EX-10.2


 Exhibit 10.2 
 Morgan Stanley & Co. International plc 
 c/o Morgan Stanley & Co. LLC 

1585 Broadway, 5th Floor 
 New
York, NY 10036 
 May 14, 2013 

 

					
	To:	  	 Shutterfly, Inc.

2800 Bridge Parkway
 Redwood City, California
94065

		  	Attention:	  	General Counsel
		  	Telephone No.:	  	650-610-3555
		  	Facsimile No.:	  	650-593-3574
		
	Re:	  	Base Call Option Transaction

 The purpose of this letter agreement (this “Confirmation”) is to confirm the terms and
conditions of the call option transaction entered into between Morgan Stanley & Co. International plc (“Dealer”) and Shutterfly, Inc. (“Counterparty”) as of the Trade Date specified below (the
“Transaction”). This letter agreement constitutes a “Confirmation” as referred to in the ISDA Master Agreement specified below. This Confirmation shall replace any previous agreements and serve as the final documentation
for the Transaction. 
 This Confirmation is subject to, and incorporates, the definitions and provisions of the 2006 ISDA
Definitions (the “2006 Definitions”) and the definitions and provisions of the 2002 ISDA Equity Derivatives Definitions (the “Equity Definitions”, and together with the 2006 Definitions, the
“Definitions”), in each case as published by the International Swaps and Derivatives Association, Inc. (“ISDA”). In the event of any inconsistency between the 2006 Definitions and the Equity Definitions, the Equity
Definitions will govern. In the event of any inconsistency between the Equity Definitions and this Confirmation, this Confirmation shall govern. Certain defined terms used herein are based on terms that are defined in the Offering Memorandum dated
May 14, 2013, (the “Offering Memorandum”) relating to the 0.25% Convertible Senior Notes due 2018 (as originally issued by Counterparty, the “Convertible Notes” and each USD 1,000 principal amount of
Convertible Notes, a “Convertible Note”) issued by Counterparty in an aggregate initial principal amount of USD 270,000,000 (as increased by up to an aggregate principal amount of USD 30,000,000 if and to the extent that
the Representatives (as defined herein) exercise their option to purchase additional Convertible Notes pursuant to the Purchase Agreement (as defined herein)) pursuant to an Indenture to be dated May 20, 2013 between Counterparty and Wells
Fargo Bank, National Association, as trustee (the “Indenture”). In the event of any inconsistency between the terms defined in the Offering Memorandum, the Indenture and this Confirmation, this Confirmation shall govern. The parties
acknowledge that this Confirmation is entered into on the date hereof with the understanding that (i) definitions set forth in the Indenture which are also defined herein by reference to the Indenture and (ii) sections of the Indenture
that are referred to herein, in each case, will conform to the descriptions thereof in the Offering Memorandum. If any such definitions in the Indenture or any such sections of the Indenture differ from the descriptions thereof in the Offering
Memorandum, the descriptions thereof in the Offering Memorandum will govern for purposes of this Confirmation. The parties further acknowledge that the Indenture section numbers used herein are based on the draft of the Indenture last reviewed by
Dealer as of the date of this Confirmation, and if any such section numbers are changed in the Indenture as executed, the parties will amend this Confirmation in good faith to preserve the intent of the parties. Subject to the foregoing, references
to the Indenture herein are references to the Indenture as in effect on the date of its execution, and if the Indenture is amended following such date, any such amendment (other than any amendment pursuant to Section 10.01(j) of the Indenture
that, as determined by the Calculation Agent, conforms the Indenture to the description of the Convertible Notes in the Offering Memorandum) will be disregarded for purposes of this Confirmation unless the parties agree otherwise in writing.

 Each party is hereby advised, and each such party acknowledges, that the other party has engaged in, or refrained from
engaging in, substantial financial transactions and has taken other material actions in reliance upon the parties’ entry into the Transaction to which this Confirmation relates on the terms and conditions set forth below. 

