Exhibit 10.3
SUB-MANAGEMENT AGREEMENT
 
THIS SUB-MANAGEMENT AGREEMENT (this “Agreement”), is entered into as of October
28, 2009, by and among PRCM ADVISERS LLC, a Delaware limited liability company
(the “Manager”), CLA FOUNDERS LLC, a Delaware limited liability company (the
“Sub-Manager”), and solely with respect to Sections 1, 9, 11(a), 14(a), 15, and
18 through 28, PINE RIVER CAPITAL MANAGEMENT L.P., a Delaware limited
partnership (“Pine River Capital”).
 
RECITALS
 
WHEREAS, on the date hereof, Two Harbors Investment Corp., a Maryland
corporation (the “Company”), is acquiring, through a merger (the “Merger”),
Capitol Acquisition Corp., a Delaware corporation (“Capitol”), pursuant to an
agreement and plan of merger, dated as of June 11, 2009, among Pine River
Capital, the Company, Two Harbors Merger Corp., a Delaware corporation, and
Capitol (the “Merger Agreement”); and

WHEREAS, on the date hereof, the Manager, the Company, and Two Harbors Operating
Company LLC, a Delaware limited liability company (the “Operating Company”), are
entering into that certain Management Agreement, in all material respects in the
form attached as an exhibit to the Merger Agreement and dated as of the date
hereof (as amended from time to time, the “Management Agreement”), pursuant to
which the Manager will provide investment advisory services to the Company and
the Subsidiaries on the terms and conditions set forth therein; and

WHEREAS, the Manager wishes to enter into this Agreement with the Sub-Manager in
order to engage the Sub-Manager to serve as a sub-advisor to the Manager to
support the performance of the Manager’s services under the Management Agreement
on the terms and conditions set forth herein; and

WHEREAS, in connection with the execution of this Agreement, Pine River Capital
has agreed to provide the Sub-Manager with opportunities to serve as a
sub-advisor to (or to enter into alternative arrangements with) the Manager on
selected additional advisory arrangements, on the terms and subject to the
conditions set forth herein.
 
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements contained herein, the parties hereto agree as follows:
 
1.           Definitions.  Capitalized terms used herein without definition
shall have the respective meanings ascribed to them in the Management
Agreement.  In addition, the following terms have the following meanings
assigned to them.
 
“Affiliate” means, with respect to any Person, any other Person that directly or
indirectly controls, is controlled by, or is under common control with, that
Person.  For purposes of this definition, “control” (including, with correlative
meanings, the terms “controlling”, “controlled by” and “under common control
with”), with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting equity
securities or by contract or otherwise.
 
“Agreement” means this Sub-Management Agreement, as amended from time to time.

 
1

--------------------------------------------------------------------------------

 

“Base Management Fee” has the meaning set forth in the Management Agreement,
provided that, notwithstanding anything to the contrary in this Agreement,
including without limitation any requirement that the Base Management Fee have
been earned or received, for purposes of calculating any amount payable under
this Agreement, the Base Management Fee will be calculated without any reduction
described in the last sentence of the definition of “Base Management Fee” in the
Management Agreement.
 
“Book Value” means (i) in the case of the Company, the Stockholders’ Equity, and
(ii) in the case of any other Public Vehicle, the book value of such Public
Vehicle used for purposes of calculating the management and termination fees
earned by the Manager or any Pine River Manager pursuant to the management or
advisory agreement between such Public Vehicle and the Manager or any Pine River
Manager.
 
“Capitol” has the meaning set forth in the Recitals to this Agreement.
 
“Cause” means a final determination by a court of competent jurisdiction (a)
that the Sub-Manager has materially breached this Agreement that has a material
adverse effect on the Manager or the Company and such material breach has
continued for a period of 30 days after receipt by the Sub-Manager of written
notice thereof specifying such breach and requesting that the same be remedied
in such 30-day period, (b) that an action taken or omitted to be taken by the
Sub-Manager in connection with this Agreement constitutes willful misconduct or
gross negligence that results in material harm to the Manager and/or the Company
and such willful misconduct or gross negligence has continued for a period of 30
days after receipt by the Sub-Manager of written notice thereof specifying such
willful misconduct or gross negligence and requesting that the same be remedied
in such 30-day period, or (c) that an action taken or omitted to be taken by the
Sub-Manager in connection with this Agreement constitutes fraud that results in
material harm to the Manager and/or the Company.
 
“Company” has the meaning set forth in the Introductory Paragraph to this
Agreement.
 
“Final Payment” has the meaning set forth in Section 11(b) of this Agreement.
 
“Grant” has the meaning set forth in Section 9(a) of this Agreement.
 
“Indemnitor” has the meaning set forth in Section 13(b) of this Agreement.
 
“Independent Revenue Sharer” means any Person who, in connection with a Pine
River Manager’s entry into a management agreement with a Public Vehicle (other
than the Company), is offered a Grant so long as (i) such Person is not an
Affiliate of Pine River Capital, the Manager or any of their respective
Affiliates, and (ii) neither Pine River Capital, the Manager nor any of their
respective Affiliates has any pecuniary interest (through contract, equity or
debt interests or otherwise) in such Person or the Grant offered to such Person;
provided, that “Independent Revenue Sharer” shall not include any Person who is
offered a Grant in connection with the financing or recapitalization of the
Manager.
 
“Interest Rate” means the current (as of the Termination Date) London Interbank
Offered Rate as quoted by Citibank, N.A. (or any successor entity thereto) for
interest periods of one year, plus 200 basis points per annum, compounding
quarterly.
 
“Management Agreement” has the meaning set forth in the Recitals to this
Agreement.
 
“Manager” has the meaning set forth in the Introductory Paragraph of this
Agreement.

