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EXHIBIT 99.4
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated as of March 9, 1998, by and between
Avalon Properties, Inc., a Maryland corporation ("ISSUER"), and Bay Apartment
Communities, Inc., a Maryland corporation ("GRANTEE").
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and
Plan of Merger dated as of the date hereof (as amended from time to time, the
"MERGER AGREEMENT"), which agreement has been executed by the parties hereto
immediately prior to the execution of this Stock Option Agreement (this
"AGREEMENT"); and
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "OPTION") to purchase, subject to the terms hereof, up to 8,584,000
fully paid and nonassessable shares of Issuer's Common Stock, par value $.01 per
share ("COMMON STOCK"), at a price of $28.8125 per share (the "OPTION PRICE");
PROVIDED, HOWEVER, that in no event shall the number of shares of Common Stock
for which this Option is exercisable exceed 19.9% of the Issuer's issued and
outstanding shares of Common Stock without giving effect to any shares subject
to or issued pursuant to 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 either
(i) issued or otherwise become outstanding after the date of this Agreement
(other than pursuant to this Agreement), or (ii) redeemed, repurchased, retired
or otherwise cease to be outstanding after the date of this Agreement, the
number of shares of Common Stock subject to the Option shall be increased or
decreased, as appropriate, so that, after such issuance, such number equals
19.9% 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.
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2. (a) Holder (as hereinafter defined) may exercise the Option, in whole
or part, and from time to time, if, but only if, a Triggering Event (as
hereinafter defined) shall have occurred prior to the occurrence of an Exercise
Termination Event (as hereinafter defined), PROVIDED that Holder shall have sent
to Issuer written notice of such exercise (as provided in subsection (e) of this
Section 2) within 90 days following such Triggering Event (or if, following the
occurrence of a Triggering Event, and prior to an Exercise Termination Event,
there shall have occurred an Extension Event, within 90 days following such
Extension Event). Each of the following shall be an "EXERCISE TERMINATION
EVENT": (i) the Effective Time (as defined in the Merger Agreement) of the
Merger; (ii) termination of the Merger Agreement in accordance with the
provisions thereof if such termination occurs prior to the occurrence of a
Triggering Event except a termination by Grantee pursuant to Section 8.1(b) of
the Merger Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional); or (iii) the passage of 18 months after
termination of the Merger Agreement if such termination follows the occurrence
of a Triggering Event or is a termination by Grantee pursuant to Section 8.1(b)
of the Merger Agreement (unless the breach by Issuer giving rise to such right
of termination is non-volitional). The term "HOLDER" shall mean the holder or
holders of the Option.
(b) The term "TRIGGERING EVENT" shall mean any of the following events
or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each, an "ISSUER
SUBSIDIARY"), without having received Grantee's prior written consent, shall
have entered into an agreement to engage in an Acquisition Transaction (as
hereinafter defined) with any person (the term "person" for purposes of this
Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3)
of the Securities Exchange Act of 1934, as amended (the "1934 ACT"), and the
rules and regulations thereunder) other than Grantee or any of its Subsidiaries
(each a "GRANTEE SUBSIDIARY"), or the Board of Directors of Issuer shall have
recommended that the stockholders of Issuer approve or accept any Acquisition
Transaction. For purposes of this Agreement, "ACQUISITION TRANSACTION" shall
mean (w) a merger or consolidation, or any similar transaction, involving Issuer
or any Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC")) of Issuer,
(x) a purchase, lease or other acquisition or assumption of all or a substantial
portion of the assets of Issuer or any Significant Subsidiary of Issuer, (y) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of the voting
power of Issuer, or (z) any substantially similar transaction; PROVIDED,
HOWEVER, that in no event shall (A) the transactions contemplated by the Merger
Agreement or the entering into of the Merger Agreement constitute an Acquisition
Transaction or (B) any merger, consolidation, purchase or similar transaction
involving only the Issuer and one or more of its Subsidiaries or involving only
any two or more of such Subsidiaries be deemed to be an Acquisition Transaction,
provided such transaction is not entered into in violation of the terms of the
Merger Agreement;
(ii) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended, proposed,
or publicly
