consultant, as applicable. None of Seller, the Shareholders, the Target Companies, nor any of their Affiliates has any commitment or obligation or has made any representations to any director, officer, employee, independent contractor or consultant, whether or not legally binding, to adopt, amend, modify or terminate any Benefit Plan or any collective bargaining agreement.
(j) To Shareholders' Knowledge, each Benefit Plan that is subject to Section 409A of the Code has been administered in compliance with its terms and the operational and documentary requirements of Section 409A of the Code and all applicable regulatory guidance (including notices, rulings and proposed and final regulations) thereunder. No Target Company has any obligation to gross up, indemnify or otherwise reimburse any individual for any excise taxes, interest or penalties incurred pursuant to Section 409A of the Code.
(k) Each individual who is classified by the Target Companies as an independent contractor has been properly classified for purposes of participation and benefit accrual under each Benefit Plan.
(l) Except as set forth in Section 3.20(l) of the Disclosure Schedules, neither the execution of this Agreement nor any of the transactions contemplated by this Agreement will (either alone or upon the occurrence of any additional or subsequent events): (i) entitle any current or former director, officer, employee, independent contractor or consultant of a Target Company to severance pay or any other payment; (ii) accelerate the time of payment, funding or vesting, or increase the amount of compensation due to any such individual; (iii) limit or restrict the right of a Target Company to merge, amend or terminate any Benefit Plan; (iv) increase the amount payable under or result in any other material obligation pursuant to any Benefit Plan; (v) result in "excess parachute payments" within the meaning of Section 280G(b) of the Code; or (vi) require a "gross-up" or other payment to any "disqualified individual" within the meaning of Section 280G(c) of the Code. There have been no Section 280G calculations prepared (whether or not final) with respect to any disqualified individual in connection with the transactions contemplated herein.
(m) The Target Companies and any co-employer of PEO Employees have complied with COBRA, the Family Medical Leave Act of 1993, as amended, the Women's Health and Cancer Rights Act of 1998, the Newborns' and Mothers' Health Protection Act of 1996, and any similar provisions of state law applicable to the Target Companies' employees and PEO Employees. The Target Companies have no unsatisfied obligations to any of its employees or qualified beneficiaries pursuant to COBRA, HIPAA or any state law governing health care coverage or extension. The co-employer of the PEO Employees does not have any unsatisfied obligations to any PEO Employees or qualified beneficiaries pursuant to COBRA, HIPAA or any state law governing health care coverage or extension.
(n) The Target Companies have complied with all applicable requirements of the Patient Protection and Affordable Care Act of 2010, including, without limitation, offering affordable coverage to a sufficient number of employees of the Target Companies to avoid penalties thereunder and providing reports to the Internal Revenue Service and the employees of the Target Companies as required by Code Sections 6055 and 6056.
Section 3.21 Employment Matters.
(a) Section 3.21(a) of the Disclosure Schedules contains a list of all persons who are employees, independent contractors or consultants of the Target Companies as of the date hereof, including any employee who is on a leave of absence of any nature, paid or unpaid, authorized or unauthorized, and sets forth for each such individual the following: (i) name; (ii) title or position (including whether full or part time); (iii) hire date; (iv) current annual base compensation rate; (v) commission, bonus or other incentive-based compensation; and (vi) a description of the fringe benefits provided to each such individual as of the date hereof. Except as set forth in Section 3.21(a) of the Disclosure Schedules, as of the date hereof, all compensation, including wages, commissions and bonuses, payable to all employees, independent contractors or consultants of the Target Companies for services performed on or prior to the date hereof have been paid in full (or accrued in full on the audited balance sheet contained in the Effective Time Working Capital Statement) and there are no outstanding agreements, understandings or commitments of the Target Companies with respect to any compensation, commissions or bonuses.
(b) The Target Companies are not, and have not been for the past three years, a party to, bound by, or negotiating any collective bargaining agreement or other Contract with a union, works council or labor organization (collectively, "Union"), and there is not, and has not been for the past three years, any Union representing or purporting to represent any employee of a Target Company, and no Union or group of employees is seeking or has sought to organize employees for the purpose of collective bargaining. There has never been, nor has there been any threat of, any strike, slowdown, work stoppage, lockout, concerted refusal to work overtime or other similar labor disruption or dispute affecting the Target Companies or any of their employees. The Target Companies have no duty to bargain with any Union.
(c) The Target Companies are and have been in compliance with all applicable Laws pertaining to employment and employment practices, including all Laws relating to labor relations, equal employment opportunities, fair employment practices, employment discrimination, harassment, retaliation, reasonable accommodation, disability rights or benefits, immigration, wages, hours, overtime compensation, child labor, hiring, promotion and termination of employees, working conditions, meal and break periods, privacy, health and safety, workers' compensation, leaves of absence and unemployment insurance. All individuals characterized and treated by the Target Companies as independent contractors or consultants are properly treated as independent contractors under all applicable Laws, and all employees of the Target Companies classified as exempt under the Fair Labor Standards Act and state and local wage and hour laws are properly classified. Except as set forth in Section 3.21(c), there are no Actions against any Target Companies pending, or to Shareholders' Knowledge, threatened to be brought or filed, by or with any Governmental Authority or arbitrator in connection with the employment of any current or former applicant, employee, consultant or independent contractor of a Target Company, including, without limitation, any claim relating to unfair labor practices, employment discrimination, harassment, retaliation, equal pay, wage and hours or any other employment related matter arising under applicable Laws.
(d) Up to the Closing Date, the Target Companies have complied with the WARN Act, and it have no plans to undertake any action in the future that would trigger the WARN Act.
(e) With respect to each Government Contract, the Target Companies are and have been in compliance with Executive Order No. 11246 of 1965 ("E.O. 11246"), Section 503 of the Rehabilitation Act of 1973 ("Section 503") and the Vietnam Era Veterans' Readjustment Assistance Act of 1974 ("VEVRAA"), including all implementing regulations. The Target Companies maintain and comply with affirmative action plans in compliance with E.O. 11246, Section 503 and VEVRAA, including all implementing regulations. Except as set forth in Section 3.21(e) of the Disclosure Schedules, the Target Companies are not, and have not been, since January 1, 2014, the subject of any audit, investigation or enforcement action by any Governmental Authority in connection with any Government Contract or related compliance with E.O. 11246, Section 503 and VEVRAA. The Target Companies have not been debarred, suspended or otherwise made ineligible from doing business with the United States government or any government contractor.
Section 3.22 Taxes. Except as set forth in Section 3.22 of the Disclosure Schedules:
(a) All Tax Returns required to be filed on or before the Closing Date by the Target Companies have been timely filed (for the avoidance of doubt, the Target Companies’ 2017 Tax Returns will be filed by the Seller’s Representative after the Closing). Such Tax Returns are, or will be, true, complete and correct in all material respects. All Taxes due and owing by the Target Companies shown on any Tax Return have been timely paid.
(b) Except as set forth on Section 3.22(b) of the Disclosure Schedules, the Target Companies have withheld and paid each Tax required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, customer, shareholder or other party, and complied with all information reporting and backup withholding provisions of applicable Law.
(c) Except as set forth on Section 3.22(c) of the Disclosure Schedules, no claim has been made by any Tax Authority in any jurisdiction where the Target Companies do not file Tax Returns that a Target Company is, or may be, subject to Tax by that jurisdiction.