 
2

--------------------------------------------------------------------------------

 

“Mark Ein Control Persons” means, collectively: (i) Mark D. Ein, (ii) any
Affiliate of Mark D. Ein, including without limitation Leland Investments, Inc.,
and (iii) upon Mark D. Ein’s death or disability, if applicable, any executors,
attorneys in fact, or administrators of Mark D. Ein or his estate, or any
trustee (whether or not as a testamentary trustee or as a successor trustee
under a non-testamentary trust).

“Mark Ein Related Persons” means, collectively: (i) Mark D. Ein, (ii) any
Affiliates of Mark D. Ein, including without limitation Leland Investments,
Inc., (iii) any trusts (or trustees thereof), family limited partnerships or
other estate planning vehicles over which one or more Mark Ein Control Persons
exercise control, (iv) upon Mark D. Ein’s death or disability, if applicable,
any executors, attorneys in fact, administrators, testamentary trustees,
legatees or beneficiaries of Mark D. Ein or his estate, or any trust formed by
either, and (v) to the extent any Mark Ein Control Person retains voting control
over the applicable interest, any charitable trust, organization or entity.

“Merger” has the meaning set forth in the Recitals to this Agreement.
 
“Merger Agreement” has the meaning set forth in the Recitals to this Agreement.
 
“Notice Date” has the meaning set forth in Section 9(c) of this Agreement.
 
“Operating Company” has the meaning set forth in the Recitals to this Agreement.
 
“Pine River Capital” has the meaning set forth in the Introductory Paragraph of
this Agreement.
 
“Pine River Manager” has the meaning set forth in Section 9(a) of this
Agreement.

 “Public Vehicle” means an entity (a) (i) whose common equity securities are
publicly issued or traded or (ii) that issues securities in an offering that
expressly contemplates such securities (or other securities of such entity
issued in exchange therefor or conversion thereof) being listed on a national
securities exchange at a future date and (b) that is a REIT or other entity the
business of which involves making investments in securities and other financial
assets, including without limitation publicly traded REITs and closed-end
funds.  Notwithstanding the foregoing, and without limiting the foregoing,
“Public Vehicle” shall not include (i) any company that is primarily an
operating business, (ii) Pine River Capital or any of its Affiliates, any of the
private investment funds currently managed by Pine River Capital and any similar
private investment vehicles that Pine River may in the future manage, or any
successor to any of the foregoing, (iii) any vehicle that is externally managed
by the Company or any other Public Vehicle with respect to which the Sub-Manager
has an effective agreement in place in accordance with Section 9(a),  (iv) a
bank, savings and loan company, other thrift or insurance company or other
similar operating financial institution, or (v) any entity whose sole material
business is the management of private investment vehicles.
 
“Section 409A Penalties” has the meaning set forth in Section 29 of this
Agreement.

“Services” has the meaning set forth in Section 3(a) of this Agreement.
 
“Sub-Manager” has the meaning set forth in the Introductory Paragraph of this
Agreement.
 
“Sub-Manager Base Management Fee” means a base management fee equal to the sum
of (i) 20%, calculated and paid (in cash) quarterly in arrears, of the Base
Management Fee earned by the Manager or its assignee under the Management
Agreement with respect to the first $1 billion of the Stockholders’ Equity and
(ii) 10%, calculated and paid (in cash) quarterly in arrears, of the Base
Management Fee earned by the Manager or its assignee under the Management
Agreement with respect to the Stockholders’ Equity in excess of $1 billion;
provided, that such reference to quarterly calculation and payment shall be
amended without further action of the parties hereto to read “monthly” to the
extent the Management Agreement is amended or modified to provide for payments
on a monthly basis.

 
3

--------------------------------------------------------------------------------

 

“Sub-Manager Indemnified Party” has the meaning set forth in Section 13(a) of
this Agreement.
 
“Sub-Manager Termination Fee” means a termination fee equal to the sum of (i)
20% of the Termination Fee earned by the Manager or its assignee under the
Management Agreement with respect to the first $1 billion of the Stockholders’
Equity and (ii) 10% of the Termination Fee earned by the Manager or its assignee
under the Management Agreement with respect to Stockholders’ Equity in excess of
$1 billion.
 
“Termination Date” has the meaning set forth in Section 11(a) of this Agreement.
 
2.           Appointment.  The Manager hereby appoints the Sub-Manager to serve
as sub- advisor on the terms and conditions set forth in this Agreement, and the
Sub-Manager hereby accepts such appointment.
 
3.           Duties of the Sub-Manager.
 
(a)           The Sub-Manager shall provide the following services (the
“Services”) to support the Manager’s performance of services to the Company
under the Management Agreement, in each case upon reasonable request by the
Manager:
 
(i)           serving as a consultant to the Manager with respect to the
periodic review of the Guidelines;
 
(ii)          identifying for the Manager potential new lines of business and
investment opportunities for the Company;
 
(iii)         identifying for and advising the Manager with respect to selection
of independent contractors that provide investment banking, securities
brokerage, mortgage brokerage and other financial services, due diligence
services, underwriting review services, legal and accounting services, and all
other services as may be required relating to the Investments;
 
(iv)         advising the Manager with respect to the Company’s stockholder and
public relations matters;
 
(v)          advising and assisting the Manager with respect to the Company’s
capital structure and capital raising; and
 
(vi)         advising the Manager on negotiating agreements relating to programs
established by the U.S. government, including the Term Asset-Backed Securities
Lending Facility.
 
Notwithstanding anything in this Agreement to the contrary, the Manager shall
remain primarily and directly responsible for the provision of all services
provided to the Company under the Management Agreement.  Without limiting the
foregoing, the Manager shall be solely responsible for (i) identifying and
consummating all Investments to be made by the Company and the Subsidiaries,
(ii) any and all portfolio monitoring or reporting services to be provided to
the Company and (iii) any matters relating to the Company’s REIT qualification
for U.S. federal income tax purposes or the status of the Company and its
Affiliates under the Investment Company Act.

