EXHIBIT 99.1
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of June 15, 1998, between NORTHERN
TELECOM LIMITED, a Canadian corporation ("Grantee"), and BAY NETWORKS, INC.,
a Delaware corporation ("Issuer").
W I T N E S S E T H:
WHEREAS, concurrently herewith, Grantee and Issuer are entering
into an Agreement and Plan of Merger (the "Merger Agreement");
WHEREAS, as a condition and inducement to Grantee's execution of
the Merger Agreement and pursuant of the transactions contemplated thereby
and in consideration therefor, Issuer has agreed to grant Grantee the Option
(as hereinafter defined); and
WHEREAS, the Board of Directors of Issuer has approved the grant of
the Option and the Merger Agreement prior to the execution hereof;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. The Option. (a) Issuer hereby grants to Grantee an
unconditional, irrevocable option (the "Option") to purchase, subject to the
terms hereof, up to an aggregate of 33,232,634 fully paid and nonassessable
shares of the common stock, $0.01 par value per share, of Issuer ("Common
Stock") at a price per share equal to $33.29 (such price, as adjusted if
applicable, the "Option Price"); provided, however, that in no event shall
the number of shares for which this Option is exercisable exceed 14.9% of the
issued and outstanding shares of Common Stock at the time of exercise without
giving effect to the shares of Common Stock issued or issuable under the
Option. The number of shares of Common Stock that may be received upon the
exercise of the Option and the Option Price are subject to adjustment as
herein set forth.
(b) In the event that any additional shares of Common Stock are
issued or otherwise become outstanding after the date of this Agreement
(other than pursuant to this Agreement and other than pursuant to an event
described in Section 5(a) hereof), the number of shares of Common Stock
subject to the Option shall be increased so that, after such issuance, such
number together with any shares of Common Stock previously issued pursuant
hereto, equals 14.9% of the number of shares of Common Stock then issued and
outstanding without giving effect to any shares subject or issued pursuant to
the Option. Nothing contained in this Section 1(b) or elsewhere in this
Agreement shall be deemed to authorize Issuer or Grantee to breach any
provision of the Merger Agreement.
2. Exercise; Closing. (a) Grantee and/or any other person that
shall become a holder of all or part of the Option in accordance with the
terms of this Agreement (each such person being referred to herein as the
"Holder") may exercise the Option, in whole or part, if, but only if, the
Termination Fee provided for in Section 8.02(b) of the Merger Agreement has
become payable (a "Triggering Event") and such exercise is prior to the
occurrence of an Exercise Termination Event (as hereinafter defined).
Notwithstanding anything to the contrary contained herein, this Agreement
shall automatically terminate upon the termination of the Merger Agreement by
Issuer pursuant to Section 8.01(b) thereof.
(b) Each of the following shall be an "Exercise Termination
Event":
(i) the Effective Time (as defined in the Merger Agreement); or
(ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of
a Triggering Event and at the time of such termination the conditions
prerequisite to a Triggering Event occurring in the future are incapable
of being fulfilled; or
(iii) the passage of thirteen (13) months (or such longer period as
provided in Section 10) after termination of the Merger Agreement; or
(iv) the receipt by Grantee of the Termination Fee.
(c) Issuer shall notify Grantee promptly in writing of the
occurrence of any Triggering Event (other than a Triggering Event by reason
of a termination of the Merger Agreement pursuant to Section 8.01(e)), it
being understood that the giving of such notice by Issuer shall not be a
condition to the right of the Holder to exercise the Option.
(d) In the event the Holder is entitled to and wishes to exercise
the Option (or any portion thereof), it shall send to Issuer a written notice
(the date of which being herein referred to as the "Notice Date") specifying
(i) the total number of shares it will purchase pursuant to such exercise and
(ii) a place and date not earlier than three business days nor later than
60 business days from the Notice Date for the closing of such purchase (the
"Closing Date"); provided, that if the closing of such purchase cannot be
consummated by reason of any applicable judgment, injunction, decree, order,
law or regulation, the period of time that would otherwise run pursuant to
this sentence shall run instead from the date on which such restriction on
consummation has expired or been terminated; and provided, further, that if
prior notification to or approval of any regulatory or antitrust agency is
required in connection with such purchase, the Holder shall promptly file the
required notice or application for approval, shall promptly notify Issuer of
such filing, and shall expeditiously process the same and the period of time
that otherwise would run pursuant to this sentence shall run instead from the
date on which any required notification periods have expired or been
terminated or such approvals have been obtained and any requisite waiting
period or periods shall have passed. Any exercise of the Option shall be
deemed to occur on the Notice Date relating thereto.
