**Exhibit 10.1**

 

***Execution Copy***

 

 

 

STOCKHOLDERS AGREEMENT

 

 

among

 

 

Michaels Stores, Inc.

 

 

and

 

 

Certain Stockholders of Michaels Stores, Inc.

 

 

 

Dated as of October 31, 2006

 

 

 

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TABLE OF CONTENTS

 
|   |                        | **Page**                                                                       |
|--------|-----------------------------|--------------------------------------------------------------------------------|
|   |                        |                                                                           |
| 1.     | EFFECTIVENESS; DEFINITIONS. | 2                                                                              |
|   |                        |                                                                           |
|   | 1.1.                        | Effectiveness                                                                  | 2 |
|   |                        |                                                                           |   |
|   | 1.2.                        | Definitions                                                                    | 2 |
|   |                        |                                                                           |   |
| 2.     | TRANSFER RESTRICTIONS.      | 2                                                                              |
|   |                        |                                                                           |   |
|   | 2.1.                        | Certain Permitted Transfers.                                                   | 2 |
|   |                        |                                                                           |   |
|   | 2.2.                        | Right of First Refusal.                                                        | 3 |
|   |                        |                                                                           |   |
|   | 2.3.                        | Securities Laws Restrictions                                                   | 5 |
|   |                        |                                                                           |   |
|   | 2.4.                        | Impermissible Transfer                                                         | 5 |
|   |                        |                                                                           |   |
|   | 2.5.                        | Other Restrictions on Transfer                                                 | 5 |
|   |                        |                                                                           |   |
|   | 2.6.                        | Period                                                                         | 5 |
|   |                        |                                                                           |   |
| 3.     | RIGHT OF PARTICIPATION.     | 5                                                                              |
|   |                        |                                                                           |   |
|   | 3.1.                        | Right of Participation.                                                        | 5 |
|   |                        |                                                                           |   |
|   | 3.2.                        | Post-Issuance Notice                                                           | 8 |
|   |                        |                                                                           |   |
|   | 3.3.                        | Excluded Transactions                                                          | 8 |
|   |                        |                                                                           |   |
|   | 3.4.                        | Certain Provisions Applicable to Options, Warrants and Convertible  Securities | 9 |
|   |                        |                                                                           |   |
|   | 3.5.                        | Acquired Shares                                                                | 9 |
|   |                        |                                                                           |   |
|   | 3.6.                        | Period                                                                         | 9 |
|   |                        |                                                                           |   |
| 4.     | CALL OPTION.                | 9                                                                              |
|   |                        |                                                                           |   |
|   | 4.1.                        | Call Option Upon Termination                                                   | 9 |
|   |                        |                                                                           |   |
|   | 4.2.                        | Payments                                                                       | 10 |
|   |                        |                                                                           |   |
|   | 4.3.                        | Closing.                                                                       | 10 |
|   |                        |                                                                           |   |
|   | 4.4.                        | Investor Group Call Option                                                     | 11 |
|   |                        |                                                                           |   |
|   | 4.5.                        | Acknowledgment                                                                 | 11 |
|   |                        |                                                                           |   |
|   | 4.6.                        | Period                                                                         | 11 |
|   |                        |                                                                           |   |
| 5.     | INFORMATION RIGHTS.         | 11                                                                             |
|   |                        |                                                                           |   |
|   | 5.1.                        | Financial and Other Information                                                | 11 |
|   |                        |                                                                           |   |
|   | 5.2.                        | Other Information                                                              | 12 |
|   |                        |                                                                           |   |
|   | 5.3.                        | Confidentiality                                                                | 12 |

 

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|   | 5.4.                         | Period                          | 13     |
|--------|------------------------------|---------------------------------|--------|
|   |                         |                            |   |
| 6.     | REMEDIES.                    | 13                              |
|   |                         |                            |   |
|   | 6.1.                         | Generally                       | 13     |
|   |                         |                            |   |
|   | 6.2.                         | Deposit                         | 13     |
|   |                         |                            |   |
| 7.     | LEGENDS.                     | 13                              |
|   |                         |                            |   |
|   | 7.1.                         | Restrictive Legend              | 13     |
|   |                         |                            |   |
|   | 7.2.                         | 1933 Act Legends                | 14     |
|   |                         |                            |   |
|   | 7.3.                         | Stop Transfer Instruction       | 14     |
|   |                         |                            |   |
|   | 7.4.                         | Termination of 1933 Act Legend  | 14     |
|   |                         |                            |   |
| 8.     | AMENDMENT, TERMINATION, ETC. | 14                              |
|   |                         |                            |   |
|   | 8.1.                         | Oral Modifications              | 14     |
|   |                         |                            |   |
|   | 8.2.                         | Written Modifications           | 14     |
|   |                         |                            |   |
|   | 8.3.                         | Effect of Termination           | 15     |
|   |                         |                            |   |
| 9.     | DEFINITIONS                  | 15                              |
|   |                         |                            |   |
|   | 9.1.                         | Certain Matters of Construction | 15     |
|   |                         |                            |   |
|   | 9.2.                         | Definitions                     | 15     |
|   |                         |                            |   |
| 10.    | MISCELLANEOUS.               | 20                              |
|   |                         |                            |   |
|   | 10.1.                        | Authority:  Effect         | 20     |
|   |                         |                            |   |
|   | 10.2.                        | Notices                         | 20     |
|   |                         |                            |   |
|   | 10.3.                        | Merger; Binding Effect, Etc     | 22     |
|   |                         |                            |   |
|   | 10.4.                        | Descriptive Heading             | 23     |
|   |                         |                            |   |
|   | 10.5.                        | Counterparts                    | 23     |
|   |                         |                            |   |
|   | 10.6.                        | Severability                    | 23     |
|   |                         |                            |   |
|   | 10.7.                        | No Recourse                     | 23     |
|   |                         |                            |   |
| 11.    | GOVERNING LAW.               | 23                              |
|   |                         |                            |   |
|   | 11.1.                        | Governing Law                   | 23     |
|   |                         |                            |   |
|   | 11.2.                        | Consent to Jurisdiction         | 23     |
|   |                         |                            |   |
|   | 11.3.                        | WAIVER OF JURY TRIAL            | 24     |
|   |                         |                            |   |
|   | 11.4.                        | Exercise of Rights and Remedies | 24     |

 

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**STOCKHOLDERS AGREEMENT**

 

This StockholdersAgreement (the “Agreement”) is made as of October 31, 2006 by and among:

 

(i)            Michaels Stores, Inc. (the “Company”);

 

(ii)           Michaels Holdings LLC (the “LLC”),Highfields Capital I LP, Highfields Capital II LP, and Highfields Capital IIILP (collectively, the “Highfields Funds”), 4390075 Canada Inc. and anyother Person executing this Agreement and listed as an “Investor” on thesignature pages hereto and such other Persons who from time to time becomeparty hereto by executing a counterpart signature page hereof and are designatedby the Board as “Investors” (collectively with their Permitted Transferees, the“Investors”);

 

(iii)          such other Persons who from time to timebecome party hereto by executing a counterpart signature page hereof (or anoption award, joinder agreement or other agreement that binds such Persons tothis Agreement) and are designated by the Board as “Managers” (collectively,the “Managers”); and

 

(iv)          such other Persons, if any, that from time totime become party hereto as Permitted Transferees of Shares pursuant to Section2.2 (together with the Investors and the Managers, the “Stockholders”)in accordance with the terms hereof.

 

**RECITALS**

 

1.             Onor about the date hereof, the Company is consummating a leveragedrecapitalization transaction on the terms and subject to the conditions of anAgreement and Plan of Merger, dated as of June 30, 2006 (as amended, the “MergerAgreement”), among the Company, Bain Paste Mergerco, Inc., a Delawarecorporation, Blackstone Paste Mergerco, Inc., a Delaware corporation, BainPaste Finco, LLC, a Delaware limited liability company, and Blackstone PasteFinco, LLC, a Delaware limited liability company.

 

2.             Uponthe closing of the transactions contemplated by the Merger Agreement, theCommon Stock (as defined below) of the Company will be held as set forth on ScheduleI hereto.

 

3.             Inconnection with the foregoing, the Company and the Investors are entering intoa Registration Rights Agreement dated on or about the date hereof (the “RegistrationRights Agreement”).

 

4.             Theparties believe that it is in the best interests of the Company and theStockholders to set forth their agreements on certain matters.

 

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**AGREEMENT**

 

Therefore, the partieshereto hereby agree as follows:

 

**1.**             EFFECTIVENESS;DEFINITIONS.

 

1.1.       Effectiveness.  This Agreement shall become effective on theClosing Date (as defined in the Merger Agreement)(referred to herein as the “Closing”).