 
4

--------------------------------------------------------------------------------

 

(b)           The Sub-Manager shall, and shall cause its officers and employees
to, devote such portion of its and their time to the provision of the Services
to the Manager as necessary for the proper performance of all of the Services
hereunder.
 
4.           Authority of the Sub-Manager.  The Sub-Manager is not authorized to
advise or bind the Company or to enter into any agreements relative to the
Company, and, with respect to the Manager, is to act only as an advisor to the
Manager, upon reasonable request.  The Sub-Manager shall have no obligation or
authority under the Management Agreement.
 
5.           Confidentiality.  The Sub-Manager and the Manager shall each keep
confidential any nonpublic information obtained in connection with the Services
rendered under this Agreement and shall not disclose any such information (or
use the same except in furtherance of its duties under this Agreement), except:
(i) to the other party hereto and its respective employees, officers, directors,
consultants or advisors; (ii) with the prior written consent of the other party
hereto; or (iii) as required by law or legal process. The foregoing shall not
apply to information which has previously become available through the actions
of a Person not resulting a violation this Section 5 or to any information
within the public domain or, for the avoidance of doubt, with respect to
Sub-Manager’s or its Affiliates’ business enterprises unrelated to the Services
or the Company. The provisions of this Section 5 shall survive the expiration or
earlier termination of this Agreement for a period of one year.
 
6.           Fees.
 
(a)           As compensation for all Services performed by the Sub-Manager
under this Agreement, the Manager shall pay the Sub-Manager (i) the Sub-Manager
Base Management Fee; and (ii) in recognition of the level of the upfront effort
and commitment of resources required by the Sub-Manager in connection with this
Agreement, either the Sub-Manager Termination Fee or the Final Payment, in each
case pursuant to the terms set forth herein.  Payment of the Sub-Manager Base
Management Fee by the Manager to the Sub-Manager for any quarter shall be
contingent upon the receipt by the Manager of the Base Management Fee under the
Management Agreement for such quarter.  The Sub-Manager Base Management Fee
shall be payable by the Manager to the Sub-Manager within five (5) days of
receipt by the Manager of the Base Management Fee.  Payment of the Sub-Manager
Termination Fee by the Manager to the Sub-Manager shall be contingent upon the
receipt by the Manager of the Termination Fee under the Management
Agreement.  Subject to the provisions of Section 11, the Sub-Manager Termination
Fee shall be payable by the Manager to the Sub-Manager within five (5) days of
receipt by the Manager of the Termination Fee.  Payment of the Final Payment
shall be made in accordance with the provisions of Section 11.
 
(b)           The Manager agrees that, without the approval of the Sub-Manager
(which approval will not be unreasonably withheld, delayed or conditioned), it
shall not agree to any modification of the Management Agreement that would both
(i) amend or waive (A) the terms of payments due to the Manager under the
Management Agreement or (B) the indemnification or expense reimbursement
provisions of the Management Agreement and (ii) have either (A) a
disproportionately adverse effect on the Sub-Manager or (B) a disproportionately
positive result for the Manager.

 
5

--------------------------------------------------------------------------------

 

(c)           The Manager agrees to use reasonable best efforts to collect the
Base Management Fee and the Termination Fee on a prompt and timely basis.
 
(d)           The Manager covenants that no payments made to the Sub-Manager
under this Agreement shall be deemed paid, directly or indirectly, from a
“nonqualified entity” under Section 457A of the Code.
 
7.           Expenses.  The Manager shall promptly submit any expenses incurred
by the Sub-Manager on behalf and at the request of the Manager that are eligible
for reimbursement by the Company pursuant to the terms of the Management
Agreement to the Company for reimbursement.  The Sub-Manager shall prepare a
statement documenting such eligible expenses of the Sub-Manager during each
quarter, and shall deliver such statement to the Manager within five (5)
business days after the end of each quarter.  The Manager shall reimburse the
Sub-Manager for such eligible expenses within five (5) days of receipt by the
Manager of reimbursement from the Company for such eligible expenses (provided,
that a failure to deliver such statement within such period shall not limit the
rights of the Sub-Manager hereunder except to the extent it prevents the Manager
from being reimbursed by the Company).  Reimbursement by the Manager to the
Sub-Manager for any expenses shall be contingent upon the receipt by the Manager
of reimbursement from the Company under the Management Agreement for such
expenses, and the Manager will pursue such reimbursement with substantially the
same level of effort that it pursues requests for its own reimbursement of
expenses.
 
8.           Restrictions on Transfer.
 
(a)           The Sub-Manager shall not directly transfer all or any portion of
its right to receive the Sub-Manager Base Management Fee, the Sub-Manager
Termination Fee or any of the amounts payable to the Sub-Manager under this
Agreement (but excluding proceeds thereof) to any other Person, without the
prior written consent of the Manager (which consent shall not be unreasonably
withheld, delayed or conditioned).
 
(b)           The consent of the Manager (which shall not be unreasonably be
withheld, delayed or conditioned) shall be required prior to a transfer of
membership interests in the Sub-Manager that would result in Mark Ein Related
Persons, in the aggregate, holding less than a majority in interest of the
Sub-Manager.  The term transfer as used in this Section 8(b) shall include any
actions that may result in any Mark Ein Related Person ceasing to be a Mark Ein
Related Person.

