SHAREHOLDERS AGREEMENT
BATES INSURANCE, INC.
Parties
THIS SHAREHOLDERS AGREEMENT (the 'Agreement') is entered into effective the date set forth on the signature page hereto, by and between:
BATES INSURANCE, INC., a Washington corporation soon to be renamed Axis-Bates, Inc. (the 'Agency' or 'Corporation'); and
THOMAS R. SMITH ('Smith');
BENJAMIN W. CHARLES ('Charles');
LEON A. BATES ('Bates'); and
ALBERT V. AXIS ('Axis'),
the shareholders of the Agency (also referred to herein individually as 'Shareholder', and/or collectively as 'Shareholders'). The founding group of three Shareholders consisting of Charles, Bates and Axis, may also be referred to herein individually as a 'Founder' or collectively as the 'Founders.'
Recitals
A. Share Ownership. The Shareholders own, or will own immediately after execution hereof, all of the issued and outstanding shares of stock of the Agency corporation (the 'Shares'). The approximate number of their respective Shares based on presently available data , is as follows:
Shares Of % Of Total
Shareholder Common Stock Outstanding
SMITH 6,735 3.1%
CHARLES 70,176 32.3%
BATES 70,176 32.3%
AXIS 70,176 32.3%
Total: 217,263 100%
Following execution hereof, the exact number of Shares owned by each Shareholder as a result of the merger of their agencies concurrently herewith, shall be determined in the manner set forth below.
B. Intention. The Shareholders and Agency want to promote their mutual interests, define their respective rights and obligations, and provide for continuity of management in the event of a Shareholder's death, disability, withdrawal, or other event which makes it impractical for the Agency to continue with the then-existing Shareholders.
C. 'S' Election. The Corporation has elected to be taxed as an 'S' corporation pursuant to Section 1362(a) of the Internal Revenue Code of 1986, as amended (the 'Code'); the Shareholders have consented to the Corporation's election, and each of the Shareholders understands and acknowledges that certain requirements must continually be satisfied in order for the Corporation to be taxed as an 'S' corporation.
NOW, THEREFORE, in consideration of their respective obligations set forth herein, it is agreed by the parties hereto as follows:
1. Share Holdings/Certificates
1.1 Share Holdings. The exact number of Shares owned by each of the Shareholders shall be determined by David Riley, C.P.A., following execution hereof, as he determines the adjusted relative book values of the two corporations merged concurrently herewith in order to form the Agency.
1.1.1 Riley shall compute book values and adjust in the manner set forth in each STOCK PURCHASE AGREEMENT executed between the Founders concurrently herewith (the 'Purchase Agreement').
1.1.2 His determination shall be controlling, and the final relative Share holdings of each shall then be indicated on an addendum to be attached hereto in form similar to the chart set forth in Recital 'A' above.
1.2 Legend. Upon execution of this Agreement, each Shareholder shall have the following legend placed conspicuously on all certificates representing his Shares:
Transfer of these shares is subject to restrictions on transfer, rights of first refusal, and other conditions specified in a Shareholders Agreement with respect thereto dated the ________ day of ___________________, 20__, a copy of which is on file with the Corporation. The Corporation shall without charge furnish a copy of said Shareholders Agreement to any party having a valid interest therein. Any transfer or attempt to transfer stock other than in accordance with said Shareholders Agreement, shall be absolutely null and void.
1.3 Delivery. A copy of this Agreement shall be delivered to the Secretary of the Agency corporation, and shown to any person making inquiry about it who has legitimate reason to see it.
1.4 Later Issue. Any Shares issued after the date of this Agreement shall also bear the legend set forth in paragraph 1.1 above, and be subject to the provisions hereof.
2. Restrictions and Corporate Control
2.1 Restrictions. No Shareholder may sell, assign, transfer, mortgage, alienate, hypothecate or otherwise encumber (collectively referred to as 'transfer') any Shares of the Agency in any manner except to the entities or persons, and in accordance with the provisions, set forth in this Agreement.
2.2 Validity. The Agency shall refuse to recognize any transfer or attempted transfer not in accordance with the procedures set forth in this Agreement, and any such purported transfer shall be absolutely null and void.
