Exhibit 10.4

ENTEROMEDICS INC.

 

 

CERTIFICATE OF DESIGNATIONS

FOR

SERIES A NON–VOTING CONVERTIBLE PREFERRED STOCK

(PURSUANT TO DELAWARE GENERAL CORPORATION LAW,

SECTION 151(G))

 

 

The undersigned, being the Chief Financial Officer, Vice President and Secretary
of EnteroMedics Inc. (the “Corporation”), a corporation organized and existing
under the Delaware General Corporation Law, in accordance with the provisions of
the Delaware General Corporation Law, Section 151(g), do hereby certify that:

Pursuant to the authority vested in the Board of Directors of the Corporation by
the Fifth Amended and Restated Certificate of Incorporation of the Corporation,
the Board of Directors of the Corporation on September 9, 2010, in accordance
with the Delaware General Corporation Law, Section 151, duly adopted the
following resolution establishing a series of 3,600,000 shares of the
Corporation’s Preferred Stock, to be designated as its Series A Non–Voting
Convertible Preferred Stock:

RESOLVED, that pursuant to the authority vested in the Board of Directors of the
Corporation (the “Board of Directors”) by the Fifth Amended and Restated
Certificate of Incorporation of the Corporation, the Board of Directors hereby
establishes a series of Series A Non–Voting Convertible Preferred Stock of the
Corporation and hereby states the number of shares and fixes the powers,
designations, preferences and relative, participating, optional and other
rights, and the qualifications, limitations and restrictions thereof, of such
series of shares as follows:

SERIES A NON–VOTING CONVERTIBLE PREFERRED STOCK

Section 1. Designation; Number of Shares. The shares of such series shall be
designated as “Series A Non–Voting Convertible Preferred Stock” (the
“Convertible Preferred Stock”), and the number of shares constituting the
Convertible Preferred Stock shall be 3,600,000. Such number of shares may be
decreased by resolution of the Board of Directors adopted and filed pursuant to
the Delaware General Corporation Law, Section 151(g), or any successor
provision; provided, that no such decrease shall reduce the number of authorized
shares of Convertible Preferred Stock to a number less than the number of shares
then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, warrants, convertible or exchangeable
securities or other rights to acquire shares of Convertible Preferred Stock.

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Section 2. Stated Capital. The amount to be represented in the stated capital of
the Corporation for each share of Convertible Preferred Stock shall be $0.01.

Section 3. Rank. The Convertible Preferred Stock shall rank prior to all of the
Corporation’s Common Stock, par value $0.01 per share (the “Common Stock”), now
outstanding or hereafter issued, as to distributions of assets upon the
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.

Section 4. Dividends. So long as any shares of Convertible Preferred Stock
remain outstanding, if the Corporation makes any dividend or distribution of
cash, securities (including, but not limited to, rights, warrants, options or
evidences of indebtedness) or properties or assets on shares of Common Stock,
then the Corporation shall simultaneously declare and pay a dividend or
distribution on shares of Convertible Preferred Stock in the amount of dividends
or distributions that would be made with respect to shares of Convertible
Preferred Stock if such shares were converted into shares of Common Stock on the
record date for such dividend or distribution (or if no record date is
established, at the date such dividend or distribution is declared).

Section 5. Liquidation Preference. In the event of a liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the holders of
Convertible Preferred Stock shall be entitled to receive out of the assets of
the Corporation, whether such assets constitute stated capital or surplus of any
nature, an amount equal to the dividends accumulated and unpaid thereon to the
date of final distribution to such holders, whether or not declared, without
interest, plus a sum equal to $2.58 per share, and no more, before any payment
shall be made or any assets distributed to the holders of Common Stock or any
other capital stock of the Corporation ranking junior as to liquidation rights
to the Convertible Preferred Stock (such Common Stock and other capital stock
being referred to herein collectively as “Junior Liquidation Stock.” After
payment in full of the liquidation preference of the shares of the Convertible
Preferred Stock, the entire remaining assets and funds of the Corporation
legally available for distribution, if any, shall be distributed among the
holders of the Common Stock and the Convertible Preferred Stock in proportion to
the shares of Common Stock then held by them and the shares of Common Stock
which they then have the right to acquire upon conversion of the shares of
Convertible Preferred Stock then held by them. A merger or consolidation (other
than one in which stockholders of the Corporation own a majority by voting power
of the outstanding shares of the surviving or acquiring corporation) and a sale,
lease, transfer, exclusive license or other disposition of all or substantially
all of the assets of the Corporation shall be deemed a liquidation, dissolution
or winding up of the Corporation for purposes of this Section 5, thereby
triggering payment of the liquidation preferences described above, unless the
holders of 75% of the Convertible Preferred Stock elect otherwise.

Section 6. No Redemption. The shares of Convertible Preferred Stock shall not be
redeemable.

 

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Section 7. Conversion.

