Exhibit 10.40
DATED                     2007
BGI (UK) LIMITED
and
BOOKSHOP ACQUISITIONS LIMITED
 
DEED OF TAX COVENANT
 
Baker & McKenzie LLP
London
Ref: AFC/JS/HXB

 

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CONTENTS

              Clause       Page  
 
           
1.
  Definitions and Interpretation     1  
2.
  Covenants     4  
3.
  Limitations     4  
4.
  Due Date for Payment     7  
5.
  Overprovisions and Savings     7  
6.
  Recoveries from Third Parties     8  
7.
  Gross Up     9  
8.
  Compliance Issues     9  
9.
  Claims     12  
10.
  Group Relief     13  
11.
  Transfer Pricing     14  
12.
  Counter Covenant     14  
13.
  Refunds     15  
14.
  Third Party Rights     15  
15.
  General     15  

Schedule

         
SCHEDULE 1
       
The Companies
       16  

 

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THIS DEED OF TAX COVENANT is made this           day of           2007
BETWEEN:

(1)   BGI (UK) LIMITED a company incorporated under the laws of England and
Wales with registered number 3434022 and having its registered office at 100 New
Bridge Street, London EC4V 6JA (the “Covenantor”); and   (2)   BOOKSHOP
ACQUISITIONS LIMITED a company incorporated under the laws of England and Wales
with registered number 6301376 and having its registered office at 32 Bedford
Row, London, WC1R 4HE (the “Purchaser”).

WHEREAS:
This Deed of Covenant is entered into pursuant to the terms and conditions of
the share sale and purchase agreement of even date herewith (the “Agreement”)
pursuant to which the Covenantor agreed to sell the entire issued share capital
of Borders UK Limited and procure the sale of Borders Books Ireland Limited to
the Purchaser.
NOW THIS DEED WITNESSES as follows:

1.   DEFINITIONS AND INTERPRETATION.   1.1   Words and expressions which are
defined in the Agreement but which are not defined in this Deed shall have the
meanings set out in the Agreement.   1.2   In this Deed unless the context
otherwise requires:       “Company” means each, any or all of the companies
whose respective names, registered numbers and registered offices are set out in
schedule 1 as the context shall require;       “Covenantor Associate” means:

  (a)   the Covenantor;     (b)   any company or person (other than the Company)
that may be treated for the purposes of any Taxation at any time (whether
before, on or after Completion) as being either a member of the same group of
companies as the Covenantor or otherwise associated with the Covenantor; and    
(c)   any company or person (other than the Company) that may be treated for the
purposes of any Taxation as being at any time prior to Completion either a
member of the same group of companies as the Company or otherwise associated
with the Company;

“Dispute” means any Tax Claim where conduct is delegated to the Covenantor
pursuant to clause 9.2 of this Deed or where the Company is requested to take
any action pursuant to clause 9.3 of this Deed;
“Event” means any transaction (including the execution and completion of the
Agreement), payment, event, act, or omission whatsoever, and reference to an
Event occurring on or before a particular date shall include an Event or Events
which for Tax purposes are deemed to have, or are treated or regarded as having,
occurred on or before that date;
“Group Relief” means any Relief eligible for surrender or transfer by one
company to another as a result of those companies forming a group for Tax
purposes including (without limitation):

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  (a)   relief surrendered or claimed pursuant to Chapter IV Part X Taxes Act
(Group relief); and/or     (b)   the surrender or transfer of a Tax refund under
the provisions of Section 102 FA 1989 (Surrender of company tax refund etc
within a group);

“Group Reallocation” means:

  (a)   the notional transfer of any asset in accordance with section 171A of
the TCGA; and/or     (b)   the reallocation of any gain or loss accruing under
section 179 of the TCGA in accordance with section 179A of the TCGA; and/or    
(c)   the reallocation of a degrouping charge pursuant to paragraph 66 of
Schedule 29 to the Finance Act 2002; and/or     (d)   the rollover of any gain
or loss accruing under section 179 of the TCGA in accordance with section 179B
of the TCGA; and/or the rollover of any gain or loss pursuant to section 175 of
the TCGA;

“Independent Accountant” means an independent firm of Chartered Accountants
appointed by agreement between the Covenantor and the Purchaser, or, if the
parties are unable to agree, an independent firm of Chartered Accountants
nominated by the President for the time being of the Institute of Chartered
Accountants in England & Wales at the request of either the Covenantor or the
Purchaser;
“Overprovision” means, applying the accounting policies, principles and
practices adopted in relation to the preparation of the Accounts, the amount by
which any contingency, provision or reserve in the Accounts relating to Tax is
overstated;
“Purchaser Associate” means:

  (a)   the Purchaser;     (b)   the Company; and     (c)   any company or
person (other than the Company) that may be treated for the purposes of any
Taxation as being at any time after Completion either a member of the same group
of companies as the Purchaser or the Company or otherwise associated with the
Purchaser or the Company;

“Purchaser’s Relief” means any Relief arising to the Company which is not
available on or before the Accounting Date but which arises in respect of an
Event occurring after the Accounting Date;
“Refund” means any refund, credit or repayment of Taxation which has arisen or
will have arisen, whether before, on or after Completion, in respect of (i) any
gross receipts, income, profits or gains earned, accrued or received by the
Company on or before the Accounting Date or (ii) any Event occurring on or
before the Accounting Date (and, for the avoidance of doubt, a Refund shall
include an amount or amounts that are due to be paid by H.M. Revenue & Customs
to Borders (UK) Limited in respect of tax that was withheld from interest paid
to US resident banks prior to the Accounting Date by Borders (UK) Limited and
paid over to HM Revenue & Customs by BGP (UK) Limited on behalf of Borders
(UK) Limited (to the extent that Borders (UK) Limited has not already paid
amounts to BGP (UK) Limited in respect of such payments by HM Revenue & Customs)
in circumstances where Borders (UK)