 

1.2.       Definitions.  Certain terms are used in this Agreement asspecifically defined herein.  Thesedefinitions are set forth or referred to in Section 9 hereof.

 

**2.**             TRANSFERRESTRICTIONS.

 

No holder of Shares mayTransfer such Shares to any other Person at any time except as provided in thisSection 2.

 

2.1.       Certain PermittedTransfers.

 

2.1.1.       Intra-Investor Group Transfers.  Any holder of Investor Shares may Transfer anyor all of such Shares to an Affiliate or Affiliated Fund of such holder.

 

2.1.2.       Estate Planning.  Subject to the provisions of Section 4, anyholder of Shares who is a natural Person may Transfer any or all of such Shares(i) by gift to, or for the benefit of, any Member or Members of the ImmediateFamily of such holder or (ii) by Transfer to a trust, private foundation orentity formed for estate planning purposes for the benefit of such holderand/or any Member or Members of the Immediate Family of such holder so long assuch holder serves as trustee for such trust or in an equivalent capacity withrespect to any such private foundation or other entity and provided thatthe trust instrument or other documents governing such trust, privatefoundation or other entity provides that such holder, as trustee (orequivalent), shall retain sole and exclusive control over the voting anddisposition of such Shares until the termination of this Agreement.

 

2.1.3.       Upon Death.  Subject to the provisions of Section 4, ifapplicable, upon the death of any holder of Shares who is a natural Person,such Shares may be distributed by the will or other instrument taking effect atdeath of such holder or by applicable laws of descent and distribution to suchholder’s estate, executors, administrators, personal representatives, heirs,legatees or distributees, whether or not such recipients are Members of theImmediate Family of such holder.

 

2.1.4.       Company or Other Persons with Board Approval.  Any holder of Shares may Transfer any or allof such Shares (i) with the Board’s approval, to the Company or any subsidiaryof the Company or (ii) to such other Persons as the Board may approve.

 

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2.1.5.       Additional Permitted Transfers by Investors.  Any holder of Investor Shares may Transferany or all of such Shares to its partners, members or other holders of itsbeneficial interests in connection with the termination of such holder’s legalexistence, subject to compliance with Section 2 of the Registration RightsAgreement.  Any such Transfer may be madeno earlier than twelve months prior to the termination of such holder’s legalexistence.

 

No Transfer permittedunder the terms of this Section 2.1 shall be effective unless the transferee ofsuch Shares (each, a “Permitted Transferee”) has delivered to theCompany a written acknowledgment and agreement in form and substance reasonablysatisfactory to the Company that such Shares to be received by such PermittedTransferee will remain Investor Shares or Management Shares, as the case maybe, and will be subject to all of the provisions of this Agreement and thatsuch Permitted Transferee will be bound by, and will be a party to, this Agreementas the holder of Investor Shares or Management Shares, as the case may be,hereunder; provided, however, that (a) any Shares that areTransferred to any director, officer or employee of, or consultant or adviserto, the Company or any of its subsidiaries will thereafter become ManagementShares hereunder, and (b) any Shares that are Transferred to any Investor willthereafter become Investor Shares hereunder; and provided further thatno Transfer by any holder of Shares to a Permitted Transferee will relieve suchholder of any of its obligations hereunder. Notwithstanding anything to the contrary herein or otherwise, the Boardwill have no obligation to approve any Transfer to any Person pursuant toSection 2.1.4.

 

2.2.       Right of First Refusal.

** **

2.2.1.       Right of First Refusal.  In addition to Transfers permitted underSection 2.1, each holder of Shares other than holders of Management Shares mayTransfer Shares to any Prospective Transferee in compliance with this Section2.2.

 

2.2.2.       Notice. Any holder of Shares other than holders of Management Shares that has abona fide, binding, written offer to purchase all or any portion of suchShares, shall first deliver to the Company a written notice (the “ROFR OfferNotice”) at least 60 days prior to such proposed Transfer.  The ROFR Offer Notice shall include:

 

(a)           theprincipal terms and conditions of the proposed Transfer, including (i) thenames and addresses of the Prospective Transferees, (ii) the number and classof the Shares to be Transferred to each such Prospective Transferee, (iii) thedate of the proposed Transfer, (iv) the proposed purchase price, (v) any othermaterial terms of the proposed Transfer and (vi) a copy of such bona fide,binding, written offer from the Prospective Transferees; and

 

(b)           anirrevocable offer (a “ROFR Option”) to Sell all such Shares to theCompany or its designee for a purchase price equal to or less than the pricespecified in the ROFR Offer Notice for such Shares and otherwise on terms thatare the same or more favorable to the Company than the terms that would applyto such proposed Sale to the Prospective Transferees.

 

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2.2.3.       Acceptance.  Any ROFR Option may be exercised by deliveryof written notice of acceptance (the “ROFR Acceptance Notice”) to theofferor within 60 days after delivery of the related ROFR Offer Notice.  The ROFR Acceptance Notice shall state thatthe Company or its designee has elected to exercise the ROFR Option.  The ROFR Option will be allocated among theCompany and its designees in such proportion as the Company may, in its solediscretion, determine.

 

2.2.4.       Failure to Exercise ROFR.  If the Company or its designee(s) do notdeliver a ROFR Acceptance Notice as provided in Section 2.2.3, then they shallbe deemed to have forfeited any right to purchase the subject Shares hereunder,and the holder of such Shares shall be free to sell such Shares to theProspective Transferee upon the terms set forth in the ROFR Offer Notice withinthe 120 day period following the delivery of the ROFR Offer Notice.

 

2.2.5.       Closing. The closing of any purchase and sale of Shares pursuant to the exerciseof any ROFR Option shall take place as soon as reasonably practicable, and inany event not later than 45 days after delivery of the ROFR Acceptance Notice(provided, that such time shall be extended as necessary to comply withapplicable legal requirements) at the principal office of the Company, or atsuch other time and location as the parties to such purchase may mutuallydetermine.  At the closing of anypurchase and sale of Shares following the exercise of any ROFR Option, theholders of Shares to be sold will deliver to the Company (or to itsdesignee(s), if applicable) a certificate or certificates representing theShares to be purchased duly endorsed, or with stock (or equivalent) powers dulyendorsed, for transfer with signature guaranteed, free and clear of any AdverseClaim, with any necessary stock (or equivalent) transfer tax stamps affixed,together with such certifications, representations and warranties as theCompany may reasonably request regarding matters such as that:  (a) such holder has full right, title andinterest in and to such Shares; (b) such holder has all necessary power andauthority and has taken all necessary action to sell such Shares ascontemplated; and (c) there is no Adverse Claim with respect to such Shares,and the Company (or its designee(s), if applicable) will pay to such holder bycertified or bank check or wire transfer of immediately available federal fundsthe purchase price of the Shares being purchased by it.  If the purchase price includes considerationother than cash, the cash equivalent value of the non-cash consideration willbe determined by the Board in good faith.

 

2.2.6.       Acknowledgment.  Each holder of Shares acknowledges and agreesthat, without limiting such holder’s rights under Section 5, neither theCompany nor any of its designee(s) (nor any other Person directly or indirectlyaffiliated with the Company or its designees, whether as a significantstockholder, director, officer, manager, employee, agent or otherwise) shallhave any duty or obligation to affirmatively disclose to such sellingStockholders, and they shall not have any right to be advised of, any materialinformation regarding the Company or otherwise at any time prior to or upon theexercise of any ROFR Option or any purchase of the Shares in accordance withthe terms of this Section 2.2.

 

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2.2.7.       Joinder to this Agreement.  No Transfer of Shares permitted under theterms of this Section 2.2 shall be effective unless, and it shall be acondition to any such Transfer of any Shares that, the transferee of suchShares has delivered to the Company a written acknowledgment and agreement inform and substance reasonably satisfactory to the Company to the effect thatthe transferee will be bound by the terms and conditions of this Agreement tothe same extent as the holder Transferring such Shares is bound at the time ofsuch Transfer.

 

2.3.       Securities LawsRestrictions.  No holder of Sharesmay Transfer such Shares to any other Person unless such holder first takes allreasonable and customary steps, to the reasonable satisfaction of the Company(subject to reasonable cooperation from the Company to facilitate such sale,but without necessity of registering Shares under applicable securities laws),to ensure that such Transfer (a) would not violate applicable securities lawsand (b) would not cause the Company to be required to register a class ofequity securities pursuant to Section 12(g) of the Exchange Act or the rulesand regulations adopted thereunder.

 

2.4.       Impermissible Transfer.  Any attempted Transfer of Shares notpermitted under the terms of this Section 2 shall be null and void, and theCompany shall not in any way give effect to any such impermissible Transfer.