 
6

--------------------------------------------------------------------------------

 

9.           Other Public Vehicles.
 
(a)           During the period from the date of the Merger Agreement through
the Termination Date, Pine River Capital represents and warrants that it has
used, and agrees that it shall use, as the case may be, commercially reasonable
efforts to ensure that the Manager is designated as the investment manager with
respect to any Public Vehicle to which Pine River Capital or its direct or
indirect majority-owned subsidiaries serves as external investment
manager.  Subject in all cases to Section 9(b) hereof, in the event that the
Manager or any direct or indirect majority-owned subsidiary of Pine River
Capital is designated as the investment manager (a “Pine River Manager”) with
respect to any other Public Vehicle, the Manager and the Sub-Manager shall enter
into good faith negotiations with regard to (a) an agreement pursuant to which
the Sub-Manager will be engaged as sub-manager with regard to the management of
such other Public Vehicle on substantially the terms set forth herein or (b)
alternative arrangements that are reasonably acceptable to both the Manager and
the Sub-Manager and that provide for substantially the same proportionate
compensation to the Sub-Manager as set forth herein and Pine River Capital shall
cause the Pine River Manager to provide the Sub-Manager with the right to enter
into such an agreement; provided, however, that (x) the payment under such
agreement that is comparable to the Final Payment will be payable in connection
with the fifth anniversary of the closing of the Merger (rather than the fifth
anniversary of the date of such agreement) and (y) if the Pine River Manager
grants to an Independent Revenue Sharer irrevocable and fully vested contractual
rights (a “Grant”) to a percentage of the total fees payable under the Pine
River Manager’s management agreement with such Public Vehicle, then the fees to
which the Sub-Manager is entitled under its applicable agreement with the Pine
River Manager with respect to such Public Vehicle will be reduced by a
percentage equal to the percentage interest provided to such Independent Revenue
Sharer in such Grant during the life of such Grant.  If the Manager proposes any
Grant in connection with this Section 9(a), Pine River Capital will provide the
Sub-Manager with all information and certifications reasonably requested by the
Sub-Manager, including with respect to (x) whether the Person receiving the
applicable Grant is an Independent Revenue Sharer and (y) the terms and
conditions of the Grant.  In connection with any such Grant, to the extent that
one or both of the Sub-Manager and Pine River Capital parties believe in good
faith that the adjustment to the Sub-Manager’s fee under this Section 9(a) does
not fairly allocate the dilution between the parties, the parties will negotiate
in good faith to adjust the terms of such adjustment.  Notwithstanding any delay
in executing such agreement or arrangement, the Sub-Manager shall be entitled to
the accrual for payment of fees commencing upon the receipt of management fees
by the Manager or such Pine River Manager with regard to such other Public
Vehicle.  Neither Pine River Capital nor the Manager shall have any obligations
pursuant to the foregoing sentences of this Section 9(a) if the Sub-Manager
remains in material breach of any provision of this Agreement after written
notice of such material breach delivered by the Manager to the Sub-Manager;
provided, however, upon cure by the Sub-Manager of any such breach, Pine River
Capital shall cause the applicable Pine River Manager to negotiate in good faith
with the Sub-Manager and provide the Sub-Manager with the right to enter into an
agreement described in this paragraph to the extent that the Sub-Manager was,
due to such breach, previously not entitled to enter into such an agreement.
 
(b)           Notwithstanding any other provision of this Agreement, the
Sub-Manager shall only be entitled to receive (A) the sum of (i) 20% of the
aggregate management fees earned by the Manager and any Pine River Manager with
respect to the first $1 billion of aggregate Book Value of all Public Vehicles
(including the Company) cumulatively managed by the Manager and any Pine River
Manager and (ii) 10% of the aggregate management fees earned by the Manager and
any Pine River Manager with respect to the  aggregate Book Value of all Public
Vehicles (including the Company) cumulatively managed by the Manager and any
Pine River Manager in excess of $1 billion; (B) the sum of (i) 20% of the
aggregate termination fees earned by the Manager and any Pine River Manager with
respect to the first $1 billion of aggregate Book Value of all Public Vehicles
(including the Company) cumulatively managed by the Manager and any Pine River
Manager and (ii) 10% of the aggregate termination fees earned by the Manager and
any Pine River Manager with respect to the  aggregate Book Value of all Public
Vehicles (including the Company) cumulatively managed by the Manager and any
Pine River Manager in excess of $1 billion; and (C) the sum of the Final Payment
and all comparable payments under other agreements entered into by the
Sub-Manager pursuant to Section 9(a).  Notwithstanding anything to the contrary
contained herein with regard to each of the Company and each Public Vehicle, the
Sub-Manager shall not be entitled to receive both a Termination Fee and a Final
Payment with regard to such entity.

 
7

--------------------------------------------------------------------------------

 

(c)           Nothing in this Agreement shall provide the Sub-Manager with any
rights, obligations or interests whatsoever with respect to the private capital
management business of Pine River Capital and its Affiliates; and Pine River and
the Manager shall have no rights, obligations or interests whatsoever with
respect to any business of the Sub-Manager, its members or their respective
Affiliates, other than the Services in respect of the Sub-Manager set forth in
this Agreement.  Without limiting the foregoing, the Sub-Manager shall have (i)
no rights with respect to any new private vehicles that Pine River Capital or
its Affiliates may form or manage during the term of this Agreement, regardless
of whether any such vehicles may invest in strategies similar to the strategy of
the Company or any Public Vehicle and (ii) no rights with respect to any Public
Vehicle that is externally managed by any management entity at the time such
management entity is acquired by Pine River Capital or its Affiliates after the
date of this Agreement, provided, however, that in connection with any such
acquisition, Pine River Capital shall, or shall cause its applicable Affiliate
to, offer to the Sub-Manager (which may assign the right to accept this offer to
any if its Affiliates in whole or in part) the right to invest, on the same
terms and conditions as Pine River Capital or its applicable Affiliate (except
that the Sub-Manager and/or any designated Affiliate will be entitled to
customary and reasonable minority investor protections), in up to 20% of each
class of securities of such management entity acquired by Pine River Capital and
its Affiliates, collectively, provided, further, that the Sub-Manager and/or its
designated Affiliates will have 45 days to accept such offer after receiving
written notice from Pine River Capital describing in reasonable detail all the
material terms of the offer (the “Notice Date”), and will have 60 days to fund
the purchase price if such offer is accepted after the Notice Date. Subject to
conflict of interest policies to be agreed upon between the parties, nothing
will limit the ability of Pine River Capital and its Affiliates, or the
Sub-Manager and its Affiliates, to enter into other transactions, including (x)
trading in the securities of special purpose acquisition companies other than
Capitol through one or more funds managed by Pine River Capital or its
Affiliates, (y) investing or trading in securities, or pursing investment
strategies, that are the same or similar to those of the Company, or (z) subject
to applicable law, pursuing any other investment or opportunity that may be of
interest to the Company.
 