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announced its intention to authorize, recommend or propose, an Acquisition
Transaction with any person other than Grantee or a Grantee Subsidiary, or the
Board of Directors of Issuer shall have publicly withdrawn or modified, or
publicly announced its intention to withdraw or modify, in any manner adverse to
Grantee, its recommendation that the stockholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation of engaging in
an Acquisition Transaction with any person other than Grantee or Grantee
Subsidiary, or the Board of Directors of Issuer shall have publicly announced
its intention not to recommend that the stockholders of Issuer approve the
transactions contemplated by the Merger Agreement because of or in connection
with an actual or proposed Acquisition Transaction involving any person other
than Grantee or Grantee Subsidiary;
(iii) Any person other than Grantee or any Grantee Subsidiary (and
also excluding any person who shall have beneficial ownership or the right to
acquire beneficial ownership of 10% or more of the outstanding shares of Common
Stock as of immediately following the time the Merger Agreement is entered into,
unless and until any such person shall have beneficial ownership or the right to
acquire beneficial ownership of a percentage of the outstanding shares of Common
Stock that is 110% or more of such person's level of beneficial ownership as of
such time) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common Stock
(the term "beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the 1934 Act, and the rules and
regulations thereunder);
(iv) Any person other than Grantee or any Grantee Subsidiary shall
have made a bona fide proposal to Issuer or its stockholders by public
announcement or written communication that is or becomes the subject of public
disclosure to engage in an Acquisition Transaction; or
(v) After an overture is made by any person other than Grantee or
any Grantee Subsidiary to Issuer or its stockholders to engage in an Acquisition
Transaction, Issuer shall have breached any covenant or obligation contained in
the Merger Agreement and such breach (x) would entitle Grantee to terminate the
Merger Agreement and (y) shall not have been cured prior to the Notice Date (as
defined below).
(c) The term "EXTENSION EVENT" shall mean either of the following
events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 20%
or more of the then outstanding Common Stock; or
(ii) The occurrence of the Triggering Event described in paragraph
(i) of subsection (b) of this Section 2, except that the percentage referred to
in clause (y) thereof shall be 20%.
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(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Triggering Event or Extension Event of which Issuer has notice, it being
understood and agreed that the giving of such notice by Issuer shall not be a
condition to the right of Holder to exercise the Option.
(e) In the event Holder is entitled to and wishes to exercise the
Option, 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 of
Common Stock 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 prior notification to or approval of any governmental authority is
required in connection with such purchase, Holder and Issuer shall promptly file
the required notice, form or application for approval 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.
(f) At the closing referred to in subsection (e) of this Section 2,
Holder shall 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
Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of the purchase
price as provided in subsection (f) of this Section 2, Issuer shall deliver to
Holder a certificate or certificates representing the number of shares of Common
Stock purchased by Holder and, if the Option shall have been exercised in part
only, a new Option evidencing the rights of Holder thereof to purchase the
balance of the shares of Common Stock purchasable hereunder, and Holder shall
deliver to Issuer a copy of this Agreement. By receipt of any shares of Common
Stock issuable hereunder Holder will agree, and does hereby agree, not to offer
to sell or otherwise dispose of such shares in violation of the Securities Act
of 1933, as amended (the "1933 ACT"), other applicable law or the provisions of
this Agreement.
(h) Certificates for shares of 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 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."
(i) The reference to the resale restrictions of the 1933 Act, in the
above legend shall be removed by delivery of substitute certificate(s) without
such reference if Holder shall
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have delivered to Issuer a copy of a letter from the staff of the SEC, 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 1933 Act; (ii)
the reference to the provisions to 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; 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.