 

2.5.       Other Restrictions onTransfer.  The restrictions onTransfer contained in this Agreement are in addition to any other restrictionson Transfer to which a Stockholder may be subject, including any restrictionson Transfer contained in a restricted stock agreement, stock option agreementor stock subscription agreement.

 

2.6.       Period.  Each of the foregoing provisions of thisSection 2 shall expire upon the earlier of (a) the consummation of a Change ofControl or (b) the effectiveness of the Company’s registration statement inconnection with the Initial Public Offering.

 

**3.**             RIGHT OFPARTICIPATION.

 

Subject to Section 3.3,the Company shall not, and shall not permit any direct or indirect subsidiaryof the Company (the Company and each such subsidiary, an “Issuer”) to,issue or sell any shares of any of its capital stock or any securitiesconvertible into or exchangeable for any shares of its capital stock, issue orgrant any options or warrants for the purchase of, or enter into any agreementsproviding for the issuance (contingent or otherwise) of, any of its capitalstock or any stock or securities convertible into or exchangeable for any sharesof its capital stock, in each case, to any Investor (including any holder ofmore than 10% of the interests in the LLC) or an Affiliate of any Investor(each an “Issuance” of “Subject Securities”), except incompliance with the provisions of Section 3.1 or Section 3.2.

 

3.1.       Right of Participation.

 

3.1.1.       Offer. Not fewer than 20 business days prior to the consummation of anIssuance, a notice (the “Participation Notice”) shall be furnished bythe Issuer to each holder of Investor Shares and Management ParticipationShares (the “Participation Offerees”). The Participation Notice shall include:

 

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(a)           theprincipal terms and conditions of the proposed Issuance, including (i) theamount, kind and terms of the Subject Securities to be included in theIssuance, (ii) the number of Equivalent Shares represented by such SubjectSecurities (if applicable), (iii) the percentage of the total Fair Market Valueof Equivalent Shares outstanding as of immediately prior to giving effect tosuch Issuance which the Fair Market Value of Equivalent Shares held by suchParticipation Offeree constitutes (excluding for such purposes UnvestedManagement Shares, the “Participation Portion”), (iv) the price(including if applicable, the Price Per Equivalent Share) per unit of theSubject Securities, including a description of any pricing formulae and of anynon-cash consideration sufficiently detailed to permit valuation thereof, (v)the proposed manner of disposition, (vi) the name and address of the Person towhom the Subject Securities will be issued (the “Prospective Subscriber”)and (vii) if known, the proposed Issuance date; and

 

(b)           anoffer by the Issuer to issue, at the option of each Participation Offeree, tosuch Participation Offeree such portion of the Subject Securities to beincluded in the Issuance as may be requested by such Participation Offeree (notto exceed the Participation Portion of the total amount of Subject Securitiesto be included in the Issuance), on the same terms and conditions, with respectto each unit of Subject Securities issued to the Participation Offerees, aseach of the Prospective Subscribers shall be issued units of SubjectSecurities.

 

3.1.2.       Exercise.

 

(a)           General.  Each Participation Offeree desiring to acceptthe offer contained in the Participation Notice shall accept such offer byfurnishing a written commitment to the Issuer within 15 business days after theeffectiveness of the Participation Notice specifying the amount of Subject Securities(not in any event to exceed the Participation Portion of the total amount ofSubject Securities to be included in the Issuance) which such ParticipationOfferee desires to be issued to it (each a “Participating Buyer”).  Each Participation Offeree who does not soaccept such offer in compliance with the above requirements, including theapplicable time periods, shall be deemed to have waived all rights toparticipate in such Issuance, and the Issuer shall thereafter be free to issueSubject Securities in such Issuance to the Prospective Subscriber and anyParticipating Buyers, at a price no less than the minimum price set forth inthe Participation Notice and on other principal terms not substantially morefavorable to the Prospective Subscriber than those set forth in theParticipation Notice, without any further obligation to such non-acceptingParticipation Offerees pursuant to this Section 3.  If, prior to consummation, the terms of suchproposed Issuance shall change with the result that the price shall be lessthan the minimum price set forth in the Participation Notice or the otherprincipal terms shall be substantially more favorable to the ProspectiveSubscriber than those set forth in the Participation Notice, it shall benecessary for a separate Participation Notice to be furnished, and the termsand provisions of this Section 3.1 separately complied with, in order toconsummate such Issuance pursuant to this Section 3.1.

 

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(b)           IrrevocableAcceptance.  The acceptance of eachParticipating Buyer shall be irrevocable except as hereinafter provided, andeach such Participating Buyer shall be bound and obligated to acquire in theIssuance on the same terms and conditions, with respect to each unit of SubjectSecurities issued, as the Prospective Subscriber, such amount of SubjectSecurities as such Participating Buyer shall have specified in suchParticipating Buyer’s written commitment.

 

(c)           TimeLimitation.  If at the end of the180th day following the date of the effectiveness of the Participation Noticethe Issuer has not completed the Issuance, each Participating Buyer shall bereleased from all obligations under the written commitment, the ParticipationNotice shall be null and void, and it shall be necessary for a separateParticipation Notice to be furnished, and the terms and provisions of thisSection 3.1 separately complied with, in order to consummate such Issuancepursuant to this Section 3.1.

 

3.1.3.       Other Securities.  The Issuer may condition the participation ofthe Participation Offerees in an Issuance upon the purchase by suchParticipation Offerees of any securities (including, if applicable, debtsecurities) other than Subject Securities (“Other Securities”) if and tothe extent that Prospective Subscribers’ participation in such Issuance is soconditioned.  In such case, eachParticipating Buyer shall acquire in the Issuance, together with the SubjectSecurities to be acquired by it, Other Securities in the same proportion to theSubject Securities to be acquired by it as the proportion of Other Securitiesto Subject Securities being acquired by the Prospective Subscriber in theIssuance, on the same terms and conditions, as to each unit of SubjectSecurities and Other Securities issued to the Participating Buyers, as theProspective Subscriber shall be issued units of Subject Securities and OtherSecurities.

 

3.1.4.       Certain Legal Requirements.  In the event that the participation in anyIssuance by a holder of Shares as a Participating Buyer would require underapplicable law (a) the registration or qualification of such securities or (b)the provision to any participant in the Issuance of any information (other thaninformation required to be provided pursuant to Section 5) regarding theCompany, its subsidiaries, such securities or the Issuer that is not otherwiserequired to be provided for the Issuance, such holder of Shares shall not havethe right to participate in the Issuance. Without limiting the generality of the foregoing, it is understood andagreed that neither the Company nor the Issuer shall be under any obligation toeffect a registration of such securities under the Securities Act or similarstate statutes.

 

3.1.5.       Further Assurances.  Each Participating Buyer will take or causeto be taken all such reasonable actions as may be necessary or reasonablydesirable in order to consummate each Issuance pursuant to this Section 3.1 andany related transactions expeditiously, including executing, acknowledging anddelivering consents, assignments, waivers and other documents or instruments;filing applications, reports, returns, filings and other documents orinstruments with governmental authorities; and otherwise cooperating with theCompany, the Issuer and the Prospective Subscriber.  Without limiting the generality of theforegoing, each such Participating Buyer agrees

 

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toexecute and deliver such subscription and other agreements specified by theIssuer to which the Prospective Subscriber will be party.

 

3.1.6.       Closing. The closing of an Issuance pursuant to Section 3.1 shall take place atsuch time and place as the Issuer shall specify by notice to each ParticipatingBuyer.  At the Closing of any Issuanceunder this Section 3.1.6 each Participating Buyer shall be delivered the notes,certificates or other instruments evidencing the Subject Securities (and, ifapplicable, Other Securities) to be issued to such Participating Buyer,registered in the name of such Participating Buyer or its designated nominee,free and clear of any Adverse Claims, with any transfer tax stamps affixed,against delivery by such Participating Buyer of the applicable consideration.

 

3.2.       Post-Issuance Notice.  Notwithstanding the notice requirements ofSections 3.1.1 and 3.1.2, as long as such action would not materiallydisadvantage any Person who would have been a Participation Offeree, the Issuermay proceed with any Issuance prior to having complied with the provisions ofSection 3.1; provided that the Issuer shall:

 

(a)           provideto each holder of Shares who would have been a Participation Offeree inconnection with such Issuance (i) with prompt notice of such Issuance and (ii)the Participation Notice described in Section 3.1.1 in which the actual priceper unit of Subject Securities (and, if applicable, actual Price Per EquivalentShare) shall be set forth;

 

(b)           offerto issue to such holder of Shares such number of securities of the type issuedin the Issuance as may be requested by such holder of Shares (not to exceed theParticipation Portion that such holder of Shares would have been entitled topursuant to Section 3.1 multiplied by the sum of (i) the number of SubjectSecurities included in the Issuance and (ii) the aggregate number of Sharesissued pursuant to this Section 3.2 with respect to such Issuance) on thesame economic terms and conditions with respect to such securities as thesubscribers in the Issuance received; and

 

(c)           keepsuch offer open for a period of 10 business days, during which period, eachsuch holder may accept such offer by sending a written acceptance to the Issuercommitting to purchase an amount of such securities (not in any event to exceedthe Participation Portion that such holder would have been entitled to pursuantto Section 3.1 multiplied by the sum of (i) the number of SubjectSecurities included in such Issuance and (ii) the aggregate number ofShares issued pursuant to this Section 3.2 with respect to such Issuance).

