Exhibit 10.3

BOARD MEMBERSHIP AGREEMENT

BOARD MEMBERSHIP AGREEMENT, dated as of February 8, 2008 (this “Agreement”),
among PAETEC Holding Corp., a Delaware corporation (“Parent”), each Person
listed on the signature pages hereof under the heading “Fidelity Stockholders”
(collectively and as more fully defined below, the “Fidelity Stockholders”), and
each Person listed on the signature pages hereof under the heading “Wayzata
Stockholders” (collectively and as more fully defined below, the “Wayzata
Stockholders”);

WHEREAS, as of the date hereof (the “Effective Date”), Parent has consummated a
merger transaction pursuant to which the common stock, par value $0.01 per
share, of McLeodUSA Incorporated (the “Seller Common Stock”) held by the
Fidelity Stockholders has been converted into the right to receive 12,185,815
shares of common stock, par value $0.01 per share, of Parent (the “Parent Common
Stock”) and the Seller Common Stock held by the Wayzata Stockholders has been
converted into the right to receive 11,477,800 shares of the Parent Common
Stock; and

WHEREAS, Parent, the Fidelity Stockholders and the Wayzata Stockholders wish to
enter into this Agreement to set forth their mutual agreement with respect to
the board membership and board observer rights provided for herein;

NOW, THEREFORE, in consideration of the foregoing and the mutual promises and
agreements contained herein, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.1. Definitions. As used in this Agreement, the following terms have
the meanings set forth below:

“Affiliate” has the same meaning as in Rule 12b-2 promulgated under the Exchange
Act as in effect on the date hereof.

“Beneficial owner” and to “beneficially own” has the same meaning as in
Rule 13d-3 promulgated under the Exchange Act as in effect on the date hereof;
provided that a Person shall not be deemed to be the beneficial owner of any
Parent Common Stock solely because such Person is a party to this Agreement, if
such Person would not be deemed to be the beneficial owner of such Parent Common
Stock within the meaning of such Rule 13d-3 if such Person were not a party to
this Agreement.

“Board of Directors” means the Board of Directors of Parent.

“Director” means a member of the Board of Directors.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

 

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“Fidelity Board Observer Period” means the period beginning on the Effective
Date and expiring on the earlier to occur of (a) the date on which the Fidelity
Stockholders collectively shall cease to own of record and beneficially at least
6,092,907 Merger Shares, as such number of Merger Shares shall be
proportionately adjusted in connection with any stock split, stock dividend,
reverse stock split or other combination, reclassification or other similar
event affecting the Parent Common Stock, and (b) February 8, 2010.

“Fidelity Stockholders” means the Persons listed on the signature pages hereof
under the heading “Fidelity Stockholders” and any other Affiliate of FMR Corp.
advised by FMR Corp.

“Merger” means the merger consummated on the Effective Date pursuant to the
Merger Agreement.

“Merger Agreement” means the Agreement and Plan of Merger, dated as of
September 17, 2007, as amended from time to time, among Parent, PS Acquisition
Corp., a wholly-owned subsidiary of Parent, and McLeodUSA Incorporated.

“Merger Shares” means the Parent Common Stock issued by Parent in the Merger
pursuant to the Merger Agreement to the Fidelity Stockholders or the Wayzata
Stockholders, as the case may be.

“Person” means any individual, corporation, partnership, limited liability
company, limited partnership, joint venture, association, joint-stock company,
trust, unincorporated organization or government body.

“Wayzata Board Membership Period” means the period beginning on the day
following the Effective Date and, subject to Section 2.2(a), expiring on the
earliest to occur of (a) the date on which the Wayzata Stockholders collectively
shall cease to own of record and beneficially at least 5,738,900 Merger Shares,
as such number of Merger Shares shall be proportionately adjusted in connection
with any stock split, stock dividend, reverse stock split or other combination,
reclassification or other similar event affecting the Parent Common Stock,
(b) February 8, 2010 and (c) March 24, 2008, but only if the Wayzata
Stockholders shall not have made an initial designation pursuant to Section 2.1
on or before March 24, 2008.

“Wayzata Stockholders” means the Persons listed on the signature pages hereof
under the heading “Wayzata Stockholders” and any Affiliate of Wayzata Investment
Partners LLC.

