FS Investment Corporation III 8-K [ex10-3.htm]

 

Exhibit 10.3

EXECUTION VERSION

 

 

INVESTMENT MANAGEMENT AGREEMENT

 

 

dated as of December 2, 2014

 

 

BY AND BETWEEN

 

 

DUNLAP FUNDING LLC,
a Delaware limited liability company

 

 

AND

 

 

FS INVESTMENT CORPORATION III,
a Maryland corporation

 

 

 

 

TABLE OF CONTENTS

 

      Page         1. General Duties of the Investment Manager.   1         2.
Duties and Obligations of the Investment Manager with Respect to the
Administration of the Company.   3         3. Authority to Bind the Company; No
Joint Venture.   5         4. Limitations Relating to Collateral Obligations.  
6         5. Brokerage.   7         6. Compensation.   7         7. Expenses.  
7         8. Services to Other Companies or Accounts; Conflicts of Interest.   7
        9. Duty of Care and Loyalty; Exculpation of Liability.   8         10.
Indemnification.   8         11. Term of Agreement; Events Affecting the
Investment Manager; Survival of Certain Terms; Delegation.   11         12.
Power of Attorney; Further Assurances.   12         13. Amendment of this
Agreement; Assignment.   12         14. Notices.   13         15. Binding Nature
of Agreement; Successors and Assigns.   13         16. Entire Agreement.   13  
      17. Costs and Expenses.   14         18. Books and Records.   14        
19. Titles Not to Affect Interpretation.   14         20. Provisions Separable.
  14         21. Governing Law.   14         22. Execution in Counterparts.   14

 

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23. Third Party Rights; Benefits of Agreement.   14         24. Representations
and Warranties of the Investment Manager.   15         25. Managing REO Assets.
  17         26. No Proceedings.   18         27. Confidentiality.   19

 

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INVESTMENT MANAGEMENT AGREEMENT

 

This Investment Management Agreement (the “Agreement”), dated as of December 2,
2014, is made by and between DUNLAP FUNDING LLC (the “Company”), a Delaware
limited liability company and FS INVESTMENT CORPORATION III (the “Investment
Manager”), a Maryland corporation. Reference is made to that certain Loan
Financing and Servicing Agreement, dated as of the date hereof, among the
Company, the lenders (the “Lenders”) and agents (the “Agents”) referred to
therein, Deutsche Bank AG, New York Branch, as administrative agent and arranger
(the “Administrative Agent”) and Wells Fargo Bank, National Association, as
collateral agent and collateral custodian (the “Collateral Agent”) (as the same
may be amended from time to time, the “LFSA”). Unless otherwise specified,
capitalized terms used but not otherwise defined in this Agreement shall have
the meanings given to them in the Limited Liability Company Agreement of the
Company dated as of the date hereof (as the same may be amended from time to
time, the “Operating Agreement”) or if not defined therein, shall have the
meanings given to them in the LFSA. References herein to the LFSA shall be
applicable solely while it is in effect.

 

1.        General Duties of the Investment Manager.

 

Subject to the direction and control of the Company and subject to and in
accordance with the Investment Management Standard, the terms of the LFSA, the
Operating Agreement, the policies adopted or approved by the Company and the
terms of this Agreement, the Investment Manager agrees to supervise and direct
the investment and reinvestment of the Collateral Obligations, manage, service,
administer and make collections on the Collateral Obligations and perform its
duties set forth herein, and shall perform on behalf of the Company those
investment and leverage related duties and functions assigned to the Company or
the Investment Manager in the LFSA, and shall have such other powers with
respect to the investment and leverage related functions of the Company as shall
be delegated from time to time to the Investment Manager by the Company. The
Investment Manager shall endeavor to comply in all material respects with all
applicable federal and state laws and regulations. In addition to, and without
limiting, the duties set forth in this Section 1, the Investment Manager
acknowledges that the Borrower is required or permitted to cause it to perform
functions specified in the following sections of the LFSA: Sections 1.2(e),
6.2(j), 6.3(b), 6.3(c), 7.2, 7.3, 7.5, 7.7, 7.9, 7.10(a)(ii), 8.1(a),
18.2(a)(i), 18.4(a), 18.5 and 18.8 (the “Specific LFSA Provisions”). The
Investment Manager acknowledges that it has read and understands the
requirements of the Specific LFSA Provisions, and to the extent of its authority
hereunder, hereby agrees to act in all material respects in accordance with the
Specific LFSA Provisions subject to and in accordance with the terms of this
Agreement. Subject to the foregoing, the other provisions of this Agreement and
the terms of the LFSA, the Investment Manager is hereby appointed as the
Company’s agent and attorney-in-fact with authority to negotiate, execute and
deliver all documents and agreements on behalf of the Company and to do or take
all related acts, with the power of substitution, to acquire, dispose of or
otherwise take action with respect to or affecting the Collateral Obligations,
including, without limitation:

 

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(a)        identifying and originating Collateral Obligations to be purchased by
the Company, selecting the dates for such purchases, and purchasing or directing
the purchase of such Collateral Obligations on behalf of the Company;

 

(b)        identifying Collateral Obligations owned by the Company to be sold by
the Company, selecting the dates for such sales, and selling such Collateral
Obligations on behalf of the Company;

 

(c)        negotiating and entering into, on behalf of the Company,
documentation providing for the purchase and sale of Collateral Obligations,
including without limitation, confidentiality agreements and commitment letters;

 

(d)        structuring the terms of, and negotiating, entering into and/or
consenting to, on behalf of the Company, documentation relating to Collateral
Obligations to be purchased, held, exchanged or sold by the Company, including
any amendments, modifications or supplements with respect to such documentation;

 

(e)        exercising, on behalf of the Company, rights and remedies associated
with Collateral Obligations, including without limitation, rights to petition to
place an obligor or issuer in bankruptcy proceedings, to vote to accelerate the
maturity of a Collateral Obligation, to waive any default, including a payment
default, with respect to a Collateral Obligation and to take any other action
which the Investment Manager deems necessary or appropriate in its discretion in
connection with any restructuring, reorganization or other similar transaction
involving an obligor or issuer with respect to a Collateral Obligation,
including without limitation, initiating and pursuing litigation;