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Limited was contractually obliged to gross up the interest payments to the US
resident banks but the US resident banks have assigned their right to be
refunded the tax to Borders (UK) Limited);
“Relief” means (without limitation) any relief, loss, allowance, credit, set
off, deduction or exemption for any Tax purpose and any right to repayment of
Tax and:

  (a)   any reference to the use or set off of a Relief shall be construed
accordingly and shall include use or set off in part; and     (b)   any
reference to the loss of a Relief shall include the absence, non-existence or
cancellation of any such Relief, or to such Relief being available only in a
reduced amount;

“Saving” means that any Tax Liability or other liability which has resulted in a
payment being made or becoming due from the Covenantor under this Deed or in
respect of the Tax Warranties has given or will give rise to a repayment, Relief
or tax saving for the Company or a Purchaser Associate (or would have given rise
to a repayment, Relief or tax saving but for it being set-off against another
liability) and that the repayment, Relief or tax saving is attributable to the
Liability for Taxation or other liability in question and which would not
otherwise have arisen;
“Tax” includes (without limitation) all taxes, duties, levies, imposts,
withholdings, social security contributions, deductions or amounts in the nature
of taxation, whenever and by whatever authority imposed and whether of the
United Kingdom or elsewhere, irrespective of the person against or to whom the
same are directly or primarily chargeable, together with all interest, fines,
penalties, surcharges, imposed pursuant to any legislation relating thereto
other than to the extent attributable to the unreasonable delay or default of
the Company or the Purchaser after Completion or the failure of the Purchaser to
comply with its obligations under the Agreement or this Deed;
“Tax Authority” means any person, body, authority or institution which seeks to
impose, assess, enforce, administer or collect any Tax whether in the United
Kingdom or elsewhere;
“Tax Claim” means:

  (a)   any claim, notice, demand, assessment, letter or other document issued,
or action taken, by or on behalf of any Tax Authority or person; or     (b)  
the preparation or submission of any notice, return, assessment, letter or other
document by the Purchaser, the Company, or any other person,

from which it appears that the Purchaser could make a claim under this Deed or
the Tax Warranties and, for this purpose, the limitations in clauses 3.2 to 3.4
of this Deed shall be disregarded;
“Tax Liability” shall mean not only any liability to make actual payments of Tax
but shall also include the loss or reduction in the amount, or the setting off
against income, profits or gains earned, accrued or received on or before the
Completion Date, or against any Tax liability, of any Purchaser’s Relief where,
but for such loss, reduction or setting off, the Company would have had a
liability to make a payment of or in respect of Taxation for which the Purchaser
would have been able to make a claim under this Deed, in which case the amount
of the Tax Liability shall be the amount of Tax saved or relieved by the Company
as a result of such set off or use of any Purchaser’s Relief PROVIDED THAT, for
the purposes of this Deed, it shall be assumed that other Reliefs are, to the
extent allowed by law, set-off or used in priority to any Purchaser’s Relief and
if it cannot be determined whether a Purchaser’s

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Relief or another Relief is used it shall be assumed that another Relief is used
in priority to a Purchaser’s Relief; and
“Tax Warranty” means the Warranties relating to Tax set out in paragraph 20 of
schedule 4 of the Agreement.

1.3   Reference to income, profits or gains earned, accrued or received shall
include income, profits or gains deemed to have been or treated as or regarded
as earned, accrued or received for the purposes of any legislation relating to
Tax.   1.4   References to schedules, clauses are to schedules and clauses of
this Deed unless the context otherwise requires.   2.   COVENANTS   2.1   The
Covenantor hereby covenants with the Purchaser to pay to the Purchaser an amount
equal to:

  (a)   any Tax Liability of the Company resulting from or by reference to any
income, profits or gains earned, accrued or received on or before the Completion
Date or any Event occurring on or before the Completion Date; and     (b)   any
Tax Liability of the Company resulting from or by reference to any income,
profits or gains earned, accrued or received after the Completion Date as a
result of an act, omission or transaction by a person other than the Company and
which liability to Tax falls upon the Company as a result of its having been
affiliated, connected with, or in the same group for Tax purposes as that person
at any time before the Completion Date; and     (c)   (without prejudice to the
generality of clause 2.1(a) above), any Tax Liability of the Company that arises
as a result of, in consequence of or in connection with the pre-sale
reorganisation identified in the “Proposed Strategic Alternative” paper dated 13
June 2007 and referred to in Ernst & Young’s Vendor Due Diligence Report (22
June 2007 draft) (the “Pre Sale Reorganisation”); and     (d)   any Tax
Liability of the Company resulting from or by reference to the release or
elimination of the principal amount of any debt owed by the Company to Borders
Group, Inc or BGI (UK) Limited prior to Completion, or the transfer of the
benefit of any such debt to the Company prior to Completion; and     (e)   all
reasonable third party costs and expenses which are properly incurred by the
Purchaser or the Company in making a successful claim under this Deed.