2.3 New Issues. The Agency shall issue no new Shares (other than for replacement or transfers expressly permitted herein) without unanimous prior written consent of the Founders.
2.4 Control. The Agency shall:
2.4.1 Not amend its Articles or Bylaws without prior written approval of Shareholders owning at least two-thirds (2/3) of the outstanding Shares;
2.4.2 Have three (3), and only three Directors, unless otherwise agreed in writing by unanimous consent of the Founders;
2.4.3 Not do any of the following without unanimous prior written consent of the Founders then remaining as Shareholders of the Agency:
(a) Sell substantially all of the assets of the Agency;
(b) Modify the Employment Contract (defined below) of any Founder executed concurrently herewith;
(c) Acquire another independent insurance agency; or
(d) Not bring in any new Shareholder(s), other than through the Events Initiating Sale of a Shareholder's Shares in accordance with Section 5 below; and
2.4.4 Shall retain Axis as President of the Agency corporation in accordance with his Employment Contract (defined below) entered into concurrently herewith, unless the Presidential portion of his Management Compensation as set forth in that Employment Contract is bought out in accordance with Exhibit 'B' attached thereto.
3. Valuation
For purposes of this Agreement, the value of all of the issued and outstanding Shares of stock of the Agency shall be determined, as of the date of any Event Initiating Sale (defined in Section 5 below), as follows:
3.1 By Shareholders' Action. For purposes of this Section, the value of each Share of issued and presently outstanding stock in the Agency is initially set at the total fair market value of the entire Agency of one million six hundred ninety-one thousand six hundred fifty-three dollars ($1,691,653.00), divided by the total number of Shares outstanding. That is a net value and includes all assets, accumulations, surplus and goodwill of the Agency corporation as a going concern, less its outstanding obligations; it does not reflect any minority or marketability discount.
3.1.1 At any time, an affirmative vote of Shareholders owning at least ninety percent (90%) of the then-outstanding Shares can determine a new value thenceforth attributable to each Share;
3.1.2 Any such newly-determined value shall then become effective and supersede the prior per-Share value as of that date thirty (30) days after said vote, and thereupon be recorded on the record sheet attached hereto as Exhibit 'A';
3.1.3 However, during the period after any Event Initiating Sale pursuant to Section 6 below and before the purchase of the Shares offered in accordance therewith, there shall be no re-valuation action in this manner; any such re-valuation would be delayed until expiration of the purchase period then in effect.
3.2 By Agreement. The purchase price of each Share of stock for any Event Initiating Sale under this Agreement, shall be the last such effective value; unless for any reason the last such value was established more than thirteen (13) months prior to the Event Initiating Sale, in which case that prior value shall be deemed no longer be effective, and:
3.2.1 In that event, the Shareholders shall within sixty (60) days thereafter attempt to reach agreement by that same 90% super-majority on a new value per Share; and
3.2.2 If an agreement is so reached, they shall set forth that new value per Share on Exhibit 'A' hereto, which shall constitute the value not only for the Event Initiating Sale which is then in process, but also carry forward as the new value thereafter for the remaining Shareholders until changed again in the manner set forth above.
3.3 By Formula. If the Shareholders are for any reason unable to reach such agreement prior to the conclusion of the 60-day period specified in paragraph 3.2.1 above, then the effective value per Share shall be determined in accordance with the formula approach set forth in Exhibit 'B' attached hereto.
3.3.1 That formula valuation shall thereupon be entered on Exhibit 'A', as thenceforth controlling between the remaining Shareholders until again re-determined in accordance with the procedures set forth above.
3.3.2 That formula as presently set forth on Exhibit 'B' can be modified at any time by an affirmative vote of Shareholders holding at least eighty percent (80%) of the then-outstanding Shares, whereupon the revised formula shall be substituted in Exhibit 'B'.
3.4 No Discount. No minority or marketability discount shall be considered in any determination of value per Share or otherwise in valuing the Share holdings of any Shareholder under this Agreement.
4. Terms of Sale
4.1 Payment. Payment of the purchase price for Shares shall be commenced within sixty (60) days after an Event Initiating Sale pursuant to Section 5 herein, by buyer(s) (each of them in the event there is more than one buyer) delivering to seller an initial down payment by cashier's, certified or official bank check for twenty-five percent (25%), or more at the option of each buyer, of the total purchase price of its purchased Shares.