(d) Except as set forth on Section 3.22(d) of the Disclosure Schedules, no extensions or waivers of statutes of limitations currently in effect have been given or requested with respect to any Taxes of the Target Companies.
(e) The amount of the Target Companies' Liability for unpaid Taxes for all periods ending on or before June 30, 2018, does not, in the aggregate, exceed the amount of accruals for Taxes (excluding reserves for deferred Taxes) reflected on the Financial Statements. The amount of the Target Companies' Liability for unpaid Taxes for all periods following the end of the recent period covered by the Financial Statements shall not, in the aggregate, exceed the amount of accruals for Taxes (excluding reserves for deferred Taxes) as adjusted for the passage of time in accordance with the past custom and practice of the Target Companies.
(f) Section 3.22(f) of the Disclosure Schedules sets forth:
(i) those taxable years for which examinations by the Tax Authorities have been completed; and
(ii) those taxable years for which examinations by Tax Authorities are presently being conducted.
(g) Except as set forth on Section 3.22(g) of the Disclosure Schedules, all deficiencies or assessments made against a Target Company as a result of any examinations by any Tax Authority have been fully paid or are being contested in good faith. Section 3.22(f) of the Disclosure Schedules sets forth all such deficiencies or assessments.
(h) Except as set forth on Section 3.22(h) of the Disclosure Schedules, no Target Company is a party to any Action by any Tax Authority. Except as set forth on Section 3.22(h) of the Disclosure Schedules, there are no pending or, to Shareholders' Knowledge, threatened Actions by any Tax Authority against any Target Company.
(i) Seller's Representative has delivered to Buyer copies of all federal, state, local and foreign income, franchise and similar Tax Returns, examination reports, and statements of deficiencies assessed against, or agreed to by, the Target Companies for all Tax periods ending on an after December 31, 2015.
(j) Except as set forth on Section 3.22(j) of the Disclosure Schedules, there are no Encumbrances for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Target Companies.
(k) Except as set forth on Section 3.22(k) of the Disclosure Schedules, no Target Company is a party to, or bound by, any Tax indemnity, Tax sharing or Tax allocation agreement.
(l) No private letter rulings, technical advice memoranda or similar agreement or rulings have been requested, entered into or issued by any Tax Authority with respect to the Target Companies
(m) Except as set forth on Section 3.22(m) of the Disclosure Schedules, no Target Company has been a member of an affiliated, combined, consolidated or unitary Tax group for Tax purposes with any non-Target Company. Except as set forth on Section 3.22(m) of the Disclosure Schedules, no Target Company has Liability for Taxes of any Person (other than any other Target Company) under Treasury Regulations Section 1.1502-6 (or any corresponding provision of state, local or foreign Law), as transferee or successor, by contract or otherwise.
(n) [Intentionally deleted.]
(o) Seller is not a "foreign person" as that term is used in Treasury Regulations Section 1.1445-2.
(p) As of the Closing, (i) the Company will be a limited liability company, which the Seller intends to be treated as a disregarded entity for federal income tax purposes, and (ii) each Company Subsidiary, other than the UK subsidiary, will be a limited liability company, which the Seller intends to be treated as a disregarded entity for federal income tax purposes.
(q) No Target Company is, and has not been, a party to, or a promoter of, a "reportable transaction" within the meaning of Section 6707A(c)(1) of the Code and Treasury Regulations Section 1.6011-4(b).
(r) Section 3.22(r) of the Disclosure Schedules sets forth each state into which the Target Companies have, directly or indirectly, sold the Products since January 1, 2015 and each state for which the Target Companies currently collect sales tax.
(s) The Target Companies have completed the Restructuring as of the Closing Date. A "check-the-box" election for the Company to be taxed as an association taxable as a corporation has not been filed with respect to the Company and none of Seller, Seller's Representative or the Shareholders will file such election.
Section 3.23 Books and Records. The minute books and stock record books of the Target Companies, all of which have been made available to Buyer in the Data Room, are reasonably complete and correct and have been maintained in accordance with sound business practices. The minute books of the Target Companies contain reasonably accurate and reasonably complete records of all meetings, and actions taken by written consent of, the stockholders, the board of directors and any committees of the board of directors of the Company, and the members or managers of the Company Subsidiaries, and no meeting, or action taken by written consent, of any such stockholders, board of directors, committee, members or managers has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of those books and records will be in the possession of the Company.
Section 3.24 Brokers. Except for MidCap Advisors, LLC, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or any other Transaction Document based upon arrangements made by or on behalf of Seller, the Shareholders or the Target Companies.
Section 3.25 Target Companies' Products.
(a) Seller's Representative has delivered or made available to Buyer in the Data Room a true, complete and correct listing of all flavors used in the Products, excluding any third-party products sold by the Target Companies, in such format and with such detail as reasonably necessary to file or maintain Buyer's product listing submissions to the FDA Center for Tobacco Products.
(b) To the Shareholders' Knowledge, the Target Companies have fully disclosed to Buyer in writing any changes to the formulations or combinations of Target Companies' Products.
Section 3.26 Franchise Matters.
(a) Section 3.26(a) of the Disclosure Schedules sets forth a true and complete list of all franchise agreements, license agreements, subfranchise agreements, sublicense agreements, master franchise agreements, area development agreements, market development agreements, and reserved area agreements (each a "Franchise Agreement" and, collectively, the "Franchise Agreements") to which the Company or any other Target Company is or was a party or by which any Target Company or was bound (other than any such agreements between the Target Companies), and that grant or purport to grant the right to operate or license others to operate or to develop within a specific geographic area or at a specific location any VaporFi® outlets or other Person whose operation with respect to the Target Companies' Products brings such Person within the scope of the Federal Trade Commission Franchise Rule (16 CFR Part 436) (each a "Franchised Outlet"). True, correct, and complete copies of all Franchise Agreements have been provided or made available to Buyer in the Data Room.
(b) Unless otherwise disclosed on Section 3.26(b) of the Disclosure Schedules, each Franchise Agreement is in full force and effect and is a valid and binding obligation of the Target Company party thereto and enforceable against such Target Company and the other parties thereto in accordance with its terms, subject, as to enforceability, to bankruptcy, insolvency, and other Laws of general applicability relating to or affecting creditors' rights and to general equity principles. To the Shareholders’ Knowledge, all Franchise Agreements comply in all material respects with all applicable Laws. The execution, delivery and performance by Seller and the Shareholders of this Agreement and the other Transaction Documents to which they are a party, and the consummation of the transactions contemplated hereby and thereby (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.26(b)), do not and will not: (i) conflict with or result in a violation or breach of, or default under, any provision of the Franchise Agreements; (ii) except as set forth in Section 3.26(b) of the Disclosure Schedules, require the consent, notice or other action by any Person under, conflict with, result in a violation or breach of, constitute a default or an event that, with or without notice or lapse of time or both, would constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate, modify or cancel any Franchise Agreements; or (iii) result in the creation or imposition of any Encumbrance other than Permitted Encumbrances on any properties or assets of any of the Target Companies pursuant to any Franchise Agreements. Except by operation of Law, no Franchise Agreement expressly grants any Franchisee any right of rescission or set-off; and no Franchisee has asserted in writing any such right of rescission or set-off. There is no default under any Franchise Agreement by any Target Company or, to the Shareholders' Knowledge, by any other party thereto, and no event has occurred that with the lapse of time or the giving of notice or both would constitute a default thereunder by a Target Company or, to the Shareholders' Knowledge, by any other party thereto.