(a) Conversion at Option of Holders.

(i) Subject to the limitation set forth in Section 7(e), holders of Convertible
Preferred Stock may, at their option upon surrender of the certificates
therefor, convert any or all of their shares of Convertible Preferred Stock into
fully paid and nonassessable shares of Common Stock (and such other securities
and property as they may be entitled to, as hereinafter provided) at any time
after issuance thereof. Each share of Convertible Preferred Stock shall be
convertible at the office of any transfer agent for the Convertible Preferred
Stock, and at such other office or offices, if any, as the Board of Directors
may designate, into that number of fully paid and nonassessable shares of Common
Stock as shall be equal to the Conversion Rate, determined as hereinafter
provided, in effect at the time of conversion. Shares of Convertible Preferred
Stock may initially be converted into full shares of Common Stock as is
determined by dividing (A) the Original Issue Price by (B) the sum of the
Original Issue Price plus the Conversion Price, subject to adjustment from time
to time as provided in Section 8 (such conversion rate, as so adjusted from time
to time, being referred to herein as the “Conversion Rate”). “Original Issue
Price” means $1.72. “Conversion Price” means $0.125 multiplied by the sum of the
number of shares of Common Stock issuable under the converting holder’s
Conversion Warrant (as defined in that certain Securities Purchase Agreement,
dated as of the date hereof, between the Corporation and the investors
purchasing Convertible Preferred Stock pursuant thereto (the “Securities
Purchase Agreement”) divided by the number of Convertible Preferred Stock held
by such converting holder. Upon conversion, no adjustment or payment shall be
made in respect of accumulated and unpaid dividends on the Convertible Preferred
Stock surrendered for conversion.

(ii) The right of holders of Convertible Preferred Stock to convert their shares
shall be exercised by surrendering for such purpose to the Corporation or its
agent, as provided above, certificates representing shares to be converted, duly
endorsed in blank or accompanied by proper instruments of transfer. The
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of Common Stock or other
securities or property upon conversion of Convertible Preferred Stock in a name
other than that of the holder of the shares of Convertible Preferred Stock being
converted, nor shall the Corporation shall be required to issue or deliver any
such shares or other securities or property unless and until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.

(b) Mandatory Conversion. Subject to the limitation set forth in Section 7(e),
each share of Convertible Preferred Stock shall be automatically converted into
shares of Common Stock at the then effective Conversion Rate (i) upon the date
on which at least 75% of the outstanding shares of Convertible Preferred Stock
elect such conversion or (ii) upon the closing of an offering of equity
securities for the account of the Corporation (other than by sale of the
Convertible Preferred Stock pursuant to the Securities Purchase Agreement),
provided that the aggregate gross proceeds to the Corporation are $15 million or
more (net of underwriting commissions and expenses) (an “Equity Offering”),
provided further that the Convertible Preferred Stock shall not be deemed to
have converted until immediately after the closing of the Equity Offering.

 

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(c) A number of shares of the authorized but unissued Common Stock sufficient to
provide for the conversion of the Convertible Preferred Stock outstanding upon
the basis hereinbefore provided shall at all times be reserved by the
Corporation, free from preemptive rights, for such conversion, subject to the
provisions of the next paragraph. If the Corporation shall issue any securities
or make any change in its capital structure which would change the number of
shares of Common Stock into which each share of the Convertible Preferred Stock
shall be convertible as herein provided, the Corporation shall at the same time
also make proper provision so that thereafter there shall be a sufficient number
of shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Convertible Preferred Stock on the new basis.
The Corporation shall comply with all securities laws regulating the offer and
delivery of shares of Common Stock upon conversion of the Convertible Preferred
Stock.

(d) Upon the surrender of certificates representing shares of Convertible
Preferred Stock to be converted, duly endorsed or accompanied by proper
instruments of transfer as provided above, the person converting such shares
shall be deemed to be the holder of record of the Common Stock issuable upon
such conversion, and all rights with respect to the shares surrendered shall
forthwith terminate except the right to receive the Common Stock or other
securities, cash or other assets as herein provided.

(e) Notwithstanding any other provision of this Section 7, no stockholder of the
Corporation’s capital stock shall be permitted to convert an amount of
Convertible Preferred Stock that would result in such stockholder owning more
than 19.99% of the Common Stock outstanding after such conversion.

Section 8. Adjustments to Conversion Rate.