1. This Confirmation evidences a complete and binding agreement between Dealer and Counterparty as to the terms of the Transaction to which this
Confirmation relates. This Confirmation shall supplement, form a part of, and 






 
be subject to an agreement in the form of the 2002 ISDA Master Agreement (the “Agreement”) as if Dealer and Counterparty had executed an agreement in such form on the Trade Date
(but without any Schedule except for (i) the election of the laws of the State of New York as the governing law (without reference to choice of law doctrine) and (ii) the election that the “Cross Default” provisions of
Section 5(a)(vi) of the Agreement will apply to Dealer as if (w) the phrase “, or becoming capable at such time of being declared,” were deleted from Section 5(a)(vi)(1) of the Agreement, (x) the “Threshold
Amount” with respect to Dealer were three percent (3%) of shareholders’ equity of Dealer on the date of determination, (y) the term “Specified Indebtedness” had the meaning specified in Section 14 of the Agreement,
except that such term did not include obligations in respect of deposits received in the ordinary course of a party’s banking business and (z) the following language were added to the end of such Section 5(a)(vi) of the Agreement:
“Notwithstanding the foregoing, a default under subsection (2) hereof shall not constitute an Event of Default if (1) the default was caused solely by error or omission of an administrative or operational nature; (2) funds were
available to enable the party to make the payment when due; and (3) the payment is made within two Exchange Business Days of such party’s receipt of written notice of its failure to pay.”). In the event of any inconsistency between
provisions of the Agreement and this Confirmation, this Confirmation will prevail for the purpose of the Transaction to which this Confirmation relates. The parties hereby agree that no transaction other than the Transaction to which this
Confirmation relates shall be governed by the Agreement. 
 2. The terms of the particular Transaction to which this Confirmation relates are as
follows: 
  

			
	General Terms.	  	
		
	 Trade Date:
	  	May 14, 2013
		
	 Effective Date:
	  	The closing date of the initial issuance of the Convertible Notes
		
	 Option Style:
	  	“Modified American”, as described under “Procedures for Exercise” below
		
	 Option Type:
	  	Call
		
	 Buyer:
	  	Counterparty
		
	 Seller:
	  	Dealer
		
	 Shares:
	  	The common stock of Counterparty, par value USD 0.0001 per share (Exchange symbol “SFLY”).
		
	 Number of Options:
	  	270,000. For the avoidance of doubt, the Number of Options shall be reduced by any Options exercised by Counterparty. In no event will the Number of Options be less than
zero.
		
	 Applicable Percentage:
	  	40%
		
	 Option Entitlement:
	  	A number equal to the product of the Applicable Percentage and 15.5847.
		
	 Strike Price:
	  	USD 64.1655
		
	 Premium:
	  	USD 22,863,600
		
	 Premium Payment Date:
	  	The Effective Date
		
	 Exchange:
	  	The NASDAQ Global Select Market
		
	 Related Exchange(s):
	  	All Exchanges



  
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	 Excluded Provisions:
	  	Section 13.03 and Section 13.04(i) of the Indenture.
		
	Procedures for Exercise.	  	
		
	 Conversion Date:
	  	With respect to any conversion of a Convertible Note, the date on which the Holder (as such term is defined in the Indenture) of such Convertible Note satisfies all of the
requirements for conversion thereof as set forth in Section 13.02(c) of the Indenture.
		
	 Free Convertibility Date:
	  	December 15, 2017
		
	 Expiration Time:
	  	The Valuation Time
		
	 Expiration Date:
	  	May 15, 2018, subject to earlier exercise.
		
	 Multiple Exercise:
	  	Applicable, as described under “Automatic Exercise” below.
		
	 Automatic Exercise:
	  	Notwithstanding Section 3.4 of the Equity Definitions, on each Conversion Date, a number of Options equal to the number of Convertible Notes in denominations of USD 1,000 as to
which such Conversion Date has occurred shall be deemed to be automatically exercised; provided that such Options shall be exercised or deemed exercised only if Counterparty has provided a Notice of Exercise to Dealer in accordance with
“Notice of Exercise” below.
		
		  	Notwithstanding the foregoing, in no event shall the number of Options that are exercised or deemed exercised hereunder exceed the Number of Options.
		