(c) Except as set forth on Section 3.26(c) of the Disclosure Schedule, the Target Companies have prepared and maintained each franchise disclosure document ("FDD") in compliance, in all material respects, with: (i) the North American Securities Administrators Association, Inc. ("NASAA") 2008 Franchise Registration and Disclosure Guidelines; (ii) the FTC Franchise Rule, 16 C.F.R. Part 436; and (iii) the Laws of the various states of the United States that require disclosure and/or registration before a company may offer and/or sell franchises or business opportunities (collectively, the "Registration Laws"). Section 3.26(c) of the Disclosure Schedules contains the status of all state franchise registrations as of the date of this Agreement. None of the Target Companies or their representatives have represented to any franchisee or potential Franchisee, or otherwise provided any disclosure or opinion to any Franchisee or potential Franchisee, to the effect that Franchise Outlets are not subject to the Registration Laws or other Laws governing franchise relationships.
(d) Neither Shareholders nor any Target Companies have furnished or authorized any Person to furnish: (i) to prospective franchisees in the United States any materials or information that could be construed as an "earnings claim" or a "financial performance representation" information in violation of the requirements specified in the NASAA 2008 Franchise Registration and Disclosure Guidelines and/or 16 C.F.R. § 436.1(b) (together, "FPR(s)"), and no FPR has been made since January 1, 2015 to any prospective Franchisee in the United States; or (ii) to prospective franchisees in any non-United States jurisdiction any materials or information from which a specific level or range of actual or potential sales, costs, income, or profit from franchised or non-franchised units may be easily ascertained, except as set forth in Section 3.26(b) of the Disclosure Schedules. None of the Target Companies, in applications and/or filings with states under the Registration Laws, or in any other applications or filings, have made any untrue statement of a material fact required to be stated therein, or omitted to state a fact necessary to make the statements made therein, taken as a whole, not misleading.
(e) None of Seller, the Shareholders or the Target Companies are a party to any Contract pursuant to which a Target Company receives Rebates as a result of transactions between the Franchisees and suppliers selling products or services to the Franchisees. When a Target Company buys products, goods, and services from a supplier, such supplier charges such Target Company (or its Affiliate) for these items on the same basis as the supplier charges a Franchisee operating a Franchised Outlet in the United States for similar products, goods, and services purchased for use in connection with such Franchised Outlet.
(f) Except as set forth on Section 3.26(f) of the Disclosure Schedule, and except with respect to the Restructuring, as to which no representation is being made pursuant to this Section 3.26(f), Shareholders and/or the Target Companies have made on an accurate basis all required additional filings under the Registration Laws, including filings with respect to material changes, advertising, broker and salesperson registrations, amendments, and renewals, and neither the Shareholders nor any Target Companies have offered or executed a Franchise Agreement or offered or sold the rights granted therein in any jurisdiction in which such offer and sale was not duly registered (if registration was required by a Registration Law) or exempt from registration at the time the offer was made and the sale occurred, and Shareholders and the Target Companies have otherwise complied with all applicable franchise disclosure document and Franchise Agreement delivery requirements under applicable Laws (including, the Registration Laws), and, in each case, obtained receipts evidencing delivery and receipt thereof. Except as set forth on Section 3.26(f) of the Disclosure Schedule, neither Shareholders nor any Target Companies have otherwise engaged in the offer, sale, or execution of Franchise Agreements in violation of applicable Registration Laws, or unfair or deceptive trade practices Law or regulation or similar Laws or regulation.
(g) The Target Companies' area development agreements grant exclusive development territories to developers that have development rights, and the Franchise Agreements grant limited protected radii to certain Franchisees. Except (i) for those grants, (ii) as set forth on Section 3.26(g) of the Disclosure Schedule, and (iii) as provided by operation of Law, no Franchisee has an exclusive territory, right of first refusal, option, or other similar arrangement with respect to a Franchised Outlet and no person currently holds any right or option to operate, develop, or locate a Franchised Outlet, or to exclude any Target Company or others from operating or licensing a third party to operate a Franchised Outlet, in any geographic area or at any location.
(h) Section 3.26(h) of the Disclosure Schedules lists the Contracts that are in effect as of the date hereof with any formal or informal franchisee association or group of Franchisees regarding any Franchise Agreement or franchise operational matter.
(i) Section 3.26(i) of the Disclosure Schedules lists the Franchisees, if any, that to the Shareholders' Knowledge are currently the subject of a bankruptcy or similar Actions.
(j) With respect to all expirations, terminations, and non-renewals of Franchisees and/or Franchise Agreements since January 1, 2015, the Shareholders and the Target Companies have complied in all material respects with all applicable franchise termination, nonrenewal, unfair practices, and/or relationship Laws, including those Laws' requirements with respect to the proper notice of default, time to cure, and the actual termination of any Franchisee or business opportunity operator.
(k) Neither the Shareholders nor any Target Companies operate a retail location selling the Products within any protected territory or reserved area granted to any Franchisee. No Franchisee has a right of first refusal, right of first negotiation, or similar right to acquire any retail location from a Target Company.
(l) The consummation of the transactions contemplated by this Agreement (other than the Restructuring, as to which no representation or warranty is being made under this Section 3.26(l)), will not result in or constitute a breach or default under any Franchise Agreement, and will neither cause the termination of such Franchise Agreement nor permit any party to such Franchise Agreement to cause it to be terminated, modified, cancelled, accelerated or receive payments in connection with the transaction contemplated by this Agreement.
Section 3.27 Exclusive Representation. Buyer acknowledges and agrees that Seller and the Shareholders have not made and are not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in this Agreement, the Transaction Documents, and the other certificates or documents furnished to Buyer pursuant to this Agreement, and that it is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties expressly set forth in this Agreement and the Transaction Documents.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as set forth in the correspondingly numbered Section of the Disclosure Schedules, Buyer represents and warrants to Seller and the Shareholders that the statements contained in this Article IV are true and correct as of the date hereof.
Section 4.01 Organization of Buyer. Buyer is a limited liability company duly organized, validly existing and in good standing under the Laws of the state of Delaware. Buyer has full entity power and authority to enter into this Agreement and the other Transaction Documents to which Buyer is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Buyer of this Agreement and any other Transaction Document to which Buyer is a party, the performance by Buyer of its obligations hereunder and thereunder and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all requisite company action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer, and (assuming due authorization, execution and delivery by Seller) this Agreement constitutes a legal, valid and binding obligation of Buyer enforceable against Buyer in accordance with its terms. When each other Transaction Document to which Buyer is or will be a party has been duly executed and delivered by Buyer (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of Buyer enforceable against it in accordance with its terms.