 

(f)        responding to any offer in respect of Collateral Obligations by
tendering the affected Collateral Obligations, declining such offer, or taking
such other actions as the Investment Manager may determine;

 

(g)        exercising all voting, consent and similar rights of the Company on
its behalf and advising the Company with respect to matters concerning the
Collateral Obligations;

 

(h)        advising and assisting the Company with respect to the valuation and
rating of the Collateral Obligations;

 

(i)        retaining legal counsel and other professionals (such as financial
advisers) to assist in the structuring, negotiation, documentation,
administration and modification and restructuring of Collateral Obligations;

 

(j)        directing, or causing to be directed, all Obligors to pay Collections
directly to the Collection Account, depositing all Collections received directly
by it into the Collection Account within one (1) Business Day of receipt thereof
and, within three (3) Business Day after receipt into the Collection Account,
identifying all available balances in the Collection Account as Interest
Collections or Principal Collections. Notwithstanding the foregoing, if the
Investment Manager at any time thereafter receives any Collections or any other
proceeds of any Collateral Obligations constituting Interest Collections or
Principal Collections, the Investment Manager shall direct, or cause to be
directed, the related Obligor to make such payments to the Collection Account
and shall promptly, and in any event no later than the Business Day after
receipt thereof, deposit or cause to be deposited all such amounts into the
Collection Account (and shall identify such amounts as either Principal
Collections or Interest Collections, as applicable);

 

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(k)        cooperating with the Collateral Agent in connection with the
preparation of the Monthly Reports and any supplement thereto and (i) supplying
any information maintained by it that the Collateral Agent may from time to time
reasonably request with respect to the Collateral and reasonably needs to
complete the reports, calculations and certificates required to be prepared by
the Collateral Agent hereunder or required to permit the Collateral Agent to
perform its obligations hereunder, (ii) providing the Collateral Agent the
information required for parts (a) through (c) of Exhibit D for such Monthly
Report and (iii) reviewing and verifying (in accordance with the standard set
forth in Section 9.14 of the LFSA with respect to all information received from
un-Affiliated third parties) the contents of the aforesaid reports (including
the Monthly Report), instructions, statements and certificates;

 

(l)        undertaking the obligations in the Specific LFSA Provisions in
accordance with such provisions;

 

(m)        causing the Borrower to pay, perform and discharge or cause to be
paid, performed and discharged promptly all Charges payable by it, except where
the failure to so pay, discharge or otherwise satisfy such Charge would not,
individually or in the aggregate, be expected to have a Material Adverse Effect;
and

 

(n)        in the Investment Manager’s discretion, performing such actions on
behalf of the Company as permitted in the LFSA and making such determinations as
necessary (in the Investment Manager’s discretion) to carry out the Company’s
business under the LFSA.

 

For the avoidance of doubt, the Investment Manager does not guarantee the
performance of any obligations of any other Person under any Transaction
Document.

 

2.        Duties and Obligations of the Investment Manager with Respect to the
Administration of the Company.

 

The Investment Manager agrees to furnish office facilities and equipment and
clerical, bookkeeping and administrative services (other than such services, if
any, provided by the Company’s custodian and other service providers) to the
Company. To the extent requested by the Company, the Investment Manager agrees
to provide the following administrative services:

 

(a)        maintain or oversee the maintenance of the books and records of the
Company and maintain (or oversee maintenance by other persons) such other books
and records required by law or for the proper operation of the Company;

 

(b)        to the extent prepared or filed by the Company, oversee the
preparation and filing, and in all events review and ensure the timely filing,
of all federal, state and local income Tax returns required to be filed by the
Company and any other required Tax returns or reports;

 

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(c)        review the appropriateness of and arrange for payment of the
Company’s expenses;

 

(d)        prepare for review and approval by officers and other authorized
persons of the Company (collectively, the “Authorized Signatories”) financial
information for the Company’s financial statements (if the Company prepares
separate financial statements) and such other reports, forms and filings, as may
be mutually agreed upon or as may be required by law or the LFSA;

 

(e)        prepare reports relating to the business and affairs of the Company
as may be mutually agreed upon and not otherwise prepared by others;

 

(f)        make recommendations to the Company concerning the performance and
fees of any of the Company’s service providers as the Company may reasonably
request or deem appropriate;

 

(g)        oversee and review calculations of fees paid to the Company’s service
providers;

 

(h)        consult with the Authorized Signatories, and the Company’s
independent accountants, legal counsel, custodian and other service providers in
establishing the accounting policies of the Company and monitor financial
accounting services;

 

(i)        determine the amounts available for distribution as dividends and
distributions to be paid by the Company to the Equityholder (its “Member”);

 

(j)        prepare such information and reports as may be required under the
LFSA;

 

(k)        provide such assistance to the Company’s custodian, counsel, auditors
and other service providers as generally may be required to properly carry on
the business and operations of the Company;

 

(l)         respond to, or refer to the Company’s officers or Authorized
Signatories, inquiries relating to the Company;

 

(m)       supervise any other aspects of the Company’s administration as may be
agreed to by the Company and the Investment Manager;

 

(n)        provide the following notices:

 

(i)        to the extent the Investment Manager has actual knowledge or has
received notice of any Revaluation Event with respect to any Collateral
Obligation, the Investment Manager shall give prompt notice thereof to the
Administrative Agent (but, in any event, not longer than three (3) Business Days
after it receives notice or gains actual knowledge thereof);

 

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(ii)        to the Administrative Agent and the Collateral Agent, promptly after
having obtained actual knowledge thereof, notice of any Investment Manager Event
of Default, Facility Termination Event or Material Modification;

 

(iii)        to the Administrative Agent and the Collateral Agent, promptly
after having obtained actual knowledge thereof, but in no event later than three
Business Days thereafter, written notice in an Officer’s Certificate of any
Unmatured Investment Manager Event of Default or Unmatured Facility Termination
Event;

 

(iv)        to the Administrative Agent and the Collateral Agent within five
Business Days after a Responsible Officer of the Investment Manager shall obtain
actual knowledge that the senior unsecured debt rating of a Hedge Counterparty
has been withdrawn or reduced by any Rating Agency; and

 

(v)        from time to time promptly following receipt thereof, forward to the
Collateral Custodian (as identified on an accompanying Schedule of Collateral
Obligations supplement) additional documents evidencing any assumption,
modification, consolidation or extension of a Collateral Obligation.