3.   LIMITATIONS   3.1   The Covenantor shall not be liable under the covenants
contained in clause 2 of this Deed for any Tax Liability or other liability to
the extent that:

  (a)   provision or reserve for the liability is made in the Accounts, or the
payment or discharge of the liability is taken into account, or the liability is
otherwise taken into account, in the Accounts or to the extent that the
liability is specifically referred to in the notes thereto; or     (b)   such
liability was discharged (whether by payment or by the use or set-off of any
Relief) on or before Completion; or

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  (c)   such liability arises or is increased or that any provision or reserve
which has been made in the Accounts is insufficient by reason only of

  (i)   any increase in rates of Tax or variation in the method of applying or
calculating the rate of Tax; or     (ii)   any change made or announced in law
(including the enactment after the Completion Date of any legislation relating
to Tax and the imposition after the Completion Date of any new Tax); or    
(iii)   any change in the published practice or procedure of the relevant Tax
Authority,

in all cases being an increase or change first announced after the Completion
Date, whether or not that change purports to be effective retrospectively in
whole or in part; or

  (d)   such liability would not have arisen but for a change of accounting
policy or practice after the Completion Date (except where such change is
necessary so as to ensure compliance with generally accepted accounting
principles) or in the length of any accounting period of any Purchaser Associate
after the Completion Date; or     (e)   such liability would not have arisen or
would have been reduced or eliminated but for a voluntary act, transaction,
omission or arrangement after Completion of any Purchaser Associate or any
officers, agents and employees thereof but excluding any act, transaction or
arrangement:

  (i)   required by law (except where there is a change in law within the
meaning of clause 3.1(c)(ii)); or     (ii)   carried out pursuant to an
obligation of the Company entered into prior to Completion; or     (iii)  
carried out in the ordinary course of business of the Company as carried on at
Completion; or

  (f)   such liability arises in respect of any income, profits or gains earned,
accrued or received between the Accounting Date and the Completion Date in the
ordinary course of business of the Company to which the liability relates,
provided this clause 3.1(f) shall not apply to the covenant in clause 2.1(d); or
    (g)   the liability arises in respect of any Event occurring between the
Accounting Date and the Completion Date in the ordinary course of business of
the Company, provided this clause 3.1(g) shall not apply to the covenant in
clause 2.1(d); or     (h)   such liability would not have arisen but for some
act, transaction, omission or arrangement carried out at the request of, or with
the approval of the Purchaser or its authorised representatives prior to
Completion excluding the Pre-Sale Reorganisation, provided this clause 3.1(h)
shall not apply to the covenant in clause 2.1(d); or     (i)   such liability
arises or is increased as a result of any failure by the Purchaser to comply
with any of its obligations under the Agreement or this Deed including for the
avoidance of doubt the Purchaser’s obligations to procure that the Company
carries out any act or does any thing; or

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  (j)   such liability arises as a result of the sale of an asset or as a result
of any other Event (including the expiry of a time period) that causes the
crystallisation of a chargeable or other capital gain by any Purchaser
Associate, at any time after Completion; or     (k)   any Relief (other than a
Purchaser’s Relief) is available, or is for no consideration made available by
any Covenantor Associate, to the Company to set against, reduce or eliminate the
Tax Liability (and any Relief that is so available in relation to more than one
Tax Liability to which this Deed applies shall be deemed, so far as possible, to
be used in such a way as to reduce to the maximum extent possible the
Covenantor’s total liability hereunder); or     (l)   such liability has been
satisfied at no expense to the Purchaser; or     (m)   such liability would not
have arisen or would have been reduced or eliminated but for a disclaimer,
surrender, claim or election made or notice or consent given or by virtue of any
other thing done after Completion by or on behalf of any Purchaser Associate
otherwise than at the request of the Covenantor under the provisions of this
Deed or where the making giving or doing of which was taken into account or
assumed in computing the provision for Tax (including the provision for deferred
Tax) in the Accounts; or     (n)   such liability would not have arisen or would
have been reduced or eliminated but for a failure or omission by the Company to
make any claim, election, surrender or disclaimer or give any notice or consent
or do any other thing after Completion the making giving or doing of which was
taken into account or assumed in computing the provision for Tax (including the
provision for deferred Tax) in the Accounts; or     (o)   such liability
comprises interest or penalties arising by virtue of any underpayment of Tax
prior to Completion, insofar as such underpayment would not have been an
underpayment but for a bona fide estimate made prior to Completion of the amount
of income, profits or gains to be earned, accrued or received after Completion
proving to be incorrect, or but for any other Event or Events occurring after
Completion; or     (p)   such liability is covered by insurance of which the
Purchaser or the Company is the beneficiary or which would have been covered had
the Purchaser maintained in force insurance policies at Completion; or     (q)  
such liability would not have arisen but for a cessation, or any change in the
nature or conduct, of any trade or business carried on by the Company at
Completion, being a cessation or change occurring on or after Completion or the
payment of any unusual or abnormal dividend by the Company after Completion; or
    (r)   to the extent that any income, profits or gains to which such
liability is attributable were earned or received by the Company or accrued to
the Company but were not reflected in the Accounts or to the extent that the
liability arises because the assets of the Company are greater than, or the
liabilities are less than, those taken into account in computing the provision
or reserve for Taxation in the Accounts, provided that this clause 3.1(r) shall
not apply to the covenant in clause 2.1(d).