Section 4.02 No Conflicts; Consents. The execution, delivery and performance by Buyer of this Agreement and the other Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) conflict with or result in a violation or breach of, or default under, any provision of the Organizational Documents of Buyer; (b) conflict with or result in a violation or breach of any provision of any Law or Governmental Order applicable to Buyer; or (c) except as set forth in Section 4.02 of the Disclosure Schedules, require the consent, notice or other action by any Person under any Contract to which Buyer is a party. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to Buyer in connection with the execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, except for such consents, approvals, Permits, Governmental Orders, declarations, filings or notices which, in the aggregate, would not have a Material Adverse Effect.
Section 4.03 Investment Purpose. Buyer is acquiring the Shares solely for its own account for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof. Buyer acknowledges that the Shares are not registered under the Securities Act of 1933, as amended, or any state securities laws, and that the Shares may not be transferred or sold except pursuant to the registration provisions of the Securities Act of 1933, as amended or pursuant to an applicable exemption therefrom and subject to state securities laws and regulations, as applicable. Buyer is an "accredited investor" within the meaning of the Securities Act of 1933 and the regulations adopted thereunder.
Section 4.04 Brokers. No broker, finder or, except as previously disclosed to Seller's Representative, investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or any other Transaction Document based upon arrangements made by or on behalf of Buyer.
Section 4.05 Legal Proceedings. There are no Actions pending or, to Buyer's knowledge, threatened against or by Buyer or any Affiliate of Buyer that challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement. No event has occurred or circumstances exist that may give rise or serve as a basis for any such Action.
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business Prior to the Closing. From the date hereof until the Closing, except as otherwise provided in this Agreement or consented to in writing by Buyer (which consent shall not be unreasonably withheld or delayed), Major Shareholders shall, and shall cause the Target Companies to, (x) conduct their respective businesses in the ordinary course of business consistent with past practice, including the offer and sale of Franchises; (y) without limiting the generality of the foregoing, conduct all Product promotions, sales, and discount offerings in the ordinary course of business consistent with past practice and refrain from any activity intended to, or that may have the result of, pulling any post-Closing period sales forward to the period prior to the Closing; and (z) use reasonable best efforts to maintain and preserve intact the current organization, business and franchise of the Target Companies and to preserve the rights, franchises, goodwill and relationships of employees, customers, lenders, suppliers, regulators and others having business relationships with the Target Companies. Without limiting the foregoing, from the date hereof until the Closing Date, Major Shareholders shall cause the Target Companies:
(a) to preserve and maintain all of its Permits;
(b) to pay their debts, Taxes and other obligations when due;
(c) to maintain the properties and assets owned, operated or used by the Target Companies in the same condition as they were on the date of this Agreement, subject to reasonable wear and tear;
(d) to continue in full force and effect without modification all Insurance Policies, except as required by applicable Law;
(e) to defend and protect their properties and assets from infringement or usurpation;
(f) to perform all of its obligations under all Contracts relating to or affecting its properties, assets or business;
(g) to maintain their books and records in accordance with past practice;
(h) to comply with all applicable Laws; and
(i) not to take or permit any action that would cause any of the changes, events or conditions described in Section 3.08 to occur.
Section 5.02 Access to Information. From the date hereof until the Closing, Major Shareholders shall, and shall cause the Target Companies to, (a) afford Buyer and its Representatives full and free access to and the right to inspect all of the Real Property, properties, assets, premises, books and records, Contracts and other documents and data related to the Target Companies; (b) furnish Buyer and its Representatives with such financial, operating and other data and information related to the Target Companies as Buyer or any of its Representatives may reasonably request; and (c) instruct the Representatives of Shareholders and the Target Companies to cooperate with Buyer in its investigation of the Target Companies. Any investigation pursuant to this Section 5.02 shall be conducted in such manner as not to interfere unreasonably with the conduct of the business the Target Companies.
Section 5.03 No Solicitation of Other Bids.
(a) Seller and Shareholders shall not, and shall not authorize or permit any of its Affiliates (including the Target Companies) or any of its or their Representatives to, directly or indirectly, (i) encourage, solicit, initiate, facilitate or continue inquiries regarding an Acquisition Proposal; (ii) enter into discussions or negotiations with, or provide any information to, any Person concerning a possible Acquisition Proposal; or (iii) enter into any agreements or other instruments (whether or not binding) regarding an Acquisition Proposal. Each Shareholder and Seller shall immediately cease and cause to be terminated, and shall cause its Affiliates (including the Target Companies) and all of its and their Representatives to immediately cease and cause to be terminated, all existing discussions or negotiations with any Persons conducted heretofore with respect to, or that could lead to, an Acquisition Proposal. For purposes hereof, "Acquisition Proposal" shall mean any inquiry, proposal or offer from any Person (other than Buyer or any of its Affiliates) concerning (A) a merger, consolidation, liquidation, recapitalization, share exchange or other business combination transaction involving any Target Company; (B) the issuance or acquisition of shares of capital stock or other equity securities of any Target Company; or (C) the sale, lease, exchange or other disposition of any significant portion of the Target Companies' properties or assets.
(b) In addition to the other obligations under this Section 5.03, Major Shareholders shall promptly (and in any event within three (3) Business Days after receipt thereof by a Major Shareholder or its Representatives) advise Buyer orally and in writing of any Acquisition Proposal, any request for information with respect to any Acquisition Proposal, or any inquiry with respect to or which could reasonably be expected to result in an Acquisition Proposal, the material terms and conditions of such request, Acquisition Proposal or inquiry, and the identity of the Person making the same.
(c) Seller and Shareholders agree that the rights and remedies for noncompliance with this Section 5.03 shall include having such provision specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to Buyer and that money damages would not provide an adequate remedy to Buyer.
Section 5.04 Notice of Certain Events.
(a) From the date hereof until the Closing, Major Shareholders shall promptly notify Buyer in writing of:
(i) any fact, circumstance, event or action the existence, occurrence or taking of which (A) has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (B) has resulted in, or could reasonably be expected to result in, any representation or warranty made by Seller or Shareholders hereunder not being true and correct or (C) has resulted in, or could reasonably be expected to result in, the failure of any of the conditions set forth in Section 7.02 to be satisfied;
(ii) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement;
(iii) any notice or other communication from any Governmental Authority in connection with the transactions contemplated by this Agreement; and
(iv) any Actions commenced or, to Shareholders' Knowledge, threatened against, relating to or involving or otherwise affecting Seller, a Shareholder or any Target Company that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.17 or that relates to the consummation of the transactions contemplated by this Agreement.
(b) Buyer's receipt of information pursuant to this Section 5.04 shall not operate as a waiver or otherwise affect any representation, warranty or agreement given or made by Seller or Shareholders in this Agreement (including Section 8.02 and Section 9.01(b)) and shall not be deemed to amend or supplement the Disclosure Schedules.
Section 5.05 If requested in writing prior to Closing by Buyer, one or more officers and directors of Target Companies shall deliver to Buyer written resignations, effective as of the Closing Date, of the applicable offices with the Target Companies.
Section 5.06 Confidentiality. From and after the Closing, each of the Shareholders and Seller shall, and each shall cause its Affiliates and Representatives (collectively, the "Restricted Parties") to hold in confidence any and all information, whether written or oral, concerning the Target Companies, except to the extent that the Restricted Parties can show that such information (a) is generally available to and known by the public through no fault of a Restricted Party; or (b) is lawfully acquired by such Restricted Party from and after the Closing from sources which are not prohibited from disclosing such information by a legal, contractual or fiduciary obligation. If a Restricted Party is compelled to disclose any information by judicial or administrative process or by other requirements of Law, such Restricted Party shall promptly notify Buyer in writing and shall disclose only that portion of such information which such Restricted Party is advised by its counsel in writing is legally required to be disclosed, provided that the Restricted Parties shall use reasonable best efforts to obtain an appropriate protective order or other reasonable assurance that confidential treatment will be accorded such information.