4.1.1 Promissory Note. The buyer shall (each, if more than one buyer) at that time execute a ten (10)-year Non-Negotiable Promissory Note in favor of seller in the form attached hereto as Exhibit 'C' (the 'Note') for the balance of such purchase price.
4.1.2 If Funded With Life Insurance. If the parties have purchased life insurance to fund a purchase of Shares, then in the event of a buyout due to the death of a Shareholder the entire proceeds received from any such policy(s) shall first be applied toward the purchase of all Shares owned by the deceased, not to exceed however the total purchase price. If insurance proceeds are less than twenty-five percent (25%) of the total purchase price, then either the buyer individuals pro rata in proportion to their respective Share ownership, or the Corporation if it is the buyer, shall contribute enough additional cash such that the total down payment equals at least twenty-five percent (25%).
4.1.3 Excess Over Purchase Price. In the event such life insurance proceeds exceed the total purchase price for the Shares of the deceased Shareholder to be acquired by that policy owner, then:
(a) The excess shall next be applied toward paying off any promissory notes or other obligations owed by the deceased Shareholder to that policy owner (including the Corporation in the event it is redeeming his Shares and is also the policy owner), regardless of due date; and
(b) Any remaining excess proceeds may then be retained by the owner of the policy.
4.2 Security for Sale . If the buyer is buying the Shares of a Shareholder on any basis other than all-cash, thereby resulting in a promissory Note for the balance pursuant to paragraph 4.1 above, then at the closing:
4.2.1 Agency As Buyer. If the Corporation is a buyer, then all Shareholders hereby agree that:
(a) Its Note to the selling Shareholder shall be jointly and severally guaranteed by all non-selling Shareholders and their respective spouses; and
(b) The seller shall retain a possessory security interest in the Shares transferred, and the buyer shall execute a Stock Pledge Agreement in favor of the seller in the form attached hereto as Exhibit 'E'.
4.2.2 Shareholder As Buyer. If other Shareholders are buying, then each one (with their respective spouse jointly and severally) shall be liable to the selling Shareholder for their portion of his Shares purchased, and shall grant a security interest in their own purchased Shares, with a possessory Stock Pledge Agreement in favor of the selling Shareholder in the form of Exhibit 'E' attached hereto.
4.3 Shareholder Loans. If a selling Shareholder has any outstanding Shareholder Loan(s) from him to the Agency, and under a redemption scenario that Shareholder Loan is not entirely paid off with proceeds of life insurance in accordance with paragraph 4.1.2 above; then
4.3.2 The remaining balance of principal and accrued interest on such Shareholder Loan shall at closing be converted from the prior format and instead thenceforth be added to the principal of, and amortized in accordance with the terms of, the new Share sale proceeds Note executed by the Agency in favor of the selling Shareholder in the form of Exhibit 'C' attached; and
4.3.3 Shall also thenceforth be guaranteed and secured in the manner set forth in paragraph 4.2.1 above.
5. Events Initiating Sale
Each of the events triggering a sale in accordance with this Section 5 may be referred to elsewhere in this Agreement as an 'Event Initiating Sale'.
5.1 Involuntary Sale Option.
5.1.1 Triggering Event. Upon the occurrence of any of the following events (except as described in paragraph 5.3), the remaining Shareholders and/or the Corporation shall have a continuing right of first refusal (but not the obligation) to purchase all or part of the Shares held by the subject Shareholder ('Offeror') in the manner set forth below:
Adjudication of a Shareholder as a bankrupt, either voluntary or involuntary;
Assignment by a Shareholder for the benefit of creditors; or
A Shareholder's violation, or attempted violation, of the terms of paragraph 2.1 above.
5.1.2 Optional Purchase.
(a) The Founders (other than the Offeror if he is a Founder) shall have such right of first refusal for a period of sixty (60) days following the date when they first have notice of any offer and/or negotiated sale or transfer arising out of an event described in paragraph 5.1.1 above, to buy as much of the Offeror's stock as they wish.
(i) The Offeror must promptly notify all Shareholders of the effective price set forth in any such third-party offer.