10.         Relationship of Sub-Manager, Manager, Pine River Capital and
Company.  The Manager and Pine River Capital, on the one hand, and the
Sub-Manager, on the other hand, are not partners, members or joint venturers
with each other nor with the Company, and nothing in this Agreement shall be
construed to make them such partners, members or joint venturers or impose any
liability as such on any of them.  The relationship of the parties is intended
to be contractual and not fiduciary in nature.
 
11.         Term and Termination.
 
(a)           This Agreement shall terminate on the earliest to occur of (i) the
fifth anniversary of the closing of the Merger, (ii) the termination of the
Management Agreement by Company, or (iii) the effective date of the removal of
the Sub-Manager for Cause (the “Termination Date”); provided that all rights and
obligations with respect to any earned but unpaid Sub-Manager Base Management
Fee and any other amounts payable under this Agreement with respect to periods
prior to, on or in connection with the Termination Date shall survive the
termination of this Agreement; provided, further, that, subject to the foregoing
proviso, in the event of termination pursuant to clause (i) or (iii) above,
there shall be no Sub-Manager Termination Fee paid to the Sub-Manager and, in
the event of termination pursuant to clause (ii) or (iii) above, there shall be
no Final Payment paid to the Sub-Manager.  If, in the event of a termination
pursuant to clause (ii) above, the Company or any of its Affiliates, on the one
hand, and the Manager or any Pine River Manager, on the other hand, enter into a
new management agreement effective within six months of such termination, this
Agreement will be deemed to apply with respect to such new management agreement,
and, without limiting the foregoing, for purposes of Section 9(a), the
Termination Date shall be deemed not to have occurred.  Pine River Capital shall
cause the applicable Pine River Manager, if it is not the Manager, to assume the
Manager’s obligations under this Agreement.  In the event one or more of the
Sub-Manager and the applicable Pine River Manager believes in good faith
that this Agreement should be amended to reflect differences between the new
management agreement and the Management Agreement, the Sub-Manager and the
applicable Pine River Manager shall enter into good faith negotiations with
regard to any such appropriate amendments and Pine River Capital shall cause the
Pine River Manager to provide the Sub-Manager with the right to enter into any
such amendments.  In any such event Pine River Capital will provide the
Sub-Manager with all information and certifications reasonably requested by the
Sub-Manager.  Notwithstanding any delay in executing any such amendment, the
Sub-Manager shall be entitled to the accrual for payment of fees (on the terms
as so amended) commencing upon the receipt of management fees by the Manager or
such Pine River Manager with regard to such new agreement.
 
 
8

--------------------------------------------------------------------------------

 

(b)           If the Termination Date occurs under Section 11(a)(i) above,
subject to Section 14(b), the Sub-Manager shall receive a final payment (the
“Final Payment”) of 7.7 times the annualized rate of (i.e., 30.8 times) the last
quarterly payment of the Sub-Manager Base Management Fee; provided that, (i) the
Final Payment shall be calculated and determined in accordance with Section
11(e) and (ii) for purposes of calculating the Final Payment, the last quarterly
Sub-Manager Base Management Fee payment shall be re-calculated to reverse any
reduction in Stockholders’ Equity that results, pursuant to clause (iii) of the
definition of Stockholders’ Equity in the Management Agreement, from any
repurchases of common stock of the Company that occurred in the 12-month period
prior to such termination. The Final Payment shall be paid on the date that is
60 days after the Termination Date (or, if such date is not a business day, the
next business day).  If during the six months following the Termination Date,
the Company raises new equity capital, then the Final Payment will be
recalculated to include the increase in Stockholders’ Equity resulting from the
issuance of such new equity capital, but reduced by any reductions in
Stockholders’ Equity occurring during such six-month period (other than any
reductions that, pursuant to the adjustment described above, would have been
excluded from the calculation of the termination payment if such reductions had
occurred during the 12 months preceding the Termination Date), with the net
increase in the amount of the Final Payment as re-calculated payable on the date
that is 60 days after the date that is six months after the Termination Date
(or, if such date is not a business day, the next business day).
 
(c)           Upon the termination of this Agreement (or in the case of a
termination pursuant to Section 11(a)(iii), the determination of termination in
accordance with Section 14(b)), except to the extent inconsistent with
applicable law, the Sub-Manager shall as promptly as reasonably practicable (A)
deliver to the Manager one copy of all expense statements generated pursuant to
Section 7 hereof covering the period following the date of the last provision of
such expense statements to the Manager through the Termination Date; and (B)
deliver to the Manager all property and documents of the Company provided to or
obtained by the Sub-Manager pursuant to or in connection with this Agreement,
including all copies and extracts thereof in whatever form, then in the
Sub-Manager’s possession or under its control (provided that the Sub-Manager’s
outside counsel may retain one copy to be kept confidential and used solely for
archival purposes).
 
(d)           Subject to other provisions of this Agreement, if the Sub-Manager
is removed for Cause, the effective date of a removal for Cause shall be the
date upon which the Manager shall have delivered to Sub-Manager both (i) written
notice that the Sub-Manager is being removed for Cause in accordance with the
Sub-Management Agreement, and (ii) a copy of the applicable final,
non-appealable order evidencing the required final determination of the court of
competent jurisdiction.