(e) At the closing referred to in subsection (d) of this
Section 2, the Holder shall (i) pay to Issuer the aggregate purchase price
for the shares of Common Stock purchased pursuant to the exercise of the
Option in immediately available funds by wire transfer to a bank account
designated by Issuer, provided that failure or refusal of Issuer to designate
such a bank account shall not preclude the Holder from exercising the Option
by delivery of a certified check or bank draft and (ii) present and surrender
this Agreement to Issuer.
(f) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (e) of this Section 2,
Issuer shall deliver to the Holder a certificate or certificates representing
the number of shares of Common Stock purchased by the Holder and, if the
Option should be exercised in part only, a new Option evidencing the rights
of the Holder thereof to purchase the balance of the shares purchasable
hereunder.
(g) Certificates for Common Stock delivered at a closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this
certificate is subject to certain provisions of an
agreement between the registered holder hereof and Issuer
and to resale restrictions arising under applicable
securities laws (including the Securities Act of 1933, as
amended). A copy of such agreement is on file at the
principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a
written request therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions arising under applicable securities laws, including the
Securities Act of 1933, as amended (the "Securities Act"), in the above
legend shall be removed by delivery of substitute certificate(s) without such
reference if the Holder shall have delivered to Issuer a copy of a letter
from the staff of the Securities and Exchange Commission, or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the Securities Act or
other applicable securities laws; (ii) the reference to the provisions of
this Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference in the
opinion of counsel to the Holder, in form and substance reasonably
satisfactory to Issuer; and (iii) the legend shall be removed in its entirety
if the conditions in the preceding clauses (i) and (ii) are both satisfied.
In addition, such certificates shall bear any other legend as may be required
by law.
The Holder understands and agrees that the Option is being issued to the
Holder pursuant to the registration and prospectus exceptions in paragraph
35(1) and clause 72(1)(b0 of the Securities Act (Ontario) (the "Ontario Act")
and that the resale of the Option or Common Stock issued upon exercise of the
Option is restricted by the provisions of the Ontario Act and other
applicable Canadian securities legislation.
(h) Upon the giving by the Holder to Issuer of the written notice
of exercise of the Option provided for under subsection (f) of this Section 2
and the tender of the applicable purchase price in immediately available
funds, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of Issuer shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. Issuer shall pay all expenses, and any and all United States
federal, state and local taxes and other charges that may be payable in
connection with the preparation, issue and delivery of stock certificates
under this Section 2 in the name of the Holder or its assignee, transferee or
designee.
3. Covenants of Issuer. In addition to its other agreements and
covenants herein, Issuer agrees:
(a) that it shall at all times maintain, free from any
subscription or preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock so that the Option may be exercised
without additional authorization of Common Stock after giving effect to
all other options, warrants, convertible securities and other rights of
third parties to purchase Common Stock from Issuer or to cause Issuer to
issue shares of Common Stock;
(b) that it will not, by charter amendment or through
reorganization, consolidation, merger, dissolution or sale of assets, or
by any other voluntary act, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by Issuer; and
(c) promptly to take all action as may from time to time be
required (including complying with all applicable notification, filing
reporting and waiting period requirements under HSR or otherwise, and
cooperating fully with the Holder in preparing any applications or
notices and providing such information to any regulatory authority as it
may require) in order to permit the Holder to exercise the Option and
Issuer duly and effectively to issue shares of Common Stock pursuant
hereto.