3.2   The Covenantor shall have no liability in respect of any claim under this
Deed and any such claim shall be wholly barred and unenforceable unless notice
of such claim (stating in reasonable detail the specific matters in respect of
which the claim is made and so far as is reasonably practicable including an
estimate of the amount of the claim) shall have been served upon the Covenantor
by the Purchaser by no later than, in the case of a claim relating to the
matters referred to in clause 2.1(d) above, 10 February 2014, or, in relation to
any other claim under this Deed, 21 September 2010, and in each case in relation
to which legal

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    proceedings have been commenced against the Covenantor within the three
months of the giving of such notice.   3.3   The Purchaser shall not be entitled
to claim or recover more than once under this Deed and/or the Agreement in
respect of any liability or liabilities caused by or attributable to the same
fact, matter, Event, or circumstance.   3.4   The limitations set out in clause
3.1 shall also operate to limit or reduce the liability of Covenantor in respect
of claims for breach of the Tax Warranties.   3.5   The maximum aggregate
liability of the Covenantor in respect of all claims under this Deed and the
Agreement (with the exception of claims under clause 2.1(d) of this Deed) shall
not exceed the amount of £1,000,000.   3.6   The maximum aggregate liability of
the Covenantor in respect of all claims under clause 2.1(d) of this Deed shall
not exceed the amount of £5,100,000.   3.7   No liability shall attach to the
Covenantor in respect of any claim unless the liability of the Covenantor in
respect of such claim exceeds £25,000 in which case the Covenantor shall
(subject to clause 3.4) be liable for the whole of such amount and not merely
the excess.   3.8   No liability shall attach to the Covenantor unless the
aggregate amount of all claims for which it would, in the absence of this
provision, be liable shall exceed £250,000 and in such event the Covenantor
shall be liable for the whole of such amount and not merely the excess.   4.  
DUE DATE FOR PAYMENT   4.1   A payment to be made by the Covenantor under this
Deed shall be made (i) within 10 Business Days after the date on which written
notice setting out the amount due is received by the Covenantor from the
Purchaser or the Company; or (ii) if later:

  (a)   in the case of an actual payment of Tax, on the date which is 2 Business
Days before the last day on which that payment of Tax is due to be made in order
to avoid incurring a liability to interest or penalties; and     (b)   in the
case of the use or set off of a Purchaser’s Relief, the date which is 2 Business
Days before the last day on which the Company would have been due to make an
actual payment of Tax, without incurring a liability to interest or penalties,
had it not been for the use or set off of the Purchaser’s Relief.

4.2   If any payment due to be made under this Deed is not made on the due date
for payment thereof, then, except to the extent that in the case of a payment to
the Purchaser where the Covenantor’s liability under clause 2 compensates the
Purchaser by virtue of it extending to interest and penalties, the payer shall
pay interest on such sum for the period from and including the due date up to
the date of actual payment in accordance with this clause. The payer shall pay
interest at the annual rate which is the aggregate of 2% per annum and the base
rate from time to time of National Westminster Bank Plc. Interest under this
clause shall accrue on the basis of the actual number of days elapsed and a
365-day year and shall be compounded monthly.   5.   OVERPROVISIONS AND SAVINGS
  5.1   If the Purchaser or any Company discovers that there has been an
Overprovision or Saving, the Purchaser shall as soon as reasonably practicable
give written notice thereof to the Covenantor such notice to include reasonably
sufficient details of such Overprovision or Saving.

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5.2   The Covenantor may request that the auditors of the Company for the time
being (the “Auditors”) determine in writing whether there has been an
Overprovision or Saving, and the Purchaser will use its reasonable endeavours to
procure that the Auditors deal expeditiously with a request for a determination
as to whether an Overprovision or Saving has arisen or will arise and will
procure that the Company provides all assistance, documents and other
information as may be reasonably required by the Auditors for that purpose.  
5.3   The amount of the Overprovision or Saving less any reasonable third party
costs properly incurred by the Company or the Purchaser in obtaining the
Overprovision or Saving shall be:

  (a)   set off against any payment then due from the Covenantor under this Deed
or for breach of any Tax Warranty;     (b)   to the extent there is an excess, a
refund shall be made to the Covenantor of any previous payments by the
Covenantor under this Deed or for breach of any Tax Warranty (and not previously
refunded under this clause 5) up to the amount of the excess;     (c)   to the
extent there is an excess, be carried forward and set-off against any future
payment or payments that become due from the Covenantor under this Deed or in
respect of the Tax Warranties; and     (d)   to the extent that, at a time when
there is both no outstanding claim and no further claims which can be made by
the Purchaser against the Covenantor under this Deed, there is an excess, it
shall forthwith be repaid to the Covenantor.

5.4   If any dispute arises as to whether there is or has been any Overprovision
or Saving, such dispute shall be referred for determination to a firm of
chartered accountants agreed between the Covenantor and the Purchaser (or
failing such agreement to a firm of independent accountants nominated by the
President for the time being of the Institute of Chartered Accountants of
England and Wales), who shall act as expert and not as arbitrator (the costs of
that determination being shared equally by the Covenantor and the Purchaser).  
5.5   If it is determined pursuant to clause 5.4 that an amount previously
determined should be amended, that amended amount shall be substituted for the
purposes of clause 5.2 in place of the amount originally determined, and such
adjusting payment (if any) as may be required by virtue of the above mentioned
substitution shall be made as soon as practicable by the Purchaser or the
Covenantor as the case may be.   5.6   The Purchaser shall procure that all
reasonable steps are taken within a reasonable time to maximise any
Overprovision or Saving. The Purchaser shall procure that any Overprovision or
Saving is used in priority to any other Relief, and in the absence of any
evidence of the same it shall be deemed to be so used.   6.   RECOVERIES FROM
THIRD PARTIES   6.1   If the Purchaser or the Company is or may be entitled to
recover from a person (including any Tax Authority) a sum in respect of any
matter giving rise to a liability on the part of the Covenantor under this Deed
or under the Tax Warranties, then:

  (a)   the Purchaser shall procure that full details of the entitlement are
given to the Covenantor as soon as reasonably practicable and if so required by
the Covenantor shall take (or shall procure that the Company shall take) at the
Covenantor’s expense such action as the Covenantor may reasonably request to
recover or to procure the recovery of the sum (keeping the Covenantor fully
informed of the progress of any

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      action taken and providing it with copies of all relevant correspondence
and documentation); and

  (b)   the Purchaser shall procure that, as soon as possible (and in any event
within 5 Business Days of the date when the sum is recovered benefit is received
or saving in question is made) any payment already made by the Covenantor in
respect of the claim which gave rise to the entitlement is forthwith repaid to
the Covenantor up to the amount of the benefit or saving (less any reasonable
costs properly incurred by the Company in obtaining it but including any
repayment supplement or interest or equivalent sum); and     (c)   any amount of
the sum recovered that is not so paid to the Covenantor shall be carried forward
and set off against any future claims under this Deed or under the Tax
Warranties.

7.   GROSS UP   7.1   All sums payable under this Deed shall be paid free and
clear of all deductions unless the deduction or withholding is required by law,
in which event (and other than in respect of interest paid pursuant to clause
4.2) the payer shall pay such additional amount as shall be required to ensure
that the net amount received under this Deed will equal the full amount which
would have been received had no such deduction or withholding been required to
be made.   7.2   If any Tax Authority brings into charge to Tax any sum paid
under this Deed (other than in respect of interest paid pursuant to clause 4.2),
then the payer shall pay such additional amount as shall be required to ensure
that the total amount paid, less the Tax chargeable on such amount, is equal to
the amount that would otherwise be payable under this Deed.   7.3   To the
extent that any deduction, withholding or tax in respect of which an additional
amount has been paid under clause 7.1 or 7.2 above results in the payee
obtaining a Relief (all reasonable endeavours having been used to obtain such
Relief) the payee shall pay to the payer, within 10 Business Days of obtaining
the benefit of the Relief, an amount equal to the lesser of the value of the
Relief obtained and the additional sum paid under paragraph 7.1 or 7.2 above.  
7.4   Paragraph 7.1 and 7.2 above shall not apply to the extent that the
deduction, withholding or tax would not have arisen but for:

  (a)   the payee not being tax resident in the United Kingdom, or having some
connection with a territory outside the United Kingdom; or     (b)   an
assignment by the payee of any of its rights under this Deed; or     (c)   a
change in law after Completion.

8.   COMPLIANCE ISSUES   8.1   The Covenantor or its duly authorised agents
shall at the Company’s cost and expense be responsible for, and have the sole
conduct of preparing, submitting and agreeing all Tax returns and computations
of the Company (including, without limitation, claims and/or surrenders in
relation to Group Relief) for all accounting periods of the Company ending on or
before Completion and in connection therewith:

  (a)   all returns, computations, documents and substantive correspondence
relating thereto shall be submitted in draft form by the Covenantor to the
Purchaser or its duly

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      authorised agents for comment at least 30 days before the date upon which
it is required to be filed with the applicable Taxation Authority without
incurring interest and penalties;

  (b)   the Purchaser or its duly authorised agents shall comment in writing
within 21 Business Days of such submission but if the Covenantor has not
received any comments within 21 Business Days, the Purchaser shall be deemed to
have approved such draft documents;     (c)   the Covenantor shall take account
of all reasonable comments made by the Purchaser or its duly authorised agents;
    (d)   the Covenantor shall be provided promptly with any information
received by the Purchaser or the Company, or of which the Purchaser or the
Company otherwise becomes aware, which may be relevant to such Tax returns and
computations, and with such assistance (including assistance from employees of
the Purchaser or the Company) and access to such documents and records of, or
relating to, the Company, as the Covenantor may reasonably require in connection
with such Tax returns and computations; and     (e)   the Purchaser undertakes
to procure that the Company shall at the request of the Covenantor sign and
submit to the relevant Tax Authority all such notices of claim, surrender or
consent to surrender (including provisional or protective notices of claim,
surrender or consent to surrender in cases where any relevant Tax computations
have not yet been agreed) and all such other documents and returns as the
Covenantor shall reasonably request to give effect to the foregoing provisions.

8.2   The Purchaser or its duly authorised agents shall be responsible for, and
have the conduct of preparing, submitting and agreeing all Tax returns and
computations of the Company for the accounting period of the Company commencing
before Completion but ending after Completion and shall procure that such
returns and computations are, so far as it is reasonable to do so, prepared on a
basis that is consistent with the manner in which the returns and computations
of the Company were prepared for accounting periods ending prior to Completion
and in connection therewith:

  (a)   all returns, computations, documents and substantive correspondence
relating thereto shall be submitted in draft form by the Purchaser to the
Covenantor or its duly authorised agents for comment at least 30 days before the
date upon which it is required to be filed with the applicable Taxation
Authority without incurring interest and penalties;     (b)   the Covenantor or
its duly authorised agents shall comment in writing within 21 Business Days of
such submission but if the Purchaser has not received any comments within 21
Business Days, the Covenantor shall be deemed to have approved such draft
documents;     (c)   the Purchaser shall incorporate all reasonable comments
made by the Covenantor or its duly authorised agents;     (d)   the Purchaser
shall procure that all such returns, computations, documents or other
correspondence are promptly executed and submitted;     (e)   the Covenantor
shall be provided promptly with any information received by the Purchaser or the
Company, or of which the Purchaser or the Company otherwise becomes aware, which
may be relevant to such Tax returns and computations, and with such assistance
(including assistance from employees of the Purchaser or the

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      Company) and access to such documents and records of, or relating to, the
Company, as the Covenantor may reasonably require in connection with such Tax
returns and computations;     (f)   the Purchaser undertakes to procure that the
Company shall at the request of the Covenantor sign and submit to the relevant
Tax Authority all such notices of claim, surrender or consent to surrender
(including provisional or protective notices of claim, surrender or consent to
surrender in cases where any relevant Tax computations have not yet been agreed)
and all such other documents and returns as the Covenantor shall reasonably
request to give effect to the foregoing provisions;

8.3   Notwithstanding any other provision in this clause 8 and save always as
may be required by law, the Purchaser shall not and shall procure that no
Purchaser Associate or any of its directors, employees or agents shall, without
the prior written consent of the Covenantor (not to be unreasonably withheld or
delayed), submit any correspondence or return or send any other document to a
Taxation Authority or do any other thing where any Purchaser Associate or any of
its directors, employees or agents is aware or could reasonably be expected to
be aware that submitting such correspondence or return or sending such document
or doing such other thing will or is likely to:

  (a)   give rise to, or increase, a claim under this Deed; or     (b)  
prejudice or reduce the availability of any Group Relief surrendered or to be
surrendered by any Covenantor Associate,

without first affording the Covenantor a reasonable opportunity to comment
thereon and without taking account of any comments received so far as it is
reasonable to do so.

8.4   The Purchaser undertakes that it shall procure that the Company shall
prepare and submit the Tax returns and computations of the Company for the
accounting period of the Company commencing before Completion but ending after
Completion and any subsequent accounting periods of the Company on the basis
that the principal amount of any debt owed by the Company to any Covenantor’s
Associate which was released prior to Completion shall not be treated as a
receipt of the trade carried on by the Company. The Purchaser further undertakes
that it shall procure that the Company shall not amend any such Tax returns or
computations of the Company on the basis that any amount of such debts is a
receipt of the trade carried on by the Company. For the avoidance of doubt, the
Covenantor and the Purchaser acknowledge and confirm that they believe that the
submission of such Tax returns and computations on the basis that the release of
such debts prior to Completion should not be treated as giving rise to a receipt
of the Company’s trade is correct to the best of their knowledge. Nothing in
this clause 8.4 shall require the Company to submit any Tax return or
computation which it reasonably believes is inaccurate or misleading, nor
prevent the Company from correcting any Tax return or computation which it
reasonably believes is inaccurate or misleading, provided that before doing so
the Purchaser shall consult with the Covenantor and shall take account of any
reasonable representations it shall make. If, having consulted with the
Covenantor and taken account of its reasonable representations, the Purchaser
and the Covenantor are unable to agree on the correct basis on which any such
Tax return or computation should be submitted or amended, the Company shall only
be entitled to submit or amend the Tax return or computation on the basis that
the Independent Accountant, jointly instructed by the Purchaser and the
Covenantor and acting as an expert and not as arbitrator, considers correct and
complete having duly considered the representations of both the Purchaser and
the Covenantor.   8.5   For the avoidance of doubt, this clause 8 shall not
apply or shall cease to apply to any matter that is or becomes the subject of a
Tax Claim and that is therefore governed by clause 9 of this Deed.

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9.   CLAIMS   9.1   If the Purchaser or the Company become aware of any Tax
Claim, the Purchaser shall give written notice thereof to the Covenantor
(including reasonably sufficient details of such Tax Claim, the due date for any
payment, the time limits for any appeal, and so far as reasonably practicable an
estimate of the amount of the claim) as soon as reasonably practicable (and in
any event not later than 15 Business Days prior to any deadline for appeal).  
9.2   If the Covenantor so directs in writing, the conduct of a Tax Claim shall
be delegated to the Covenantor upon such terms as may be agreed from time to
time between the Purchaser and the Covenantor PROVIDED THAT, unless the
Purchaser and the Covenantor specifically agree otherwise in writing, the
following terms shall be deemed to be incorporated into any such agreement:

  (a)   all written communications pertaining to the Dispute which are
transmitted to or by the relevant Taxation Authority shall be copied to the
Purchaser;     (b)   the Purchaser shall procure that the Company gives to such
person or persons as may for the time being be nominated by the Covenantor
authority to conduct the Dispute and confirms such authority to any relevant
Taxation Authority;     (c)   the Purchaser shall and shall procure that the
Company and its agents, officers or employees shall give (without charge) the
Covenantor or its agents all such assistance as may reasonably be required to
conduct the Dispute, including (without limitation) providing access to the
personnel, books, accounts and records of the Company, providing copies of
relevant documentation and requiring personnel to provide statements and proofs
of evidence and to attend at any trial or hearing to give evidence or otherwise.

9.3   Where conduct of a Dispute is not delegated to the Covenantor pursuant to
sub-clause 9.2 above, the Purchaser shall take such action and procure that the
Company shall take such action as the Covenantor may reasonably request to
avoid, dispute, resist, appeal, compromise or defend the Tax Claim.   9.4   The
Covenantor shall reimburse to the Purchaser and the Company their reasonable
costs and expenses properly incurred in connection with any such action as is
referred to in clauses 9.2 or 9.3 above.   9.5   If the Covenantor does not
request that conduct of a Tax Claim be delegated to the Covenantor in accordance
with sub-clause 9.2 and does not request that the Purchaser or the Company take
any action under sub-clause 9.3 of this Deed within a period of time that is
reasonable having regard to the nature of the Tax Claim and the existence of any
time limit in relation to avoiding, disputing, defending, resisting, appealing
or compromising such Tax Claim or if the Covenantor notifies the Purchaser or
the Company to the effect that it no longer wishes to pursue the Dispute, the
Purchaser shall have the conduct of a Tax Claim and shall be free to reach a
reasonable settlement or compromise PROVIDED THAT the Covenantor shall promptly
be sent a copy of all correspondence and documentation relating to the Tax
Claim.   9.6   The Purchaser and the Company shall procure that no Tax Claim is
settled or otherwise compromised without the prior written consent of the
Covenantor, such consent not to be unreasonably withheld or delayed, and,
subject to clause 8.4 and 9.2 of this Deed, the Purchaser shall not, and shall
procure that the Company shall not, without first affording the Covenantor a
reasonable opportunity to comment and without first taking account of such
comments so far as it is reasonable to do so, submit any correspondence or
return or send any other document to any Tax Authority where the Purchaser or
the Company is aware or could

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    reasonably be expected to be aware that the effect of submitting such
correspondence or return or sending such document would or could:

  (a)   put such Tax Authority on notice of any matter which could give rise to,
or could increase, a claim under this Deed or for breach of any Tax Warranty; or
    (b)   prejudice or reduce the availability of any Group Relief surrendered
or to be surrendered by any Covenantor Associate.

10.   GROUP RELIEF   10.1   Notwithstanding the generality of this clause 10, if
the Covenantor shall become liable to make any payment under clause 2 of this
Deed or in respect of the Tax Warranties, the Covenantor may at its option
surrender or procure the surrender, (without payment) to the Company of Group
Relief or make or procure a Group Reallocation or make or procure a payment of
an amount not exceeding the “available compensating adjustment” determined in
accordance with paragraph 7A(3) of Schedule 28AA to the Taxes Act. To the extent
that the Tax Liability giving rise to the liability under clause 2 of this Deed
is reduced or eliminated thereby or to the extent that a payment is made, there
shall be a corresponding reduction or elimination of the Covenantor’s liability
under clause 2 of this Deed. The Purchaser shall procure that the Company shall
promptly (and in any event within any applicable statutory time limit) take such
steps as may reasonably be required by the Covenantor to facilitate or permit
such a surrender of Group Relief, Group Reallocation or payment.   10.2  
Subject to the following provisions of this clause 10 and without prejudice to
the generality of clause 8 the Purchaser shall procure that the Company shall,
in respect of any time or period falling prior to Completion (which for the
purposes of this clause 10 shall include for the avoidance of doubt any
overlapping period pursuant to section 403A of the Taxes Act), make or give any
claim, election, surrender, notice or consent (whether unconditional or
conditional, whether or not forming part of any other return or tax document,
whether provisional or final, and including amendment to or withdrawal of any
earlier claim, election, surrender, notice or consent) as the Covenantor shall
direct in connection with any surrender of Group Relief by or to any Covenantor
Associate to or by (as the case may be) the Company.   10.3   Where the Company
enters into any Group Relief arrangement (an “Arrangement”) pursuant to
sub-clause 10.2 and makes a saving of Taxation or otherwise receives a Taxation
benefit or Relief that would not have arisen but for the Arrangement in question
then, other than to the extent that such saving, benefit or Relief was treated
as an asset or was assumed in computing the Accounts, the Covenantor may require
the Company to make a payment to the relevant Covenantor Associate in relation
to the Arrangement up to a maximum amount as leaves the Company in the same net
after-Tax position as if the Arrangement had not been entered into. The
Covenantor shall specify the due date for the making of any such payment by the
Company PROVIDED THAT the specified due date must not be such as to leave the
Company in a cashflow position that is worse than if the Arrangement in question
had not been entered into.   10.4   Where the Company enters into any
Arrangement pursuant to sub-clause 10.2 and has a Taxation liability that would
not have arisen but for the Arrangement in question (or a Relief that would have
been available to the Company but for the Arrangement in question ceases to be
available or is reduced) then, other than to the extent that such Taxation
liability or the unavailability or reduction in the Relief was assumed in
computing the Accounts, the Covenantor shall make or shall procure that the
relevant Covenantor Associate makes a payment to the Company in relation to the
Arrangement of a minimum amount as leaves the Company in the same net after-Tax
position as if the Arrangement had not been entered into. The Covenantor shall
specify the due date for the making of any such payment to the

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    Company PROVIDED THAT the specified due date must not be such as to leave
the Company in a cashflow position that is worse than if the Arrangement in
question had not been entered into.

10.5   Clause 5 shall not apply to any Taxation refund to the extent that a
payment is made under this clause 10 to any Covenantor Associate that is
attributable to that Taxation refund.   11.   TRANSFER PRICING   11.1   If:

  (a)   any Taxation Authority determines that the provisions of Schedule 28AA
of the Taxes Act (“Schedule 28AA”) apply to any transaction or series of
transactions between the Company and a Covenantor Associate; and     (b)  
paragraph 6(1) of Schedule 28AA would apply to the relevant transaction or
series of transactions; and     (c)   the Company would be the “disadvantaged
person” as defined in paragraph 6(1)(b) of Schedule 28AA in relation to such
transaction or series of transactions,

then the Purchaser shall procure that the Company pays to the Covenantor (on
behalf of the relevant Covenantor Associate) by way of balancing payment an
amount determined in accordance with clause 11.2 below on the date determined in
accordance with clause 11.2 below.

11.2   The amount payable to the Covenantor shall be an amount equal to any
repayment of Tax or reduction in the Company’s Tax Liability, and the time for
payment under this clause 11.2 shall be the date the Purchaser Associate
receives the benefit of such repayment or reduction.   11.3   Where any amount
has been determined in accordance with clause 11.2 above, the Covenantor or the
Purchaser may request the Auditors (at the expense of the party making the
request) to review such determination in the light of all relevant circumstances
including facts which have become known only since such determination and to
determine whether such determination remains correct and whether the amount that
was the subject of such determination should be amended. If the Auditors shall
determine that the amount should be amended, an adjusting payment shall be made
as soon as practicable by the Covenantor or (as the case may be) to the
Covenantor.   12.   COUNTER COVENANT   12.1   The Purchaser hereby covenants
with the Covenantor to pay to the Covenantor an amount equal to:

  (a)   any Tax Liability for which the Company is liable but for which the
Covenantor becomes liable as a result of the failure by the Company to discharge
it; and     (b)   all reasonable costs and expenses incurred by the Covenantor
in connection with any Tax Liability in respect of which the Covenantor can
bring a claim under this clause 12.1.

12.2   The provisions of clause 4 (Due Date for Payment), clause 7 (Gross Up)
and clause 9 (Claims) shall apply to this clause as if the same were set out
herein but replacing references to the Covenantor with the Purchaser (and vice
versa) and making any other necessary modifications.

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12.3   The covenants contained in clause 12.1 shall not apply to a Tax Liability
to the extent that the Covenantor is liable to make or has made a payment in
respect of that Tax Liability under clause 2.1 of this Deed.   12.4   Any
payment made by the Purchaser to the Covenantor under this clause 12 shall be
applied to discharge the Tax Liability giving rise to the claim under this
clause 12. The Covenantor shall not enforce any statutory right of recovery
against the Purchaser in respect of a Tax Liability to the extent that it has
already made a recovery in respect of that liability under this clause 12 and
the Covenantor shall not be entitled to make a claim under this clause 12 in
respect of a Tax Liability to the extent that it has already made a recovery in
respect of that liability under any statutory right or otherwise.   13.  
REFUNDS   13.1   The Purchaser shall promptly notify the Covenantor of any
Refund to which the Company is or becomes entitled or receives where or to the
extent that such Refund was not recognised in the Accounts as an asset and does
not arise from the use of a Purchaser’s Relief and is not a payment or Relief to
which clause 5 applies.   13.2   Any Refund actually obtained before, on or
after Completion, whether by repayment or set off (and less any reasonable third
party costs properly incurred in obtaining it but including any repayment
supplement or interest or equivalent sum) shall be:

  (a)   set off against any payment then due from the Covenantor under this Deed
or for breach of any Tax Warranty;     (b)   to the extent there is an excess,
it shall forthwith be repaid to the Covenantor.

14.   THIRD PARTY RIGHTS       Nothing in this Deed is intended to confer on any
person any right to enforce any term of this Deed which that person would not
have had but for the Contracts (Rights of Third Parties) Act 1999.

15.   GENERAL   15.1   Any payment made by the Covenantor under this Deed shall
(so far as possible) be by way of reduction in, and repayment of, the
consideration for the Shares or the Irish Shares (as appropriate) under the
Agreement. Any payment made by the Purchaser under this Deed shall (so far as
possible) be by way of an increase in the consideration for the Shares or the
Irish Shares (as appropriate) under the Agreement.   15.2   The provisions of
the following clauses of the Agreement shall have effect as if incorporated into
this Deed mutatis mutandis with references to this Agreement being replaced with
references to this Deed and with any other necessary modifications:       clause
1 (Interpretation), clause 11 (Counterparts), clause 13 (Variation, Waiver and
Consent), clause 16 (Notices), clause 17 (Costs), clause 21 (Assignment) and
clause 23 (Governing Law and Submission to Jurisdiction).   15.3   For the
purposes of determining whether a Tax Liability or a Relief relates to a pre or
post Completion period, an accounting period of the Company shall be deemed to
have ended on Completion.

IN WITNESS whereof the parties hereto have duly executed and delivered this Deed
on the day and year first before written.

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SCHEDULE 1
The Companies

          Name   Registered/Company Number   Registered Office
Borders (UK) Limited
  01580771   120 Charing Cross Road,

 
      London WC2H 0JR

 
      United Kingdom
 
       
Borders Books Ireland Limited
  404624   70 Sir John Rogerson’s Quay,
 
      Dublin 2

Signatures to this Deed begin on the next page.

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EXECUTED as a DEED by
    )     /s/ Edward W. Wilhelm    
BGI (UK) LIMITED
    )          
acting by two directors or a director and the
    )          
company secretary
    )     /s/ George L. Jones    
 
               
 
               
EXECUTED as a DEED by
    )          
BOOKSHOP ACQUISITIONS LIMITED
    )     /s/ Luke Johnson    
acting by two directors or a director and the
    )          
company secretary
    )     /s/ Mark Farrer - Brown    

17