 

All services are to be furnished through the medium of any officers, Authorized
Signatories or employees of the Investment Manager or its affiliates as the
Investment Manager deems appropriate in order to fulfill its obligations
hereunder.

 

The Company shall, upon demand, reimburse the Investment Manager or its
affiliates for all out-of-pocket expenses incurred by them in connection with
the performance of the administrative services described in this Section 2.

 

3.        Authority to Bind the Company; No Joint Venture.

 

(a)        Except as provided in or pursuant to Sections 1, 4 and 12 hereof, the
Investment Manager shall have no authority to bind or obligate the Company. All
acts of the Investment Manager (other than as provided in the LFSA, the
Operating Agreement or in Section 1 or Section 12 hereof with respect to any
Collateral Obligation) shall require the Company’s consent and approval to bind
the Company. Nothing in this Agreement shall be deemed to create a joint venture
or partnership between the parties with respect to the arrangements set forth in
this Agreement. For all purposes hereof, the Investment Manager shall be deemed
to be an independent contractor and, unless otherwise provided herein or
specifically authorized by the Company from time to time, shall have no
authority to act for or represent the Company.

 

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(b)        The Investment Manager shall act in conformity with the written
instructions and directions of the Company delivered in accordance with the
terms and conditions hereof, except to the extent that authority has been
delegated to the Investment Manager pursuant to the terms of this Agreement or
the Operating Agreement. The Investment Manager will not be bound to follow any
amendment to the LFSA or the Operating Agreement until it has received written
notice thereof and until it has received a copy of the amendment from the
Company or the Administrative Agent; provided that if any such amendment
materially affects the rights or duties of the Investment Manager, the
Investment Manager shall not be obligated to respect or comply with the terms of
such amendment unless it consents thereto. Subject to the fiduciary duty of the
Member, the Company agrees that it shall not permit any amendment to the
Operating Agreement that materially affects the rights or duties of the
Investment Manager to become effective unless the Investment Manager has been
given prior written notice of such amendment and has consented thereto in
writing. The Investment Manager may, with respect to the affairs of the Company,
consult with such legal counsel, accountants and other advisors as may be
selected by the Investment Manager. The Investment Manager shall be fully
protected, to the extent permitted by applicable law, in acting or failing to
act hereunder if such action or inaction is taken or not taken in good faith by
the Investment Manager in accordance with the advice or opinion of such counsel,
accountants or other advisors. The Investment Manager shall be fully protected
in relying upon any writing signed in the appropriate manner with respect to any
instruction, direction or approval of the Company and may also rely on opinions
of the Investment Manager’s counsel with respect to such instructions,
directions and approvals. The Investment Manager shall also be fully protected
when acting upon any instrument, certificate or other writing the Investment
Manager believes in good faith to be genuine and to be signed or presented by
the proper person or persons. The Investment Manager shall be under no duty to
make any investigation or inquiry as to any statement contained in any such
writing and may accept the same as conclusive evidence of the truth and accuracy
of the statements therein contained if the Investment Manager in good faith
believes the same to be genuine.

 

4.         Limitations Relating to Collateral Obligations.

 

(a)        Collateral Obligations. Except as otherwise provided in this
Section 4 and except in accordance with the Investment Management Standard, and
subject to the requirements of the LFSA, the Operating Agreement and applicable
law, the Investment Manager may cause the Company (which term shall include, for
all purposes relating to the purchase and sale of Collateral Obligations and the
duties and obligations of the Investment Manager set forth in Section 1 hereof,
the Company and its consolidated subsidiaries, if any) from time to time to
purchase Collateral Obligations.

 

(b)        Reserved.

 

(c)        Reserved.

 

(d)        Transaction, Director, Consulting, Advisory, Closing and Break-up
Fees. The Company shall receive its pro-rata share, measured by the amount
invested or proposed to be invested by the Company in any Collateral Obligation,
of any transaction, director, consulting, advisory, closing and break-up fees,
or similar fees (“Additional Fees”) payable with respect to any Collateral
Obligation. Notwithstanding anything herein or in the Operating Agreement to the
contrary, to the extent that any Additional Fees with respect to the Company’s
share of such investment are paid to the Investment Manager or any of its
Affiliates, at the election of the Investment Manager, such amount will first be
applied to reimburse the Investment Manager or its Affiliates for their
out-of-pocket expenses in connection with the transaction giving rise to such
fees and 100% of the balance will be applied to reduce the subsequent
installments of the Primary IM Fee and the Secondary IM Fee.

 

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5.        Brokerage.

 

The Investment Manager shall use commercially reasonable efforts to effect all
purchases and sales of securities in a manner consistent with the principles of
best execution, taking into account net price (including commissions) and
execution capability and other services which the broker or other intermediary
may provide. In this regard, the Investment Manager may effect transactions
which cause the Company to pay a commission in excess of a commission which
another broker or other intermediary would have charged; provided, however, that
the Investment Manager shall have first determined that such commission is
reasonable in relation to the value of the brokerage or research services
performed by that broker or other intermediary or that the Company is the sole
beneficiary of the services provided.

 

6.        Compensation.

 

The Company agrees to pay to the Investment Manager and the Investment Manager
agrees to accept as compensation for all services rendered by the Investment
Manager as such, on each Distribution Date and to the extent not waived or
deferred, the Primary IM Fee and the Secondary IM Fee for the related Collection
Period pursuant to Section 8.3(a) of the LFSA.