 
9

--------------------------------------------------------------------------------

 

(e)           For the purposes of calculating the Final Payment and the
Sub-Manager Base Management Fee on which the Final Payment is based, the Manager
shall (i) calculate Stockholders’ Equity (A) in accordance with (1) the books
and records of the Company and (2) the definition of Stockholders’ Equity in the
Management Agreement and (B) using the same accounting principles, policies,
practices and methodologies used in, and applied consistently with, the prior
calculations of Stockholders’ Equity under the Management Agreement, and (ii)
shall otherwise follow the past practices of the Manager and the Company with
respect to calculating Stockholders' Equity, in each case, subject to the
adjustments expressly provided for in Section 11(a). In connection with the
calculation of the Final Payment, upon the Manager’s calculation of the
applicable Sub-Manager Base Management Fee, the Manager shall promptly deliver
to the Sub-Manager a written statement setting forth in reasonable detail its
calculation of the Final Payment (including the applicable calculations of
Sub-Manager Base Management Fee and Stockholders’ Equity) and provide the
Sub-Manager reasonable access, during normal business hours and upon reasonable
notice, to all work papers, schedules, memoranda and other documents prepared or
reviewed by the Manager or by any of its representatives that are relevant to
its calculation of the Final Payment (or the applicable calculation of
Sub-Manager Base Management Fee or Stockholders’ Equity), and such access shall
be provided promptly after request by the Sub-Manager, and the Manager shall
request that its accountants communicate with the Sub-Manager and its
representatives; provided, that the Sub-Manager may be required to sign an
“indemnification letter” in the form generally used by the Manager’s accountant
prior to receiving access to any materials prepared by such accountant.  The
Manager shall cause its representatives to be available, during normal business
hours and upon reasonable notice, to the Sub-Manager to review the calculation
of the Final Payment (including the applicable Sub-Manager Base Management Fee
or Stockholders’ Equity).  In the event that the Sub-Manager disputes the
calculation of the Final Payment (including the calculation of the applicable
Sub-Manager Base Management Fee or Stockholders’ Equity), the Sub-Manager and
the Manager will use commercially reasonable efforts, and negotiate in good
faith, to promptly reach agreement as to the correct calculation of the Final
Payment.
 
12.         Assignment.  The Manager may not assign any of its rights and
obligations under this Agreement, except that the Manager may assign, in their
entirety, its rights and obligations under this Agreement to any third party
upon the assignment of its rights and obligations under the Management Agreement
to such third party; provided that both the assignee agrees in writing to assume
all obligations hereunder and the Manager shall continue to remain liable for
its obligations to the Sub-Manager hereunder.  The transfer of fees and other
amounts payable to the Sub-Manager under this Agreement shall be governed by
Section 8(a).  Otherwise this Agreement shall not be assigned by any party
hereto without the prior written consent of the other parties.
 
13.         Indemnification.  The Manager will use commercially reasonable
efforts to cause the Sub-Manager to be indemnified by the Company in accordance
with the Management Agreement.

 
10

--------------------------------------------------------------------------------

 

14.         Remedies; Limitation of Liability.
 
(a)           Notwithstanding any other provision of this Agreement, in no event
shall Pine River Capital, the Company or any of their Affiliates (including the
Manager), on the one hand, or the Sub-Manager, on the other hand, be responsible
or liable for special, indirect, punitive or consequential loss or damage of any
kind whatsoever (including, but not limited to, loss of profit) irrespective of
whether Pine River Capital, the Company or their Affiliates, on the one hand, or
the Sub-Manager, on the other hand, has been advised of the likelihood of such
loss or damage and regardless of the form of action; provided, however, that in
connection with any dispute between Pine River or the Manager, on the one hand,
and the Sub-Manager, on the other hand, regarding the Sub-Manager’s right to
receive payments under this Agreement, (x) if the Sub-Manager is finally
determined to have been entitled to receive any amounts (not paid when due)
under this Agreement, the Sub-Manager will be entitled to (1) reimbursement of
reasonable costs and expenses (including attorneys’ fees) incurred in connection
with such dispute and collection of such amounts and (2) interest accruing at
the Interest Rate on such unpaid amounts from the date payment was originally
due until actually paid, and (y) if the Sub-Manager is finally determined not to
have been entitled to receive any amounts (not paid when due) under this
Agreement, the Manager will be entitled to reimbursement of reasonable costs and
expenses (including attorneys’ fees) incurred in connection with such
dispute.  Further, notwithstanding any other provision of this Agreement,
neither the Manager, Pine River Capital nor any of their respective Affiliates
shall be liable to the Sub-Manager for payment of a Sub-Manager Base Management
Fee, Sub-Manager Termination Fee or any similar compensation (other than any
Final Payment or other final payment) except to the extent that the Manager,
Pine River Capital or such Affiliate (as the case may be) or its assignee has
actually received a corresponding fee from corresponding Public Vehicles
(including the Company).  This Agreement may only be enforced against, and any
claim or cause of action based upon, arising out of, or related to this
Agreement or the transactions contemplated hereby may only be brought against,
the entities that are expressly named as parties hereto and then only with
respect to the specific obligations set forth herein with respect to such
party.  Except to the extent a named party to this Agreement (and then only to
the extent of the specific obligations undertaken by such named party in this
Agreement and not otherwise), no past, present or future director, officer,
employee, incorporator, member, partner, stockholder, Affiliate, agent,
attorney, advisor or representative or Affiliate of any of the foregoing shall
have any liability (whether in contract, tort, equity or otherwise) for any one
or more of the representations, warranties, covenants, agreements or other
obligations or liabilities of any one or more of the parties under this
Agreement (whether for indemnification or otherwise) of or for any claim based
on, arising out of, or related to this Agreement or the transactions
contemplated hereby.
 