	 Notice Deadline:
	  	In respect of any exercise of any Conversion Date, 2:00 p.m. (New York City time) on the Scheduled Valid Day immediately preceding the scheduled first day of the Settlement
Averaging Period for such Options; provided that in respect of any Options relating to Convertible Notes with a Conversion Date occurring on or after the Free Convertibility Date, the Notice Deadline is 2:00 p.m. (New York City time) on the
Scheduled Valid Day immediately preceding the Expiration Date; provided, further, that notwithstanding the foregoing, any Notice of Exercise or Notice of Final Settlement Method and the related automatic exercise of the related Options shall
be effective if given after the relevant Notice Deadline but prior to 5:00 p.m. (New York City time) on the fifth Scheduled Valid Day following the Notice Deadline and, in respect of any Options in respect of which such notice is delivered
after the relevant Notice Deadline pursuant to this proviso, the Calculation Agent shall have the right (i) to postpone the Settlement Date and (ii) to adjust the number of Shares and/or amount of cash deliverable by Dealer with respect to such
Options in a commercially reasonable manner as appropriate to reflect the additional costs (including, but not limited to, hedging mismatches and market losses) and expenses incurred by Dealer in connection with its hedging activities (including
the



  
 3 








			
		
		  	unwinding of any hedge position) as a result of Dealer not having received such notice on or prior to the Notice Deadline.
		
	 Notice of Exercise:
	  	Notwithstanding anything to the contrary in the Equity Definitions or under “Automatic Exercise” above, in order to exercise any Options on any Conversion Date,
Counterparty must notify Dealer in writing before the Notice Deadline of (i) the aggregate principal amount of Convertible Notes as to which such Conversion Date has occurred (including, if applicable, whether all or any portion of such Convertible
Notes are Convertible Notes as to which additional Shares would be added to the Conversion Rate (as defined in the Indenture) pursuant to Section 13.03 of the Indenture (the “Make-Whole Convertible Notes”)), (ii) the scheduled first
day of the Settlement Averaging Period and the scheduled Settlement Date, and (iii) if Counterparty elects a Settlement Method for such Options other than Net Share Settlement, such notice shall also include the information and acknowledgements
required pursuant to “Settlement Method Election Conditions” below; provided that in respect of any Options relating to Convertible Notes with a Conversion Date occurring on or after the Free Convertibility Date, (A) such notice
need only specify the information required in clause (i) above, and (B) if the relevant Settlement Method for such Options is not Net Share Settlement, Dealer shall have received a separate notice (the “Notice of Final Settlement
Method”) in respect of all such Convertible Notes before 5:00 p.m. (New York City time) on the Scheduled Trading Day immediately following the Free Convertibility Date specifying the information required in clause (iii)
above.
		
	 Valuation Time:
	  	The close of trading of the regular trading session on the Exchange; provided that if the principal trading session is extended, the Calculation Agent shall determine the
Valuation Time in its reasonable discretion.
		
	 Market Disruption Event:
	  	Section 6.3(a) of the Equity Definitions is hereby replaced in its entirety by the following:
		
		  	“‘Market Disruption Event’ means (i) a failure by the primary U.S. national or regional securities exchange or market on which the Shares are listed or admitted for
trading to open for trading during its regular trading session or (ii) the occurrence or existence prior to 1:00 p.m., New York City time, on any Scheduled Valid Day for the Shares for more than one half-hour period in the aggregate during
regular trading hours of any suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the relevant securities exchange or otherwise) in the Shares or in any options contracts or futures contracts
relating to the Shares.”



  
 4 








			
		
	Settlement Terms.	  	
		
	 Settlement Method:
	  	For any Option, Net Share Settlement; provided that Counterparty may elect Cash Settlement or Combination Settlement for such Option if the Settlement Method Election
Conditions have been satisfied and Counterparty shall have notified Dealer of the Settlement Method in the Notice of Exercise or Notice of Final Settlement Method, as applicable, for such Option; provided further that if Counterparty has
elected to settle its conversion obligations in respect of the related Convertible Notes (A) entirely in Shares pursuant to Section 13.02(a) of the Indenture (together with cash in lieu of fractional Shares) (such settlement method,
“Settlement in Shares”), or (B)(x) in a combination of cash and Shares pursuant to Section 13.02(a) of the Indenture with a Specified Option Cash Amount (as defined below) less than USD 1,000 (such settlement method,
“Low Cash Combination Settlement”), or (y) in a combination of cash and Shares pursuant to Section 13.02(a) of the Indenture with a Specified Option Cash Amount (as defined below) equal to USD 1,000, then, in each case, the relevant
Settlement Method for such Option shall be Net Share Settlement.
		