 

7.        Expenses.

 

Other than as set forth below, the Company will be responsible for paying all of
its expenses. On behalf of the Company, the Investment Manager may advance
payment of any expenses, and the Company shall, upon request, reimburse the
Investment Manager therefor within 30 days following written request from the
Investment Manager. Nothing in this Section 7 shall limit the ability of the
Investment Manager to be reimbursed by any Person other than the Company
(including issuers or obligors of securities, instruments or obligations owned
by the Company) for out-of-pocket expenses incurred by the Investment Manager in
connection with the performance of services hereunder. The Investment Manager
shall maintain complete and accurate records with respect to costs and expenses
and shall furnish the Company with receipts or other written vouchers with
respect thereto upon request of the Company. The Company shall bear the costs
and expenses of all audits and inspections permitted by Sections 7.9 and Section
18.6 of the LFSA.

 

8.         Services to Other Companies or Accounts; Conflicts of Interest.

 

(a)        The Investment Manager and its Affiliates, employees or associates
are in no way prohibited from, and intend to, spend substantial business time in
connection with other businesses or activities, including, but not limited to,
managing investments, advising or managing entities whose investment objectives
are the same as or overlap with those of the Company, participating in actual or
potential investments of the Company, providing consulting, merger and
acquisition, structuring or financial advisory services, including with respect
to actual, contemplated or potential investments of the Company, or acting as a
director, officer or creditors’ committee member of, advisor to, or participant
in, any corporation, company, trust or other business entity. The Investment
Manager and its Affiliates may, and expect to, receive fees or other
compensation from third parties for any of these activities unrelated to the
Company, which fees will be for the benefit of their own account and not the
Company.

 

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(b)        In addition, the Investment Manager and its Affiliates may manage
other investment vehicles and separate accounts (“Other Accounts”) that invest
in assets eligible for purchase by the Company. The Company may have the
ability, under certain circumstances, to take certain actions that would have an
adverse effect on Other Accounts. In these circumstances, the Investment Manager
and its affiliated persons will act in a manner believed to be equitable to the
Company and such Other Accounts, including co-investment in accordance with
applicable laws, including the conditions of any exemptive relief obtained by
the Company and the Investment Manager. The allocation of investment
opportunities among the Company and Other Accounts will be made in good faith
pursuant to the Investment Manager’s written allocation policies. The Investment
Manager may combine purchase or sale orders on behalf of the Company with orders
for Other Accounts, and allocate the assets so purchased or sold among such
accounts in an equitable manner. The Company may invest in portfolio companies
in which Other Accounts have or are concurrently making the same investment or a
different investment (e.g., an investment that is junior to the Company’s
investment). In such situations, the Company and the Other Accounts may
potentially have conflicting interests. If any matter arises that the Investment
Manager determines in its good faith judgment constitutes an actual conflict of
interest, the Investment Manager may take such actions as may be necessary or
appropriate to ameliorate the conflict. These actions may include, by way of
example and without limitation, disposing of the asset giving rise to the
conflict of interest, appointing an independent fiduciary, or delegating
decisions relating to the asset giving rise to the conflict of interest to a
subcommittee of the Investment Manager.

 

9.        Duty of Care and Loyalty; Exculpation of Liability.

 

The Investment Manager shall exercise its discretion and authority in accordance
with the Investment Management Standard.

 

10.      Indemnification.

 

(a)      To the fullest extent permitted by applicable law, the Company shall be
held harmless and indemnified by the Investment Manager against any claims,
demands, costs, liabilities and expenses, including amounts paid in satisfaction
of judgments, in compromise or as fines and penalties, and counsel fees incurred
by the Company (“Losses”) in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which the Company may be or may have
been involved as a party or otherwise or with which the Company may be or may
have been threatened, while acting in connection with the establishment,
management or operations of the Company or the management of the Collateral
Obligations, provided, however, to the fullest extent permitted by applicable
law, that the Company shall not be indemnified hereunder if there has been a
determination by a final decision on the merits by a court or other body of
competent jurisdiction before whom the issue of entitlement to indemnification
was brought that such Losses have been primarily attributable to the Company’s
willful misfeasance, bad faith, gross negligence in performance, or reckless
disregard, of its obligations; provided further, that the Investment Manager
will not be required to indemnify the Company with respect to any Losses (i)
arising out of an action or claim brought against the Company by the Investment
Manager or its Affiliates, or (ii) resulting from the performance or
non-performance of the Collateral Obligations.

 

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Indemnification under this Section 10(a) shall survive the termination of this
Agreement and the resignation or removal of any Investment Manager Indemnified
Party and shall include reasonable fees and expenses of counsel and expenses of
litigation.

 

If for any reason (other than the exclusions set forth in the first paragraph of
Section 10(a)) the indemnification provided above in Section 10(a) is
unavailable to an Investment Manager Indemnified Party or is insufficient to
hold an Investment Manager Indemnified Party harmless, then the Investment
Manager agrees to contribute to the amount paid or payable by such Investment
Manager Indemnified Party as a result of such loss, claim, damage or liability
in such proportion as is appropriate to reflect not only the relative benefits
received by such Investment Manager Indemnified Party, on the one hand, and the
Investment Manager and its Affiliates, on the other hand, but also the relative
fault of such Investment Manager Indemnified Party, on the one hand, and the
Investment Manager and its Affiliates, on the other hand, as well as any other
relevant equitable considerations.