4. Exchange; Replacement. This Agreement (and the Option granted
hereby) are exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Issuer, for other Agreements providing for Options of different denominations
entitling the holder thereof to purchase, on the same terms and subject to
the same conditions as are set forth herein, in the aggregate the same number
of shares of Common Stock purchasable hereunder. The terms "Agreement" and
"Option" as used herein include any Agreements and related Options for which
this Agreement (and the Option granted hereby) may be exchanged. Upon
receipt by Issuer of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Agreement, and (in the case of loss,
theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost,
stolen, destroyed or mutilated shall at any time be enforceable by any person
other than the holder of the new Agreement.
5. Adjustments. In addition to the adjustment in the number of
shares of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common Stock
purchasable upon the exercise of the Option and the Option Price shall be
subject to adjustment from time to time as provided in this Section 5.
(a) In the event of any change in, or distributions in respect of,
the Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares or the like, the type and number of shares of Common Stock purchasable
upon exercise hereof shall be appropriately adjusted and proper provision
shall be made so that, in the event that any additional shares of Common
Stock are to be issued or otherwise become outstanding as a result of any
such change (other than pursuant to an exercise of the Option), the number of
shares of Common Stock that remain subject to the Option shall be increased
so that, after such issuance and together with shares of Common Stock
previously issued pursuant to the exercise of the Option (as adjusted on
account of any of the foregoing changes in the Common Stock), it equals 14.9%
of the number of shares of Common Stock then issued and outstanding.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which shall be equal to the number of shares of Common Stock
purchasable prior to the adjustment and the denominator of which shall be
equal to the number of shares of Common Stock purchasable after the
adjustment.
6. Registration. (a) Upon the occurrence of any Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered within twelve (12) months (or such later period
as provided in Section 10) of such Triggering Event (whether on its own
behalf or on behalf of any subsequent holder of this Option (or part thereof)
or any of the shares of Common Stock issued pursuant hereto), promptly
prepare, file and keep current a shelf registration statement under the
Securities Act covering any shares issued and issuable pursuant to this
Option and shall use its reasonable best efforts to cause such registration
statement to become effective and remain current in order to permit the sale
or other disposition of any shares of Common Stock issued upon total or
partial exercise of this Option ("Option Shares") in accordance with any plan
of disposition requested by Grantee. Issuer will use its reasonable best
efforts to cause such registration statement promptly to become effective and
then to remain effective for such period not in excess of 180 days from the
day such registration statement first becomes effective or such shorter time
as may be reasonably necessary to effect such sales or other dispositions.
Grantee shall have the right to demand two such registrations. The Issuer
shall bear the costs of such registrations (including, but not limited to,
Issuer's attorneys' fees, printing costs and filing fees, except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto). The foregoing
notwithstanding, if, at the time of any request by Grantee for registration
of Option Shares as provided above, Issuer is in registration with respect to
an underwritten public offering by Issuer of shares of Common Stock, and if
in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the inclusion of the Option Shares would interfere with the
successful marketing of the shares of Common Stock offered by Issuer, the
number of Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; provided, however, that after any such
required reduction the number of Option Shares to be included in such
offering for the account of the Holder shall constitute at least 25% of the
total number of shares to be sold by the Holder and Issuer in the aggregate;
and provided further, however, that if such reduction occurs, then Issuer
shall file a registration statement for the balance as promptly as
practicable thereafter as to which no reduction pursuant to this Section 6
shall be permitted or occur and the Holder shall thereafter be entitled to
one additional registration and the twelve (12) month period referred to in
the first sentence of this section shall be increased to twenty-four (24)
months. Each such Holder shall provide all information reasonably requested
by Issuer for inclusion in any registration statement to be filed hereunder.
If requested by any such Holder in connection with such registration, Issuer
shall become a party to any underwriting agreement relating to the sale of
such shares, but only to the extent of obligating itself in respect of
representations, warranties, indemnities and other agreements customarily
included in such underwriting agreements for Issuer. Upon receiving any
request under this Section 6 from any Holder, Issuer agrees to send a copy
thereof to any other person known to Issuer to be entitled to registration
rights under this Section 6, in each case by promptly mailing the same,
postage prepaid, to the address of record of the persons entitled to receive
such copies. Notwithstanding anything to the contrary contained herein, in
no event shall the number of registrations that Issuer is obligated to effect
be increased by reason of the fact that there shall be more than one Holder
as a result of any assignment or division of this Agreement.