ARTICLE II

SECTION 2.1. Designation of Director. During the Wayzata Board Membership
Period, the Wayzata Stockholders collectively shall be entitled to designate one
individual for appointment or for nomination for election to the Board of
Directors who shall be reasonably acceptable to Parent. Any such designation
shall be made in writing and addressed to the Board of Directors. The designee
identified in the initial designation pursuant to this Section 2.1 shall be
appointed to Class III of the Board of Directors with a term expiring at
Parent’s annual meeting of stockholders in 2009.

 

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SECTION 2.2. Vacancies Resignations.

(a) Subject to Section 2.2(b), during the Wayzata Board Membership Period, in
the event that a vacancy is created at any time by the death, disability,
retirement, resignation or removal of the Director designated for appointment or
for nomination for election to the Board of Directors pursuant to Section 2.1,
the Wayzata Stockholders shall collectively have the right, by written notice to
Parent, to designate a replacement individual for appointment or nomination for
election to the Board of Directors to fill such vacancy. Each such replacement
designee shall be reasonably acceptable to Parent. If the Wayzata Stockholders
do not designate any such replacement to fill such vacancy within 30 days after
receipt by the Wayzata Stockholders of written notice from Parent that the
Wayzata Stockholders have 30 days to designate a replacement to fill such
vacancy, the Board of Directors shall be entitled to fill such vacancy or to
reduce the number of authorized Directors by one, and the Wayzata Stockholders
thereafter shall not have any rights to designate a Director pursuant to this
Agreement. The Director appointed or elected to the Board of Directors pursuant
to a designation made by Wayzata Stockholders in accordance with this
Section 2.2(a) shall be deemed for purposes of this Article II to be a Director
who was designated for appointment or nomination for election to the Board of
Directors pursuant to Section 2.1.

(b) Promptly upon the expiration of the Wayzata Board Membership Period, the
Wayzata Stockholders shall take all necessary actions (including actions as
stockholders of Parent) to cause the Director they have previously designated
for appointment or nomination for election to the Board of Directors pursuant to
Section 2.1 to resign from the Board of Directors as soon as reasonably
practicable.

SECTION 2.3. Action by Wayzata Stockholders. All communications by and to the
Wayzata Stockholders relating to the exercise of their rights pursuant to
Sections 2.1 and 2.2 shall be directed to and by a single representative of the
Wayzata Stockholders designated in writing by the Wayzata Stockholders to Parent
from time to time. Parent may rely upon any such designation that is executed
and delivered by Wayzata Stockholders that collectively own of record and
beneficially at least a majority of the Merger Shares then owned of record and
beneficially by all Wayzata Stockholders. The initial representative of the
Wayzata Stockholders shall be John D. McEvoy.

SECTION 2.4. Undertaking By Parent. During the Wayzata Board Membership Period,
Parent agrees to take such action as shall be necessary to cause each individual
designated by the Wayzata Stockholders pursuant to Section 2.1 to be appointed
as a Director or to be nominated for election by Parent’s stockholders as a
Director, including, without limitation, having such individual named as a
management nominee for whom proxies would be solicited for the management slate.

ARTICLE III

BOARD OBSERVER RIGHTS

SECTION 3.1. Board Observer Rights. During the Fidelity Board Observer Period,
the Fidelity Stockholders shall have the right to appoint one representative
(the

 

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“Observer Representative”) to attend each meeting of the Board of Directors as a
non-voting observer, whether such meeting is conducted in person or by
teleconference. Any such designation shall be made in writing and addressed to
the Board of Directors. The Observer Representative shall have the right to
present matters for consideration by the Board of Directors and to speak on
matters presented by others. Subject to the confidentiality provisions of
Section 3.2, Parent shall cause the Observer Representative to be provided with
all communications and materials that are provided by Parent or its consultants
to the members of the Board of Directors generally, including all notices, board
packages, reports, presentations, minutes and consent instruments. The Fidelity
Stockholders may change the Observer Representative from time to time during the
Fidelity Board Observer Period upon written notice to Parent, provided that each
Observer Representative appointed from time to time shall be reasonably
acceptable to Parent. Parent shall reimburse the Observer Representative or the
Fidelity Stockholders for the reasonable out-of-pocket travel expenses of the
Observer Representative in attending meetings of the Board of Directors.