 

(b)        

 

(i)        To the fullest extent permitted by applicable law, each of the
Investment Manager, and its Affiliates, or any officer, director, member,
manager, employee, stockholder, assign, representative or agent of any such
Person (each an “Indemnified Person,” and collectively, the “Indemnified
Persons”) shall be held harmless and indemnified by the Company (solely out of
the Collateral Obligations and in accordance with Section 10(b)(v), and not
(solely for the purposes of this Agreement) out of the separate assets of any
Member) against any claims, demands, costs, liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees incurred by such Indemnified Person in connection
with the defense or disposition of any action, suit or other proceeding, whether
civil or criminal, before any court or administrative or investigative body in
which such Indemnified Person may be or may have been involved as a party or
otherwise (other than as authorized by the directors of the Member, as the
plaintiff or complainant) or with which such Indemnified Person may be or may
have been threatened, while acting in such Person’s capacity as an Indemnified
Person in connection with the establishment, management or operations of the
Company or the management of the Collateral Obligations, provided, however, that
an Indemnified Person shall not be indemnified hereunder if and to the extent
resulting from such Indemnified Person’s bad faith, willful misfeasance, gross
negligence or reckless disregard; provided further, that the Company will not be
required to indemnify the Indemnified Persons with respect to any Losses (i)
arising out of an action or claim brought against any Indemnified Person by the
Company or its Affiliates, or (ii) resulting from the performance or
non-performance of the Collateral Obligations.

 

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(ii)        Only to the extent permitted pursuant to the terms of the LFSA, the
Company shall make advance payments in connection with the expenses of defending
any action, suit or other proceeding with respect to which indemnification might
be sought hereunder if the Company receives a written affirmation by the
Indemnified Person of the Indemnified Person’s good faith belief that the
standards of conduct necessary for indemnification have been met and a written
undertaking to reimburse the Company unless it is subsequently determined that
the Indemnified Person is entitled to such indemnification and if a majority of
the directors of the Member determine that the applicable standards of conduct
necessary for indemnification appear to have been met. In addition, at least one
of the following conditions must be met: (i) the Indemnified Person shall
provide adequate security for its undertaking, (ii) the Company shall be insured
against losses arising by reason of any lawful advances, or (iii) independent
legal counsel in a written opinion, shall conclude, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is
substantial reason to believe that the Indemnified Person ultimately will be
found entitled to indemnification. Any payments pursuant to this
Section 10(b)(ii) while the LFSA is in effect will be paid solely in accordance
with Section 8.3 of the LFSA (subject to the availability of funds and to the
conditions set forth in the LFSA).

 

(iii)        The rights accruing to any Indemnified Person under these
provisions shall not exclude any other right to which such Indemnified Person
may be lawfully entitled.

 

(iv)        Each Indemnified Person (other than the Investment Manager) shall,
in the performance of its duties, be fully and completely justified and
protected with regard to any act or any failure to act resulting from reliance
in good faith upon the books of account or other records of the Company, upon an
opinion of counsel, or upon reports made to the Company by any of the Company’s
officers or employees or by any advisor, administrator, manager, distributor,
selected dealer, accountant, appraiser or other expert or consultant selected
with reasonable care by the directors of the Member, officers or employees of
the Company, regardless of whether such counsel or other person may also be a
director of the Member. The Investment Manager shall, in the performance of its
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon any books of
account or other records of the Company that were prepared by an agent or other
third party, upon an opinion of counsel, or upon reports made to the Company by
any advisor, administrator, manager, distributor, selected dealer, accountant,
appraiser or other expert or consultant selected with reasonable care by the
directors of the Member, officers or employees of the Company, regardless of
whether such counsel or other person may also be a director of the Member.

 

(v)        Any payments pursuant to Section 10(b)(i) while the LFSA is in effect
will be paid solely in accordance with Section 8.3 of the LFSA (subject to the
availability of funds and to the conditions set forth in the LFSA). All
determinations that may be made to make advance payments in connection with the
expense of defending or settling any action, suit or other proceeding, whether
civil or criminal, shall be authorized and made (if so authorized and made) in
accordance with paragraph (b)(ii) above.

 

-10-

 

 

11.        Term of Agreement; Events Affecting the Investment Manager; Survival
of Certain Terms; Delegation.

 

(a)        This Agreement shall become effective as of the date hereof and,
unless sooner terminated by the Company or the Investment Manager as provided
herein, shall continue in effect for the term of the Company. Notwithstanding
the foregoing, this Agreement may be terminated by the Company without the
payment of any penalty, upon the occurrence of a “cause” event. A “cause” event
for purposes of this Section 11(a) shall have occurred by reason of (i) the
conviction (or plea of no contest) for a felony of the Investment Manager,
(ii) the conviction (or plea of no contest) for a felony of an officer or a
member of the board of directors of the Investment Manager, if the employment or
other affiliation of such Person so convicted is not terminated by the
Investment Manager within 30 days of such conviction and the Member votes
thereafter to invoke this termination provision, or (iii) the Investment Manager
or an officer or a member of the board of directors of the Investment Manager
has engaged in gross negligence or willful misconduct with respect to the
Company that has resulted in a material adverse effect on the Company or the
Collateral Obligations, or has committed a knowing material violation of
securities laws, each as determined by a final decision of a court or binding
arbitration decision unless, in the case of such natural persons, their
employment or other affiliation with the Investment Manager is terminated or
suspended within 30 days after discovery by the Investment Manager. The
Investment Manager shall promptly provide written notice to the Member upon the
occurrence of a “cause” event.

 

(b)        Notwithstanding anything herein to the contrary, Sections 7 and 10 of
this Agreement shall survive any termination hereof.

 

(c)        From and after the effective date of termination of this Agreement,
the Investment Manager and its Affiliates shall not be entitled to compensation
for further services hereunder, but shall be paid all compensation and
reimbursement of expenses accrued to the date of termination. Upon such
termination, or upon the occurrence of an Investment Manager Event of Default
and upon request by the Borrower, the Investment Manager shall deliver as
directed copies of its Records within five Business Days after demand therefor
and a computer tape or diskette (or any other means of electronic transmission
acceptable to the successor investment manager) containing as of the close of
business on the date of demand all of the data maintained by the Investment
Manager in computer format in connection with managing the Collateral
Obligations. The Investment Manager agrees to use reasonable efforts to
cooperate with any successor investment manager in the transfer of its
responsibilities hereunder, and will, among other things, provide upon receipt
of a written request by such successor investment manager any information
available to it regarding any Collateral Obligations. The Investment Manager
agrees that, notwithstanding any termination, it will reasonably cooperate in
any proceeding arising in connection with this Agreement, the LFSA or any
Collateral Obligation (excluding any such proceeding in which claims are
asserted against the Investment Manager or any Affiliate of the Investment
Manager) upon receipt of appropriate indemnification and expense reimbursement.