(b) In the event that Grantee so requests, the closing of the sale
or other disposition of the Common Stock or other securities pursuant to a
registration statement filed pursuant to Section 6(a) shall occur
substantially simultaneously with the exercise of the Option.
(c) If the Common Stock or the class of any other securities to be
acquired upon exercise of the Option are then listed on the New York Stock
Exchange, Inc., Issuer, upon the request of the Holder, shall promptly file
an application to list the Common Stock or other securities to be acquired
upon exercise of the Option on the New York Stock Exchange, Inc. and will use
its reasonable best efforts to obtain approval of such listing as soon as
practicable.
7. Repurchase of Option and/or Option Shares. (a) At any time
after the occurrence of a Triggering Event (i) at the request of the Holder,
delivered in writing prior to an Exercise Termination Event (or such later
period as provided in Section 10), Issuer (or any successor thereto) shall
repurchase the Option from the Holder at a price (the "Option Repurchase
Price") equal to the amount by which (A) the market/offer price (as defined
below) exceeds (B) the Option Price, multiplied by the number of shares for
which this Option may then be exercised and (ii) at the request of the owner
of Option Shares from time to time (the "Owner"), delivered in writing prior
to an Exercise Termination Event (or such later period as provided in
Section 10), Issuer (or any successor thereto) shall repurchase such number
of the Option Shares from the Owner as the Owner shall designate at a price
(the "Option Share Repurchase Price") equal to the market/offer price
multiplied by the number of Option Shares so designated. The term
"market/offer price" shall mean the highest of (i) the price per share of
Common Stock at which a tender or exchange offer therefor has been made,
(ii) the price per share of Common Stock to be paid by any third party
pursuant to an agreement with Issuer, (iii) the highest closing price for
shares of Common Stock within the six-month period immediately preceding the
date the Holder gives notice of the required repurchase of this Option or the
Owner gives notice of the required repurchase of Option Shares, as the case
may be, or (iv) in the event of a sale of all or substantially all of
Issuer's assets, the sum of the net price paid in such sale for such assets
and the current market value of the remaining net assets of Issuer as
determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at the
time of such sale, which determination, absent manifest error, shall be
conclusive for all purposes of this Agreement. In determining the
market/offer price, the value of consideration other than cash shall be
determined by a nationally recognized investment banking firm selected by the
Holder or Owner, as the case may be, and reasonably acceptable to Issuer,
which determination, absent manifest error, shall be conclusive for all
purposes of this Agreement.
(b) The Holder and the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option and any Option Shares
pursuant to this Section 7 by surrendering for such purpose to Issuer, at its
principal office, a copy of this Agreement or certificates for Option Shares,
as applicable, accompanied by a written notice or notices stating that the
Holder or the Owner, as the case may be, elects to require Issuer to
repurchase this Option and/or the Option Shares in accordance with the
provisions of this Section 7. As promptly as practicable, and in any event
within five business days after the surrender of the Option and/or
certificates representing Option Shares and the receipt of such notice or
notices relating thereto, Issuer shall deliver or cause to be delivered to
the Holder the Option Repurchase Price and/or to the Owner the Option Share
Repurchase Price therefor or the portion thereof that Issuer is not then
prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law
or regulation from repurchasing the Option and/or the Option Shares in full,
Issuer shall immediately so notify the Holder and/or the Owner and thereafter
deliver or cause to be delivered, from time to time, to the Holder and/or the
Owner, as appropriate, the portion of the Option Repurchase Price and the
Option Share Repurchase Price, respectively, that it is no longer prohibited
from delivering, within five business days after the date on which Issuer is
no longer so prohibited; provided, however, that if Issuer at any time after
delivery of a notice of repurchase pursuant to paragraph (b) of this
Section 7 is prohibited under applicable law or regulation from delivering to
the Holder and/or the Owner, as appropriate, the Option Repurchase Price and
the Option Share Repurchase Price, respectively, in full (and Issuer hereby
undertakes to use its reasonable best efforts to obtain all required
regulatory and legal approvals and to file any required notices as promptly
as practicable in order to accomplish such repurchase), the Holder or Owner
may revoke its notice of repurchase of the Option and/or the Option Shares
whether in whole or to the extent of the prohibition, whereupon, in the
latter case, Issuer shall promptly (i) deliver to the Holder and/or the
Owner, as appropriate, that portion of the Option Repurchase Price and/or the
Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to the Holder, a new Agreement
evidencing the right of the Holder to purchase that number of shares of
Common Stock obtained by multiplying the number of shares of Common Stock for
which the surrendered Agreement was exercisable at the time of delivery of
the notice of repurchase by a fraction, the numerator of which is the Option
Repurchase Price less the portion thereof theretofore delivered to the Holder
and the denominator of which is the Option Repurchase Price, and/or (B) to
the Owner, a certificate for the Option Shares it is then so prohibited from
repurchasing. If an Exercise Termination Event shall have occurred prior to
the date of the notice by Issuer described in the first sentence of this
subsection (c), or shall be scheduled to occur at any time before the
expiration of a period ending on the thirtieth day after such date, the
Holder shall nonetheless have the right to exercise the Option until the
expiration of such 30-day period.