(ii) The buyers shall each have the right to buy pro rata in proportion to the then number of Shares owned by each of them, unless otherwise agreed to between themselves.
(b) If those Founders do not timely exercise their option to purchase all such Shares available from Offeror, then for a period of ten (10) days after that 60-day period, any other non-selling Shareholders shall have a second right of refusal to buy any remainder of the offered Shares not theretofore optioned by Founders.
(i) If more than one desires to buy, they may purchase pro rata in proportion to the then number of Shares owned by those unless otherwise agreed to by them.
(c) Following that 10-day period, the Corporation itself shall have a third right of refusal to acquire any remainder of the offered Shares.
(d) Any exercise of the purchase options conferred by this paragraph 5.1.2 shall be at the purchase price set forth in the third-part outside offer; terms shall be as set forth in Section 4 above, regardless of any terms specified in the third-party offer.
(e) In the event any such offered Shares are not acquired in a timely manner either by the other Shareholders or the Agency in accordance with this paragraph 5.1.2, then the subject Shares shall be transferable free of such restrictions for a period of six (6) months following the last option deadline; provided, however, that any transferee must first meet all Subchapter 'S' qualifications to the satisfaction of Agency counsel, such that any such acquisition shall not jeopardize the Corporation's election (if any such election is in effect at that time) thereunder, and shall then automatically become a 'Shareholder' hereunder and thenceforth subject to all provisions of this Agreement.
5.2 Delayed Forceout.
5.2.1 With the approval of the owners of at least sixty-five percent (65%) of the then outstanding Shares, at an Agency corporation Shareholders' meeting duly called for that express purpose, the Agency may at its option redeem all but not less than all of the Shares of stock of any Shareholder(s), at a price equal to one hundred five percent (105%) of the per-Share value determined in accordance with Section 3 above, and upon the terms described in Section 4. The corporation's Directors shall ratify and implement the transaction.
5.2.2 In the event the Agency notifies a Shareholder that it has elected to exercise such option to redeem, the Shareholder subject to the redemption shall within ten (10) days of the receipt of such notice, sell his Shares to the Agency.
5.3 Cut And Choose Option. The three Founders have a vested interest in retaining within their group the block of Shares held by them collectively at any time. Therefore, at any time, any two (2) of the Founders shall have the opportunity to force the third into an election to buy or sell their respective Share holdings in the Agency. Upon obtaining prior written approval of at least sixty-five percent (65%) of the then-outstanding Shares of the Agency, any two of those Founders (the 'Offerors') may make an offer to the third (the 'Offeree') to purchase all but not less than all of the Shares held by the Offeree. That offer shall include the price, terms, and all conditions of purchase and sale on a per-Share basis. The duty then shall arise on the part of the Offeree to elect and fulfill one of the following alternatives:
5.3.1 Sell. The Offeree may accept the offer of the Offerors, and sell to them all of the Offeree's Shares in the Corporation upon the price and other terms and conditions set forth therein; or
5.3.2 Buy. Offeree may instead buy all of the Shares held by the Offerors, upon the same price and other terms and conditions of the offer previously made by Offerors (the turnaround offer from Offeree to purchase all of the Shares of the Offerors shall be the same price per-Share as the offer by Offerors to purchase all Shares of the Offeree, notwithstanding that the Offeree would be purchasing a different number of Shares).
The Offeree must elect one of those two alternatives within sixty (60) days following notice of the offer from the Offerors, and shall timely notify the Offerors of such election; failure for any reason to make a timely election shall automatically be deemed an election by Offeree to accept the offer as made by the Offerors.
5.4 Mandatory Purchase. Upon the happening of any of the following events, the other Shareholders shall purchase in the manner set forth below, and the subject Shareholder ('Offeror') or the personal representative or trustee of a deceased Shareholder shall sell, all Shares of the Agency owned by that Shareholder:
5.4.1 Death or Disability. Death or disability of a Shareholder, in which case the price and terms shall be as set forth in Sections 3 and 4 above; disability of any Shareholder such that he is unable to perform his customary duties as an employee of the Agency, as a result of mental or physical incapacity, for a period of six (6) consecutive months. The determination of 'disability&qu