	 Settlement Method Election Conditions:
	  	In order to elect a Settlement Method other than Net Share Settlement for any Option, the Notice of Exercise or Notice of Final Settlement Method for such Option, as applicable,
shall contain:
		
		  	(i) Counterparty’s election of such other Settlement Method for the related Convertible Notes which shall correspond to Counterparty’s election under the Convertible Notes
of whether it elects to settle its conversion obligations in respect of the related Convertible Notes:
		
		  	(A) in a combination of cash and Shares pursuant to Section 13.02(a) of the Indenture with a Specified Option Cash Amount (as defined below) greater than USD 1,000, in which case
such other Settlement Method shall be Combination Settlement; or
		
		  	(B) entirely in cash pursuant to Section 13.02(a) of the Indenture, in which case such other Settlement Method shall be Cash Settlement;
		
		  	(ii) if such other Settlement Method is Combination Settlement, the fixed amount of cash applicable to the settlement of each related Convertible Note (the “Specified Option
Cash Amount”); and
		
		  	(iii) an acknowledgment by Counterparty of its responsibilities under applicable securities laws, and in particular Section 9 and Section 10(b) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”) and the rules and regulations thereunder, in respect of any



  
 5 








			
		
		  	election of a Cash Settlement or a Combination Settlement with respect to the Convertible Notes.
		
	 Net Share Settlement:
	  	If Net Share Settlement is applicable to any Option exercised or deemed exercised hereunder, Dealer will deliver to Counterparty, on the relevant Settlement Date for each such
Option, a number of Shares (the “Net Share Settlement Amount”) equal to the sum, for each Valid Day during the Settlement Averaging Period for each such Option, of (i) the Daily Option Value for such Valid Day, divided by
(ii) the Relevant Price on such Valid Day, divided by (iii) the number of Valid Days in the Settlement Averaging Period; provided that, for any Option exercised or deemed exercised hereunder on a Conversion Date occurring on or after
the Free Convertibility Date, in no event shall the Net Share Settlement Amount for any Option exceed a number of Shares equal to the Applicable Limit for such Option divided by the Applicable Limit Price on the Settlement Date for such
Option.
		
		  	Dealer will pay cash in lieu of delivering any fractional Shares to be delivered with respect to any Net Share Settlement Share Amount valued at the Relevant Price for the last
Valid Day of the applicable Settlement Averaging Period.
		
	 Combination Settlement:
	  	If Combination Settlement is applicable to any Option exercised or deemed exercised hereunder, Dealer will pay and/or deliver, as applicable, to Counterparty, on the relevant
Settlement Date for each such Option:
		
		  	(i) an amount of cash (the “Combination Settlement Cash Amount”) equal to the sum, for each Valid Day during the Settlement Averaging Period for such Option, of (A)
an amount for such Valid Day (the “Daily Combination Settlement Cash Amount”) equal to the lesser of (1) the product of (x) the Applicable Percentage and (y) the excess of (i) the Specified Option Cash Amount over (ii)
USD 1,000 and (2) the Daily Option Value for such Valid Day, divided by (B) the number of Valid Days in the Settlement Averaging Period; provided that if the calculation in clause (A) above results in zero or a negative
number for any Valid Day, the Daily Combination Settlement Cash Amount for such Valid Day shall be deemed to be zero; and
		
		  	(ii) a number of Shares (the “Combination Settlement Share Amount”) equal to the sum, for each Valid Day during the Settlement Averaging Period for such Option, of
a number of Shares for such Valid Day (the “Daily Combination Settlement Share Amount”) equal to (A) the Daily Option Value on such Valid Day minus the Daily Combination Settlement Cash Amount for such Valid Day, divided
by (B) the Relevant Price on such Valid Day, divided by (C) the number of Valid Days in



  
 6 








			
		
		  	the Settlement Averaging Period; provided that if the calculation in clause (A) above results in zero or a negative number for any Valid Day, the Daily Combination Settlement
Share Amount for such Valid Day shall be deemed to be zero;
		
		  	provided that, for any Option exercised or deemed exercised hereunder on a Conversion Date occurring on or after the Free Convertibility Date, in no event shall the sum of
(x) the Combination Settlement Cash Amount for any Option and (y) the Combination Settlement Share Amount for such Option multiplied by the Applicable Limit Price on the Settlement Date for such Option exceed the Applicable Limit for such
Option.
		