8. Substitute Option. (a) In the event that prior to an Exercise
Termination Event, Issuer shall enter into an agreement (i) to consolidate
with or merge into any person, other than Grantee or any of its Subsidiaries
(collectively, "Excluded Persons") and Issuer shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than an Excluded Person, to merge into Issuer and Issuer shall
be the continuing or surviving or acquiring corporation, but, in connection
with such merger, the then outstanding shares of Common Stock shall be
changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged or acquiring company, or (iii) to sell or
otherwise transfer all or substantially all of its or any Significant
Subsidiary's assets to any person, other than an Excluded Person, then, and
in each such case, the agreement governing such transaction shall make proper
provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option (the "Substitute Option"), at the election
of the Holder, of either (x) the Acquiring Corporation (as hereinafter
defined) or (y) any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving person of a consolidation or merger with Issuer (if other than
Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving or acquiring person, and (iii) the transferee of all or
substantially all of Issuer's assets (or the assets of a Significant
Subsidiary of Issuer).
(ii) "Substitute Shares" shall mean the shares of capital stock (or
similar equity interest) with the greatest voting power in respect of
the election of directors (or other persons similarly responsible for
direction of the business and affairs) of the issuer of the Substitute
Option.
(iii) "Assigned Value" shall mean the market/offer price, as defined
in Section 7.
(iv) "Average Price" shall mean the average closing price per
Substitute Share, on the principal trading market on which such shares
are traded as reported by a recognized source, for one year immediately
preceding the consolidation, merger or sale in question, but in no event
higher than the closing price of the Substitute Shares on such market on
the day preceding such consolidation, merger or sale; provided that if
Issuer is the issuer of the Substitute Option, the Average Price shall
be computed with respect to a share of common stock issued by the person
merging into Issuer or by any company which controls or is controlled by
such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to the Holder. The issuer of the
Substitute Option shall also enter into an agreement with the then Holder or
Holders of the Substitute Option in substantially the same form as this
Agreement (after giving effect for such purpose to the provisions of
Section 9), which agreement shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
Substitute Shares as is equal to the Assigned Value multiplied by the number
of shares of Common Stock for which the Option was exercisable immediately
prior to the event described in the first sentence of Section 8(a), divided
by the Average Price. The exercise price of the Substitute Option per
Substitute Share shall then be equal to the Option Price multiplied by a
fraction, the numerator of which shall be the number of shares of Common
Stock for which the Option was exercisable immediately prior to the event
described in the first sentence of Section 8(a) and the denominator of which
shall be the number of Substitute Shares for which the Substitute Option is
exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs,
shall the number of shares purchasable upon exercise of the Substitute Option
exceed 14.9% of the Substitute Shares then issued and outstanding at the time
of exercise (without giving effect to Substitute Shares issued or issuable
under the Substitute Option). In the event that the Substitute Option would
be exercisable for more than 14.9% of the Substitute Shares then issued and
outstanding prior to exercise but for this clause (e), the issuer of the
Substitute Option (the "Substitute Option Issuer") shall make a cash payment
to Holder equal to the excess of (i) the value of the Substitute Option
without giving effect to the limitation in this clause (e) over (ii) the
value of the Substitute Option after giving effect to the limitation in this
clause (e). This difference in value shall be determined by a nationally
recognized investment banking firm selected by Grantee (or, if Grantee is not
then the Holder owning Options with respect to the largest number of Shares,
the largest Holder), which determination, absent manifest error, shall be
conclusive for all purposes of this Agreement.