(j) Upon the giving by Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price under subsection (f) of this Section
2, 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 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 Holder or its
assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
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 to purchase Common Stock; (ii)
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;
(iii) that it shall promptly take all action as may from time to time be
required in order to permit Holder to exercise the Option and Issuer duly and
effectively to issue shares of Common Stock pursuant hereto; and (iv) that it
shall promptly take all action provided herein to protect the rights of Holder
against dilution and otherwise hereunder.
4. This Agreement (and the Option granted hereby) are exchangeable, without
expense, at the option of 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 this Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
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5. 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. 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, distributions on or in respect of the Common Stock that would be
prohibited under the terms of the Merger Agreement, or the like, the type and
number of securities purchasable upon exercise hereof and the Option Price shall
be appropriately adjusted in such manner as shall fully preserve the economic
benefits provided hereunder and proper provision shall be made in any agreement
governing any such transaction to provide for, and the inclusion and validity of
such provision shall be a condition to, the validity and consummation of any
such transaction, such proper adjustment and the full satisfaction of the
Issuer's obligations hereunder.
6. Upon the occurrence of a Triggering Event that occurs prior to an
Exercise Termination Event, Issuer shall, at the request of Grantee delivered
within 90 days 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 1933 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 distribution 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 a period of 180 days from the
day such registration statement first becomes effective. Grantee shall have the
right to demand two such registrations. 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
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 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 if such
reduction occurs, then the Issuer shall file a registration statement for the
balance as promptly as practical and no reduction shall thereafter occur. 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 secondary
offering underwriting agreements for the 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
Issuer be obligated to effect more than two registrations pursuant to this
Section 6 by reason of the fact
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that there shall be more than one Grantee as a result of any assignment or
division of this Agreement.
7. (a) (i) At the request of Holder or of the owner of Option Shares (the
"OWNER"), delivered following the occurrence of a Triggering Event and prior to
the occurrence of a Repurchase Event (as defined below), and prior to an
Exercise Termination Event, Issuer (or any successor thereto) shall, immediately
prior to the Repurchase Event, repurchase (x) in the case of a request from
Holder, the Option from 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 then subject to the Option,
and (y) in the case of a request from the Owner, such number of 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, and (ii) at the request of Holder or the Owner,
delivered within 90 days after such Repurchase Event(or such later period as
provided in Section 10), Issuer shall repurchase (x) in the case of a request
from Holder, the Option from Holder at the Option Repurchase Price, and (y) in
the case of a request from the Owner, such number of Option Shares from the
Owner as the Owner shall designate at the Option Share Repurchase Price. The
term "MARKET/OFFER PRICE" shall mean the highest of (i) the price per share of
Common Stock at which a tender offer or exchange offer therefor has been made in
connection with such Repurchase Event or within the six-month period immediately
preceding the date 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, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with Issuer in connection with such Repurchase
Event, (iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date 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, and (iv) in the event of a sale
of all or a substantial portion of Issuer's assets, the sum of the price paid in
such sale for such assets and the current market value of the remaining assets
of Issuer as determined by a nationally recognized investment banking firm
selected by Holder or the Owner, as the case may be, and reasonably acceptable
to the Issuer, divided by the number of shares of Common Stock of Issuer
outstanding at the time of such sale. 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 Holder or Owner, as the case may
be, and reasonably acceptable to the Issuer.