(b)           Notwithstanding anything to the contrary in this Agreement, the
Manager will not be entitled to terminate the Agreement (except as expressly set
forth in the termination provisions above), withhold or offset amounts owed
hereunder or otherwise seek recourse against the Sub-Manager for any breach of
this Agreement, except that the Manager may seek payment of monetary damages to
the extent a court of competent jurisdiction finally determines such damages are
awarded to the Manager against the Sub-Manager as a result of Cause (and such
damages exceed any amounts released from escrow to the Manager in accordance
with this Section 14(b)); provided that, in the event that the Manager has, in
good faith in accordance with this Agreement, initiated litigation with respect
to Cause prior to the fifth anniversary of the closing of the Merger, the
Manager may, in lieu of making payments to the Sub-Manager with respect to the
Final Payment, but at the time at which such payments would otherwise be
required, deposit such payments into an interest-bearing escrow arrangement
reasonably satisfactory to the Sub-Manager.  If Cause is finally determined to
have occurred prior to the fifth anniversary of the Merger, the amounts then in
escrow will be released to the Manager (and the Manager shall have no further
obligation to make payments with respect to the Final Payment).  If a court of
competent jurisdiction finally determines that no Cause occurred prior to the
fifth anniversary of the Merger, then the amounts then in escrow will be
released to the Sub-Manager, and the Manager will be responsible for any
additional amounts owing in respect of the Final Payment.
 
15.         Representations and Warranties of Pine River Capital and the
Manager.  The Manager and Pine River Capital each, severally and not jointly,
hereby represents and warrants to the Sub-Manager, as follows:

 
11

--------------------------------------------------------------------------------

 

(a)           It, in the case of the Manager, is a limited liability company
and, in the case of Pine River Capital, is a limited partnership and, in any
case, is duly organized, validly existing and in good standing under the laws of
the State of Delaware, and is qualified to do business in every jurisdiction in
which the failure to so qualify might reasonably be expected to have a material
adverse effect on the financial condition, operating results, assets, operations
or business prospects of it and its subsidiaries taken as a whole.  It has all
requisite corporate or other power and authority and all material licenses,
permits and authorizations necessary to own and operate its properties, to carry
on its businesses as now conducted and to carry out the transactions
contemplated by this Agreement.
 
(b)           The execution, delivery and performance of this Agreement has been
duly authorized by it.  This Agreement has been duly executed and delivered by
it and, assuming due execution and delivery by the Sub-Manager, constitutes a
valid and binding obligation of it, enforceable in accordance with its
terms.  The execution and delivery by it of this Agreement, and the fulfillment
of and compliance with the terms hereof by it, do not and will not (i) conflict
with or result in a breach of the terms, conditions or provisions of, (ii)
constitute a default under, (iii) result in the creation of any lien, security
interest, charge or encumbrance upon its capital stock or membership interests,
as applicable, or assets pursuant to, (iv) give any third party the right to
modify, terminate or accelerate any obligation under, (v) result in a violation
of, or (vi) require any authorization, consent, approval, exemption or other
action by or notice to any court or administrative or governmental body pursuant
to, its organizational documents, or any law, statute, rule or regulation to
which it is subject, or any agreement, instrument, order, judgment or decree to
which it is a party or by which it is bound.
 
16.         Representations and Warranties of the Sub-Manager.  The Sub-Manager
hereby represents and warrants to Pine River Capital and the Manager as follows:
 
(a)           The Sub-Manager is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is qualified to do business in every jurisdiction in which the failure to so
qualify might reasonably be expected to have a material adverse effect on the
financial condition, operating results, assets, operations or business prospects
of the Sub-Manager taken as a whole.  The Sub-Manager has all requisite power
and authority and all material licenses, permits and authorizations necessary to
own and operate its properties, to carry on its businesses as now conducted and
to carry out the transactions contemplated by this Agreement.
 
(b)           The execution, delivery and performance of this Agreement has been
duly authorized by the Sub-Manager.  This Agreement has been duly executed and
delivered by the Sub-Manager and, assuming due execution and delivery by Pine
River Capital and the Manager, constitutes a valid and binding obligation of the
Sub-Manager, enforceable in accordance with its terms.  The execution and
delivery by the Sub-Manager of this Agreement, and the fulfillment of and
compliance with the terms hereof by the Sub-Manager, do not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Sub-Manager’s capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice to
any court or administrative or governmental body pursuant to, the Sub-Manager's
certificate of formation or amended and restated limited liability company, or
any law, statute, rule or regulation to which the Sub-Manager is subject, or any
agreement, instrument, order, judgment or decree to which the Sub-Manager is a
party or by which it is bound.

 
12

--------------------------------------------------------------------------------

 

17.         Further Assurances.  The Sub-Manager and the Manager will use
commercially reasonable efforts to cooperate to give effect to the arrangements
contemplated hereby, including with a view towards compliance with the Advisers
Act, counterpart state law and regulations adopted thereunder, and any
amendments thereto or registration requirements thereunder that may in arise the
future.
 
18.         Notices.  Unless expressly provided otherwise in this Agreement, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
(i) personal delivery, (ii) delivery by reputable overnight courier,
(iii) delivery by facsimile transmission with telephonic confirmation or
(iv) delivery by registered or certified mail, postage prepaid, return receipt
requested, addressed as set forth below:
 
·
If to the Manager:

 
PRCM Advisers LLC
601 Carlson Parkway
Suite 330
Minnetonka, MN  55305
Attention:  General Counsel
 
·
If to the Sub-Manager:

 
CLA Founders LLC
c/o Kastle Systems
1501 Wilson Blvd
Arlington, VA  22209
Attn:  Mark D. Ein
 
With a copy (which shall not constitute notice) to:
 
Richard C. Donaldson
1650 Tysons Boulevard
14th Floor
McLean, Virginia  22102

·
If to Pine River Capital:

 
Pine River Capital Management L.P.
601 Carlson Parkway
Suite 330
Minnetonka, MN  55305
Attention:  General Counsel
 
·
If to the Company:

 
Two Harbors Investment Corp.
601 Carlson Parkway
Suite 330
Minnetonka, MN  55305
Attention:  General Counsel

 
13

--------------------------------------------------------------------------------

 

Any party may alter the address to which communications or copies are to be sent
by giving notice of such change of address in conformity with the provisions of
this Section 18 for the giving of notice.
 