(f) In addition to any other restrictions or covenants, Issuer
agrees that it shall not enter or agree to enter into any transaction
described in Section 8(a) unless (i) the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations
of Issuer hereunder and (ii) the Substitute Option Issuer agrees to comply
with this Section 8 and agrees to take all action necessary to prevent the
exercise of any rights of any holder of Substitute Shares or shares of
capital stock of any successor to the Substitute Option Issuer that any
holder of the Substitute Option (each such person being referred to herein as
a "Substitute Option Holder") or any holder of Substitute Shares (each such
person being referred to herein as a "Substitute Share Owner") purchased upon
exercise of the Substitute Option by a Substitute Option Holder would be
prohibited or precluded from exercising or the exercise of which would
adversely affect the rights of any Substitute Option Holder under the
agreement for such Substitute Option or the transactions contemplated by the
Merger Agreement.
9. Repurchase of Substitute Option. (a) At the written request
of a Substitute Option Holder, the Substitute Option Issuer shall repurchase
the Substitute Option from the Substitute Option Holder at a price (the
"Substitute Option Repurchase Price") equal to the amount by which (i) the
Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise
price of the Substitute Option, multiplied by the number of Substitute Shares
for which the Substitute Option may then be exercised, and at the request of
the Substitute Share Owner, the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price") equal
to the Highest Closing Price multiplied by the number of Substitute Shares so
designated. The term "Highest Closing Price" shall mean the highest closing
price for Substitute Shares within the six-month period immediately preceding
the date the Substitute Option Holder gives notice of the required repurchase
of the Substitute Option or the Substitute Share Owner gives notice of the
required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner,
as the case may be, may exercise its respective rights to require the
Substitute Option Issuer to repurchase the Substitute Option and the
Substitute Shares pursuant to this Section 9 by surrendering for such purpose
to the Substitute Option Issuer, at its principal office, the agreement for
such Substitute Option (or, in the absence of such an agreement, a copy of
this Agreement) and/or certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or the
Substitute Share Owner, as the case may be, elects to require the Substitute
Option Issuer to repurchase the Substitute Option and/or the Substitute
Shares in accordance with the provisions of this Section 9. As promptly as
practicable and in any event within five business days after the surrender of
the Substitute Option and/or certificates representing Substitute Shares and
the receipt of such notice or notices relating thereto, the Substitute Option
Issuer shall deliver or cause to be delivered to the Substitute Option Holder
the Substitute Option Repurchase Price and/or to the Substitute Share Owner
the Substitute Share Repurchase Price therefor or the portion thereof which
the Substitute Option Issuer is not then prohibited under applicable law and
regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation from repurchasing the Substitute Option
and/or the Substitute Shares in part or in full, the Substitute Option Issuer
shall immediately so notify the Substitute Option Holder and/or the
Substitute Share Owner and thereafter deliver or cause to be delivered, from
time to time, to the Substitute Option Holder and/or the Substitute Share
Owner, as appropriate, the portion of the Substitute Option Repurchase Price
and/or the Substitute Share Repurchase Price, respectively, which it is no
longer prohibited from delivering, within five (5) business days after the
date on which the Substitute Option Issuer is no longer so prohibited;
provided, however, that if the Substitute Option Issuer is at any time after
delivery of a notice of repurchase pursuant to subsection (b) of this
Section 9 prohibited under applicable law or regulation from delivering to
the Substitute Option Holder and/or the Substitute Share Owner, as
appropriate, the Substitute Option Repurchase Price and the Substitute Share
Repurchase Price, respectively, in full (and the Substitute Option Issuer
shall use its best efforts to receive all required regulatory and legal
approvals as promptly as practicable in order to accomplish such repurchase),
the Substitute Option Holder and/or Substitute Share Owner may revoke its
notice of repurchase of the Substitute Option or the Substitute Shares either
in whole or to the extent of prohibition, whereupon, in the latter case, the
Substitute Option Issuer shall promptly (i) deliver to the Substitute Option
Holder or Substitute Share Owner, as appropriate, that portion of the
Substitute Option Repurchase Price or the Substitute Share Repurchase Price
that the Substitute Option Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a
new Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of Substitute Shares obtained by multiplying the number
of Substitute Shares for which the surrendered Substitute Option was
exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Substitute Option Repurchase Price
less the portion thereof theretofore delivered to the Substitute Option
Holder and the denominator of which is the Substitute Option Repurchase
Price, and/or (B) to the Substitute Share Owner, a certificate for the
Substitute Option Shares it is then so prohibited from repurchasing. If an
Exercise Termination Event shall have occurred prior to the date of the
notice by the Substitute Option Issuer described in the first sentence of
this subsection (c), or shall be scheduled to occur at any time before the
expiration of a period ending on the thirtieth day after such date, the
Substitute Option Holder shall nevertheless have the right to exercise the
Substitute Option until the expiration of such 30-day period.