(b) 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 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. Prior to the later to occur of (x) 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 and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall deliver
or cause to be delivered to Holder the Option Repurchase Price and/or to the
Owner the Option Share Repurchase Price therefor or the
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portion thereof, if any, that Issuer is not then prohibited under applicable law
and regulations 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 Holder and/or the Owner and thereafter deliver or
cause to be delivered, from time to time, to 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 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 best
efforts to obtain all required regulatory and legal approvals and to file any
required notices, in each case as promptly as practicable in order to accomplish
such repurchase), Holder or Owner may revoke its notice of repurchase of the
Option or the Option Shares either in whole or to the extent of the prohibition,
whereupon, in the latter case, Issuer shall promptly (i) deliver to Holder
and/or the Owner, as appropriate, that portion of the Option Repurchase Price or
the Option Share Repurchase Price that Issuer is not prohibited from delivering;
and (ii) deliver, as appropriate, either (A) to Holder, a new Agreement
evidencing the right of 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 Holder and the denominator of
which is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a "REPURCHASE EVENT" shall be
deemed to have occurred upon either (i) the consummation of any merger,
consolidation or similar transaction involving Issuer or any purchase, lease or
other acquisition of all or a substantial portion of the assets of Issuer, other
than any such transaction which would not constitute an Acquisition Transaction
pursuant to the proviso to Section 2(b)(i), or (ii) the acquisition by any
person of beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, in either case before an Exercise Termination Event. Prior to the
occurrence of any Repurchase Event, the Issuer shall notify in writing the
Holder and each Owner of such Repurchase Event.
8. (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 one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving 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 voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries,
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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
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 corporation of a consolidation or merger with Issuer (if
other than Issuer), (ii) Issuer in a merger in which Issuer is the
continuing or surviving person, and (iii) the transferee of all or
substantially all of Issuer's assets.
(ii) "SUBSTITUTE COMMON STOCK" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise 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 of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock 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
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 to those
of the Option and in no event less advantageous to Holder of the Option. 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, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall 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 is then exercisable and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option. In the
event that the Substitute Option would be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to
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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 Holder or the Owner, as the case may be, and reasonably acceptable to the
Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"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 (x) 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 shares of Substitute Common Stock
for which the Substitute Option may then be exercised plus (y) Grantee's
reasonable out-of-pocket expenses (to the extent not previously reimbursed), and
at the request of the owner (the "SUBSTITUTE SHARE OWNER") of shares of
Substitute Common Stock (the "SUBSTITUTE SHARES"), the Substitute Option Issuer
shall repurchase the Substitute Shares at a price (the "SUBSTITUTE SHARE
REPURCHASE PRICE") equal to (x) the Highest Closing Price multiplied by the
number of Substitute Shares so designated plus (y) Grantee's reasonable
out-of-pocket expenses (to the extent not previously reimbursed). The term
"HIGHEST CLOSING PRICE" shall mean the highest closing price for shares of
Substitute Common Stock 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 right 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
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, in either case, the portion thereof which the Substitute Option
Issuer is not then prohibited under applicable law and regulation from so
delivering.
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(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 following a
request for repurchase pursuant to this Section 9 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 Share Repurchase Price, respectively, which it is no longer
prohibited from delivering, within five 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 obtain any
such required regulatory and legal approvals, in each case as promptly as
practicable, in order to accomplish such repurchase), the Substitute Option
Holder 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
the 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 shares of the Substitute
Common Stock obtained by multiplying the number of shares of the Substitute
Common Stock 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, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so prohibited
from repurchasing.
10. The 90-day period for exercise of certain rights under Sections 2, 6, 7
and 14 shall be extended: (i) to the extent necessary to obtain all legal and
regulatory approvals for the exercise of such rights, for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) 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.
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(b) 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 hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action so that the entering into of this
Agreement, the acquisition of shares of Common Stock hereunder and the other
transactions contemplated hereby do not and will not result in the grant of any
rights to any person under the Avalon Rights Agreement (as defined in the Merger
Agreement) or enable or require the Avalon Rights (as defined in the Merger
Agreement) to be exercised, distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. 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 part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. (a) Notwithstanding anything to the contrary herein, in no event shall
Grantee's Total Profit (as hereinafter defined) exceed $75 million.