 

3.3.       Excluded Transactions.  The provisions of this Section 3 shall notapply to Issuances by the Company or any subsidiary of the Company as follows:

 

(a)           AnyIssuance of Common Stock upon the exercise or conversion of any Common Stock,Options, Warrants or Convertible Securities outstanding or approved on the datehereof or Issued after the date hereof in compliance with the provisions ofthis Section 3;

 

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(b)           AnyIssuance of Common Stock pursuant to the Initial Public Offering;

 

(c)           TheIssuance of Shares in connection with the Closing; or

 

(d)           AnyIssuance of shares of Common Stock in connection with any stock split, stockdividend or recapitalization approved by the Board.

 

3.4.       Certain ProvisionsApplicable to Options, Warrants and Convertible Securities.  In the event that the Issuance of SubjectSecurities shall result in any increase in the number of shares of Common Stockissuable upon exercise, conversion or exchange of any Options, Warrants orConvertible Securities, the number of shares (or Equivalent Shares, ifapplicable) of Subject Securities (and Other Securities, if applicable) whichthe holders of such Options, Warrants or Convertible Securities, as the casemay be, shall be entitled to purchase pursuant to Section 3.1, if any, shall bereduced, share for share, by the amount of any such increase.

 

3.5.       Acquired Shares.  Any Subject Securities constituting CommonStock acquired by any holder of Shares pursuant to this Section 3 shall bedeemed for all purposes hereof to be Investor Shares or Management Shareshereunder of like kind with the Shares then held by the acquiring holderhereunder.

 

3.6.       Period.  Each of the foregoing provisions of thisSection 3 shall expire on the earlier of (a) the consummation of a Changeof Control or (b) the closing of the Initial Public Offering.

 

**4.**             CALL OPTION.

 

4.1.       Call Option UponTermination.  Except as the Companymay otherwise agree in writing with any Manager with respect to Shares held bysuch Manager’s Management Call Group, upon any termination of the employment bythe Company and its subsidiaries of any Manager (by the Company, such Manageror otherwise), the Company shall have the right to purchase all of theManagement Shares held by such Manager or originally issued to such Manager butheld by one or more Permitted Transferees (collectively, the “ManagementCall Group”) on the following terms (the “Management Call Option”):

 

4.1.1.       Purchased Management Shares.  The Company may purchase all of the PurchasedManagement Shares held by such Management Call Group at a per share price equalto the Fair Market Value of such Shares on the Management Call Notice Date.

 

4.1.2.       Other Shares.  For all Management Shares which are notPurchased Management Shares, the following terms shall apply:

 

(a)           Terminationfor Cause. If such termination is the result of termination of such Manager’semployment by the Company or its subsidiaries for Cause, then the Company maypurchase all or any portion of the Shares held by such Management Call Group ata per Share price equal to the lesser of the

 

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Cost or theFair Market Value of such Shares on the Management Call Notice Date.

 

(b)           Deathor Disability.  If such terminationis the result of the death or Disability of such Manager, then the Company maypurchase all or any portion of the Shares held by such Management CallGroup at a per Share price equal to the Fair Market Value of such Shares on theManagement Call Notice Date.

 

(c)           Terminationby Manager.  If such termination isthe result of termination by a Manager (but not by the Company) other than byreason of the Manager’s death or Disability and other than in circumstanceswhere the Company or its subsidiaries would have grounds to terminate suchManager for Cause, then the Company may purchase all or any portion of theShares held by such Management Call Group at a per Share price equal to theFair Market Value of such Shares on the Management Call Notice Date.

 

(d)           Termination bythe Company Not for Cause.  If suchtermination is the result of termination by the Company or itssubsidiaries and such termination is not for Cause, then the Company maypurchase all or any portion of the Shares held by such Management CallGroup at a per Share price equal to the Fair Market Value of such Shares on theManagement Call Notice Date.

** **

4.1.3.       Notices. Any Management Call Option maybe exercised by delivery of written notice thereof (the “Management CallNotice”) to all members of the applicable Management Call Group from whomthe Company has elected to purchase Shares no later than the Management CallNotice Date.  The Management Call Noticeshall state that the Company has elected to exercise the Management Call Optionand the price or date for determining the price of such shares.  For purposes of this Section 4, the “ManagementCall Notice Date” shall mean the date of delivery of a Management CallNotice, which, if delivered, shall be no later than 240 days after (but notbefore the date that is one day after the six-month anniversary of) the laterof (i) the date of termination of employment or (ii) the exercise of any Optionoriginally granted to such Manager or the date upon which any Unvested Sharesgranted to such Manager become Vested Shares.

 

4.1.4.       Vesting.  The rights of the Company to purchaseManagement Shares under this Section 4 are in addition to, and do not modify,any vesting requirements that may be included in the terms of any ManagementShares, and any Shares which remain subject to restrictions upon termination bya Manager shall be automatically forfeited to the Company, if applicable, inaccordance with their terms.

 

4.2.       Payments.  The Company shall make any payment requiredto be made by the Company to the Management Call Group under any provision ofthis Section 4 in cash.

 

4.3.       Closing.

 

4.3.1.       The closing of any purchase and sale ofManagement Shares pursuant to this Section 4 shall take place as soon asreasonably practicable, and in any event not

 

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laterthan 30 days after the Management Call Notice Date (provided that suchtime shall be extended as necessary to comply with applicable legalrequirements) at the principal office of the Company, or at such other time andlocation as the parties to such purchase may mutually determine.

 

4.3.2.       At the closing of any purchase and sale ofManagement Shares following the exercise of any Management Call Option, theholders of Shares to be sold shall deliver to the Company a certificate orcertificates representing the Shares to be purchased by the Company dulyendorsed, or with stock (or equivalent) powers duly endorsed, for transfer withsignature guaranteed, free and clear of any Adverse Claim, with any necessarystock (or equivalent) transfer tax stamps affixed, and the Company shall pay tosuch holder by certified or bank check or wire transfer of immediatelyavailable federal funds the purchase price of the Shares being purchased by theCompany.  The delivery of a certificateor certificates for Shares by any Person selling Shares pursuant to anyManagement Call Option shall be deemed a representation and warranty by suchPerson that:  (a) such Person has fullright, title and interest in and to such Shares; (b) such Person has allnecessary power and authority and has taken all necessary action to sell suchShares as contemplated and (c) such Shares are free and clear of any and allAdverse Claims.

 

4.4.       Investor Group CallOption.  If the Company shall electnot to purchase pursuant to this Section all Management Shares that are held bya Management Call Group, the Company may, in its discretion, allocate all ofits rights to purchase such Shares under this Section to one or more Investorsin the discretion of the Company, provided however that any purchase of Sharesby an Investor shall be for cash and shall be made within the time periods setforth for the Company’s performance under this Section.

 

4.5.       Acknowledgment.  Each holder of Management Shares acknowledgesand agrees that neither the Company nor any Person directly or indirectlyaffiliated with the Company (in each case whether as a director, officer,manager, employee, agent or otherwise) shall have any duty or obligation toaffirmatively disclose to holders of Management Shares, and they shall not haveany right to be advised of, any material information regarding the Company orotherwise at any time prior to, upon, or in connection with any termination ofhis or her employment by the Company or its subsidiaries upon the exercise ofany Management Call Option or any purchase of the Shares in accordance with theterms hereof.

 

4.6.       Period.  The foregoing provisions of this Section 4shall expire upon the earlier of (a) the consummation of a Change of Controland (b) the closing of the Initial Public Offering.

 

**5.**             INFORMATION RIGHTS.

 

5.1.       Financial and OtherInformation.  The Company shallprovide or cause to be provided, to any Stockholder that, together with itsAffiliates or Affiliated Funds, initially holds more than 5% of the outstandingCommon Stock as of the Closing (a “Five Percent Stockholder”), thefollowing information:

 

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5.1.1.       Annual Reports.  As soon as available, and in any event within90 days after the end of each fiscal year, the consolidated balance sheet ofthe Company and its subsidiaries as at the end of such fiscal year and theconsolidated statements of income, cash flows and stockholders’ equity for suchfiscal year of the Company and its subsidiaries, accompanied by the auditreport of independent certified public accountants of recognized nationalstanding with respect thereto.