 

(d)        Until a successor investment manager has commenced investment
management activities in the place of FS Investment Corporation III, FS
Investment Corporation III shall not resign as Investment Manager hereunder.
Notwithstanding anything contained herein to the contrary and to the extent
permitted by Applicable Law without causing the Investment Manager to have
liability, the resignation of the Investment Manager shall not become effective
until an entity approved in accordance with Section 7.2(a) of the LFSA and shall
have assumed the responsibilities and obligations of the Investment Manager.

 

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12.        Power of Attorney; Further Assurances.

 

In addition to the power of attorney granted to the Investment Manager in
Section 1 of this Agreement, the Company hereby makes, constitutes and appoints
the Investment Manager, with full power of substitution, as its true and lawful
agent and attorney-in-fact, with full power and authority in its name, place and
stead, in accordance with the terms of this Agreement (a) to sign, execute,
certify, swear to, acknowledge, deliver, file, receive and record any and all
documents which the Investment Manager reasonably deems necessary or appropriate
in connection with its investment management duties under this Agreement and
(b) to (i) subject to any policies adopted by the Member or the Company with
respect thereto, exercise in its discretion any voting or consent rights
associated with any securities, instruments or obligations included in the
Company’s assets, (ii) execute proxies, waivers, consents and other instruments
with respect to such securities, instruments or obligations, (iii) endorse,
transfer or deliver such securities, instruments and obligations and
(iv) participate in or consent (or decline to consent) to any modification,
work-out, restructuring, bankruptcy proceeding, class action, plan of
reorganization, merger, combination, consolidation, liquidation or similar plan
or transaction with regard to such securities, instruments and obligations. To
the extent permitted by applicable law, this grant of power of attorney is
irrevocable and coupled with an interest, and it shall survive and not be
affected by the subsequent dissolution or bankruptcy of the Company; provided
that this grant of power of attorney will expire, and the Investment Manager
will cease to have any power to act as the Company’s attorney-in-fact, upon
termination of this Agreement in accordance with its terms. The Company shall
execute and deliver to the Investment Manager all such other powers of attorney,
proxies, dividend and other orders, and all such instruments, as the Investment
Manager may reasonably request for the purpose of enabling the Investment
Manager to exercise the rights and powers which it is entitled to exercise
pursuant to this Agreement. Each of the Investment Manager and the Company shall
take such other actions, and furnish such certificates, opinions and other
documents, as may be reasonably requested by the other party hereto in order to
effectuate the purposes of this Agreement and to facilitate compliance with
applicable laws and regulations and the terms of this Agreement.

 

13.        Amendment of this Agreement; Assignment.

 

No provision of this Agreement may be amended, waived, discharged or terminated
orally, but only by an instrument in writing signed by the party against which
enforcement of the amendment, waiver, discharge or termination is sought. If the
Company has outstanding any securities rated by a rating agency, the Company
shall promptly provide a copy of any such amendment or waiver to such rating
agency. The Investment Manager may not, directly or indirectly, assign all or
any part of its rights and duties under this Agreement to any Person without the
prior consent of the Company, the Administrative Agent and the Required Lenders.
In accordance with the foregoing, the Investment Manager may transfer this
Agreement or its rights and duties under this Agreement without obtaining the
prior consent of the Company or providing prior notice to the Member in a
transaction that does not result in an Investment Manager Event of Default,
change in control or management of the Investment Manager.

 

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14.        Notices.

 

Unless expressly provided otherwise herein, any notice, request, direction,
demand or other communication required or permitted under this Agreement shall
be in writing and shall be deemed to have been duly given, made and received if
sent by hand or by overnight courier, when personally delivered, if sent by
telecopier, when receipt is confirmed by telephone, or if sent by registered or
certified mail, postage prepaid, return receipt requested, when actually
received if addressed as set forth below:

 

  (a) If to the Company:           Dunlap Funding LLC     c/o FS Investment
Corporation III     2929 Arch Street, Suite 675     Philadelphia, PA 19104    
Attention: Gerald F. Stahlecker, Executive Vice President     Tel: (215)
495-1169     Fax: (215) 222-4649         (b) If to the Investment Manager:      
    FS Investment Corporation III     2929 Arch Street, Suite 675    
Philadelphia, PA 19104     Attention: Gerald F. Stahlecker, Executive Vice
President     Tel: (215) 495-1169     Fax: (215) 222-4649

 

(c)        If to the Administrative Agent, the Collateral Agent or any Lender
under the LFSA, as provided in the LFSA, as may be amended therein.

 

Either party to this Agreement may alter the address to which communications or
copies are to be sent to it by giving notice of such change of address in
conformity with the provisions of this Section 14.

 

15.        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 successors and assigns as provided herein.

 

16.        Entire Agreement.

 

This Agreement contains the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof, 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 hereof. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent with any
of the terms hereof.

 

-13-

 

 

17.        Costs and Expenses.

 

The costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiation, preparation and
execution of this Agreement, and all matters incident thereto, shall be borne by
each party hereto.

 

18.        Books and Records.

 

In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Investment Manager hereby agrees that all records which it maintains for the
Company are the property of the Company and further agrees to surrender promptly
to the Company any such records upon the Company’s request. The Investment
Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records maintained by it in its capacity as Investment
Manager that are required to be maintained by Rule 31a-1 under the 1940 Act.

 

19.        Titles Not to Affect Interpretation.

 

The titles of sections contained in this Agreement are for convenience only, and
they neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.

 

20.        Provisions Separable.

 

The provisions of this Agreement are independent of and separable from each
other, and, to the extent permitted by applicable law, no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other or others of them may be invalid or unenforceable in whole or
in part.

 

21.        Governing Law.

 

This Agreement shall be governed by and construed in accordance with the laws of
the State of New York.