		  	Dealer will pay cash in lieu of delivering any fractional Shares to be delivered with respect to any Combination Settlement Share Amount valued at the Relevant Price for the last
Valid Day of the Settlement Averaging Period.
		
	 Cash Settlement:
	  	If Cash Settlement is applicable to any Option exercised or deemed exercised hereunder, in lieu of Section 8.1 of the Equity Definitions, Dealer will pay to Counterparty, on the
relevant Settlement Date for each such Option, an amount of cash (the “Cash Settlement Amount”) equal to the sum, for each Valid Day during the Settlement Averaging Period for such Option, of (i) the Daily Option Value for such
Valid Day, divided by (ii) the number of Valid Days in the Settlement Averaging Period; provided that, for any Option exercised or deemed exercised hereunder on a Conversion Date occurring on or after the Free Convertibility Date, in
no event shall the Cash Settlement Amount exceed the Applicable Limit.
		
	 Daily Option Value:
	  	For any Valid Day, an amount equal to (i) the Option Entitlement on such Valid Day, multiplied by (ii) the Relevant Price on such Valid Day less the Strike Price on such
Valid Day; provided that if the calculation contained in clause (ii) above results in a negative number, the Daily Option Value for such Valid Day shall be deemed to be zero. In no event will the Daily Option Value be less than
zero.
		
	 Applicable Limit:
	  	For any Option, an amount of cash equal to the Applicable Percentage multiplied by the excess of (i) the aggregate of (A) the amount of cash, if any, delivered to the Holder
of the related Convertible Note upon conversion of such Convertible Note and (B) the number of Shares, if any, delivered to the Holder of the related Convertible Note upon conversion of such Convertible Note, in each case, pursuant to the terms of
the Indenture, multiplied by the Applicable Limit Price on the Settlement Date for such Option, over (ii) USD 1,000.



  
 7 








			
		
	 Applicable Limit Price:
	  	On any day, the opening price as displayed under the heading “Op” on Bloomberg page “SFLY <equity>” (or its equivalent successor if such page is not
available).
		
	 Valid Day:
	  	A day on which (i) there is no Market Disruption Event and (ii) trading in the Shares generally occurs on the Exchange or, if the Shares are not then listed on the Exchange, on the
principal other U.S. national or regional securities exchange on which the Shares are then listed or, if the Shares are not then listed on a U.S. national or regional securities exchange, on the principal other market on which the Shares are then
listed or admitted for trading. If the Shares are not so listed or admitted for trading, “Valid Day” means a Business Day.
		
	 Scheduled Valid Day:
	  	A day that is scheduled to be a Valid Day on the principal U.S. national or regional securities exchange or market on which the Shares are listed or admitted for trading. If the
Shares are not so listed or admitted for trading, “Scheduled Valid Day” means a Business Day.
		
	 Business Day:
	  	Any day other than a Saturday, a Sunday or a day on which the Federal Reserve Bank of New York is authorized or required by law or executive order to close or be
closed.
		
	 Relevant Price:
	  	On any Valid Day, the per Share volume-weighted average price as displayed under the heading “Bloomberg VWAP” on Bloomberg page “SFLY <equity> AQR” (or its
equivalent successor if such page is not available) in respect of the period from the scheduled opening time of the Exchange to the Scheduled Closing Time of the Exchange on such Valid Day (or if such volume-weighted average price is unavailable,
the market value of one Share on such Valid Day determined, using a volume-weighted average method, if practicable, by the Calculation Agent). The Relevant Price will be determined without regard to after-hours trading or any other trading outside
of the regular trading session trading hours.
		