SECTION 3.2. Confidentiality. Notwithstanding any provision of Section 3.1 to
the contrary, the Board of Directors shall have the right to keep confidential
from the Observer Representative for such period of time as the Board of
Directors deems reasonable any information and copies of written materials
Parent is required by law or agreement with a third party to keep confidential.
As a condition of the exercise of his rights under this Section 3.1, the
Observer Representative shall enter into such agreements or undertakings with
Parent to maintain the confidentiality of information provided to him in
connection with the exercise of such rights as Parent may reasonably request.

SECTION 3.3. Action by Fidelity Stockholders. All communications by and to the
Fidelity Stockholders relating to the exercise of their rights pursuant to
Section 3.1 shall be directed to and by a single representative of the Fidelity
Stockholders designated in writing by the Fidelity Stockholders to Parent from
time to time. Parent may rely upon any such designation that is executed and
delivered by Fidelity Stockholders that collectively own of record and
beneficially at least a majority of the Merger Shares then owned of record and
beneficially by all Fidelity Stockholders. The initial representative of the
Fidelity Stockholders shall be Nate Van Duzer.

ARTICLE IV

MISCELLANEOUS

SECTION 4.1. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by facsimile, hand delivery, by
mail (registered or certified mail, postage prepaid, return receipt requested)
or by any overnight courier service, such as Federal Express, providing proof of
delivery. All communications hereunder shall be delivered to the respective
parties at the following addresses:

 

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if to the Wayzata Stockholders, to their representative

designated pursuant to Section 2.3, as follows:

Wayzata Investment Partners LLC

45 Fairfield Street, 4th Floor

Boston, Massachusetts 02116

Attention: John D. McEvoy

if to the Fidelity Stockholders, to their representative

designated pursuant to Section 3.3, as follows:

Nate Van Duzer

Fidelity Investments

82 Devonshire St., V13H

Boston, MA 02109

617-392-8129

617-392-1605 (fax)

if to PAETEC Holding Corp., to:

PAETEC Holding Corp.

One PAETEC Plaza

600 Willowbrook Office Park

Fairport, New York 14450

Attention: General Counsel

Facsimile: (585) 340-2563

SECTION 4.2. Amendments; Waivers. No modification, amendment or waiver of any
provision of this Agreement shall be effective against Parent or any other party
hereto, unless such modification, amendment or waiver is approved in writing by
Parent and each other party hereto, provided that (a) any modification,
amendment or waiver approved by the holders of a majority of the Merger Shares
owned of record and beneficially by the Fidelity Stockholders shall be effective
against each Fidelity Stockholder and (b) any modification, amendment or waiver
approved by the holders of a majority of the Merger Shares owned of record and
beneficially by the Wayzata Stockholders shall be effective against each Wayzata
Stockholder. No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.

SECTION 4.3. Further Assurances. At any time or from time to time after the date
hereof, the parties agree to cooperate with each other, and at the request of
any other party, to execute and deliver any further instruments or documents and
to take all such further action as such other party may reasonably request in
order to evidence or effectuate the consummation of the transactions
contemplated by this Agreement and otherwise to carry out the intent of the
parties hereunder.

 

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SECTION 4.4. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties to
this Agreement shall negotiate in good faith to modify this Agreement, so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
shall be consummated as originally contemplated to the fullest extent possible.

SECTION 4.5. Entire Agreement; Assignment. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements (including, without limitation, the Merger
Agreement) and undertakings, both written and oral, among the parties, or any of
them, with respect to the subject matter hereof. This Agreement shall not be
assigned by operation of law or otherwise.

SECTION 4.6. Parties in Interest. This Agreement shall be binding upon and inure
to the benefit of each party hereto and their respective successors.

SECTION 4.7. Governing Law; Consent to Jurisdiction. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of Delaware
without giving effect to principles of conflicts of law. Each of the parties
hereto (a) consents to the exclusive jurisdiction of the Court of Chancery of
the State of Delaware and in the absence of jurisdiction of such court with
respect to the applicable matter, any federal court located in the State of
Delaware or any Delaware state court in the event any dispute arises out of this
Agreement or any of the transactions contemplated by this Agreement, (b) agrees
that it shall not attempt to deny or defeat such exclusive jurisdiction by
motion or other request for leave from any such court, and (c) agrees that it
shall not bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than the Court of Chancery of
the State of Delaware and, in the absence of jurisdiction of such court with
respect to the applicable matter, a federal court sitting in the State of
Delaware or a Delaware state court. EACH OF THE PARTIES IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
AND ALL RIGHTS TO TRIAL BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

SECTION 4.8. Headings. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.