Section 5.07 Non-competition; Non-solicitation.
(a) For a period equal to the later of (i) 24 months after the Closing Date, or (ii) 24 months after the date that such Person's and/or such Person's Affiliate’s employment with a Target Company or Affiliate of Buyer shall terminate (the "Restriction Period"), none of Seller, Pegasus, Molina, Epstein or Herrera (all of the foregoing being the “Restricted Sellers”) shall, and none of the Restricted Sellers shall permit any of their Affiliates to, directly or indirectly, (i) engage in or assist others in engaging in the Restricted Business in the Territory; (ii) have an interest in any Person that engages directly or indirectly in the Restricted Business in the Territory in any capacity, including as a partner, shareholder, member, employee, principal, agent, trustee or consultant; or (iii) intentionally interfere in any material respect with the business relationships (whether formed prior to or after the date of this Agreement) between the a Target Company and its customers or suppliers. Notwithstanding the foregoing, each Restricted Seller may own, directly or indirectly, solely as an investment, securities of any Person traded on any national securities exchange if such Restricted Seller is not a controlling Person of, or a member of a group which controls, such Person and does not, directly or indirectly, own 5% or more of any class of securities of such Person.
(b) During the Restriction Period, Restricted Sellers shall not, and shall not permit any of their Affiliates to, directly or indirectly, hire or solicit any employee of a Target Company or encourage any such employee to leave such employment or hire any such employee who has left such employment except pursuant to a general solicitation which is not directed specifically to any such employees.
(c) During the Restriction Period, Restricted Sellers shall not, and shall not permit any of their Affiliates to, directly or indirectly, solicit or entice, or attempt to solicit or entice, any clients or customers of a Target Company or potential clients or customers of a Target Company for purposes of diverting their business or services from the Target Company.
(d) Each Shareholder and Seller agrees that it shall (i) maintain the strict confidence of, undertake all necessary steps to avoid divulging or disclosing, and preserve and protect the trade secrets, know-how, discoveries, concepts, ideas, market studies, business plans, products, services, costs, processes, techniques, protocols, plans for future development, market analyses, product uses, projects and plans, customer lists, information regarding Target Companies' financial status, customers, profits, profit margins, project costs, pricing information and any other information that may not be known generally or publicly outside of Target Companies (collectively, "Confidential Information") from disclosure to, or access or use by, any person or entity, including any competitor or potential competitor of the Business, and (ii) not use the Confidential Information to compete, directly or indirectly, with the Business, nor attempt to otherwise take commercial advantage of the Confidential Information. Each Shareholder and Seller acknowledges that the Confidential Information constitutes valuable, special and unique property of the business of the Target Companies being acquired by Buyer. Buyer has expressly or impliedly protected such information from unrestricted use by persons not associated with Buyer. Each Shareholder and Seller agrees to return and deliver to Buyer at Closing any and all papers, books, records, documents, memoranda and manuals, including all copies thereof, whether hard or digital copies, belonging or relating to the business of the Target Companies, or containing any Confidential Information.
(e) To the extent that a Shareholder or Seller or their respective Affiliates owns, acquires or controls any part of the Intellectual Property used by or relating to the business of the Target Companies, or any rights therein, such party hereby irrevocably assigns, transfers, conveys and quitclaims all right, title and interest therein and thereto to Target Companies, and agrees to irrevocably assign, transfer, convey and quitclaim any and all future ownership and rights, title and interest therein and thereto to Target Companies. Furthermore, to the extent that some or all of such Intellectual Property are determined not to constitute "works made for hire," as a matter of law, each Shareholder and Seller hereby irrevocably assigns, transfers, conveys and quitclaims to Target Companies, without any separate or additional remuneration or compensation, all right, title and interest in and to any such Intellectual Property, including, without limitation, any copyrights.
(f) Seller and Shareholders acknowledge that a breach or threatened breach of this Section 5.07 would give rise to irreparable harm to Buyer, for which monetary damages would not be an adequate remedy, and hereby agrees that in the event of a breach or a threatened breach by Seller or a Shareholder of any such obligations, Buyer shall, in addition to any and all other rights and remedies that may be available to it in respect of such breach, be entitled to equitable relief, including a temporary restraining order, an injunction, specific performance and any other relief that may be available from a court of competent jurisdiction (without any requirement to post bond).
(g) Seller and Shareholders acknowledge that the restrictions contained in this Section 5.07 are reasonable and necessary to protect the legitimate interests of Buyer and constitute a material inducement to Buyer to enter into this Agreement and consummate the transactions contemplated by this Agreement. In the event that any covenant contained in this Section 5.07 should ever be adjudicated to exceed the time, geographic, product or service, or other limitations permitted by applicable Law in any jurisdiction, then any court is expressly empowered to reform such covenant, and such covenant shall be deemed reformed, in such jurisdiction to the maximum time, geographic, product or service, or other limitations permitted by applicable Law. The covenants contained in this Section 5.07 and each provision hereof are severable and distinct covenants and provisions. The invalidity or unenforceability of any such covenant or provision as written shall not invalidate or render unenforceable the remaining covenants or provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such covenant or provision in any other jurisdiction.
(h) The parties agree and acknowledge that no portion of the Purchase Price shall be allocated to the covenants set forth in this Section 5.07.
Section 5.08 Governmental Approvals and Consents.
(a) Major Shareholders and Buyer shall, as promptly as possible, (i) make, or cause or be made, all filings and submissions required under any Law applicable to such party or any of its Affiliates; and (ii) use reasonable best efforts to obtain, or cause to be obtained, all consents (except for any consents requirements triggered by the Restructuring), authorizations, orders and approvals from all Governmental Authorities that may be or become necessary for its execution and delivery of this Agreement and the performance of its obligations pursuant to this Agreement and the other Transaction Documents. Each party shall cooperate fully with the other party and its Affiliates in promptly seeking to obtain all such consents, authorizations, orders and approvals. The parties hereto shall not willfully take any action that will have the effect of delaying, impairing or impeding the receipt of any required consents, authorizations, orders and approvals.
(b) Major Shareholders and Buyer shall use reasonable best efforts to give all notices to, and obtain all consents from, all third parties that are described in Section 3.05 of the Disclosure Schedules.
(c) Without limiting the generality of the parties' undertakings pursuant to subsections (a) and (b) above, each of the Major Shareholders and Buyer shall use all reasonable best efforts to:
(i) respond to any inquiries by any Governmental Authority regarding antitrust or other matters with respect to the transactions contemplated by this Agreement or any Transaction Document;
(ii) avoid the imposition of any order or the taking of any action that would restrain, alter or enjoin the transactions contemplated by this Agreement or any Transaction Document; and
(iii) in the event any Governmental Order adversely affecting the ability of the parties to consummate the transactions contemplated by this Agreement or any Transaction Document has been issued, to have such Governmental Order vacated or lifted.