 

5.1.2.       Quarterly Reports.  As soon as available, and in any event within45 days after the end of each of the first three fiscal quarters of each fiscalyear, the unaudited consolidated balance sheet of the Company and itssubsidiaries as at the end of such fiscal quarter and the consolidatedstatements of income, cash flows and stockholder’s equity for such fiscalquarter and the portion of the fiscal year then ended with such fiscal quarterof the Company and its subsidiaries.  

 

5.1.3.       Monthly Reports.  As soon as available, and in any event within30 days after the end of each fiscal month, other than the last month of anyfiscal quarter or of the fiscal year, the unaudited consolidated balance sheetof the Company and its subsidiaries as at the end of such fiscal month and theconsolidated statements of income, cash flows and stockholder’s equity for suchfiscal month and the portion of the fiscal year then ended with such fiscalmonth of the Company and its subsidiaries.

 

If, at any time, theCompany is required by the rules and regulations of the Commission to fileannual and quarterly reports electronically with the Commission through the Commission’sElectronic Data Gathering, Analysis and Retrieval System (or any successorsystem), or is voluntarily filing such reports, then the obligations of theCompany under Sections 5.1.1 and 5.1.2 shall be satisfied by the making of suchfilings.

 

5.2.       Other Information.  The Company will also furnish to each FivePercent Stockholder with reasonable promptness, such other information and datawith respect to the Company as such Stockholder may from time to timereasonably request, which information will not be used for any purpose by suchFive Percent Stockholder other than to evaluate his, her or its investment inthe Company and shall be subject to the confidentiality provisions of Section5.3 below.

 

5.3.       Confidentiality.  Each Five Percent Stockholder covenants andagrees that if such Five Percent Stockholder receives information under thisSection 5, such Five Percent Stockholder shall keep confidential, and cause itsofficers, directors, employees, agents and representatives, to keep confidential,all information, materials and documents concerning the business of the Companyand its subsidiaries furnished by, or on behalf of, the Company or itssubsidiaries or otherwise acquired by such Five Percent Stockholder (the “ConfidentialInformation”).  Notwithstanding theforegoing, a Five Percent Stockholder shall be permitted to discloseConfidential Information:  (a) to itsofficers, managers, directors, employees, agents and representatives andAffiliates provided that such Confidential Information shall remainconfidential; (b) to the extent required by applicable laws and regulations orby any subpoena or similar legal process, or to the extent requested by anygovernmental agency or authority; (c) to the extent such ConfidentialInformation (i) becomes publicly available other than as a result of a breachof this Agreement, (ii) becomes available to the Five Percent Stockholder on anon-

 

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confidentialbasis from a source other than the Company or its subsidiaries or (iii) wasavailable to the Five Percent Stockholder on a non-confidential basis prior toits disclosure to the Five Percent Stockholder by the Company or itssubsidiaries; or (d) to the extent the Company or its subsidiaries shall have consentedto such disclosure in writing.

 

5.4.       Period.  Each of the foregoing provisions of thisSection 5 shall expire on the closing of the Initial Public Offering.

 

**6.**             REMEDIES.

 

6.1.       Generally.  The Company and each holder of Shares shallhave all remedies available at law, in equity or otherwise in the event of anybreach or violation of this Agreement or any default hereunder by the Companyor any holder of Shares.  The partiesacknowledge and agree that in the event of any breach of this Agreement, in additionto any other remedies which may be available, each of the parties hereto shallbe entitled to specific performance of the obligations of the other partieshereto and, in addition, to such other equitable remedies (including,preliminary or temporary relief) as may be appropriate in the circumstances.

 

6.2.       Deposit.  Without limiting the generality of Section6.1, if any holder of Shares fails to deliver to the purchaser thereof thecertificate or certificates evidencing Shares to be Sold pursuant to Section 4hereof, such purchaser may, at its option, in addition to all other remedies itmay have, deposit the purchase price for such Shares with any national bank ortrust company having combined capital, surplus and undivided profits in excessof One Hundred Million Dollars ($100,000,000) (the “Escrow Agent”) andthe Company shall cancel on its books the certificate or certificatesrepresenting such Shares and thereupon all of such holder’s rights in and tosuch Shares shall terminate.  Thereafter,upon delivery to such purchaser by such holder of the certificate orcertificates evidencing such Shares (duly endorsed, or with stock powers dulyendorsed, for transfer, with signature guaranteed, free and clear of anyAdverse Claims, and with any transfer tax stamps affixed), such purchaser shallinstruct the Escrow Agent to deliver the purchase price (without any interestfrom the date of the closing to the date of such delivery, any such interest toaccrue to such purchaser) to such holder.

 

**7.**             LEGENDS.

 

7.1.       Restrictive Legend.  Each certificate representing Shares shallhave the following legend endorsed conspicuously thereupon:

 

The sale,encumbrance or other disposition of the shares of stock represented by thiscertificate are subject to the provisions of a Stockholders Agreement and aRegistration Rights Agreement, in each case to which the issuer and certain ofits stockholders are party, a copy of which may be inspected at the principaloffice of the issuer or obtained from the issuer without charge.

 

Each certificaterepresenting Investor Shares shall also have the following legend endorsedconspicuously thereupon:

 

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The shares ofstock represented by this certificate were originally issued to, or issued withrespect to shares originally issued to, the following Investor:               .

 

Each certificaterepresenting Management Shares shall also have the following legend endorsedconspicuously thereupon:

 

The shares ofstock represented by this certificate were originally issued to, or issued withrespect to shares originally issued to, the following Manager:               .

 

Any person who acquiresShares which are not subject to any of the terms of this Agreement shall havethe right to have such legend (or the applicable portion thereof) removed fromcertificates representing such Shares.

 

7.2.       1933 Act Legends.  Each certificate representing Shares shallhave the following legend endorsed conspicuously thereupon:

 

The securities represented by this certificatewere issued in a private placement, without registration under the SecuritiesAct of 1933, as amended (the “Act”), and may not be sold, assigned, pledged orotherwise transferred in the absence of an effective registration under the Actcovering the transfer or an opinion of counsel, satisfactory to the issuer,that registration under the Act is not required.

 

7.3.       Stop TransferInstruction.  The Company willinstruct any transfer agent not to register the Transfer of any Shares untilthe conditions specified in the foregoing legends are satisfied.

 

7.4.       Termination of 1933 ActLegend.  The requirement imposed bySection 7.2 hereof shall cease and terminate as to any particular Shares (i)when, in the opinion of Ropes & Gray LLP, or other counsel reasonablyacceptable to the Company, such legend is no longer required in order to assurecompliance by the Company with the Securities Act or (ii) when such Shares havebeen effectively registered under the Securities Act or transferred pursuant toRule 144.  Wherever (x) such requirementshall cease and terminate as to any Shares or (y) such Shares shall betransferable under paragraph (k) of Rule 144, the holder thereof shall beentitled to receive from the Company, as the case may be, without expense, newcertificates not bearing the legend set forth in Section 7.2 hereof.

 

**8.**             AMENDMENT,TERMINATION, ETC.

 

8.1.       Oral Modifications.  This Agreement may not be orally amended,modified, extended or terminated, nor shall any oral waiver of any of its termsbe effective.

 

8.2.       Written Modifications.  This Agreement may be amended, modified,extended or terminated, and the provisions hereof may be waived, only by anagreement in writing signed by the Company and the Stockholders that hold amajority of the Shares held by all Stockholders;

 

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provided,however, that any amendment, modification, extension, termination orwaiver (an “Amendment”) shall also require the consent of anyStockholder who would be disproportionately and adversely affected thereby.

 

Each such Amendment shallbe binding upon each party hereto and each holder of Shares subjecthereto.  In addition, each party heretoand each holder of Shares subject hereto may waive any right hereunder by aninstrument in writing signed by such party or holder.

 

8.3.       Effect of Termination.  No termination under this Agreement shallrelieve any Person of liability for breach prior to termination.

 

**9.**             DEFINITIONS.  For purposesof this Agreement:

 

9.1.       Certain Matters ofConstruction.  In addition to thedefinitions referred to or set forth below in this Section 9:

 

(a)           Thewords “hereof’, “herein”, “hereunder” and words of similar import shall referto this Agreement as a whole and not to any particular Section or provision ofthis Agreement, and reference to a particular Section of this Agreement shallinclude all subsections thereof;

 

(b)           Theword “including” shall mean including, without limitation;

 

(c)           Definitionsshall be equally applicable to both nouns and verbs and the singular and pluralforms of the terms defined; and

 

(d)           Themasculine, feminine and neuter genders shall each include the other.