SECTION 4.9. Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.

 

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SECTION 4.10. Effectiveness; Termination.

(a) This Agreement shall be effective as of the Effective Date upon its
execution by Parent, each Fidelity Stockholder and each Wayzata Stockholder.

(b) The rights and obligations hereunder of the Fidelity Stockholders, and the
rights and obligations hereunder of Parent and each Wayzata Stockholder with
respect to the Fidelity Stockholders, shall terminate as of the expiration of
the Fidelity Board Observer Period.

(c) The rights and obligations hereunder of the Wayzata Stockholders, and the
rights and obligations hereunder of Parent and each Fidelity Stockholder with
respect to the Wayzata Stockholders, shall terminate as of the expiration of the
Wayzata Board Membership Period.

SECTION 4.11. Obligations Imposed By Law. Any obligation imposed upon Parent,
any Wayzata Stockholder or any Fidelity Stockholder hereunder shall not be
exclusive of, or otherwise relieve such party of, any obligation imposed upon
Parent or such Wayzata Stockholder or Fidelity Stockholder by the laws of the
State of Delaware.

 

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

 

PAETEC HOLDING CORP. By:  

/s/ Arunas A. Chesonis

Name:  

Arunas A. Chesonis

Title:  

Chairman, President and

Chief Executive Officer

 

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FIDELITY STOCKHOLDERS: FIDELITY ADVISOR SERIES II: FIDELITY ADVISOR HIGH INCOME
ADVANTAGE FUND By:  

/s/ Peter Lydecker

Name:   Peter Lydecker Title:   Vice President COMMONWEALTH OF MASSACHUSETTS
PENSION RESERVES INVESTMENT MANAGEMENT BOARD By:   Fidelity Management Trust
Company, as Investment Manager, under Power of Attorney By:  

/s/ Geoffrey W. Johnson

Name:   Geoffrey W. Johnson Title:   Vice President PENSION INVESTMENT COMMITTEE
OF GENERAL MOTORS FOR GENERAL MOTORS EMPLOYEES DOMESTIC GROUP PENSION TRUST By:
  Fidelity Management Trust Company, as Investment Manager, under Power of
Attorney By:  

/s/ Geoffrey W. Johnson

Name:   Geoffrey W. Johnson Title:   Vice President

 

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FIDELITY SECURITIES FUND: FIDELITY LEVERAGED COMPANY STOCK FUND By:  

/s/ Peter Lydecker

Name:   Peter Lydecker Title:   Vice President FIDELITY ADVISOR SERIES I:
FIDELITY ADVISOR LEVERAGED COMPANY STOCK FUND By:  

/s/ Peter Lydecker

Name:   Peter Lydecker Title:   Vice President

 

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WAYZATA STOCKHOLDERS: WAYLAND DISTRESSED OPPORTUNITIES FUND I-B, LLC By:  
Wayzata Investment Partners LLC, its Manager By:  

/s/ John D. McEvoy

Name:   John D. McEvoy Title:   Authorized Signatory WAYLAND DISTRESSED
OPPORTUNITIES FUND I-C, LLC By:   Wayzata Investment Partners LLC, its Manager
By:  

/s/ John D. McEvoy

Name:   John D. McEvoy Title:   Authorized Signatory WAYZATA OPPORTUNITIES FUND,
LLC By:   Wayzata Investment Partners LLC, its Manager By:  

/s/ John D. McEvoy

Name:   John D. McEvoy Title:   Authorized Signatory

 

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WAYZATA OPPORTUNITIES FUND OFFSHORE, L.P. By:   Wayzata Offshore GP, LLC, its
General Partner By:   Wayzata Investment Partners LLC, its Manager By:  

/s/ John D. McEvoy

Name:   John D. McEvoy Title:   Authorized Signatory WAYZATA RECOVERY FUND, LLC
By:   Wayzata Investment Partners LLC, its Manager By:  

/s/ John D. McEvoy

Name:   John D. McEvoy Title:   Authorized Signatory

 

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