(d) If any consent, approval or authorization necessary to preserve any right or benefit under any Contract to which a Target Company is a party is not obtained prior to the Closing, Major Shareholders shall, subsequent to the Closing, cooperate with Buyer and the Target Company in attempting to obtain such consent, approval or authorization as promptly thereafter as practicable. If such consent, approval or authorization cannot be obtained, Major Shareholders shall use reasonable best efforts to provide the Target Company with the rights and benefits of the affected Contract for the term thereof, and, if Major Shareholders provide such rights and benefits, the Target Company shall assume all obligations and burdens thereunder.
(e) All analyses, appearances, meetings, discussions, presentations, memoranda, briefs, filings, arguments, and proposals made by or on behalf of either party before any Governmental Authority or the staff or regulators of any Governmental Authority, in connection with the transactions contemplated hereunder (but, for the avoidance of doubt, not including any interactions between Major Shareholders or the Target Companies with Governmental Authorities in the ordinary course of business, any disclosure which is not permitted by Law or any disclosure containing confidential information) shall be disclosed to the other party hereunder in advance of any filing, submission or attendance, it being the intent that the parties will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any such analyses, appearances, meetings, discussions, presentations, memoranda, briefs, filings, arguments, and proposals. Each party shall give notice to the other party with respect to any meeting, discussion, appearance or contact with any Governmental Authority or the staff or regulators of any Governmental Authority, with such notice being sufficient to provide the other party with the opportunity to attend and participate in such meeting, discussion, appearance or contact.
(f) Notwithstanding the foregoing, nothing in this Section 5.08 shall require, or be construed to require, Buyer or any of its Affiliates to agree to (i) sell, hold, divest, discontinue or limit, before or after the Closing Date, any assets, businesses or interests of Buyer, the Target Companies or any of their respective Affiliates; (ii) any conditions relating to, or changes or restrictions in, the operations of any such assets, businesses or interests which, in either case, could reasonably be expected to result in a Material Adverse Effect or materially and adversely impact the economic or business benefits to Buyer of the transactions contemplated by this Agreement; or (iii) any material modification or waiver of the terms and conditions of this Agreement.
Section 5.09 Books and Records.
(a) In order to facilitate the resolution of any claims, investigations, audits or other similar inquiries made against or incurred by Shareholders prior to the Closing, or for any other reasonable purpose, for a period of five years after the Closing, Buyer shall:
(i) retain the books and records (including personnel files) of the Target Companies relating to periods prior to the Closing in a manner reasonably consistent with the prior practices of the Target Companies; and
(ii) upon reasonable notice, afford Shareholders or their Representatives reasonable access (including the right to make, at a Shareholders' expense, photocopies), during normal business hours, to such books and records; provided, however, that any books and records related to Tax matters shall be retained pursuant to the periods set forth in Article VI.
(b) In order to facilitate the resolution of any claims, investigations, audits or other similar inquiries made by or against or incurred by Buyer or the Target Companies after the Closing, or for any other reasonable purpose, for a period of five years following the Closing, Major Shareholders shall:
(i) retain the books and records (including personnel files) which relate to the Target Companies and its operations for periods prior to the Closing; and
(ii) upon reasonable notice, afford the Representatives of Buyer or the Target Companies reasonable access (including the right to make, at Buyer's expense, photocopies), during normal business hours, to such books and records; provided, however, that any books and records related to Tax matters shall be retained pursuant to the periods set forth in Article VI.
(c) Neither Buyer nor Major Shareholders shall be obligated to provide the other party with access to any books or records (including personnel files) pursuant to this Section 5.09 where such access would violate any Law.
Section 5.10 Closing Conditions. From the date hereof until the Closing, each party hereto shall, and Major Shareholders shall cause the Target Companies to, use reasonable best efforts to take such actions as are necessary to expeditiously satisfy the closing conditions set forth in Article VII.
Section 5.11 Public Announcements. The parties acknowledge that Buyer will announce the Closing of the transactions contemplated by this Agreement as required under applicable Law and stock exchange requirements.
Section 5.12 Shareholders' Guaranties.
(a) Major Shareholders and Buyer shall use reasonable best efforts to ensure that, effective as of the Closing, each Shareholder is removed as a personal guarantor of any post-Closing obligations of a Target Company under any guaranties executed by any Shareholder in favor of a Target Company including, without limitation, those items set forth in Exhibit D (collectively, the " Shareholders' Guaranties"). In the event that Buyer and Major Shareholder are unable to remove the Shareholders from all Shareholders' Guaranties prior to the Closing Date, Buyer and Major Shareholders agree to use reasonable best efforts to remove Shareholders from any ongoing Shareholders' Guaranties as promptly as possible following the Closing and in particular: (a) within a reasonable time following the Closing, the Buyer shall cause the Company to replace the American Express credit card account currently held by it, and which is guaranteed by Nicolas Molina, with a replacement credit card with no personal guaranty by any Seller; and (b) within sixty (60) days following the Closing, the Buyer shall cause the Company to replace the current merchant accounts which are personally guaranteed by David Mardini with replacement merchant accounts with no personal guaranty by any Seller. As set forth in Section 8.03(c), Buyer will indemnify the Shareholders for any liability of the Shareholders relating to post-Closing obligations of the Target Companies arising under such Shareholders' Guaranties.
Section 5.13 Further Assurances. Following the Closing, each of the parties hereto shall, and shall cause their respective Affiliates to, execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement.
Section 5.14 Buyer's Retirement Plan. For purposes of determining eligibility and vesting of employees of the Target Companies in Buyer's retirement plan and for all other employee benefits and perquisites (including length of vacation time), and to the extent allowable by the plan documents, Buyer shall recognize all service credit of a Target Company's employees with the Target Company.
Section 5.15 Closed Retail Locations. Major Shareholders represent and warrant to Buyer that all leases affecting the Company-owned retail locations set forth on Section 5.15 of the Disclosure Schedules (the "Closed Retail Locations") have been terminated. Major Shareholders have made available to Buyer in the Data Room true and complete copies of the termination agreements for all Closed Retail Locations
Section 5.16 Payment of Bonus Compensation. Seller agrees that it shall be solely responsible for and shall pay any amounts due to employees (including the Bonused Employees) of the Target Companies with respect to any phantom stock in the Target Companies or other bonus arrangements or bonus plans or other compensation arrangements pursuant to which a right to compensation or bonus amounts have accrued through the Closing Date or are triggered by the consummation of the transactions contemplated by this Agreement, which responsibility shall include the obligation to withhold from such compensation tax withholding amounts subject to the terms of Section 2.06.
ARTICLE VI
TAX MATTERS
Section 6.01 Tax Covenants; Tax Returns.
(a) Prior to Closing, the Shareholders, the Company and the Seller shall complete the Restructuring. Seller and Shareholders agree that they will not file a "check-the-box" election or take any other action resulting in the Company being taxed as an association taxable as a corporation. The parties acknowledge that the sale of the Shares by Seller and the acquisition by Buyer of the Shares are intended to be treated for federal tax purposes as a purchase and sale of assets, and each of the parties shall file all applicable income tax returns consistent with the treatment of the transaction as an asset sale and purchase.