	 Settlement Averaging Period:
	  	For any Option and regardless of the Settlement Method applicable to such Option:
		
		  	 (i)      if the related Conversion Date occurs prior to the Free Convertibility Date, the 30
consecutive Valid Day period beginning on, and including, the second Valid Day after such Conversion Date; provided that if the Notice of Exercise for such Option specifies that Settlement in Shares or Low Cash Combination Settlement applies
to the related Convertible Note, the Settlement Averaging Period shall be the 80 consecutive Valid Day period beginning on, and including, the second Valid Day after such Conversion Date;
or




  
 8 








			
		
		  	 (ii)     if the related Conversion Date occurs on or after the Free Convertibility Date, the 30
consecutive Valid Day period beginning on, and including, the 32nd Scheduled Valid Day immediately preceding the Expiration Date; provided that if the Notice of Exercise or Notice of Final Settlement Method, as applicable, for such Option
specifies that Settlement in Shares or Low Cash Combination Settlement applies to the related Convertible Note, the Settlement Averaging Period shall be the 80 consecutive Valid Days beginning on, and including, the 82nd Scheduled Valid Day immediately preceding the Expiration
Date.

		
	 Settlement Date:
	  	For any Option, the third Business Day immediately following the last Valid Day of the Settlement Averaging Period for such Option.
		
	 Settlement Currency:
	  	USD
		
	 Other Applicable Provisions:
	  	The provisions of Sections 9.1(c), 9.8, 9.9 and 9.11 of the Equity Definitions will be applicable, except that all references in such provisions to “Physically-settled”
shall be read as references to “Share Settled.” “Share Settled” in relation to any Option means that Net Share Settlement or Combination Settlement is applicable to that Option.
		
	 Representation and Agreement:
	  	Notwithstanding anything to the contrary in Equity Definitions (including, but not limited to, Section 9.11 thereof), the parties acknowledge that (i) any Shares delivered to
Counterparty shall be, upon delivery, subject to restrictions and limitations arising from Counterparty’s status as issuer of the Shares under applicable securities laws, (ii) Dealer may deliver any Shares required to be delivered hereunder in
certificated form in lieu of delivery through the Clearance System and (iii) any Shares delivered to Counterparty may be “restricted securities” (as defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities
Act”)).


  

	3.	Additional Terms applicable to the Transaction. 


 

			
	Adjustments applicable to the Transaction:
		
	 Potential Adjustment Events:
	  	Notwithstanding Section 11.2(e) of the Equity Definitions, a “Potential Adjustment Event” means an occurrence of any event or condition, as set forth in any Dilution
Adjustment Provision, that would result in an adjustment to the “Conversion Rate” or to any “Last Reported Sale Price,” “Daily VWAP,” “Daily Conversion Value” or “Daily Settlement Amount” (each as
defined in the Indenture) of the Convertible Notes.
		
	 Method of Adjustment:
	  	Calculation Agent Adjustment, which means that, notwithstanding Section 11.2(c) of the Equity Definitions, upon any Potential Adjustment Event, the Calculation Agent shall make a
corresponding adjustment to any one



  
 9 








			
		
		  	or more of the Strike Price, the Option Entitlement and any other variable relevant to the exercise, settlement or payment for the Transaction to the extent an analogous adjustment
would be made pursuant to the Indenture in connection with such Potential Adjustment Event; provided that, notwithstanding the foregoing, if the Calculation Agent in good faith disagrees with any adjustment to the Convertible Notes that
involves an exercise of discretion by Counterparty or its board of directors (including, without limitation, pursuant to Section 13.05 of the Indenture or in connection with any proportional adjustment or the determination of the fair value of any
securities, property, rights or other assets), then in each such case, the Calculation Agent will determine the adjustment to be made to any one or more of the Strike Price, the Option Entitlement and any other variable relevant to the exercise,
settlement or payment for the Transaction in a commercially reasonable manner by making such adjustment by exercising its discretion on such matters in lieu of the exercise of discretion made by Counterparty or its board of directors, as the case
may be.
		
	 Dilution Adjustment Provisions:
	  	Sections 13.04(a), 13.04(b), 13.04(c), 13.04(d), 13.04(e) and 13.05 of the Indenture.
	
