**Exhibit 10.3**

 

**MANAGEMENT AGREEMENT**

 

This MANAGEMENT AGREEMENT (this “Agreement”) is entered into asof October 31, 2006****by and amongMichaels Stores, Inc., a Delaware corporation (the “Company”) andHighfields Capital Management LP (the “Manager”).

 

RECITALS

 

WHEREAS, the Company desires to retain the Manager to providemanagement, consulting and financial and other advisory services (“Services”)to the Company and the Manager is willing to provide such services on the termsset forth below.

 

AGREEMENT

 

NOW THEREFORE, in consideration of the mutual covenants containedherein, the parties hereto, intending to be legally bound, hereby agree asfollows:

 

# 1.                                         Services.The Manager hereby agrees that it will provide the following Services tothe Company:

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#### (a)                                  advice in connectionwith the negotiation and consummation of agreements, contracts, documents andinstruments necessary to provide the Company with financing on terms andconditions satisfactory to the Company;

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#### (b)                                 financial, managerialand operational advice in connection with day-to-day operations, including,without limitation, advice with respect to the development and implementationof strategies for improving the operating, marketing and financial performanceof the Company;

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#### (c)                                  advice in connectionwith financing, acquisition, disposition, merger, business combination andchange of control transactions involving the Company (however structured); and

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#### (d)                                 such other services(which may include financial and strategic planning and analysis, consulting services,human resources and executive recruitment services and other services) as theManager and the Company may from time to time agree to in writing.

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The Manager will devote such time and efforts to the performance ofservices contemplated hereby as such Manager, in its discretion, deemsreasonably necessary or appropriate; *provided,however,* that no minimum number of hours is required to be devotedby the Manager on a weekly, monthly, annual or other basis. The Companyacknowledges that the Manager’s services are not exclusive to the Company andthat the Manager will render similar services to other persons and entities. TheManager and the Company understand that the Company may, at times, engage oneor more investment bankers or financial advisers to provide services inaddition to, but not in lieu of, services provided by the Manager under thisAgreement. In providing services to the Company, the Manager will act as anindependent 

 

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contractor and it is expresslyunderstood and agreed that this Agreement is not intended to create, and doesnot create, any partnership, agency, joint venture or similar relationship andthat no party has the right or ability to contract for or on behalf of anyother party or to effect any transaction for the account of any other party.

 

# 2.                                       Paymentof Fees.

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#### (a)                                  During the Term, theCompany will pay to the Manager (or such affiliates as it may designate), anaggregate annual periodic fee (the “Periodic Fee”) of $1,000,000 inexchange for the ongoing Services provided by the Manager under this Agreement,such fee being payable by the Company quarterly in advance on or before thestart of each calendar quarter; *provided,however,* that the Company will pay the Periodic Fee for the periodfrom the date hereof through March 31, 2007 on the date hereof. The PeriodicFee will be prorated for any partial period of less than three months. If atany time during the Term all or a portion of the periodic management fees owedby the Company under any management agreement similar to this Agreement (a “SimilarAgreement”), including the Management Agreement dated the date hereofbetween the Company, Bain Capital Partners, LLC and Blackstone ManagementPartners V, L.L.C., are deferred, then the Company may elect in its solediscretion to defer the payment to the Manager of up to the same percentage ofthe Periodic Fee as the percentage of such other periodic management fees thathave been deferred and for up to the same length of time.

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#### (b)                                 Subject to the termsof this section, in the event that this Agreement is terminated pursuant toSection 3(a) or (b), the Company shall pay a lump sum amount equal to the netpresent value (using a discount rate equal to the then prevailing yield on U.S.Treasury Securities of like maturity) of the Periodic Fees that would have beenpayable to the Manager with respect to the period from the date of suchtermination until October 31, 2016, such fee to be due and payable upon suchtermination. If the board of directors of the Company determines in good faiththat it is in the best interests of the Company to reduce the fees paid to theManager pursuant to this Section 2(b), then the Company may permanently reducesuch fees payable to the Manager, but the Company shall not reduce the amountpaid to the Manager pursuant to this Section below an amount equal to theproduct of (i) the net present value (using a discount rate equal to the thenprevailing yield on U.S. Treasury Securities of like maturity) of the PeriodicFees that would have been payable to the Manager with respect to the periodfrom the date of such termination until October 31, 2016 and (ii) the greaterof (A) 22% or (B) the percentage of any similar termination fees due to othermanagers under any Similar Agreement that are actually paid upon termination ofsuch Similar Agreement.