19.           Binding Nature of Agreement; Successors and Assigns.  This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and permitted
assigns as provided in this Agreement.
 
20.           Entire Agreement.  This Agreement contains the entire agreement
and understanding among the parties hereto with respect to the subject matter of
this Agreement, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter of this
Agreement.  The express terms of this Agreement control and supersede any course
of performance and/or usage of the trade inconsistent with any of the terms of
this Agreement.  This Agreement may not be modified or amended other than by an
agreement in writing signed by the parties hereto.
 
21.           GOVERNING LAW.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD
TO CONFLICTS OF LAW PRINCIPLES TO THE CONTRARY.
 
22.           Jurisdiction; Waiver of Jury Trial.  Any proceeding or action
based upon, arising out of or related to this Agreement or the transactions
contemplated hereby shall be brought in any state court of the State of Delaware
or, in the case of claims to which the federal courts have subject matter
jurisdiction, any federal court of the United States of America, in either case,
located in the State of Delaware, and each of the parties irrevocably submits to
the exclusive jurisdiction of each such court in any such proceeding or action,
waives any objection it may now or hereafter have to personal jurisdiction,
venue or to convenience of forum, agrees that all claims in respect of the
proceeding or action shall be heard and determined only in any such court, and
agrees not to bring any proceeding or action arising out of or relating to this
Agreement or the transactions contemplated hereby in any other court.  Nothing
herein contained shall be deemed to affect the right of any party to serve
process in any manner permitted by law or to commence legal proceedings or
otherwise proceed against any other party in any other jurisdiction, in each
case, to enforce judgments obtained in any action, suit or proceeding brought
pursuant to this Section 22. EACH PARTY HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
RIGHT THAT SUCH PARTY MAY HAVE TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF
ACTION DIRECTLY OR INDIRECTLY BASED UPON OR ARISING OUT OF THIS AGREEMENT.
 
23.           No Waiver; Cumulative Remedies.  No failure to exercise and no
delay in exercising, on the part of any party hereto, any right, remedy, power
or privilege hereunder shall operate as a waiver thereof; nor shall any single
or partial exercise of any right, remedy, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.  Subject to Section 14, the rights, remedies, powers
and privileges herein provided are cumulative and not exclusive of any rights,
remedies, powers and privileges provided by law.  No waiver of any provision
hereunder shall be effective unless it is in writing and is signed by the party
asserted to have granted such waiver.
 
24.           Headings.  The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed part of
this Agreement.

 
14

--------------------------------------------------------------------------------

 

25.           Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original as against any
party whose signature appears thereon, and all of which shall together
constitute one and the same instrument.  This Agreement shall become binding
when one or more counterparts of this Agreement, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
 
26.           Severability.  Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
 
27.           Gender.  Words used herein regardless of the number and gender
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
 
28.           Non-Disparagement.  The Sub-Manager hereby agrees to refrain, and
to use reasonable efforts to cause its members, from making any defamatory or
derogatory statements concerning the Company, the Manager and Pine River Capital
and the Company, the Manager and Pine River Capital hereby agree to refrain from
making any defamatory or derogatory statements concerning the Sub-Manager and
its members.  This Section 28 shall survive termination of this Agreement for a
period of five years.  Notwithstanding the foregoing, nothing herein shall be
deemed to prohibit any individual or entity from making any truthful statements
in response to a subpoena, in connection with a legal proceeding or as otherwise
required by law or legal process.
 
29.           Section 409A. This Agreement is intended to be written,
administered, interpreted and construed in a manner such that no payments
provided under the Agreement become subject to (a) the gross income inclusion
set forth within Section 409A(a)(1)(A) of the Code or (b) the interest and
additional tax set forth within Section 409A(a)(1)(B) of the Code (together,
referred to herein as the “Section 409A Penalties”), including, where
appropriate, the construction of defined terms to have meanings that would not
cause the imposition of Section 409A Penalties. The Sub-Manager expects that the
payments provided under this Agreement will be exempt from the application of
Section 409A of the Code because the Sub-Manager intends to account on an
accrual basis for U.S. income tax purposes. If, following the date of this
Agreement, the Sub-Manager reasonably determines that it is no longer advisable
for Sub-Manager to account on an accrual basis for U.S. income tax purposes (as
a result in a change in applicable laws or regulations or otherwise), or the
Sub-Manager reasonably determines that any payments under this Agreement may be
subject to Section 409A Penalties, the parties agree to work together in good
faith to adopt such amendments to this Agreement as most closely reflects the
original intent of the parties (including amendments with retroactive effect) or
take any other commercially reasonable actions necessary or appropriate to (x)
exempt each of the payments provided under this Agreement from Section 409A of
the Code and/or preserve the intended tax treatment of such payments or (y)
comply with the requirements of Section 409A of the Code and related Department
of Treasury guidance. Each payment provided under this Agreement, including each
separate installment of the Sub-Manager Base Management Fee shall be a separate
and distinct payment under this Agreement for all purposes.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

 
15

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
 

 
PRCM ADVISERS LLC
     
By:
/s/  Jeff Stolt
   
Name: Jeff Stolt
   
Title: Chief Financial Officer
       
CLA FOUNDERS LLC
       
By: Leland Investments, Inc., its managing member
     
By:
/s/ Mark D. Ein
   
Name:  Mark D. Ein
   
Title:  President
       
PINE RIVER CAPITAL MANAGEMENT L.P.,
solely with respect to Sections 1, 9, 11(a), 14(a), 15,
and 18 through 28
     
By:
/s/  Jeff Stolt
 
Name: Jeff Stolt
 
Title: Chief Financial Officer

 
Signature Page to Sub-Management Agreement

 
- 16 -

--------------------------------------------------------------------------------