(a) Notwithstanding anything in this Section 8 to the contrary, no change in the
Conversion Rate shall be made until the cumulative effect of the adjustments
called for by this Section 8 since the date of the last change in the Conversion
Rate would change the Conversion Rate by more than 3%. However, once the
cumulative effect would result in such a change, then the Conversion Rate shall
be changed to reflect all adjustments called for by this Section 8 and not
previously made. Subject to the foregoing, the Conversion Rate shall be adjusted
from time to time as follows:

(i) In case the Corporation shall (A) pay a dividend or make a distribution on
its Common Stock in shares of its capital stock, (B) subdivide its outstanding
Common Stock into a greater number of shares, (C) combine the shares of its
outstanding Common Stock into a smaller number of shares or (D) issue by
reclassification of its Common Stock any shares of its capital stock, then in
each such case the Conversion Rate in effect immediately prior thereto shall be
proportionately adjusted so that the holder of any Convertible Preferred Stock
thereafter surrendered for conversion shall be entitled to receive, to the
extent permitted by applicable law, the number and kind of shares of capital
stock of the Corporation which such holder would have owned or have been
entitled to receive after the happening of such event had such Convertible
Preferred Stock been converted immediately prior to the record date for such
event (or if no record date is

 

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established in connection with such event, the effective date for such action).
An adjustment pursuant to this subparagraph (a)(ii) shall become effective
immediately after the record date in the case of a stock dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification.

(b) Except as otherwise provided above in this Section 8, no adjustment in the
Conversion Rate shall be made in respect of any conversion for share
distributions or dividends theretofore declared and paid or payable on the
Common Stock.

(c) Whenever the Conversion Rate is adjusted as herein provided, the Corporation
shall send to each transfer agent for the Convertible Preferred Stock and the
Common Stock, and to the NASDAQ Capital Market, a statement signed by the
Chairman of the Board of Directors, the President or any Vice President of the
Corporation and by its Treasurer or its Secretary stating the adjusted
Conversion Rate determined as provided in this Section 8; and any adjustment so
evidenced, given in good faith, shall be binding upon all stockholders and upon
the Corporation. Whenever the Conversion Rate is adjusted, the Corporation shall
give notice by mail at the time of, and together with, the next dividend payment
to the holders of record of Convertible Preferred Stock, setting forth the
adjustment and the new Conversion Rate and Conversion Price. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.

(d) Whenever the Corporation shall propose to take any of the actions specified
in subparagraphs (a)(i) or (a)(ii) of this Section 8 which would result in any
adjustment in the Conversion Rate, the Corporation shall cause a notice to be
mailed at least 30 days prior to the date on which the books of the Corporation
will close or on which a record will be taken for such action to the holders of
record of the outstanding Convertible Preferred Stock on the date of such
notice. Such notice shall specify the action proposed to be taken by the
Corporation and the date as of which holders of record of the Common Stock shall
participate in any such actions or be entitled to exchange their Common Stock
for securities or other property, as the case may be. Failure by the Corporation
to give such notice or any defect in such notice shall not affect the validity
of the transaction.

Section 9. Convertible Preferred Stock Not Redeemable at Option of Holders or
Exchangeable; No Sinking Fund. The Convertible Preferred Stock shall not be
redeemable upon the request of holders thereof or exchangable for other capital
stock or indebtedness of the Corporation or other property. The shares of
Convertible Preferred Stock shall not be subject to the operation of a purchase,
retirement or sinking fund.

Section 10. Voting Rights. The holders of Convertible Preferred Stock shall not
have any voting rights except as set forth below in Section 11 or as otherwise
from time to time required by law.

 

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Section 11. Certain Actions Not to be Taken Without Vote of Holders of
Convertible Preferred Stock. So long as 10% of the shares of Convertible
Preferred Stock are outstanding, in addition to any other vote or approval
required under the Fifth Amended and Restated Certificate of Incorporation of
the Corporation or the Amended and Restated Bylaws of the Corporation, the
Corporation will not, without the written consent of the holders of at least 75%
of the Convertible Preferred Stock, either directly or by amendment, merger,
consolidation or otherwise (i) create or authorize the creation of or issue any
other security convertible into or exercisable for any equity security, having
rights, preferences or privileges senior to or on parity with the Convertible
Preferred Stock, or increase the authorized number of shares of Convertible
Preferred Stock or (ii) purchase or redeem or pay any dividend on any capital
stock prior to the Convertible Preferred Stock other than stock repurchased from
former employees or consultants in connection with the cessation of their
employment or services, as the case may be, at the lower of fair market value or
cost, other than as approved by the Board of Directors.

Section 12. Outstanding Shares. For purposes of this Certificate of
Designations, all shares of Convertible Preferred Stock shall be deemed
outstanding except for (a) shares of Convertible Preferred Stock held of record
or beneficially by the Corporation or any subsidiary of the Corporation;
(b) from the date of surrender of certificates representing Convertible
Preferred Stock for conversion pursuant to Section 7, all shares of Convertible
Preferred Stock which have been converted into Common Stock or other securities
or property pursuant to Section 7.

IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
Gregory S. Lea, its Chief Financial Officer, Senior Vice President and
Secretary, this 29th day of September, 2010.

 

ENTEROMEDICS INC. By:  

 

  Name:   Gregory S. Lea   Title:  

Chief Financial Officer,

Senior Vice President and Secretary

 

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