(b) Buyer shall not take any action with respect to any Tax filing or Tax Return relating to any Target Company for the period ending at the Effective Time. Buyer shall prepare, or cause to be prepared, all Tax Returns for the Target Companies for the period after the Effective Time.
(c) All transfer, documentary, sales, use, stamp, registration, value added and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the other Transaction Documents (including any real property transfer Tax and any other similar Tax) shall be borne and paid fifty percent by the Seller and fifty percent by Buyer when due. Seller shall, at its own expense, timely file any Tax Return or other document with respect to such Taxes or fees (and Buyer shall cooperate with respect thereto as necessary).
(d) Each of the parties acknowledges that such party has relied on his or its own tax advisors with respect to the tax consequences of the Restructuring and the IRS filings and other aspects of structuring and implementing the Restructuring and that such party acknowledges that it has not relied on any representations and warranties or other information provided by any other party's tax advisors in connection with the structuring and implementation and tax consequences of the Restructuring.
Section 6.02 Tax Indemnification. Except to the extent attributable to a Buyer Tax Act, Seller shall indemnify the Buyer, and each Buyer Indemnitee and hold them harmless from and against (a) any Loss to Buyer or the Target Companies attributable to any breach of or inaccuracy in any representation or warranty made in Section 3.22; (b) any Loss to Buyer or the Target Companies attributable to any breach or violation of, or failure to fully perform, any covenant, agreement, undertaking or obligation in this Article VI; (c) any Loss to Buyer or the Target Companies attributable to Taxes of the Target Companies (or relating to the businesses of the Target Companies) up to and including the Closing Date; (d) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which a Target Company (or any predecessor of such Target Company) is or was a member on or prior to the Closing Date by reason of a liability under Treasury Regulation Section 1.1502-6 or any comparable provisions of foreign, state or local Law; and (e) any and all Taxes of any person imposed on a Target Company arising under the principles of transferee or successor liability or by contract, relating to an event or transaction occurring before the Closing Date; in each of the above cases, together with any out-of-pocket fees and expenses (including reasonable attorneys' and accountants' fees) incurred in connection therewith.
Section 6.03 Allocation of Purchase Price. The parties agree that the Purchase Price and the Liabilities of the Target Companies (which are Indebtedness paid off at Closing or thereafter) (plus other relevant items) shall be allocated among the assets of the Target Companies for tax purposes) in accordance with this Agreement and as shown on the allocation schedule attached hereto as Exhibit H (the "Allocation Schedule"). The Allocation Schedule is intended to comply with the requirements of Section 1060 of the Code and the applicable Treasury Regulations promulgated thereunder (and any similar provision of state, local or foreign Law, as appropriate). The Buyer, the Seller and their respective Affiliates shall report all Tax and file all Tax Returns and any amendments to such Tax Returns required with respect to any adjustment to the Purchase Price (including Internal Revenue Service Form 8594) in all respects and for all purposes consistent with the Allocation Schedule. None of the Target Companies, Seller, Buyer, or any of their Affiliates shall take any position (whether in audits, Tax Returns or otherwise) that is inconsistent with the information set forth on the Allocation Schedule, unless required to do so by applicable Law; provided, however, that the amount realized by Seller may differ from the total amount allocated hereunder to reflect transaction costs that reduce the amount realized for federal income Tax purposes. In the event that any adjustment is required to be made to the Allocation Schedule as a result of an adjustment to the Purchase Price pursuant to this Agreement, such adjustment shall be made in a manner consistent with the Allocation Schedule and Seller shall prepare or cause to be prepared, and shall provide to Buyer a revised Allocation Schedule reflecting such adjustment.
Section 6.04 Contests.
(a) The Seller shall control the preparation, prosecution, defense, settlement or other resolution, and conduct, through counsel of its own choosing and at its own expense, of any Tax Claim (as defined below) relating to Seller or any of the Target Companies relating to any Pre-Closing Period.
(b) The Buyer shall control the preparation, prosecution, defense, settlement or other resolution, and conduct, through counsel of its own choosing and at its own expense, of any Tax Claim relating to any of the Subsidiaries of Seller that are Target Companies relating to any Post-Closing Period.
(c) For the avoidance of doubt, this Section 6.04, and not Section 8.05, shall govern the conduct of any Tax Claims. Without limiting the foregoing, the parties hereto shall cooperate fully, as and to the extent reasonably requested by any other party, in connection with the filing of Tax Returns arising from any Tax Claim (including signing any such Tax Returns) and the preparation, prosecution, defense or conduct of any audit, claim for refund, or administrative or judicial Actions involving any asserted Tax liability or refund (any such audit, claim for refund, or Actions relating to an asserted Tax liability referred to herein as a "Tax Claim").
Section 6.05 Tax Refunds.
(a) Any refund (or credit against Taxes received in lieu of an actual refund) of Taxes (including any interest thereon received from a Governmental Authority) of each Target Company for a Post-Closing Tax Period shall be the property of the Target Company and shall be retained by the Target Company.
(b) Any refund (or credit against Taxes received in lieu of an actual refund) of Taxes (including any interest thereon received from a Governmental Authority) of each Target Company for a Pre-Closing Tax Period shall be the property of the Seller and, if received or utilized by Buyer (or any of its Affiliates) or the Target Companies after the Closing shall be promptly paid (net of Taxes actually paid by Buyer or the Target Companies and any other costs and expenses) by such party to the Seller's Representative (for the benefit of the Seller).
(c) Any refund of Taxes (including any interest thereon) for a Taxable period of a Target Company that includes but does not end on the Closing Date shall be allocated between the Pre-Closing Tax Period and the Post-Closing Tax Period based on the percentage of the relevant tax year represented by each such period.
Section 6.06 Cooperation and Exchange of Information. Seller and Buyer shall provide each other with such cooperation and information as either of them reasonably may request of the other in filing any Tax Return pursuant to this Article VI or in connection with any audit or other Actions in respect of Taxes of the Target Companies. Such cooperation and information shall include providing copies of relevant Tax Returns or portions thereof, together with accompanying schedules, related work papers and documents relating to rulings or other determinations by Tax Authorities. Seller shall retain all Tax Returns, schedules and work papers, records and other documents in its possession relating to Tax matters of the Target Companies for any Pre-Closing Tax Period until the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions.
Section 6.07 [Intentionally Deleted]
Section 6.08 Overlap. To the extent that any obligation or responsibility pursuant to Article VIII may overlap with an obligation or responsibility pursuant to this Article VI, the provisions of this Article VI shall govern.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.01 Conditions to Obligations of All Parties. The obligations of each party to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions:
(a) No Governmental Authority shall have enacted, issued, promulgated, enforced or entered any Governmental Order which is in effect and has the effect of making the transactions contemplated by this Agreement illegal, otherwise restraining or prohibiting consummation of such transactions or causing any of the transactions contemplated hereunder to be rescinded following completion thereof.
(b) Major Shareholders shall have received all consents, authorizations, orders and approvals from the Governmental Authorities referred to in Section 3.05 (if any) and Buyer shall have received all consents, authorizations, orders and approvals from the Governmental Authorities referred to in Section 4.02 (if any), in each case, in form and substance reasonably satisfactory to Buyer and the Seller's Representative, and no such consent, authorization, order and approval shall have been revoked.