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Each payment made pursuant to this Section 2 will be paid by wiretransfer of immediately available federal funds to the accounts specified onSchedule 1 hereto, or to such other account(s) as the Manager may specifyto the Company in writing prior to such payment.

 

# 3.                                       Term.This Agreement will continue in full force and effect until December 31, 2016; *provided* that this Agreement shall beautomatically extended each December 31 thereafter 

 

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for an additional year unlessthe Company or the Manager provides written notice of its desire not toautomatically extend the term of this Agreement to the other party hereto atleast 90 days prior to such December 31; and *providedfurther, however,* that (a) the Company may cause this Agreement toterminate at any time, (b) this Agreement will terminate automaticallyimmediately prior to an Initial Public Offering or a Change of Control (each asdefined in the Stockholder Agreement) unless the Company and the Managerdetermine otherwise and (c) the Company or the Manager may terminate thisAgreement at any time in the event of a material breach by the other party thathas not been cured within 30 days of the provision of notice thereof (theperiod on and after the date hereof through the termination hereof beingreferred to herein as the “Term”); and *providedfurther*, that each of (x) Sections 4, 5 and 8 (whether in respect ofor relating to services rendered during or after the Term) will all survive anytermination of this Agreement to the maximum extent permitted under applicablelaw and (y) any and all accrued and unpaid obligations of the Company owedunder Section 2 will be paid promptly upon any termination of this Agreement. Atthe end of the Term, all obligations of the Manager under this Agreement willterminate and any subsequent services rendered by the Manager to the Companywill be separately compensated.

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# 4.                                       Expenses;Indemnification.

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#### (a)                                  Expenses. TheCompany will pay on demand all Reimbursable Expenses. As used herein, “ReimbursableExpenses” means all (i) expenses incurred or accrued by the Manager orits affiliates in connection with this Agreement out-of-pocket expenses and thefees and charges of Goodwin Procter LLP, counsel, (ii) reasonableout-of-pocket expenses incurred from and after the date hereof relating to itsaffiliated funds’ investment in, the operations of, or the services provided bythe Manager to, the Company or any of their affiliates from time to time(including, without limitation, all air travel (by first class on a commercialairline or by charter, as determined by the Manager) and other travel relatedexpenses), and (iii) reasonable out-of-pocket legal expenses incurred bythe Manager or its affiliates from and after Closing Date in connection withthe enforcement of rights or taking of actions under this Agreement, under theCompany’s certificate of incorporation and bylaws, or under any subscriptionagreements, stockholders agreements, registration rights agreements, votingagreements or similar agreements entered into with the Company in connectionwith investments in the Company and/or its subsidiaries (subject to anyapplicable limitations on expense reimbursement rights expressly set forth insuch agreements).

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#### (b)                                 Indemnity andLiability. The Company hereby indemnifies and agrees to exonerate and holdthe Manager and each of its former, current or future, direct or indirectdirectors, officers, employees, agents, advisors or affiliates, each former,current or future, direct or indirect holder of any equity interests orsecurities of the Manager (whether such holder is a limited or general partner,member, stockholder or otherwise), each former, current or future assignee ofthe Manager and each former, current or future director, officer, employee,agent, advisors, general or limited partner, manager, member, stockholder,affiliate, controlling person, representative or assignee of any of theforegoing (each such person or entity, a “Related Person”)(collectively, the “Indemnitees”), each of whom is an intended thirdparty beneficiary 

 