 

9.2.       Definitions.  The following terms shall have the followingmeanings:

 

“Adverse Claim”shall have the meaning set forth in Section 8-102 of the applicable UniformCommercial Code.

 

“Affiliate” shallmean, with respect to any specified Person, (i) any other Person which directlyor indirectly through one or more intermediaries controls, or is controlled by,or is under common control with, such specified Person (for the purposes ofthis definition, “control” (including, with correlative meanings, the terms “controlling,”“controlled by” and “under common control with”), as used with respect to anyPerson, means the possession, directly or indirectly, of the power to direct orcause the direction of the management or policies of such Person, whetherthrough the ownership of voting securities, by agreement or otherwise); and(ii) with respect to any natural Person, any Member of the Immediate Family ofsuch natural Person.

 

“Affiliated Fund”means with respect to any Investors, each corporation, trust, limited liabilitycompany, general or limited partnership or other entity under common controlwith that Investor (including any such entity with the same general partner orprincipal investment advisor as that Investor or with a general partner orprincipal investment advisor that is an Affiliate of the general partner orprincipal investment advisor of that Investor), and in the case of the LLC,Affiliated Fund shall include each member of the LLC.

 

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“Agreement” shallhave the meaning set forth in the Preamble.

 

“Amendment” shallhave the meaning set forth in Section 8.2.

 

“Board” shall meanthe board of directors of the Company.

 

“business day”shall mean any day that is not a Saturday, a Sunday or other day on which banksare required or authorized by law to be closed in the City of New York.

 

“Cause”, with respect to any Manager, shall mean the followingevents or conditions, as determined by the Board in its reasonablejudgment:  (i) the refusal orfailure to perform (other than by reason of disability), or material negligencein the performance of such Manager’s duties and responsibilities to the Companyor any of its Affiliates, or refusal or failure to follow or carry out anyreasonable direction of the Board, and the continuance of such refusal, failureor negligence for a period of 10 days after notice to such Manager; (ii) thematerial breach by such Manager of any provision of any material agreementbetween such employee and the Company or any of its Affiliates; (iii) fraud,embezzlement, theft or other dishonesty by such Manager with respect to theCompany or any of its Affiliates; (iv) the conviction of, or a plea of *nolo contendere* by, such Manager to any felony or any othercrime involving dishonesty or moral turpitude; and (v) any other conduct thatinvolves a breach of fiduciary obligation on the part of such Manager orotherwise could reasonably be expected to have a material adverse effect uponthe business, interests or reputation of the Company or any of its Affiliates.

 

“Change of Control”shall mean the occurrence of any of the following: (i) any consolidation ormerger of the Company with or into any other corporation or other Person, orany other corporate reorganization or transaction (including the acquisition ofcapital stock of the Company), whether or not the Company is a party thereto,in which the stockholders of the Company immediately prior to suchconsolidation, merger, reorganization or transaction, own capital stock either(A) representing directly, or indirectly through one or more entities, lessthan fifty percent (50%) of the economic interests in or voting power of theCompany or other surviving entity immediately after such consolidation, merger,reorganization or transaction or (B) that does not directly, or indirectlythrough one or more entities, have the power to elect a majority of the entireboard of directors of the Company or other surviving entity immediately aftersuch consolidation, merger, reorganization or transaction, (ii) any stock saleor other transaction or series of related transactions, whether or not theCompany is a party thereto, after giving effect to which in excess of fiftypercent (50%) of the Company’s voting power is owned directly, or indirectlythrough one or more entities, by any Person and its “affiliates” or “associates”(as such terms are defined in the rules adopted by the Commission under theExchange Act), other than the Investors and their respective Affiliated Funds,excluding, in any case referred to in clause (i) or (ii) the Initial PublicOffering or any bona fide primary or secondary public offering following theoccurrence of the Initial Public Offering; or (iii) a sale, lease or otherdisposition of all or substantially all of the assets of the Company.

 

“Closing” shallhave the meaning set forth in Section 1.1.

 

“Commission” shallmean the Securities and Exchange Commission.

 

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“Common Stock”shall mean the common stock, par value $0.10 per share, of the Company.

 

“Company” shallhave the meaning set forth in the Preamble.

 

“Confidential Information”shall have the meaning set forth in Section 5.3.

 

“ConvertibleSecurities” shall mean any evidence of indebtedness, shares of stock (otherthan Common Stock) or other securities (other than Options and Warrants) whichare directly or indirectly convertible into or exchangeable or exercisable forshares of Common Stock.

 

“Cost” shall meanwith respect to any Management Shares, the purchase price paid for suchManagement Shares by the original holder thereof less any distributionsreceived with respect to such Management Shares; provided, that the Costof (i) unvested shares of capital stock shall equal the purchase price paid forsuch shares, if any, and (ii) unvested options shall equal zero; and provided,further, that any consideration included in the purchase price for anyunvested Shares shall equal zero.

 

“Disability”, withrespect to any Manager, shall have the meaning ascribed to such term in anyemployment agreement, severance or other similar agreement between such Managerand the Company or any of its subsidiaries, or, if no such agreement exists orthe provisions of such agreements conflict, the disability of a Manager duringhis employment hereunder through any illness, injury, accident or condition ofeither a physical or psychological nature as a result of which he is unable toperform substantially all of his duties and responsibilities hereunder,notwithstanding the provision of any reasonable accommodation, for ninety (90)consecutive days during any period of three hundred and sixty-five (365)consecutive calendar days.

 

“Equivalent Shares”shall mean, at any date of determination, (i) as to any outstanding shares ofCommon Stock, such number of shares of Common Stock and (ii) as to anyoutstanding Options, Warrants or Convertible Securities which constituteShares, the maximum number of shares of Common Stock for which or into whichsuch Options, Warrants or Convertible Securities may at the time be exercised,converted or exchanged (or which will become exercisable, convertible or exchangeableon or prior to, or by reason of, the transaction or circumstance in connectionwith which the number of Equivalent Shares is to be determined).

 

“Escrow Agent”shall have the meaning set forth in Section 6.2.

 

“Exchange Act”shall mean the Securities Exchange Act of 1934, as in effect from time to time.

 

“Fair Market Value”shall mean, as of any date, as to any Share, the Board’s good faithdetermination of the fair value of such Share as of the applicable referencedate.

 

“Five PercentStockholder” shall have the meaning set forth in Section 5.1.

 

“Highfields Funds”shall have the meaning set forth in the Preamble.

 

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“Initial PublicOffering” shall mean the initial Public Offering registered on Form S-1 (orany successor form under the Securities Act) after the date hereof.

 

“Investors” shallhave the meaning set forth in the Preamble.

 

“Investor Shares”shall mean all Shares held by an Investor.

 

“Issuance” shallhave the meaning set forth in Section 3.

 

“Issuer” shallhave the meaning set forth in Section 3.

 

“LLC” shall havethe meaning set forth in the Preamble.

 

“Management Call Group”shall have the meaning set forth in Section 4.1.

 

“Management CallNotice” shall have the meaning set forth in Section 4.1.3.

 

“Management CallNotice Date” shall have the meaning set forth in Section 4.1.3.

 

“Management CallOption” shall have the meaning set forth in Section 4.1.

 

“ManagementParticipation Shares” means Purchased Management Shares and, without duplication,Vested Management Shares.

 

“Management Shares”shall mean all Shares held by a Manager. Any Management Shares that are Transferred by the holder thereof to suchholder’s Permitted Transferees shall remain Management Shares in the hands ofsuch Permitted Transferee.

 

“Managers” shallhave the meaning set forth in the Preamble.

 

“Members of the Immediate Family” means, withrespect to any individual, each spouse or child or other descendants of suchindividual, each trust created solely for the benefit of one or more of theaforementioned Persons and their spouses and each custodian or guardian of anyproperty of one or more of the aforementioned Persons in his or her capacity assuch custodian or guardian.

 

“Merger Agreement”shall have the meaning set forth in the Recitals.

 

“Options” shallmean any options to subscribe for, purchase or otherwise directly acquireCommon Stock from the Company, other than any such option held by the Companyor any right to purchase shares pursuant to this Agreement.

 

“Other Securities”shall have the meaning set forth in Section 3.1.3.

 

“Participating Buyer”shall have the meaning set forth in Section 3.1.2.

 

“Participation Notice”shall have the meaning set forth in Section 3.1.1.

 

“ParticipationOfferees” shall have the meaning set forth in Section 3.1.1.

 

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“Participation Portion”shall have the meaning set forth in Section 3.1.1.

 

“Permitted Transferee”shall have the meaning set forth in Section 2.1.

