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                                                                                        Exhibit
10.4
 
 
 
INVESTOR RIGHTS AGREEMENT
 
This INVESTOR RIGHTS AGREEMENT (this “Agreement”), dated as of September 19,
2007, is entered into by and among NEPHROS, INC., a Delaware corporation (the
“Company”), LAMBDA INVESTORS LLC, a Delaware limited liability company
(“Lambda”), and the other parties named on the signature pages to this Agreement
or who subsequently become a party to this Agreement in accordance with the
terms hereof (collectively, the “Covered Holders”).
 
WHEREAS, to induce Lambda to make an investment in the Company, the Company and
Covered Holders have agreed to cause two individuals having reasonably
appropriate experience and background designated by Lambda from time to time
(the “Lambda Nominees”) to be elected to the Board of Directors of the Company
(the “Board”); and
 
WHEREAS, the parties hereto desire to enter into this Agreement to provide for
the election of the Nominees and to address certain matters relating to the
service of the Lambda Nominees as members of the Board.
 
NOW THEREFORE, in consideration of the foregoing and the covenants and
agreements contained in this Agreement, the sufficiency of which is hereby
acknowledged, the parties agree as follows:
 
1.  Board Representation.
 
(a)  The Company, Lambda and the Covered Holders shall take such corporate
actions as may be required to ensure that the number of directors constituting
the Board is at all times no greater than seven (7) or such greater number as
Lambda shall have agreed to in writing, provided, that a unanimous written
consent of the Board, including the consent of the Lambda Nominees, shall
constitute a writing for such purposes, and provided further, that a writing
shall not be required if a majority of the directors on the Board approve a
resolution at a Board meeting to increase the size of the Board and the Lambda
Nominees vote in the majority.
 
(b)  Lambda shall be entitled to (i) nominate the Lambda Nominees to the Board
to serve as directors until their respective successor(s) are elected and
qualified, (ii) nominate each successor to the Lambda Nominees, provided that
any successor shall have reasonably appropriate experience and background, and
(iii) direct the removal from the Board of any director nominated under the
foregoing clauses (i) or (ii).
 
(c)  Each nomination or any direction to remove from the Board any Lambda
Nominee shall be made by delivering to the Company a notice signed by
Lambda.  As promptly as practicable, but in any event within ten (10) days after
delivery of such notice, the Company shall take or cause to be taken such
corporate actions as may be reasonably required to cause the election or removal
proposed in such notice.  Such corporate actions may include calling a meeting
or soliciting a written consent of the Board, or calling a meeting or soliciting
a written consent of the stockholders of the Company.
 
(d)  Upon the written request of Lambda, the Company and each Covered Holder
shall take such actions as may be reasonably required to cause the persons then
serving on the Board
 
 
 

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based on the nomination of Lambda to be appointed to the board of directors (or
similar governing body) of all direct and indirect subsidiaries of the Company.
 
2.  Voting Agreement.
 
(a)  Each Covered Holder covenants and agrees to vote all common stock, par
value $.001 per share of the Company (“Common Stock”), and any other capital
stock or other securities of the Company held by such Covered Holder that are
entitled to vote in the election of the Board (“Voting Securities”) for the
election to the Board of the Lambda Nominees in accordance with Section 1(b) and
for the removal from the Board of the Lambda Nominees proposed to be removed in
accordance with Section 1(b) and shall take all actions required on its behalf
to give effect to the agreements set forth in this Section 2.  Each Covered
Holder covenants and agrees not to vote any Voting Securities for the removal of
any Lambda Director except pursuant to direction from Lambda pursuant to Section
1(b)(iii).
 
(b)  Each Covered Holder hereby grants to Lambda an irrevocable proxy, coupled
with an interest, authorizing Lambda to act as proxy of such Covered Holder,
with full powers of substitution and resubstitution, and hereby authorizes
Lambda to vote, give consents and in all other ways act in such Covered Holder’s
place with respect to all Voting Securities held by such Covered Holder in
connection with such Covered Holder’s agreements contained in this Section 2 to
vote in favor of or for the removal of the Lambda Nominees, which proxy shall be
valid and remain in effect until the termination of this Agreement.
 
3.  Vacancies and Removal.
 
(a)  The Lambda Nominees designated pursuant to Section 1(b) will be elected at
any annual or special meeting of the stockholders of the Company (or by written
consent in lieu of a meeting of the stockholders) and will serve until their
successors are duly elected and qualified or until their earlier resignation or
removal.
 