10. Extension. The 30-day, 6-month, 12-month, 18-month or 24-
month periods for exercise of certain rights under Sections 2, 6, 7, 9,
12 and 15 shall be extended: (i) to the extent necessary to obtain all
governmental and regulatory approvals for the exercise of such rights (for so
long as the Holder, Owner, Substitute Option Holder or Substitute Share
Owner, as the case may be, is using commercially reasonable efforts to obtain
such regulatory approvals), and for the expiration of all statutory waiting
periods; (ii) during any period for which an injunction or similar legal
prohibition on exercise shall be in effect and (iii) to the extent necessary
to avoid liability under Section 16(b) of the Securities Exchange Act of
1934, as amended, by reason of such exercise.
11. Representations and Warranties. (a) Issuer hereby represents
and warrants to Grantee as follows:
(i) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of Issuer and no other
corporate proceedings on the part of Issuer are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Issuer and
constitutes a valid and legally binding obligation of Issuer enforceable
in accordance with its terms.
(ii) Issuer has taken all necessary corporate action to authorize
and reserve and to permit it to issue, and at all times from the date
hereof through the termination of this Agreement in accordance with its
terms will have reserved for issuance upon the exercise of the Option,
that number of shares of Common Stock equal to the maximum number of
shares of Common Stock at any time and from time to time issuable
hereunder, and all such shares, upon issuance pursuant to the Option,
will be duly authorized, validly issued, fully paid, nonassessable, and
will be delivered free and clear of all claims, liens, encumbrances and
security interests (other than those created by this Agreement) and not
subject to any preemptive rights.
(iii) The execution, delivery and performance of this Agreement does
not or will not, and the consummation by Issuer of any of the
transactions contemplated hereby will not, constitute or result in (i) a
breach or violation of or a default under, its articles or certificate
of incorporation or by-laws, or the comparable governing instruments of
any of its subsidiaries, or (ii) a breach or violation of or a default
under, any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation of it or any of its subsidiaries (with
or without the giving of notice, the lapse of time or both) or under any
law, rule, ordinance or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which it or any of
its subsidiaries is subject.
(b) Grantee hereby represents and warrants to Issuer that Grantee
has full corporate power and authority to enter into this Agreement and,
subject to obtaining the approvals referred to in this Agreement, to
consummate the transactions contemplated by this Agreement; the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the party of Grantee; and this Agreement has been duly executed and
delivered by Grantee and constitutes a valid and legally binding obligation
of Grantee enforceable in accordance with its terms.
12. Assignment. Neither of the parties hereto may assign any of
its rights or obligations under this Agreement or the Option created
hereunder to any other person, without the express written consent of the
other party, except that in the event a Triggering Event shall have occurred
prior to an Exercise Termination Event, Grantee, subject to the express
provisions hereof, may assign in whole or in part its rights and obligations
hereunder within twelve (12) months following such Triggering Event (or such
later period as provided in Section 10).