Section 7.02 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or Buyer's waiver, at or prior to the Closing, of each of the following conditions:
(a) Other than the representations and warranties of Shareholders and Seller contained in Section 3.01, Section 3.02, Section 3.03, Section 3.06 and Section 3.24, the representations and warranties of Seller and Shareholders contained in this Agreement, the other Transaction Documents and any certificate or other writing delivered pursuant hereto shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Material Adverse Effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or Material Adverse Effect) on and as of the date hereof and on and as of the Closing Date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects). The representations and warranties of Seller and Shareholders contained in Section 3.01, Section 3.02, Section 3.03, Section 3.06 and Section 3.24 shall be true and correct in all respects on and as of the date hereof and on and as of the Closing Date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects).
(b) Each of the Shareholders, Seller's Representative and Seller shall have duly performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement and each of the other Transaction Documents to be performed or complied with by it prior to or on the Closing Date.
(c) No Action shall have been commenced against Buyer, a Shareholder, Seller or a Target Company, which would prevent the Closing. No injunction or restraining order shall have been issued by any Governmental Authority, and be in effect, which restrains or prohibits any transaction contemplated hereby.
(d) Consent by the landlord(s) and sublandlord(s) with respect to the leases of the Company’s headquarters and warehouse located at 14412-20 and 14300 Commerce Way, Miami Lakes, Florida, that are listed on Section 3.05 of the Disclosure Schedules shall have been received, and executed counterparts thereof shall have been delivered to Buyer at or prior to the Closing.
(e) From the date of this Agreement, there shall not have occurred any Material Adverse Effect, nor shall any event or events have occurred that, individually or in the aggregate, with or without the lapse of time, could reasonably be expected to result in a Material Adverse Effect.
(f) The Transaction Documents (other than this Agreement) shall have been executed and delivered by the parties thereto and true and complete copies thereof shall have been delivered to Buyer.
(g) Buyer shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Company certifying as to correct and complete copies of (i) each Target Company's Organizational Documents, (ii) incumbency and signatures of officers of the Company, and (iii) resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the Transaction Documents to which the Company is a party, and the taking of any and all actions reasonably necessary to consummate the transactions contemplated herein and therein.
(h) Buyer shall have received resignations of the directors and officers of the Target Companies pursuant to Section 5.05.
(i) Intentionally deleted.
(j) Intentionally Deleted.
(k) Seller's Representative shall have delivered to Buyer good standing certificates (or its equivalent) for each Target Company from the secretary of state or similar Governmental Authority of the jurisdiction under the Laws in which each such Target Company is organized.
(l) Seller shall have delivered a statement (in such form as may be reasonably requested by counsel to Buyer), dated as of the Closing Date and executed by the Seller's President, certifying that for purposes of satisfying Buyer's obligations under Treasury Regulation Section 1.1445-2(b)(2), the Seller is not a "foreign person" as defined in Section 1445 of the Code.
(m) If requested by Buyer, Seller's Representative shall cause the Company to deliver to Buyer written resignations, effective as of Closing, of all officers and directors of the Company.
(n) Seller's Representative shall have delivered to Buyer any necessary payoff or similar letters with respect to the repayment and satisfaction, simultaneous with or prior to Closing, of the Indebtedness (other than the Assumed Indebtedness), and the Company's assets shall have been released, or be eligible for release, from all security interests thereon and the Company shall have taken all steps necessary to terminate, or initiate the termination of, all UCC financing statements which have been filed with respect to such security interests (except, in each case, with respect to the Assumed Indebtedness).
(o) Each Shareholder shall have delivered to Buyer a general release by such Shareholder of the Target Companies (and with respect to Pegasus by Nicolas Molina and with respect to Milander by Steven Martinez), in the form of Exhibit I attached hereto.
(p) Seller's Representative shall have delivered, or caused Seller to have delivered, to Buyer a certificate for 50,000 Units of limited liability company interest in the Company evidencing the Shares, free and clear of Encumbrances, duly endorsed in blank or accompanied by a stock power or other instruments of transfer duly executed in blank (or other satisfactory evidence of the existence and title to such equity in Buyer's sole discretion).
(q) Seller's Representative shall have delivered documents sufficient to cause Buyer's designees to be added, and the designees of the Target Companies to be removed, as signatories with respect to each Target Company's bank accounts and to terminate any powers of attorney.
(r) Seller's Representative shall have delivered to Buyer such other documents or instruments as Buyer reasonably requests and are reasonably necessary to consummate the transactions contemplated by this Agreement.
(s) Seller's Representative shall have disclosed all known instances, incidents, claims, lawsuits, demands, investigations, fines, warnings, adverse health effects or other similar information relating to the Products.
(t) Seller's Representative shall have preserved all health documents in his possession, regardless of source or date publish, and have provided such information to Buyer prior to the Closing Date.
(u) At or prior to Closing, Seller's Representative and Buyer shall have agreed upon and executed the Closing Statement.
(v) Seller's Representative shall have delivered agreements and instruments effecting the Restructuring, in form and content satisfactory to Buyer.
(w) The Target Companies shall have prepared and provided copies to Buyer of all necessary documents to enable all franchisees to register such franchisees as manufacturers post-closing (with such documents to be distributed to the franchisees following, and not prior to, the Closing).
Section 7.03 Conditions to Obligations of Seller. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or Seller's waiver, at or prior to the Closing, of each of the following conditions:
(a) Other than the representations and warranties of Buyer contained in Section 4.01 and Section 4.04, the representations and warranties of Buyer contained in this Agreement, the other Transaction Documents and any certificate or other writing delivered pursuant hereto shall be true and correct in all respects (in the case of any representation or warranty qualified by materiality or Material Adverse Effect) or in all material respects (in the case of any representation or warranty not qualified by materiality or Material Adverse Effect) on and as of the date hereof and on and as of the Closing Date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects). The representations and warranties of Buyer contained in Section 4.01 and Section 4.04 shall be true and correct in all respects on and as of the date hereof and on and as of the Closing Date with the same effect as though made at and as of such date.
(b) Buyer shall have duly performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement and each of the other Transaction Documents to be performed or complied with by it prior to or on the Closing Date.
(c) No injunction or restraining order shall have been issued by any Governmental Authority, and be in effect, which restrains or prohibits any material transaction contemplated hereby.
(d) The Transaction Documents (other than this Agreement) shall have been executed and delivered by the parties thereto and true and complete copies thereof shall have been delivered to Sellers.
(e) Seller shall have received a certificate, dated the Closing Date and signed by a duly authorized officer of Buyer, that each of the conditions set forth in Section 7.03(a) and Section 7.03(b) have been satisfied.
(f) Seller shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying that attached thereto are true and complete copies of all resolutions adopted by the board of directors of Buyer authorizing the execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby.
(g) Seller shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying the names and signatures of the officers of Buyer authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder.
(h) Buyer shall have delivered to Seller's Representative (i) the Buyer Shares, (ii) the Buyer Parent Note, and (iii) cash in an amount equal to the Closing Payment, by wire transfer in immediately available funds, to an account or accounts designated by Seller's Representative in a written notice to Buyer.
(i) Buyer shall have delivered to Seller such other documents or instruments as Seller's Representative reasonably request and are reasonably necessary to consummate the transactions contemplated by this Agreement