(b)  In the event a vacancy is created on the Board by reason of the death,
removal or resignation of any Lambda Nominee, Lambda shall be entitled to
nominate a successor Lambda Director having reasonably appropriate experience
and background and such vacancy shall be filled in accordance with the
procedures set forth in Section 1(c).
 
4.  Meetings; Expenses; Compensation; Insurance.
 
(a)  The Company shall convene meetings of the Board at least once every three
months.  Upon any failure by the Company to convene any meeting required by this
paragraph, a Lambda Director shall be empowered to convene such meeting.
 
(b)  The Lambda Nominees shall be entitled to compensation and reimbursement for
expenses on the same terms as other directors of the Company who are not
officers or employees of the Company.
 
(c)  The Company shall maintain a directors’ and officers’ policy of insurance
in the amount of at least $7,000,000 per occurrence covering all directors.
 
 

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5.  Business Opportunities.
 
(a)  In anticipation of Lambda becoming, indirectly or directly, a substantial
stockholder of the Company, and in recognition of (i) the benefits to be derived
by the Company through its continued contractual, corporate and business
relations with Lambda (including the services of officers, directors, partners,
managers, employees or affiliates of Lambda (collectively, “Lambda Persons”) as
directors of the Company) and (ii) the difficulties attendant to any director
who desires and endeavors fully to satisfy such director’s fiduciary duties, in
determining the full scope of such duties in any particular situation, the
provisions of this Section 5 are set forth to regulate, define and guide the
conduct of certain affairs of the Company as they may involve Lambda and any
Lambda Persons, and the powers, rights, duties and liabilities of the Company
and its officers, directors and stockholders in connection therewith.
 
(b)  Except as Lambda may otherwise agree in writing, Lambda shall have the
right to (i) engage, directly or indirectly, in the same or similar business
activities or lines of business as the Company and (ii) do business with any
client, competitor or customer of the Company, with the result that the Company
shall have no right in or to such activities or any proceeds or benefits
therefrom, and neither Lambda nor any Lambda Person (except as provided in
Section 5(c)) shall be liable to the Company or its stockholders for breach of
any fiduciary duty by reason of any such activities of Lambda or of such Lambda
Person’s participation therein.  A Lambda Person who is serving as an officer or
director of the Company may not, at the same time, serve as an officer or
director of any entity whose principal business activity is (i) the development
or sale of medical devices for the treatment of end stage renal disease or (ii)
water filtration.  In the event that Lambda or any Lambda Person acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity for both Lambda and the Company other than in the case of a
director-related opportunity, Lambda and such Lambda Person shall have no duty
to communicate or present such corporate opportunity to the Company and the
Company hereby renounces any interest or expectancy it may have in such
corporate opportunity, with the result that Lambda or such Lambda Person shall
not be liable to the Company or its stockholders for breach of any fiduciary
duty, including for breach of any fiduciary duty as a director or stockholder of
the Company, by reason of the fact that Lambda pursues or acquires such
corporate opportunity for itself, directs such corporate opportunity to another
person or entity, or does not present such corporate opportunity to the Company.
 
(c)  In the event that a director of the Company who is a Lambda Person acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity for both the Company and Lambda, such corporate opportunity shall
belong to Lambda, and the Company hereby renounces any interest or expectancy it
may have in such corporate opportunity, unless such corporate opportunity is a
director-related opportunity, in which case such corporate opportunity shall
belong to the Company.
 
(d)  For the purposes of this Section 5, “corporate opportunities” shall not
include any business opportunities that the Company is not financially or
contractually able to undertake, or that are, from their nature, not in the line
of the Company’s business or are of no practical advantage to it or that are
ones in which the Company has no interest or reasonable expectancy.  For the
purposes of this Section 5, a “director-related opportunity” means a potential
transaction or matter that may be a corporate opportunity for both the Company
and Lambda where
 
 
 

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knowledge of such corporate opportunity is made known to a Lambda Person who is
serving as a director of the Company as a result of his serving as a director of
the Company prior to (x) Lambda or any other Lambda Person acquiring knowledge
of such corporate opportunity, or (y) such Lambda Person acquiring knowledge of
such corporate opportunity other than as a result of such Lambda Person’s
serving as a director.
 
(e)  For purposes of this Section 5 only, the “Company” shall mean the Company
and all corporations, partnerships, joint ventures, associations and other
entities in which the Company beneficially owns (directly or indirectly) fifty
percent (50%) or more of the outstanding voting stock, voting power or similar
voting interests.
 