13. Filings; Other Actions. Each of Grantee and Issuer will use
its best efforts to make all filings with, and to obtain consents of, all
third parties and regulatory and governmental authorities necessary to the
consummation of the transactions contemplated by this Agreement, including,
without limitation, notices and filings under HSR.
14. Total Profit. (a) Notwithstanding any other provision of
this Agreement, in no event shall the Grantee's Total Profit (as hereinafter
defined) exceed $ 275 million less the amount of any fee paid pursuant to
Section 8.02(b) of the Merger Agreement and, if it otherwise would exceed
such amount, the Grantee, at its sole election, shall either (i) reduce the
number of shares of Common Stock subject to this Option, (ii) deliver to
Issuer for cancellation Option Shares previously purchased by Grantee,
(iii) pay cash to Issuer, or (iv) any combination thereof, so that Grantee's
actually realized Total Profit shall not exceed such amount after taking into
account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this
Option may not be exercised for a number of shares as would, as of the date
of exercise, result in a Notional Total Profit (as defined below) of more
than $275 million less the amount of any fee paid pursuant to Section 8.02(b)
of the Merger Agreement; provided that nothing in this sentence shall
restrict any exercise of the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (i) the amount received by
Grantee pursuant to Issuer's repurchase of the Option (or any portion
thereof) pursuant to Section 7, (ii) (x) the amount received by Grantee
pursuant to Issuer's repurchase of Option Shares pursuant to Section 7, less
(y) the Grantee's purchase price for such Option Shares, (iii) (x) the net
cash amounts received by Grantee pursuant to the sale of Option Shares (or
any other securities into which such Option Shares are converted or
exchanged) to any unaffiliated party, less (y) the Grantee's purchase price
of such Option Shares, (iv) any amounts received by Grantee on the transfer
of the Option (or any portion thereof) to any unaffiliated party, and (v) any
amount equivalent to the foregoing with respect to the Substitute Option.
(d) As used herein, the term "Notional Total Profit" with respect
to any number of shares as to which Grantee may propose to exercise this
Option shall be the Total Profit determined as of the date of such proposed
exercise assuming that this Option were exercised on such date for such
number of shares and assuming that such shares, together with all other
Option Shares (or any other securities into which such Option Shares are
converted or exchanged) held by Grantee and its affiliates as of such date,
were sold for cash at the closing market price for the Common Stock as of the
close of business on the preceding trading day (less customary brokerage
commissions).
15. Specific Performance. The parties hereto acknowledge that
damages would be an inadequate remedy for a breach of this Agreement by
either party hereto and that the obligations of the parties hereto shall be
enforceable by either party hereto through injunctive or other equitable
relief.
16. Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated. If for any
reason such court or regulatory agency determines that the Holder is not
permitted to acquire, or Issuer is not permitted to repurchase pursuant to
Section 7, the full number of shares of Common Stock provided in Section 1(a)
hereof (as adjusted pursuant to Section 1(b) or Section 5 hereof), it is the
express intention of Issuer to allow the Holder to acquire or to require
Issuer to repurchase such lesser number of shares as may be permissible,
without any amendment or modification hereof.
17. Notices. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by fax, telecopy, or by registered or certified mail
(postage prepaid, return receipt requested) at the respective addresses of
the parties set forth in the Merger Agreement.
18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
20. Expenses. Except as otherwise expressly provided herein, each
of the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
21. Entire Agreement. Except as otherwise expressly provided
herein or in the Merger Agreement, this Agreement contains the entire
agreement between the parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with
respect thereof, written or oral. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto and
their respective successors and permitted assignees. Nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto, and their respective successors except as assignees,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
22. Captions; Capitalized Terms. The Article, Section and
paragraph captions herein are for convenience of reference only, do not
constitute part of this Agreement and shall not be deemed to limit or
otherwise affect any of the provisions hereof. Capitalized terms used in
this Agreement and not defined herein shall have the meanings assigned
thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement
to be executed on its behalf by its officers thereunto duly authorized, all
as of the date first above written.
NORTHERN TELECOM LIMITED
By:/s/ John A. Roth
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Name:
Title:
By:/s/ C.W. Scott
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Name:
Title:
BAY NETWORKS, INC.
By:/s/ David L. House
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Name:
Title: