Exhibit 10.1

 

STANDSTILL AGREEMENT

 

This Standstill Agreement (this “Agreement”) is made and entered into as of
May 14, 2012 between Kratos Defense & Security Solutions, Inc., a Delaware
corporation (the “Company”), Bandel Carano, a director of the Company
(“Director”), and the following Affiliates of the Director:  Oak Investment
Partners IX, L.P., Oak IX Affiliates Fund, L.P., Oak IX Affiliates Fund-A, L.P.
(collectively, the “Oak IX Funds”), Oak X Affiliates Fund, L.P., Oak Investment
Partners X, L.P. (collectively, the “Oak X Funds”), and Oak Investment Partners
XIII, L.P. (the “Oak XIII Fund”).  Director, the Oak IX Funds, the Oak X Funds,
and the Oak XIII Fund are collectively referred to herein as the “Oak Parties”.
The Company and the Oak Parties are referred to herein as the “Parties.”

 

WITNESSETH

 

WHEREAS, the Company is a party to that certain Underwriting Agreement, dated as
of May 9, 2012, with B. Riley & Co, LLC (the “Underwriter”), with respect to the
public offering (the “Offering”) of shares of common stock of the Company, par
value $0.001 per share (“Company Common Stock”);

 

WHEREAS, as of the date hereof but prior to the closing of the Offering, the Oak
Parties are the Beneficial Owners (as defined below) of an aggregate of 854,530
shares of Company Common Stock, or 2.6% of the outstanding shares of Company
Common Stock;

 

WHEREAS, the Oak Parties have informed the Company of their support of the
Company, its directors, its management and its direction and, accordingly, their
desire to increase their Beneficial Ownership (as defined below) by purchasing
an aggregate of up to $55,000,000 of  shares of Company Common Stock in the
Offering (all shares purchased in the Offering being the “Additional Shares”);

 

WHEREAS, following the Offering, the Oak Parties will Beneficially Own enough 
of the total outstanding shares of Company Common Stock to exceed the 15%
threshold set forth under the definition of “Acquiring Person” in the Rights
Agreement, dated as of December 16, 2004, by and between the Company and Wells
Fargo Bank, N.A., as Rights Agent (the “Rights Agreement”); and

 

WHEREAS, the board of directors of the Company (the “Board”) has agreed to amend
the Rights Agreement to allow the Oak Parties and their Affiliates and
Associates to purchase the Additional Shares without triggering the Rights
Agreement, on the condition that the Oak Parties agree on behalf of themselves
and their respective Affiliates and Associates to the restrictions set forth in
this Agreement.

 

NOW, THEREFORE, in consideration of the mutual agreements and understandings set
forth herein, the Parties hereto hereby agree as follows:

 

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ARTICLE 1
DEFINITIONS

 

1.1                                 Defined Terms.  As used in this Agreement,
the following terms shall have the following meanings:

 

(a)                                  “Affiliate” and “Associate” shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended
(“Exchange Act”), as in effect on the date of the Rights Agreement.

 

(b)                                 “Agreement” shall mean this Agreement as in
effect on the date hereof and as hereafter from time-to-time amended, modified,
or supplemented in writing in accordance with the terms hereof.

 

(c)                                  A Person shall be deemed the “Beneficial
Owner” of, and shall be deemed to have “Beneficial Ownership” of and to
“beneficially own” any securities:

 

(i)                                     which such Person or any of such
Person’s Affiliates or Associates is considered to be a “beneficial owner” under
Rule 13d-3 of the General Rules and Regulations under the Exchange Act (the
“Exchange Act Regulations”) as in effect on the date hereof ; provided, however,
that a Person shall not be deemed the “Beneficial Owner” of, or to “beneficially
own,” any securities under this subparagraph (i) as a result of an agreement,
arrangement, or understanding to vote such securities if such agreement,
arrangement, or understanding (A) arises solely from a revocable proxy or
consent given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable provisions of the Exchange
Act and the Exchange Act Regulations, and (B) is not reportable by such Person
on Schedule 13D under the Exchange Act (or any comparable or successor report);

 

(ii)                                  which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate of such other
Person) with which such Person (or any of such Person’s Affiliates or
Associates) has any agreement, arrangement, or understanding (whether or not in
writing), for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy or consent as described in the proviso to subparagraph (i) of
this paragraph (c)) or disposing of such securities; or

 

(iii)                               which such Person or any of such Person’s
Affiliates or Associates, directly or indirectly, has the right to acquire
(whether such right is exercisable immediately or only after the passage of time
or upon the satisfaction of conditions) pursuant to any agreement, arrangement
or understanding (whether or not in writing) or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise; provided,
however, that under this paragraph (c) a Person shall not be deemed the
“Beneficial Owner” of, to have “Beneficial Ownership” of, or to “beneficially
own,” (A) securities tendered pursuant to a tender or exchange offer made in
accordance with Exchange Act Regulations by such Person or any of such Person’s
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange, (B) securities that may be issued upon exercise of Rights
(as defined in the Rights Agreement) at any time prior to the occurrence of a
Triggering Event (as defined in the Rights Agreement), or (C)

 

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securities that may be issued upon exercise of Rights from and after the
occurrence of a Triggering Event, which Rights were acquired by such Person or
any of such Person’s Affiliates or Associates prior to the Distribution Date (as
defined in the Rights Agreement) or pursuant to Section 3(c) or Section 22 of
the Rights Agreement (the “Original Rights”) or pursuant to Section 11(i) of the
Rights Agreement in connection with an adjustment made with respect to any
Original Rights; and further provided, however, that (x) nothing in this
paragraph (c) shall cause a Person engaged in business as an underwriter of
securities to be the “Beneficial Owner” of, to have “Beneficial Ownership of, or
to “beneficially own,” any securities acquired through such Person’s
participation in good faith in a firm commitment underwriting until the
expiration of forty (40) days after the date of such acquisition, (y) no
decision reached, or action taken, by the Board or any committee thereof shall
cause any Person (or any Affiliate or Associate of such Person) who is a member
of the Board or such committee to be deemed, for the purposes of this Agreement,
to be a Beneficial Owner of any securities beneficially owned by any other
Person (or any Affiliate or Associate of such Person) who is a member of the
Board or any committee thereof solely by reason of such membership of the Board
or any committee thereof or participation in the decisions or actions thereof on
the part of either or both of such Persons and (z) no Person who is an officer,
director, or employee of an Exempt Person (as defined in the Rights Agreement)
shall be deemed, solely by reason of such Person’s status or authority as such,
to be the “Beneficial Owner” of, to have “Beneficial Ownership” of, or to
“beneficially own,” any securities that are “beneficially owned” (as defined in
this paragraph (c)), including, without limitation, in a fiduciary capacity, by
an Exempt Person or by any other such officer, director or employee of an Exempt
Person.

 

Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, the phrase, “then outstanding,” when used with reference to a Person’s
Beneficial Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding together with the number of such
securities not then actually issued and outstanding which such Person would be
deemed the Beneficial Owner hereunder.

 

(d)                                 “Company Acquisition Transaction” shall mean
(i) the commencement (within the meaning of Rule 14d-2 of the General Rules and
Regulations under the Exchange Act) of any tender offer or exchange offer
involving any securities of the Company or any direct or indirect Subsidiary of
the Company, (ii) the commencement by a third party of a proxy contest with
respect to the election of any directors of the Company, (iii) any sale,
license, lease, exchange, transfer, disposition, or acquisition of any portion
of the business or assets of the Company or any direct or indirect Subsidiary of
the Company (other than in the ordinary course of business), or (iv) any merger,
consolidation, business combination, share exchange, reorganization,
recapitalization, restructuring, liquidation, dissolution, or similar
transaction or series of related transactions involving the Company or any
direct or indirect Subsidiary of the Company.

 

(e)                                  “Existing Directors” shall mean the members
of the Board as of the date of this Agreement and any other member of the Board
appointed by a majority of the then Existing Directors or elected by the
stockholders of the Company upon the recommendation of a majority of the then
Existing Directors.

 

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(f)                                    “Governmental Authority” shall mean any
United States (federal, state, local) or foreign court or tribunal, or
administrative, governmental or regulatory body, agency or authority.

 

(g)                                 “Group” shall have the meaning set forth in
Section 13(d)(3) of the Exchange Act and Rule 13d-5 of the Exchange Act
Regulations.

 

(h)                                 “Person” shall mean any individual, firm,
corporation, partnership, limited liability company, joint venture, trust,
association, unincorporated organization, group or other entity, and shall
include any successor (by merger or otherwise) of such entity.

 

(i)                                     “Subsidiary” of any Person shall mean
any corporation or other entity of which a majority of the voting power of the
voting equity securities or equity interest is owned, directly or indirectly, by
such Person.

 

1.2                                 Capitalized Terms.  All other capitalized
terms used herein but not defined shall have the meanings ascribed to such terms
in the Rights Agreement.

 

ARTICLE 2
STANDSTILL

 

2.1                                 Standstill Provisions.  The Oak Parties
agree, on behalf of themselves and their respective Affiliates and Associates,
that, commencing on the date of this Agreement, during any period that the Oak
Parties and their Affiliates and Associates collectively Beneficially Own in
excess of 5% (adjusted to reflect any future acquisition of any Company Common
Stock by the Company, any combination or reverse split or similar action by the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares Beneficially Owned by the Oak Parties so long as
the Oak Parties and their Affiliates and Associates do not acquire any
additional shares of Company Common Stock after any such event) of the then
outstanding Company Common Stock (the “Standstill Period”), except pursuant to a
negotiated transaction with the Oak Parties approved by the Board, none of the
Persons comprising the Oak Parties will, in any manner, directly or indirectly:

 

(a)                                  make, effect, initiate, cause or
participate in (i) subject to Section 2.5, any acquisition of Beneficial
Ownership of any securities of the Company or any securities of any Subsidiary
or other Affiliate or Associate of the Company if such acquisition would result
in the Oak Parties and their respective Affiliates and Associates collectively
Beneficially Owning 25% or more of the then outstanding Company Common Stock
including the Additional Shares; (ii) any Company Acquisition Transaction (other
than one that has been approved by the Board), or (iii) any “solicitation” of
“proxies” (as those terms are defined in Rule 14a-1 of the Exchange Act
Regulations) or consents with respect to any securities of the Company;

 

(b)                                 form or join in a partnership, limited
partnership, syndicate or other group, including, without limitation, a group as
such term is used in Section 13(d) of the Exchange Act, with respect to the
Company Common Stock or otherwise support or participate in any effort by a
third party, with respect to the matters set forth in Section 2.1(a) above, or
deposit any

 

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Company Common Stock in a voting trust or subject any Company Common Stock to
any voting agreement, other than in each case solely with its Affiliates or
Associates (which Affiliates and Associates the Oak Parties shall cause to be
subject to the same restrictions set forth herein as if they were parties
hereto) with respect to the Company Common Stock now or hereafter owned by the
Oak Parties or pursuant to this Agreement;

 

(c)                                  nominate or seek to nominate any person
(other than Bandel Carano) to the Board or otherwise act, alone or in concert
with others, to seek to control or influence the management, Board, or policies
of the Company;

 

(d)                                 take any action which might force the
Company to make a public announcement regarding any of the types of matters set
forth in subsection (a) of this Section 2.1;

 

(e)                                  request or propose that the Company (or its
directors, officers, employees or agents), directly or indirectly, amend or
waive any provision of this Section 2.1, including this subsection (e);

 

(f)                                    agree or offer to take, or encourage or
propose (publicly or otherwise) the taking of, any action referred to in
subsections (a), (b), (c), (d), or (e) of this Section 2.1;

 

(g)                                 assist, induce or encourage any other Person
to take any action referred to in subsections (a), (b), (c), (d), or (e) of this
Section 2.1; or

 

(h)                                 enter into any discussions or arrangements
with any third party with respect to the taking of any action referred to in
subsections (a), (b), (c), (d), or (e) of this Section 2.1.

 

2.2                                 Voting.  During the Standstill Period, each
Person comprising the Oak Parties shall, with respect to any proposal submitted
to the Company’s stockholders, vote any and all Company Common Stock
Beneficially Owned by the Oak Parties as of the date hereof, together with any
Company Common Stock acquired by the Oak Parties after the date of this
Agreement, whether pursuant to the exercise of any convertible security
Beneficially Owned by the Oak Parties or otherwise,  in favor of the proposals
recommended by a majority of the then Existing Directors and against any
proposals not recommended by a majority of the then Existing Directors.  The
foregoing voting restrictions do not apply if there is any change in the
majority of the then Existing Directors following the date of this Agreement.

 

2.3                                 Sales of Shares of Company Common Stock. 
During the Standstill Period each person comprising the Oak Parties will only
sell shares of Company Common Stock in open market transactions on the NASDAQ
Stock Market or on such principal stock exchange as the Company Common Stock is
then listed for trading or in private transactions so long as any sale in a
private transaction is not to any Person or Group who any Oak Party knows, or
has reason to know, Beneficially Owns or as a result of such transaction would
Beneficially Own more than 5% of the then outstanding Company Common Stock.

 

2.4                                 Certain Transactions.  The Oak Parties
agree, on behalf of themselves and their respective Affiliates and Associates,
that, during the Standstill Period neither the Oak Parties nor

 

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any of their respective Affiliates and Associates will engage in the short sale
of Company Common Stock Beneficially Owned by the Oak Parties or any of their
respective Affiliates or Associates, nor will they permit such Company Common
Stock to be used for lending or otherwise by any third party in connection with
short selling transactions or any other derivative transactions with similar
economic effect.

 

2.5                                 Director Compensation.  Notwithstanding
Section 2.1 or any other provision of this Agreement to the contrary, the
Director shall be entitled to receive options, restricted stock units or other
equity awards, as such awards may be granted from time-to-time by the Company,
pursuant to the Company’s equity compensation plans as compensation for services
rendered as a member of the Board.

 

ARTICLE 3
REPRESENTATIONS AND WARRANTIES

 

3.1                                 Each Party hereto represents and warrants to
the other as follows:

 

(a)                                  Authorization.  Such Party has the
requisite power, authority and legal capacity to execute, deliver and perform
and to consummate the transactions contemplated by this Agreement.  This
Agreement constitutes a legal, valid, and binding obligation of such Party,
enforceable against such Party in accordance with its terms, except as such
enforcement may be limited by any applicable bankruptcy, insolvency, moratorium,
or similar law affecting creditors’ rights generally.

 

(b)                                 No Consents.  No consent of any Governmental
Authority or other person is required to be obtained by such Party in connection
with the execution and delivery by such Party of this Agreement.

 

3.2                                 The Oak Parties represent and warrant to the
Company as follows:

 

(a)                                  Ownership.  As of the date hereof, the Oak
Parties and their Affiliates and Associates collectively Beneficially Own
(i) 825,600 shares of Company Common Stock, (ii) options to purchase 28,930
shares of Company Common Stock, and have no other interest in the capital stock
of the Company.

 

(b)                                 Reliance. Each of the undersigned Oak
Parties recognizes that the Offering will benefit such undersigned and the
Company.  Each of the undersigned Oak Parties acknowledges that the Company is
relying on the representations and agreements of such undersigned contained in
this Agreement in carrying out the Offering and in entering into the
Underwriting Agreement.

 

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ARTICLE 4
MISCELLANEOUS

 

4.1                                 Severability.  If any term, provision,
covenant, or restriction of this Agreement is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants, and restrictions of this Agreement shall remain in full
force and effect.

 

4.2                                 Specific Enforcement.  The Parties hereto
acknowledge and agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached.  It is accordingly agreed that the
Parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions of this Agreement (without the necessity of posting any
bond), this being in addition to any other remedy to which they may be entitled
by law or equity.

 

4.3                                 Further Assurances.  The Oak Parties shall
use their reasonable best efforts to cause their respective Affiliates and
Associates to comply in all respects with the provisions of this Agreement
applicable to the Oak Parties to the same extent as if such Affiliates and
Associates were original parties hereto.

 

4.4                                 Entire Agreement; Amendments.  This
Agreement contains the entire understanding of the Parties with respect to the
matters covered hereby and thereby.  This Agreement may be amended only by an
agreement in writing executed by the Parties hereto.  The Parties hereto may
amend this Agreement without notice to or the consent of any third party,
including any Affiliate or Associate of the Oak Parties.

 

4.5                                 Notices.  Any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) when personally delivered at the address designated below,
(b) when transmitted by facsimile or other electronic means, such as electronic
mail, on a business day during normal business hours where such notice is to be
received at the number or Email address designated below (with a confirming copy
sent by overnight courier), (c) on the business day when verification of
delivery is obtained when sent by fully paid overnight courier, or (d) on the
business day that is three (3) days following the date of mailing by courier,
fully prepaid, addressed to such address, whichever shall first occur.  The
addresses for such communications shall be:

 

If to the Company:

Kratos Defense & Security Solutions, Inc.

 

4820 Eastgate Mall, Suite 200

 

San Diego, CA 92121

 

Facsimile: (858) 812-7303

 

Email: deborah.butera@kratosdefense.com

 

Attention:  General Counsel

 

 

With a copy to:

Paul Hastings LLP

 

4747 Executive Drive, 12th Floor

 

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San Diego, CA 92121

 

Facsimile: (858) 458-3000

 

Email: spiri@paulhastings.com

 

Attention:  Deyan Spiridonov

 

 

If to the Oak Parties:

Oak Investment Partners

 

525 University Avenue, Suite 1300

 

Palo Alto, CA 94301

 

Email:  bandel@oakvc.com / clang@oakvc.com

 

Attn:  Bandel Carano / Craig Lang

 

Any Party hereto may from time to time change its address for notices under this
Section 4.5 by giving written notice of such changed address to the other
Parties hereto.

 

4.6                                 Waivers.  No waiver by any Party of any
default with respect to any provision, condition, or requirement of this
Agreement shall be deemed to be a continuing waiver in the future thereof or a
waiver of any other provision, condition or requirement of this Agreement; nor
shall any delay or omission of any Party to exercise any right hereunder in any
manner impair the exercise of any such right accruing to it thereafter.

 

4.7                                 Headings.  The headings herein are for
convenience only, do not constitute a part of this Agreement and shall not be
deemed to limit or affect any of the provisions of this Agreement.

 

4.8                                 Successors and Assigns.  This Agreement
shall be binding upon and inure to the benefit of the Parties and their
successors and legal representatives.  No Party shall assign this Agreement or
any rights hereunder without the prior written consent of the other Parties
(which consent may be withheld for any reason in the sole discretion of the
Party from whom consent is sought) except to a successor of all or substantially
all of the business or assets of such Party and in the case of the Oak Parties
to such Person as part of such transaction to whom all of the shares of Company
Common Stock are transferred, so long as such Person agrees in advance in
writing to be subject to this Agreement.

 

4.9                                 No Third Party Beneficiaries.  This
Agreement is intended for the benefit of the Parties hereto and their respective
permitted successors and assigns and is not for the benefit of, nor may any
provision of this Agreement be enforced by, any other person.

 

4.10                           Governing Law; Venue.  This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Delaware without regard to the principles of conflicts of laws.  The parties
hereby irrevocably submit to the jurisdiction of the courts of the State of
Delaware and the federal courts located in the State of Delaware in respect of
the interpretation and enforcement of the provisions of this Agreement.

 

4.11                           Counterparts.  This Agreement may be executed in
separate counterparts (including by facsimile or electronic transmission), each
such counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute one and the same

 

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instrument.  In the event that any signature to this Agreement is delivered by
facsimile transmission or by Email delivery of a portable document format (.pdf
or similar format) data file, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof.

 

[REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK]

 

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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the date first written
above.

 

 

Kratos Defense & Security Solutions, Inc.

 

 

 

 

 

/s/ Eric DeMarco

 

Eric DeMarco

 

President & Chief Executive Officer

 

 

 

 

 

/s/ Bandel Carano

 

Bandel Carano

 

Director of Kratos Defense & Security Solutions, Inc.

 

 

 

 

 

Oak Investment Partners IX, L.P.

 

Oak IX Affiliates Fund, L.P.

 

Oak IX Affiliates Fund-A, L.P.

 

Oak X Affiliates Fund, L.P.

 

Oak Investment Partners X, L.P.

 

Oak Investment Partners XIII, L.P.

 

 

 

 

 

/s/ Bandel Carano

 

By:  Bandel Carano

 

Its:   Managing Member of the General Partner of each above-listed Oak fund
entities

 

[Signature Page to Oak Parties’ Standstill Agreement]

 

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