(f)  Neither the Company nor any Covered Holder will take any action to approve
any amendment to the Certificate of Incorporation or Bylaws of the Company that
is inconsistent with any provision of this Section 5.
 
6.  Joinder Agreements; Transfers.  
 
(a)  Except as Lambda may otherwise agree in writing, the Company shall require
each person or entity who subscribes for or otherwise purchases any newly issued
capital stock of the Company, securities convertible into or exchangeable for
shares of capital stock of the Company, and all options, warrants, and other
rights to purchase or otherwise acquire from the Company shares of such capital
stock (collectively, “Equity Securities”), other than Excluded Securities (as
defined below), after the date hereof, as a condition to the effectiveness of
such subscription or purchase, to execute a joinder to this Agreement,
substantially in the form attached hereto as Exhibit A (the “Joinder
Agreement”), agreeing to be treated as a Covered Holder, whereupon such Person
shall be a party to and bound by the provisions of this Agreement.  For purposes
of this paragraph, “Excluded Securities” means (i) options granted to directors,
officers, bona fide consultants and employees of the Company issued pursuant to
an employee benefit plan of the Company and shares of capital stock at any time
issuable upon the exercise of such options, (ii) shares of capital stock
issuable upon conversion of the Company’s Series A 10% Secured Convertible Notes
Due 2008 or Series B 10% Secured Convertible Notes Due 2008, (iii) warrants
issuable upon conversion of the Company’s Series A 10% Secured Convertible Notes
Due 2008 and shares of capital stock at any time issuable upon the exercise of
such warrants, (iv) shares of Common Stock issuable upon the exercise of
options, warrants or other securities exchangeable or exercisable for, or
convertible into, shares of capital stock that are outstanding as of the date
hereof, (v) shares of capital stock issued by the Company in an underwritten
public offering and (vi) Equity Securities issued after the date hereof to give
effect to any stock dividend or distribution, stock split, reverse stock split
or combination or other similar pro rata recapitalization event affecting
capital stock.
 
(b)  From the date hereof until two (2) regular annual meetings of stockholders
of the Company at which directors of the Company are elected have been
conducted, no Covered Holder shall sell, transfer, assign, pledge, hypothecate
or otherwise dispose of any Equity Securities (each, a “Transfer”), and the
Company shall not record any such Transfer, unless and until the transferee
(unless already subject to this Agreement) executes and delivers to the Company
a Joinder Agreement, agreeing to be treated in the same manner as the Covered
Holder.  Upon such Transfer and such execution and delivery, the transferee
shall be a party to
 
 

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and bound by this Agreement with respect to the transferred Equity Securities in
the same manner as the transferring Covered Holder.  The provisions of this
Section 6(b) shall apply to all Equity Securities now owned or hereafter
acquired by a Covered Holder.  Any Transfer of Equity Securities by a Covered
Holder not made in accordance with this Section 6(b) shall be void ab
initio.  The provisions of this Section 6(b) shall not apply to any sale of
shares of Common Stock by a Covered Holder pursuant to an effective registration
statement or Rule 144.
 
7.  Legend. Each certificate representing Equity Securities held by a Covered
Person shall, in addition to any other legends otherwise required, bear a legend
substantially in the following form:
 
“THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND THE OBLIGATIONS OF THE HOLDER OF SUCH
SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO AN INVESTOR
RIGHTS AGREEMENT DATED AS OF SEPTEMBER ___, 2007 (AS IT MAY BE AMENDED, RESTATED
OR OTHERWISE MODIFIED FROM TIME TO TIME), AMONG NEPHROS, INC. AND CERTAIN
HOLDERS OF ITS OUTSTANDING CAPITAL STOCK. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF NEPHROS, INC.
 
Each Covered Holder hereby agrees to promptly deliver to the Company upon
execution of this Agreement any certificates representing Equity Securities for
the purpose of adding the foregoing legend to such certificates.
 
8.  Termination.  This Agreement shall automatically terminate on the first day
that the aggregate number of shares of Common Stock held by Lambda or any Lambda
Transferee (as defined below), or issuable to Lambda or any Lambda Transferee
upon the exercise or conversion of Equity Securities held by Lambda or such
Lambda Transferee (whether or not then exercisable or convertible), represents
less than ten percent (10%) of the sum of the issued and outstanding shares of
Common Stock of the Company plus the number of shares of Common Stock issuable
to Lambda or any Lambda Transferee upon the exercise or conversion of Equity
Securities held by Lambda (whether or not then exercisable or convertible).  In
addition, Lambda may unilaterally terminate this Agreement at any time by giving
written notice of such termination to the Company.  Upon the termination of this
Agreement, the Company shall give notice of such termination to Lambda and the
Covered Holders and the Covered Holders shall be entitled, upon the surrender of
any certificates representing Equity Securities that bear the legend set forth
in Section 7, to receive a replacement certificate representing such Equity
Securities that does not bear such legend.
 
9.  Representations and Warranties.  Each of the Covered Holders hereby makes
the following representations and warranties to Lambda with respect solely to
itself and not with respect to any other Covered Holder:
 
 
 

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(a)  This Agreement has been duly executed and delivered by each Covered Holder
and constitutes the legal, valid and binding obligation of each Covered Holder,
enforceable against such Covered Holder in accordance with its terms.
 
(b)  Neither the execution, delivery nor performance of this Agreement by each
Covered Holder violates or conflicts with, creates (with or without the giving
of notice or the lapse of time, or both) a default under or a lien or
encumbrance upon any of such Covered Holder’s assets or properties pursuant to,
or requires the consent, approval or order of any government or governmental
agency or other person or entity under (i) any note, indenture, lease, license
or other agreement to which such Covered Holder is a party or by which it or any
of its assets or properties is bound or (ii) any statute, law, rule, regulation
or court decree binding upon or applicable to such Covered Holder or its assets
or properties.  If such Covered Holder is not a natural person, the execution,
delivery and performance by such Holder of this Agreement, have been duly
authorized by all necessary corporate or other action on behalf of such Covered
Holder and such execution, delivery and performance does not and will not
constitute a breach or violation of, or default under, the charter or by-laws or
equivalent governing documents of such Holder.
 
10.  Miscellaneous.

(a)  This Agreement, including the exhibits hereto, sets forth the entire
understanding of the parties with respect to the subject matter hereof,
supersedes all existing agreements among them concerning such subject matter,
and the provisions hereof may be amended or waived, only by a written instrument
duly executed by the party to be charged; provided, that this Agreement may be
amended by a written instrument duly executed by the Company, Lambda and Covered
Holders holding a majority of all shares of Common Stock then held by the
Covered Holders.  Notwithstanding the foregoing, no such amendment,
modification, supplement, waiver, consent or departure shall distinguish between
Covered Holders or groups of Covered Holders unless any Covered Holder adversely
affected thereby shall have consented thereto in writing.
 
(b)  Except as otherwise specifically provided herein, any notice or other
communication required or permitted to be given hereunder shall be in writing
and shall be mailed by certified mail, return receipt requested, or by Federal
Express, Express Mail or similar guaranteed overnight delivery or courier
service or delivered in person against receipt to the party to whom it is to be
given,
 
 
 

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(i)if to the Company,
 
Nephros, Inc.
3960 Broadway
New York, New York  10032
Attn:  President

(ii) with a copy to,

Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
Attention:  Thomas D. Balliett, Esq.

(ii) if to any other party, at the address of such party set forth on the stock
transfer records of the Company or its transfer agent,
 
or in any case, to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 10(b).  Any notice
given by means permitted by this Section 10(b) shall be deemed given at the time
of receipt thereof at the address specified in this Section 10(b).
 
(c)  This Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The Company may not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of Lambda.  Lambda may assign its rights, or a portion thereof, to any
person or entity to whom it Transfers Equity Securities, provided that such
transferee agrees in writing to be bound, with respect to the Transferred Equity
Securities, by the provisions of this Agreement.  A person or entity to whom
rights under this Agreement have been assigned by Lambda (either simultaneous
with or subsequent to a Transfer of Equity Securities) is referred to herein as
a “Lambda Transferee”; however, a person or entity to whom Lambda has
Transferred Equity Securities but has not assigned rights under this Agreement
shall not be treated as a Lambda Transferee.
 
(d)  The headings in this Agreement are solely for convenience of reference and
shall be given no effect in the construction or interpretation of this
Agreement.
 
(e)  This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
 
(f)  This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, without giving effect to principles governing
conflicts of law that would defer to the substantive law of another
jurisdiction.
 
(g)  In the event that any provision of this Agreement shall be determined to be
illegal or unenforceable, that provision will be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
 
 
 

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(h)  This Agreement does not create, and shall not be construed as creating, any
rights enforceable by any person not a party to this Agreement.
 
(i)  Each party hereto consents and submits to the exclusive jurisdiction of any
state court sitting in the County of New York or federal court sitting in the
Southern District of the State of New York in connection with any dispute
arising out of or relating to this Agreement, and agrees that all suits, actions
and proceedings brought by such party hereunder shall be brought only in such
jurisdictions.  Each party hereto waives any objection to the laying of venue in
such courts and any claim that any such action has been brought in an
inconvenient forum.  To the extent permitted by law, any judgment in respect of
a dispute arising out of or relating to this Agreement may be enforced in any
other jurisdiction within or outside the United States by suit on the judgment,
a certified copy of such judgment being conclusive evidence of the fact and
amount of such judgment.  Each party hereto agrees that personal service of
process may be effected by any of the means specified in Section 10(b),
addressed to such party.  The foregoing shall not limit the rights of any party
to serve process in any other manner permitted by law.
 
(j)  In addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, Lambda will be entitled to
specific performance under this Agreement.  The parties agree that monetary
damages may not be adequate compensation for any loss incurred by reason of any
breach by the Company or any Covered Holder of its respective obligations
contained in this Agreement and hereby agree to waive and not to assert in any
action for specific performance of any such obligation the defense that a remedy
at law would be adequate.
 
(k)  In the event of any litigation or other proceeding concerning this
Agreement or the transactions contemplated hereby, including any such litigation
or proceeding with respect to the enforcement of this Agreement against any
defaulting party, the prevailing party in such litigation or proceeding shall be
entitled to reimbursement from the party opposing such prevailing party for all
attorneys’ fees and costs incurred by such prevailing party in such litigation
or proceeding
 
[Signature page follows immediately]
 
 

 

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IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights
Agreement on the date first written abobe.
 
 
                                                                           
NEPHROS, INC.
 
 
                                            By:/s/ Norman J.
Barta                               
                                              Name:  Norman J. Barta
                                              Title: President and Chief
Executive Officer
 

 

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                                            LAMBDA INVESTORS LLC

                                            By:/s/ Arthur
Amron                           
                                               Name: Arthur Amron
                                               Title: Vice President
 

 

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                                            Purchaser:GPC 76, LLC
                                            By: SouthpawAssetManagementLP

                                            By:/s/ Kevin
Wyman                        
                                               Name: Kevin Wyman
                                               Title: Investment Manager

 

 

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                                                    Purchaser: Lewis P.
Schneider

                                                    By: /s/ Lewis P.
Schneider                     
                                                       Name: Lewis P. Schneider
                                                       Title:
 
 

 
 

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                                                        Purchaser: Enso Global
Equities Partnership LP

                                                        By: /s/ Joshua A.
Fink                 
                                                           Name: Joshua A. Fink
                                                           Title: Director of GP
 
 
 
 
 
 

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                                                      3V Capital Master Fund
Ltd.

                                                      By: 3V Capital Management
LLC

                                                      By:/s/ Scott A. Stagg    
                          
                                                        Name: Scott A. Stagg
                                    Title: Managing Member

 
                                                      Distressed/High Yield
Trading Opportunities, Ltd.

 
                                                      By: Eliteperformance Fund,
Ltd.
 
                                  By: /s/ Scott A.
Stagg                             
                                     Name: Scott A. Stagg
                                     Title: Portfolio Manager
 
                                                      Southpaw Credit
Opportunity Master Fund LP

                                                     By: Southpaw GP LLC

                                                     By: /s/ Kevin
Wyman                              
                                                        Name: Kevin Wyman
                                                        Title: Managing Member

                                                     Kudu Partners, L.P.
 
                                                     By: /s/ Brian P.
Lupien                            
                                                        Name: Brian P. Lupien
                                                        Title: Treasurer

                                                     LJHS Company

                                                     By: /s/ Jack A.
McLeod                          
                                                        Name: Jack A. McLeod
                                                        Title: Agent
 

 

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EXHIBIT A

JOINDER AGREEMENT
 
By execution of this Joinder Agreement, the undersigned agrees to become a party
to that certain Investor Rights Agreement, dated as of September ___, 2007,
among Nephros, Inc., and the other persons and entities that are parties thereto
(as the same may be amended, restated or otherwise modified from time to
time).  The undersigned shall have all the rights, and shall observe all the
obligations, applicable to a Covered Holder thereunder.
 
Name:  __________________________
 
Address
for                                                                                              
with copies
Notices:                                                                                         
to:
 

___________________________                                                                                     ___________________________

___________________________                                                                                     ___________________________

___________________________                                                                                     ___________________________

___________________________                                                                                     ___________________________