 

“Person” shallmean any individual, partnership, corporation, company, association, trust,joint venture, limited liability company, unincorporated organization, entityor division, or any government, governmental department or agency or politicalsubdivision thereof.

 

“Price Per EquivalentShare” means the Board’s good faith determination of the price perEquivalent Share of any Convertible Securities or Options which are the subjectof an issuance pursuant to Section 3 hereof.

 

“ProspectiveSubscriber” shall have the meaning set forth in Section 3.1.1.

 

“ProspectiveTransferee” shall mean any Person other than a competitor of the Company.

 

 “Public Offering” shall mean a publicoffering and sale of Common Stock for cash pursuant to an effectiveregistration statement under the Securities Act.

 

“Purchased ManagementShares” shall mean, with respect to any Manager or direct or indirectPermitted Transferee of a Manager, all of the Management Shares which wereeither (i) originally purchased from the Company by that Manager for cash,(ii) retained by that Manager in respect of Rollover Shares (as defined in theMerger Agreement) or (iii) retained by that Manager in respect of RolloverOptions (as defined in the Merger Agreement). Shares issued to Managers directly or indirectly pursuant to anincentive plan or scheme, including any restricted stock award (whether or notvested), Options and Shares issued upon exercise of Options (except thosespecified in clause (iii) above), are not Purchased Management Shares for purposesof this Agreement.

 

“Registration RightsAgreement” shall have the meaning set forth in the Recitals.

 

“ROFR AcceptanceNotice” shall have the meaning set forth in Section 2.2.3.

 

“ROFR Offer Notice”shall have the meaning set forth in Section 2.2.2.

 

“ROFR Option”shall have the meaning set forth in Section 2.2.2.

 

“Sale” shall meana Transfer for value and the terms “Sell” and “Sold” shall have correlativemeanings.

 

“Securities Act”shall mean the Securities Act of 1933, as in effect from time to time.

 

“Shares” shallmean (i) all shares of Common Stock held by a Stockholder, whenever issued,including all shares of Common Stock issued upon the exercise, conversion orexchange of any Options, Warrants or Convertible Securities and (ii) allOptions, Warrants and Convertible Securities held by a Stockholder (treatingsuch Options, Warrants and Convertible Securities as a number of Shares equalto the number of Equivalent Shares represented by such

 

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Options, Warrants andConvertible Securities for all purposes of this Agreement except as otherwisespecifically set forth herein).

 

“Stockholders”shall have the meaning set forth in the Preamble.

 

“Subject Securities”shall have the meaning set forth in Section 3.

 

“Transfer” shallmean any sale, pledge, assignment, encumbrance or other transfer or dispositionof any Shares to any other Person, whether directly, indirectly, voluntarily,involuntarily, by operation of law, pursuant to judicial process or otherwise.

 

“Unvested ManagementShares” shall mean, at any time, all Management Shares that are not VestedManagement Shares or Purchased Management Shares.

 

“Vested ManagementShares” shall mean, at any time, all Management Shares that are granted orissued under any restricted stock award, stock option award or similar programwith respect to which all applicable vesting conditions have been satisfied.

 

“Warrants” shallmean any warrants to subscribe for, purchase or otherwise directly acquireCommon Stock.

 

**10.**           MISCELLANEOUS.

 

10.1.     Authority:  Effect. Each party hereto represents and warrants to and agrees with each otherparty that the execution and delivery of this Agreement and the consummation ofthe transactions contemplated hereby have been duly authorized on behalf ofsuch party and do not violate any agreement or other instrument applicable tosuch party or by which its assets are bound. This Agreement does not, and shall not be construed to, give rise to thecreation of a partnership among any of the parties hereto, or to constitute anyof such parties members of a joint venture or other association.

 

10.2.     Notices.  Any notices, requests, demands, claims andother communications required or permitted in this Agreement shall be effectiveif in writing and (a) delivered personally, (b) sent by facsimile, or (c) sentby overnight courier, in each case, addressed as follows:

 
|   | If to the Company to: |
|--------|-----------------------|
|   |                  |   |   |
|   |                  | Michaels Stores, Inc. |
|   |                  | 8000 Bent Branch Drive |
|   |                  | Irving, Texas  75261 |
|   |                  | Facsimile: | (972) 409-1901 |
|   |                  | Attention: | Jeffrey N. Boyer |
|   |                  |   | Mark V. Beasley |
|        |                       |  |  |  |

 

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|   | with copies to:                       |                                         |
|--------|---------------------------------------|----------------------------------------------|
|   |                                  |                                         |   |
|   |                                  | Ropes  & Gray LLP                        |   |
|   |                                  | One International Place                      |   |
|   |                                  | Boston, MA  02110                       |
|   |                                  | Facsimile:                                   | (617) 951-7050 |
|   |                                  | Attention:                                   | David  C. Chapin |
|   |                                  |                                         | William  M. Shields |
|   |                                  |                                         | R.  Newcomb Stillwell |
|   |                                  |                                         |   |
|   | If  to the LLC, to:                   |                                         |
|   |                                  |                                         |   |
|   |                                  | c/o  Bain Capital Partners, LLC              |   |
|   |                                  | 111  Huntington Avenue                       |   |
|   |                                  | Boston,  Massachusetts  02199           |
|   |                                  | Facsimile:                                   | (617) 516-2010 |
|   |                                  | Attention:                                   | Matthew S. Levin |
|   |                                  |                                         | Todd M. Cook |
|   | and                                   |                                         |
|   |                                  |                                         |   |
|   |                                  | c/o  Blackstone Management Associates V, LLC |   |
|   |                                  | 345  Park Avenue, 31st Floor                 |   |
|   |                                  | New  York, New York 10154                    |
|   |                                  | Facsimile:                                   | (212)  583-5712 |
|   |                                  | Attention:                                   | Michael  Chae |
|   |                                  |                                         | Matthew  S. Kabaker |
|   |                                  |                                         |   |
|   | with  copies to:                      |                                         |
|   |                                  |                                         |   |
|   |                                  | Ropes  & Gray LLP                        |   |
|   |                                  | One International Place                      |   |
|   |                                  | Boston, MA  02110                       |
|   |                                  | Facsimile:                                   | (617) 951-7050 |
|   |                                  | Attention:                                   | David  C. Chapin |
|   |                                  |                                         | William  M. Shields |
|   |                                  |                                         | R.  Newcomb Stillwell |
|   |                                  |                                         |   |
|   | If  to the Highfields Funds, to them: |                                         |
|   |                                  |                                         |   |
|   |                                  | c/o Highfields Capital  Management LP        |   |
|   |                                  | John Hancock Tower                           |   |
|   |                                  | 200 Clarendon Street, 51st  Floor            |   |
|   |                                  | Boston, Massachusetts  02116                 |
|   |                                  | Facsimile:                                   | (617) 850-7503 |
|   |                                  | Attention:                                   | Joseph Mazzella |
|        |                                       |                                              |  |  |

 

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|   | with copies to:                 |                         |
|--------|---------------------------------|------------------------------|
|   |                            |                         |   |
|   |                            | Goodwin Procter LLP          |   |
|   |                            | Exchange Place               |   |
|   |                            | Boston, Massachusetts  02109 |
|   |                            | Facsimile:                   | 617) 523-1231 |
|   |                            | Attention:                   | Laura C. Hodges Taylor |
|   |                            |                         |   |
|   | If to 4390075 Canada Inc.,  to: |                         |
|   |                            |                         |   |
|   |                            | 4390075 Canada Inc.          |   |
|   |                            | 1 St Clair Avenue East       |   |
|   |                            | Suite 1003                   |   |
|   |                            | Toronto, Ontario             |   |
|   |                            | M4T 2V7                      |   |
|   |                            | Canada                       |
|   |                            | Facsimile:                   | (514) 201-5290 |
|   |                            | Attention:                   | Gregory David |
|        |                                 |                              |  |  |  |

 

If to a Manager, or adirect or indirect transferee of a Manager, to it at the address set forth inthe records of the Company.

 

If to any otherStockholder, to it at the address set forth in the records of the Company.

 

Notice to the holder ofrecord of any shares of capital stock shall be deemed to be notice to theholder of such shares for all purposes hereof.

 

Unless otherwisespecified herein, such notices or other communications shall be deemed effective(a) on the date received, if personally delivered, (b) on the date received ifdelivered by facsimile on a business day, or if not delivered on a businessday, on the first business day thereafter and (c) 2 business days after beingsent by overnight courier.  Each of theparties hereto shall be entitled to specify a different address by givingnotice as aforesaid to each of the other parties hereto.