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#### of this Agreement, free and harmless from and against any and allactions, causes of action, suits, claims, liabilities, damages and costs andexpenses in connection therewith (including reasonable attorneys’ fees andexpenses) incurred by the Indemnitees or any of them before or after the dateof this Agreement (collectively, the “Indemnified Liabilities”), as aresult of, arising out of, or in any way relating to (i) this Agreement, anytransaction to which the Company is a party, or any other circumstances withrespect to the Company or (ii) operations of, or services provided by theManager to, the Company, or any of their affiliates from time to time(including but not limited to any indemnification obligations assumed orincurred by any Indemnitee to or on behalf of the Company, or any of itsaccountants or other representatives, agents or affiliates) except for any suchIndemnified Liabilities arising from such Indemnitee’s gross negligence orwillful misconduct. If and to the extent that the foregoing undertaking may beunavailable or unenforceable for any reason, the Company hereby agrees to makethe maximum contribution to the payment and satisfaction of each of theIndemnified Liabilities that is permissible under applicable law. For purposesof this Section 4(b), “gross negligence or willful misconduct” will bedeemed to have occurred only if so found in a final non-appealable judgment ofa court of competent jurisdiction to such effect, in which case to the extentany of the foregoing limitations is so determined to apply to any Indemnitee asto any previously advanced indemnity payments made by the Company, then suchpayments shall be promptly repaid by such Indemnitee to the Company. The rightsof any Indemnitee to indemnification hereunder will be in addition to any otherrights any such person may have under any other agreement or instrumentreferenced above or any other agreement or instrument to which such Indemniteeis or becomes a party or is or otherwise becomes a beneficiary or under law orregulation. If the Indemnitees related to the Manager are similarly situatedwith respect to their interests in connection with a matter that may be anIndemnified Liability and such Indemnified Liability is not based on aThird-Party Claim, the Indemnitees may enforce their rights pursuant to thisSection 4(b) with respect to such matter only with the consent of the Manager. Inthis Agreement, “Person” means any individual or corporation,association, partnership, limited liability company, joint venture, joint stockor other company, business trust, trust, organization, or other entity of anykind. A “Third-Party Claim” means any (i) claim brought by a Personother than the Company, the Manager or any indemnified Person related to theManager and (ii) any derivative claim brought in the name of the Company thatis initiated by a Person other than the Manager or any indemnified Personrelated to the Manager.

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# 5.                                       Disclaimerand Limitation of Liability; Opportunities.

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#### (a)                                  Disclaimer;Standard of Care. The Manager does not make any representations orwarranties, express or implied, in respect of the services to be provided bythe Manager hereunder. In no event will the Manager or any of the Indemniteesbe liable to the Company or any of its affiliates for any act, alleged act,omission or alleged omission that does not constitute gross negligence orwillful misconduct of such Manager as determined by a final, non-appealabledetermination of a court of competent jurisdiction.

 

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#### (b)                                 Freedom to PursueOpportunities. In recognition that the Manager and its respective Indemniteescurrently have, and will in the future have or will consider acquiring,investments in numerous companies with respect to which the Manager or itsrespective Indemnitees may serve as an advisor, a director or in some othercapacity, and in recognition that the Manager and its respective Indemniteeshave myriad duties to various investors and partners, and in anticipation thatthe Company, on the one hand and the Manager (or one or more affiliates,associated investment funds or portfolio companies, or clients of theManagers), on the other hand, may engage in the same or similar activities orlines of business and have an interest in the same areas of corporateopportunities, and in recognition of the benefits to be derived by the Companyhereunder and in recognition of the difficulties that may confront any advisorwho desires and endeavors fully to satisfy such advisor’s duties in determiningthe full scope of such duties in any particular situation, the provisions ofthis Section 5(b) are set forth toregulate, define and guide the conduct of certain affairs of the Company asthey may involve the Manager. Except as the Manager may otherwise agree inwriting after the date hereof:

 

#### (i)             The Manager and its respective Indemniteeswill have the right:  (A) todirectly or indirectly engage in any business (including, without limitation,any business activities or lines of business that are the same as or similar tothose pursued by, or competitive with, the Company and its subsidiaries) orinvest, own or deal in securities of any other Person so engaged in anybusiness, (B) to directly or indirectly do business with any client or customerof the Company and its subsidiaries, (C) to take any other action that theManager believes in good faith is necessary to or appropriate to fulfill itsobligations as described in the first sentence of this Section 5(b), and (D)not to present potential transactions, matters or business opportunities to theCompany or any of their subsidiaries, and to pursue, directly or indirectly,any such opportunity for itself, and to direct any such opportunity to anotherperson.

 

#### (ii)          The Manager and its respective Indemniteeswill have no duty (contractual or otherwise) to communicate or present anycorporate opportunities to the Company or any of its affiliates or to refrainfrom any actions specified in Section 5(b)(i), and the Company, on its ownbehalf and on behalf of its affiliates, hereby renounce and waive any right torequire the Manager or any of its Indemnitees to act in a manner inconsistentwith the provisions of this Section 5(b).

 

#### (iii)       The Manager and its Indemnitees will not beliable to the Company or any of its affiliates for breach of any duty(contractual or otherwise) by reason of any activities or omissions of thetypes referred to in this Section 5(b) or of any such person’s participationtherein.

 

#### (c)                                  Limitation of Liability*.*In no event will the Manager or any of itsIndemnitees be liable to the Company or any of its affiliates for any indirect,special, incidental or consequential damages, including, without limitation,lost profits or savings, whether or not such damages are foreseeable, or forany third party claims 

 

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#### (whetherbased in contract, tort or otherwise), relating to the services to be providedby the Manager hereunder.