 

22.        Execution in Counterparts.

 

This Agreement may be executed in separate counterparts, each of which shall be
an original and all of which taken together shall constitute one and the same
instrument.

 

23.        Third Party Rights; Benefits of Agreement.

 

Other than as set forth in this Section 23, none of the provisions of this
Agreement shall be for the benefit of or enforceable by any creditor of the
Company or by any creditor of the Member.

 

The Investment Manager hereby acknowledges that the Collateral Agent is the
beneficiary of a collateral assignment of this Agreement pursuant to Section
12.1 of the LFSA and the Collateral Agent for the benefit of the Secured Parties
shall be an express third party beneficiary of the Company’s rights hereunder,
including but not limited to the Company’s right to indemnification set forth in
Section 10, subject, in each case, to each of the limitations, restrictions and
conditions set forth in Section 12.1 of the LFSA with respect to the collateral
assignment of this Agreement, and for the avoidance of doubt, excluding any
right of the Company to replace or terminate the Investment Manager; provided
that, such collateral assignment and such third party beneficiary rights shall
automatically terminate upon the irrevocable payment in full of the Obligations
(other than contingent indemnity obligations as to which no claim has been made)
and the termination of the Commitments in full.

 

-14-

 

 

24.        Representations and Warranties of the Investment Manager.

 

The Investment Manager represents, warrants and covenants as of the Effective
Date and each Funding Date as to itself:

 

(a)        Organization and Good Standing. It has been duly organized and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of organization, with power and authority to own its properties and
to conduct its business as such properties are currently owned and such business
is currently conducted, and had at all relevant times;

 

(b)        Due Qualification. It is duly qualified to do business as a Maryland
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions where the failure to do so would have a Material
Adverse Effect;

 

(c)        Power and Authority. It has the power, authority and legal right to
execute and deliver this Agreement and to perform its obligations hereunder; and
the execution, delivery and performance of this Agreement has been duly
authorized by the Investment Manager by all necessary corporate action;

 

(d)        Binding Obligations. This Agreement has been executed and delivered
by the Investment Manager and, assuming due authorization, execution and
delivery by the Company, constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms, except as enforceability
may be limited by (A) bankruptcy, insolvency, reorganization, or other similar
laws affecting the enforcement of creditors’ rights generally, (B) equitable
limitations on the availability of specific remedies, regardless of whether such
enforceability is considered in a proceeding in equity or at law and (C) implied
covenants of good faith and fair dealing;

 

(e)        No Violation. The execution, delivery and performance of this
Agreement by the Investment Manager, the Investment Manager’s consummation of
the transactions contemplated hereby and the Investment Manager’s fulfillment of
the terms hereof do not (A) conflict with, result in any breach of any of the
terms and provisions of, or constitute (with or without notice or lapse of time)
a default under, its articles of amendment and restatement or amended and
restated bylaws, or any material indenture, agreement, mortgage, deed of trust
or other material instrument to which it is a party or by which it or its
properties are bound, (B) result in the creation or imposition of any Adverse
Claim upon any of its properties pursuant to the terms of any such material
indenture, agreement, mortgage, deed of trust or other material instrument
(except as may be created pursuant to this Agreement or any other Transaction
Document), or (C) violate in any material respect any Applicable Law except, in
the case of this subclause (C), to the extent that such conflict or violation
would not reasonably be expected to have a Material Adverse Effect;

 

-15-

 

 

(f)        No Proceedings. There are no proceedings or investigations pending
or, to the best of the Investment Manager’s knowledge, threatened against it,
before any Official Body having jurisdiction over it or its properties (A)
asserting the invalidity of this Agreement, (B) seeking to prevent the
consummation of any of the transactions contemplated hereby or (C) seeking any
determination or ruling that would reasonably be expected to have a Material
Adverse Effect;

 

(g)        No Consents. No consent, license, approval, authorization or order
of, or registration, declaration or filing with, any Official Body having
jurisdiction over it or any of its properties is required to be made in
connection with the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby, in each case other than
(A) consents, licenses, approvals, authorizations, orders, registrations,
declarations or filings which have been obtained or made and continuation
statements and renewals in respect thereof and (B) where the lack of such
consents, licenses, approvals, authorizations, orders, registrations,
declarations or filings would not have a Material Adverse Effect;

 

(h)        Investment Company Status. It is not required to be registered as an
“investment company” within the meaning of the 1940 Act;

 

(i)         Information True and Correct. All information (other than any
information provided to the Investment Manager by an un-Affiliated third party)
heretofore or hereafter furnished by or on behalf of the Investment Manager in
writing to any Lender, the Collateral Agent or the Administrative Agent in
connection with this Agreement or any transaction contemplated hereby is and
will be (when taken as a whole) true and correct in all material respects. With
respect to any information received from any un-Affiliated third party, the
Investment Manager (i) will not furnish (and has not furnished) any such
information to any Lender, the Collateral Agent or the Administrative Agent in
connection with this Agreement or any transaction contemplated hereby that it
knows (or knew) to be incorrect at the time such information is (or was)
furnished in any material respect and (ii) has informed (or will inform) the
applicable Lender, the Collateral Agent or the Administrative Agent, as
applicable, of any such information which it found to be incorrect in any
material respect after such information was furnished.

 

(j)         Reserved.

 

(k)        Eligibility of Collateral Obligations. All Collateral Obligations
included as Eligible Collateral Obligations in the calculation of the Borrowing
Base in the most recently delivered Monthly Report are, to the knowledge of the
Investment Manager, Eligible Collateral Obligations;

 

(l)         Collections. The Investment Manager acknowledges that all
Collections received by it or its Affiliates with respect to the Collateral are
held and shall be held in trust for the benefit of the Secured Parties until
deposited into the Collection Account; and

 

-16-

 

 

(m)       Allocation of Charges. There is not any agreement or understanding
between the Investment Manager and the Borrower (other than as expressly set
forth herein or as consented to by the Administrative Agent), providing for the
allocation or sharing of obligations to make payments or otherwise in respect of
any Taxes, fees, assessments or other governmental charges.

 

25.       Managing REO Assets.

 

(a)        If, in the reasonable business judgment of the Investment Manager, it
becomes necessary to foreclose upon or repossess from the applicable Obligor any
real property securing any Collateral Obligation (each such Collateral
Obligation, an “REO Asset”), the Investment Manager shall first cause the
Borrower to transfer and assign such Collateral Obligation (or the portion
thereof owned by the Borrower) to a special purpose vehicle meeting the
requirements of Section 10.5 of the LFSA and wholly owned by the Borrower (the
“REO Asset Owner”) using a contribution agreement reasonably acceptable to the
Administrative Agent. All equity interests of the REO Asset Owner acquired by
the Borrower shall immediately become a part of the Collateral and be subject to
the grant of a security interest under Section 12.1 of the LFSA and shall be
promptly delivered to the Collateral Agent, each undated and duly indorsed in
blank. The REO Asset Owner shall be formed and operated pursuant to
organizational documents reasonably acceptable to the Administrative Agent.
After execution thereof, the Investment Manager shall prevent the REO Asset
Owner from agreeing to any amendment or other modification of the REO Asset
Owner’s organizational documents without first obtaining the written consent of
the Administrative Agent. The Investment Manager shall cause each REO Asset to
be serviced (i) in accordance with applicable laws, (ii) in accordance with the
Investment Management Standard and (iii) in accordance with the applicable REO
Asset Owner’s limited liability company operating agreement (collectively, the
“REO Investment Management Standard”). The Investment Manager will cause all
“Distributable Cash” (or comparable definition set forth in the REO Asset
Owner’s organization documents) to be deposited into the Collection Account
within two (2) Business Days of receipt thereof.

 

(b)        In the event that title to any Related Property is acquired on behalf
of the REO Asset Owner for the benefit of its members in foreclosure, by deed in
lieu of foreclosure or upon abandonment or reclamation from bankruptcy, the deed
or certificate of sale shall be taken in the name of a REO Asset Owner. The
Investment Manager shall cause the REO Asset Owner to manage, conserve, protect
and operate each REO Asset for its members solely for the purpose of its prompt
disposition and sale.

 

(c)        Notwithstanding any provision to the contrary contained in this
Agreement, the Investment Manager shall not (and shall not permit the REO Asset
Owner to) obtain title to any Related Property as a result of or in lieu of
foreclosure or otherwise, obtain title to any direct or indirect partnership
interest in any Obligor pledged pursuant to a pledge agreement and thereby be
the beneficial owner of Related Property, have a receiver of rents appointed
with respect to, and shall not otherwise acquire possession of, or take any
other action with respect to, any Related Property if, as a result of any such
action, the REO Asset Owner would be considered to hold title to, to be a
“mortgagee-in-possession” of, or to be an “owner” or “operator” of, such Related
Property within the meaning of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended from time to time, or any
comparable state or local environmental law, unless the Investment Manager has
previously determined in accordance with the REO Investment Management Standard,
based on an updated Phase I environmental assessment report generally prepared
in accordance with the ASTM Phase I Environmental Site Assessment Standard E
1527-05, as may be amended or, with respect to residential property, a property
inspection and title report, that:

 

-17-

 

 

(i)        such Related Property is in compliance in all material respects with
applicable environmental laws, and

 

(ii)       there are no circumstances present at such Related Property relating
to the use, management or disposal of any hazardous materials for which
investigation, testing, monitoring, containment, clean-up or remediation would
reasonably be expected to be required by the owner, occupier or operator of the
Related Property under applicable federal, state or local law or regulation.

 

(d)        In the event that the Phase I or other environmental assessment first
obtained by the Investment Manager with respect to Related Property indicates
that such Related Property may not be in compliance with applicable
environmental laws or that hazardous materials may be present but does not
definitively establish such fact, the Investment Manager shall cause the
Borrower to immediately sell the related Loan in accordance with Section 7.10 of
the LFSA to the extent permitted thereunder.

 

26.        No Proceedings.

 

(a)        The Investment Manager hereby agrees that it will not institute
against the Borrower, or join any other Person in instituting against the
Borrower, any insolvency proceeding (namely, any proceeding of the type referred
to in the definition of Insolvency Event) so long as any Advances or other
amounts due from the Borrower hereunder shall be outstanding or there shall not
have elapsed one year plus one day since the last day on which any such Advances
or other amounts shall be outstanding. The foregoing shall not limit the
Investment Manager’s right to file any claim in or otherwise take any action
with respect to any insolvency proceeding that was instituted by any Person
other than the Investment Manager.

 

(b)        The Investment Manager hereby agrees that it will not institute
against, or join any other Person in instituting against any Conduit Lender, any
insolvency proceeding (namely, any proceeding of the type referred to in the
definition of Insolvency Event) so long as any commercial paper note issued by
such applicable Conduit Lender shall be outstanding or there shall not have
elapsed one year plus one day since the last day on which any such commercial
paper notes shall be outstanding.

 

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27.        Confidentiality.

 

The Investment Manager shall hold in confidence, and not disclose to any Person,
the identity of any Lender or the terms of any fees payable in connection with
any Transaction Document except it may disclose such information (i) to its
officers, directors, employees, agents, counsel, accountants, auditors,
advisors, prospective lenders, equity investors or representatives, (ii) with
the consent of such Lender, (iii) to the extent such information has become
available to the public other than as a result of a disclosure by or through
such Person, (iv) to the extent the Investment Manager or any Affiliate deems
disclosure reasonably prudent under, or should be required by, any law or
regulation applicable to it, or (v) as requested by any Official Body to
disclose such information.

 

[Remainder of page intentionally left blank.]

 

-19-

 

 

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

 

FS INVESTMENT CORPORATION III      By:/s/ Gerald F. Stahlecker   Name: Gerald F.
Stahlecker   Title: Executive Vice President      DUNLAP FUNDING LLC      By:/s/
Gerald F. Stahlecker   Name: Gerald F. Stahlecker   Title: Executive Vice
President

 

 

SPV, LLC

Investment Management Agreement