 

10.3.     Merger; Binding Effect,Etc.  This Agreement, together withthe Registration Rights Agreement, constitute the entire agreement of theparties with respect to their subject matter, supersede all prior orcontemporaneous oral or written agreements or discussions with respect to suchsubject matter, and shall be binding upon and inure to the benefit of theparties hereto and their respective heirs, representatives, successors andpermitted assigns.  Except as otherwiseexpressly provided herein, no Stockholder party hereto may assign any of his,her or its respective rights or delegate any of his, her or its respectiveobligations under this Agreement without the prior written consent of theCompany and the Stockholders that hold a majority of the Shares held by allStockholders, and any attempted assignment or delegation in violation of theforegoing shall be null and void.

 

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10.4.     Descriptive Heading.  The descriptive headings of this Agreementare for convenience of reference only, are not to be considered a part hereofand shall not be construed to define or limit any of the terms or provisionshereof.

 

10.5.     Counterparts.  This Agreement may be executed in multiplecounterparts, each of which shall be deemed an original, but all of which takentogether shall constitute one instrument.

 

10.6.     Severability.  In the event that any provision hereof would,under applicable law, be invalid or unenforceable in any respect, suchprovision shall be construed by modifying or limiting it so as to be valid andenforceable to the maximum extent compatible with, and possible under,applicable law.  The provisions hereofare severable, and in the event any provision hereof should be held invalid orunenforceable in any respect, it shall not invalidate, render unenforceable orotherwise affect any other provision hereof.

 

10.7.     No Recourse.  Notwithstanding anything that may beexpressed or implied in this Agreement, the Company and each Stockholdercovenant, agree and acknowledge that no recourse under this Agreement or anydocuments or instruments delivered in connection with this Agreement shall behad against any current or future director, officer, employee, general orlimited partner or member of any Stockholder or of any Affiliate or assigneethereof, as such, whether by the enforcement of any assessment or by any legalor equitable proceeding, or by virtue of any statute, regulation or otherapplicable law, it being expressly agreed and acknowledged that no personalliability whatsoever shall attach to, be imposed on or otherwise be incurred byany current or future officer, agent or employee of any Stockholder or anycurrent or future member of any Stockholder or any current or future director,officer, employee, partner or member of any Stockholder or of any Affiliate orassignee thereof, as such, for any obligation of any Stockholder under thisAgreement or any documents or instruments delivered in connection with thisAgreement for any claim based on, in respect of or by reason of suchobligations or their creation.

 

**11.**           GOVERNING LAW.

 

11.1.     Governing Law.  This Agreement and all claims arising out ofor based upon this Agreement or relating to the subject matter hereof shall begoverned by and construed in accordance with the domestic substantive laws ofthe State of New York without giving effect to any choice or conflict of lawsprovision or rule that would cause the application of the domestic substantivelaws of any other jurisdiction.

 

11.2.     Consent to Jurisdiction.  Each party to this Agreement, by itsexecution hereof, (a) hereby irrevocably submits to the exclusive jurisdictionof the state and federal courts sitting in the State of New York for thepurpose of any action, claim, cause of action or suit (in contract, tort orotherwise), inquiry, proceeding or investigation arising out of or based uponthis Agreement or relating to the subject matter hereof, (b) hereby waives tothe extent not prohibited by applicable law, and agrees not to assert, andagrees not to allow any of its subsidiaries to assert, by way of motion, as adefense or otherwise, in any such action, any claim that it is not subjectpersonally to the jurisdiction of the above-named courts, that its property isexempt or immune from attachment or execution, that any such proceeding broughtin one of the above-

 

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named courts is improper, or that this Agreement orthe subject matter hereof or thereof may not be enforced in or by such courtand (c) hereby agrees not to commence or maintain any action, claim, cause ofaction or suit (in contract, tort or otherwise), inquiry, proceeding orinvestigation arising out of or based upon this Agreement or relating to thesubject matter hereof or thereof other than before one of the above-namedcourts nor to make any motion or take any other action seeking or intending tocause the transfer or removal of any such action, claim, cause of action orsuit (in contract, tort or otherwise), inquiry, proceeding or investigation toany court other than one of the above-named courts whether on the grounds ofinconvenient forum or otherwise. Notwithstanding the foregoing, (x) to the extent that any party heretois or becomes a party in any litigation in connection with which it may assertindemnification rights set forth in this agreement, the court in which such litigationis being heard shall be deemed to be included in clause (a) above; and (y) anyparty to this Agreement may commence and maintain an action to enforce ajudgment of any of the above-named courts in any court of competentjurisdiction.  Each party hereto herebyconsents to service of process in any such proceeding in any manner permittedby New York law, and agrees that service of process by registered or certifiedmail, return receipt requested, at its address specified pursuant to Section10.2 hereof is reasonably calculated to give actual notice.

 

11.3.     WAIVER OF JURY TRIAL.  TO THE EXTENT NOT PROHIBITED BY APPLICABLELAW WHICH CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES AND COVENANTS THATIT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TOTRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE OR ACTION, CLAIM, CAUSE OFACTION OR SUIT (IN CONTRACT, TORT OR OTHERWISE), INQUIRY, PROCEEDING ORINVESTIGATION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT MATTERHEREOF OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THETRANSACTIONS CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING ORHEREAFTER ARISING.  EACH PARTY HERETOACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE OTHER PARTIES HERETO THAT THISSECTION 11.3 CONSTITUTES A MATERIAL INDUCEMENT UPON WHICH THEY ARE RELYING ANDWILL RELY IN ENTERING INTO THIS AGREEMENT. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THISSECTION 11.3 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCHPARTY TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.

 

11.4.     Exercise of Rights andRemedies.  No delay of or omission inthe exercise of any right, power or remedy accruing to any party as a result ofany breach or default by any other party under this Agreement shall impair anysuch right, power or remedy, nor shall it be construed as a waiver of oracquiescence in any such breach or default, or of any similar breach or defaultoccurring later; nor shall any such delay, omission nor waiver of any singlebreach or default be deemed a waiver of any other breach or default occurringbefore or after that waiver.

 

[Signature pages follow]

 

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**INWITNESS WHEREOF**, eachof the undersigned has duly executed this Agreement (or caused this Agreementto be executed on its behalf by its officer or representative thereunto dulyauthorized) as of the date first above written.

 
| *COMPANY* | **MICHAELS STORES, INC.** |
|-----------|---------------------------|
|      |                      |
|      |                      |
|      | By:                       | /s/ Jeffrey N. Boyer |
|      |                      | Name: Jeffrey N. Boyer |
|      |                      | Title:   President and Chief Financial Officer |

 

*[Stockholders Agreement]*

 

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| *INVESTORS* | **MICHAELS  HOLDINGS LLC** |
|-------------|----------------------------|
|        |                       |
|        |                       |
|        | By:                        | /s/ Todd  Cook |
|        |                       | Name: Todd Cook |
|        |                       | Title: Vice  President, Secretary and |
|        |                       | Assistant  Treasurer |

 

*[Stockholders Agreement]*

 

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| *INVESTORS* | **HIGHFIELDS  CAPITAL I LP, a Delaware limited  partnership**                  |
|-------------|--------------------------------------------------------------------------------|
| * *    |                                                                           |
| * *    | By:                                                                            | Highfields  Associates LLC, its General Partner |
| * *    |                                                                           |
| * *    |                                                                           |
| * *    | By:                                                                            | /s/ Richard  L. Grubman |   |
| * *    |                                                                           | Name:Richard  L. Grubman |
| * *    |                                                                           | Title:  Managing  Member |
| * *    |                                                                           |
| * *    |                                                                           |
|        | **HIGHFIELDS  CAPITAL II LP, a Delaware limited  partnership**                 |
|        |                                                                           |
|        | By:                                                                            | Highfields  Associates LLC, its General Partner |
|        |                                                                           |
|        |                                                                           |
|        | By:                                                                            | /s/ Richard  L. Grubman |   |
|        |                                                                           | Name:Richard  L. Grubman |
|        |                                                                           | Title:  Managing  Member |
|        |                                                                           |
|        |                                                                           |
|        | **HIGHFIELDS  CAPITAL III LP, a Cayman Islands  exempted limited partnership** |
|        |                                                                           |
|        | By:                                                                            | Highfields  Associates LLC, its General Partner |
|        |                                                                           |
|        |                                                                           |
|        | By:                                                                            | /s/ Richard  L. Grubman |   |
|        |                                                                           | Name:Richard  L. Grubman |
|        |                                                                           | Title:  Managing  Member |

 

*[Stockholders Agreement]*

 

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| *INVESTORS* | **4390075  CANADA INC.** |
|-------------|--------------------------|
|        |                     |
|        |                     |
|        | By:                      | /s/ Gregory  David |
|        |                     | Name:  Gregory David |
|        |                     | Title:Director |

 

*[Stockholders Agreement]*

 

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* *

**SCHEDULE I**

 

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