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# 6.                                         Assignment, etc. Except as provided below, no party heretohas the right to assign this Agreement without the prior written consent ofeach of the other parties. Notwithstanding the foregoing, (a) the Manager mayassign all or part of its rights and obligations hereunder to any affiliate ofsuch Manager that provides services similar to those called for by thisAgreement, in which event such Manager will be released of all of its rightsand obligations hereunder and (b) the provisions hereof for the benefit ofIndemnitees other than the Manager itself shall also inure to the benefit ofsuch other Indemnitees and their successors and assigns.

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# 7.                                      Amendments and Waivers. No amendment or waiver of any term,provision or condition of this Agreement will be effective, unless in writingand executed by the Manager and the Company (or their respective successors). Nowaiver on any one occasion will extend to or effect or be construed as a waiverof any right or remedy on any future occasion. No course of dealing of anyperson nor any delay or omission in exercising any right or remedy willconstitute an amendment of this Agreement or a waiver of any right or remedy ofany party hereto.

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# 8.                                         Governing Law; Jurisdiction.

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#### (a)                                  Choice of Law. This Agreement and all matters arisingunder or related to this Agreement will be governed by and construed inaccordance with the laws of the State of New York.

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#### (b)                                 Consent to Jurisdiction. Each of the parties agrees that allactions, suits or proceedings arising out of, based upon or relating to thisAgreement or the subject matter hereof will be brought and maintainedexclusively in the federal and state courts of the State of New York, City ofNew York, County of New York. Each of the parties hereto by execution hereof(i) hereby irrevocably submits to the jurisdiction of the federal andstate courts in the State of New York, City of New York, County of New York forthe purpose of any action, suit or proceeding arising out of or based upon thisAgreement or the subject matter hereof and (ii) hereby waives to the extent notprohibited by applicable law, and agrees not to assert, by way of motion, as adefense or otherwise, in any such action, suit or proceeding, any claim that itis not subject personally to the jurisdiction of the above-named courts, thatit is immune from extraterritorial injunctive relief or other injunctiverelief, that its property is exempt or immune from attachment or execution, thatany such action, suit or proceeding may not be brought or maintained in one ofthe above-named courts, that any such action, suit or proceeding brought ormaintained in one of the above-named courts should be dismissed on grounds of forumnonconveniens, should be transferred to any court other than oneof the above-named courts, should be stayed by virtue of the pendency of anyother action, suit or proceeding in any court other than one of the above-namedcourts, or that this Agreement or the subject matter hereof may not be enforcedin or by any of the above-named courts. Notwithstanding the foregoing, to theextent that any party hereto is or becomes a party in any litigation inconnection with which it may assert indemnification rights 

 

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#### setforth in this Agreement, the court in which such litigation is being heard willbe deemed to be included in clause (i) above. Each of the parties hereto herebyconsents to service of process in any such suit, action or proceeding in anymanner permitted by the laws of the State of New York, agrees that service ofprocess by registered or certified mail, return receipt requested, at theaddress specified in or pursuant to Section 10 is reasonably calculated to giveactual notice and waives and agrees not to assert by way of motion, as adefense or otherwise, in any such action, suit or proceeding any claim thatservice of process made in accordance with Section 10 does not constitute goodand sufficient service of process. The provisions of this Section 8 will notrestrict the ability of any party to enforce in any court any judgment obtainedin a court included in clause (i) above.

 

#### (c)                                  Waiver of Jury Trial. To the extent not prohibited by applicablelaw that cannot be waived, each of the parties hereto hereby waives, andcovenants that it will not assert (whether as plaintiff, defendant, orotherwise), any right to trial by jury in any forum in respect of any issue,claim, demand, cause of action, action, suit or proceeding arising out of,based upon or relating to this Agreement or the subject matter hereof, in eachcase whether now existing or hereafter arising and whether in contract or tortor otherwise. Each of the parties hereto acknowledges that it has been informedby each other party that the provisions of this Section 8(c) constitute amaterial inducement upon which such party is relying and will rely in enteringinto this Agreement and the transactions contemplated hereby. Any of theparties hereto may file an original counterpart or a copy of this Agreementwith any court as written evidence of the consent of each of the parties heretoto the waiver of its right to trial by jury.

 

# 9.                                         Entire Agreement. This Agreement contains the entireunderstanding of the parties with respect to the subject matter hereof andsupersedes any prior communication or agreement with respect thereto.

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# 10.                                   Notice. All notices, demands, and communications required or permitted underthis Agreement will be in writing and will be effective if served upon suchother party and such other party’s copied persons as specified below to theaddress set forth for it below (or to such other address as such party willhave specified by notice to each other party) if (i) delivered personally, (ii)sent and received by facsimile or (iii) sent by certified or registered mail orby Federal Express, DHL, UPS or any other comparably reputable overnightcourier service, postage prepaid, to the appropriate address as follows:

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Ifto the Company, to it at:

 

Michaels Stores, Inc.

8000 Bent Branch Drive

Irving, TX 75261

Facsimile: (972) 409-1901

Attention:                 General Counsel

ChiefFinancial Officer

 

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withcopies to:

 

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

Facsimile: (617) 951-7050

Attention:                 David C. Chapin

WilliamM. Shields

R.Newcomb Stillwell

 

Ifto Highfields, to:

 

HighfieldsCapital Management LP

200Clarendon Street

Boston,MA 02116

Facsimile:  (617) 850-7503

Attention:  Joseph Mazzella

 

withcopies to:

 

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109

Facsimile: (617) 523-1231

Attention: Laura C. Hodges Taylor

 

Unlessotherwise specified herein, such notices or other communications will be deemedeffective, (a) on the date received, if personally delivered or sent byfacsimile during normal business hours, (b) on the business day after beingreceived if sent by facsimile other than during normal business hours, (c) onebusiness day after being sent by Federal Express, DHL or UPS or othercomparably reputable delivery service and (d) five business days after beingsent by registered or certified mail. Each of the parties hereto shall beentitled to specify a different address by giving notice as aforesaid to eachof the other parties hereto.

 

# 11.                                   Severability. If in any judicial or arbitral proceedingsa court****or arbitrator refuses to enforce anyprovision of this Agreement, then such unenforceable provision will be deemedeliminated from this Agreement for the purpose of such proceedings to theextent necessary to permit the remaining provisions to be enforced, and theparties hereto shall negotiate in good faith to seek to enter into substituteprovisions incorporating, as nearly as possible, the purpose, intent and effectof such unenforceable provision. To the full extent, however, that theprovisions of any applicable law may be waived, they are hereby waived to theend that this Agreement be deemed to be a valid and binding agreementenforceable in accordance with its terms, and in the event that any provisionhereof is found to be invalid or unenforceable, such provision will beconstrued by limiting it so as to be valid and enforceable to the maximumextent consistent with and possible under applicable law.

 

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# 12.                                   Miscellaneous.

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# (a)                                  Counterparts. This Agreement may be executed in anynumber of counterparts and by each of the parties hereto in separatecounterparts, each of which when so executed will be deemed to be an originaland all of which together will constitute one and the same agreement.

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(b)                                 Interpretation. The headings contained in this Agreementare for convenience of reference only and will not in any way affect themeaning or interpretation hereof. As used herein the word “including” shall bedeemed to mean “including without limitation”. This Agreement reflects themutual intent of the parties and no rule of construction against the draftingparty shall apply.

 

[*The remainder of this page is intentionally leftblank. Signatures follow.*]

 

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**INWITNESS WHEREOF**, eachof the parties has caused this Agreement to be executed on its behalf as aninstrument under seal as of the date first above written by its officer orrepresentative thereunto duly authorized.

 
| *THE  COMPANY:* | **MICHAELS  STORES, INC.**                               |
|-----------------|----------------------------------------------------------|
|            |                                                     |
|            |                                                     |
|            |  /s/  Jeffrey N. Boyer                              |   |
|            | Name:  Jeffrey N. Boyer                                  |
|            | Title:   President and Chief Financial Officer |
|            |                                                     |
|            |                                                     |
| *MANAGER:*      | **HIGHFIELDS  CAPITAL MANAGEMENT LP**                    |
| * *        | ** **                                               |
|            |                                                     |
|            |  /s/  Richard L. Grubman                            |   |
|            | Name:  Richard L. Grubman                                |
|            | Title:   Managing Member                       |

 

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Schedule 1 to

Management Agreement

 

***Wire Transfer Instructions forHighfields Capital Management LP***

 
| Bank:    | Bank  of America                    |
|----------|-------------------------------------|
| ABA  #:  | 026-009-593                         |
| For:     | Highfields  Capital Management L.P. |
| Acct  #: | 00898-87189                         |

 

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