(b) Notwithstanding anything to the contrary herein, the 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 hereinafter defined) of more than $75 million;
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 Holder
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7, (ii) (x) the amount received by Owner pursuant to Issuer's
repurchase of Option Shares pursuant to Section 7, less (y) Owner's purchase
price for such Option Shares, (iii) (x) the net amounts received by Owner
pursuant to the sale or other disposition of Option Shares (or any other
securities into which such Option Shares shall be converted or exchanged) to any
unaffiliated party in connection with any Acquisition Transaction or at a time
when any Acquisition Transaction is pending or proposed or the subject of any
public announcement, less (y) Owner's purchase price of such Option Shares, (iv)
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any amounts received by Holder on the transfer of the Option (or any portion
thereof) to any unaffiliated party, and (v) any equivalent amount 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 Holder may propose to exercise the Option shall
be the Total Profit determined as of the date of such proposed exercise assuming
that the Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Holder
and its affiliates as of such date, were sold for cash at the closing market
price for the Issuer Common Stock as of the close of business on the preceding
trading day (less customary brokerage commissions).
14. 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 under this Agreement or the
Option created hereunder within 90 days following such Triggering Event (or such
later period as provided in Section 10).
15. Each of Grantee and Issuer will use its best efforts to make all filings
with, and to obtain consents of, all third parties and governmental authorities
necessary to the consummation of the transactions contemplated by this
Agreement, including without limitation making application to list the shares of
Common Stock issuable hereunder on the New York Stock Exchange upon official
notice of issuance.
16. Grantee hereby agrees and acknowledges that for a period of two (2)
years from the exercise of the Option, it and its affiliates (as defined in Rule
12b-2 under the 1934 Act) will not (and Grantee and they will not assist,
provide or arrange financing to or for others or encourage others to), directly
or indirectly, acting alone or in concert with others, unless specifically
requested in writing in advance by the Board of Directors of the Issuer:
(a) acquire or agree, offer, seek or propose to acquire (or
request permission to do so), ownership (including, but not limited to,
beneficial ownership as defined in Rule 13d-3 under the 1934 Act) of
any of the assets or businesses of the Issuer or any securities issued
by the Issuer (excluding the exercise of the Option itself), or any
rights or options to acquire such ownership (including from a third
party),
(b) seek or propose to influence or control the management or
the policies of the Issuer or to obtain representation on the Issuer's
Board of Directors, or solicit, or participate in the solicitation of,
any proxies or consents with respect to any securities of the Issuer,
(c) enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to any of the
foregoing, or
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(d) seek or request permission to do any of the foregoing or
make or seek permission to make any public announcement with respect to
any of the foregoing.
If at any time after a Triggering Event Grantee is approached by any
third party concerning Grantee's or any affiliates participation in a
transaction involving the assets or businesses of the Issuer or securities
issued by the Issuer, Grantee will promptly inform the Issuer of the nature of
such contact and the parties thereto.
17. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto, that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof or was otherwise breached, and
that the parties will be entitled to specific relief hereunder, including,
without limitation, an injunction or injunctions to prevent and enjoin breaches
of the provisions of this Agreement and to enforce specifically the terms and
provisions hereof, in addition to any other remedy at law or in equity to which
they may be entitled at law or in equity. Any requirements for the securing or
posting of any bond with respect to any such remedy are hereby waived.
18. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or other governmental authority 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 governmental authority determines
that 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) (as adjusted pursuant to Section 1(b) or 5), it is the
express intention of Issuer to allow Holder to acquire or to require Issuer to
repurchase such lesser number of shares as may be permissible, without any
amendment or modification hereof.
19. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
20. This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
21. 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.
22. 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.
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23. 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 assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided herein.
24. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
25. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. Any waiver of any rights under
this Agreement shall only be valid if set forth in an instrument in writing
signed by the party to be charged therewith.
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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.
AVALON PROPERTIES, INC.
By: /s/ Richard L. Michaux
-----------------------------------
Name: Richard L. Michaux
Title: Chief Executive Officer
BAY APARTMENT COMMUNITIES, INC.
By: /s/ Gilbert M. Meyer
-----------------------------------
Name: Gilbert M. Meyer
Title: President
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