	Extraordinary Events applicable to the Transaction:
		
	 Merger Events:
	  	Notwithstanding Section 12.1(b) of the Equity Definitions, which shall not apply with respect to the Transaction, a “Merger Event” means the occurrence of any event or
condition set forth in the definition of “Merger Event” in Section 13.07(a) of the Indenture.
		
	 Tender Offers:
	  	Not Applicable
		
	 Consequence of Merger Events:
	  	Notwithstanding Section 12.2 of the Equity Definitions, upon the occurrence of a Merger Event, the Calculation Agent shall make a corresponding adjustment in respect of any
adjustment under the Indenture to the nature of the Shares to the extent an analogous adjustment would be made pursuant to the Indenture in connection with such Merger Event; provided, however, that no adjustment shall be made in
respect of any adjustment to the Conversion Rate pursuant to any Excluded Provision; provided further that if, with respect to a Merger Event, (i) the consideration for the Shares includes (or, at the option of a holder of Shares, may
include) shares of an entity or person that is not a corporation or is not organized under the laws of the United States, any State thereof or the District of Columbia or (ii) the Counterparty to the Transaction following such Merger Event will not
be either (A) the Issuer or (B) a wholly-owned subsidiary of the Issuer whose obligations under the Transaction are fully and unconditionally guaranteed by the Issuer, then Dealer, in its sole discretion, may
elect



  
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		  	for Cancellation and Payment (Calculation Agent Determination) to apply.
		
	 Nationalization, Insolvency or Delisting:
	  	Cancellation and Payment (Calculation Agent Determination); provided that, in addition to the provisions of Section 12.6(a)(iii) of the Equity Definitions, it will also
constitute a Delisting if the Exchange is located in the United States and the Shares are not immediately re-listed or re-quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or their respective
successors); if the Shares are immediately re-listed or re-quoted on any of the New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or their respective successors), such exchange or quotation system shall thereafter
be deemed to be the Exchange.
		
	 Restrictions on Adjustments:
	  	Notwithstanding anything to the contrary in the Equity Definitions or this Confirmation, none of the events listed in Section 13.04(j) of the Indenture will constitute a Potential
Adjustment Event or a Merger Event, and no adjustment will be made to the Transaction in connection with any such event pursuant to the Equity Definitions (as amended by this Confirmation) or otherwise.
		
	 Additional Disruption Events:
	  	
		
	 Change in Law:
	  	Applicable; provided that (i) Section 12.9(a)(ii) of the Equity Definitions is hereby amended by replacing the parenthetical beginning after the word “regulation”
in the second line thereof with the words “(including, for the avoidance of doubt and without limitation, (x) any tax law or (y) adoption or promulgation of new regulations authorized or mandated by existing statute),” and (ii) Section
12.9(a)(ii)(X) of the Equity Definitions is hereby amended by replacing the word “Shares” with the phrase “Hedge Positions”.
		
	 Failure to Deliver:
	  	Not Applicable
		
	 Hedging Disruption:
	  	Applicable; provided that:
		
		  	 (i)      Section 12.9(a)(v) of the Equity Definitions is hereby amended by (a) inserting the
following words at the end of clause (A) thereof: “in the manner contemplated by the Hedging Party on the Trade Date” and (b) inserting the following two phrases at the end of such Section:

		
		  	 “For the avoidance of doubt, the term “equity price risk” shall be deemed to include, but shall not be limited to, stock price and
volatility risk. And, for the further avoidance of doubt, any such transactions or assets referred to in phrases (A) or




  
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		  	 (B) above must be available on commercially reasonable pricing terms.”; and

		
		  	 (ii)     Section 12.9(b)(iii) of the Equity Definitions is hereby amended by inserting in the third line
thereof, after the words “to terminate the Transaction”, the words “or a portion of the Transaction affected by such Hedging Disruption”.

		
	 Increased Cost of Hedging:
	  	Not Applicable
		
	 Hedging Party:
	  	For all applicable Additional Disruption Events, Dealer.
		
	 Determining Party:
	  	For all applicable Extraordinary Events, Dealer.
		
	 Non-Reliance:
	  	Applicable
		
	 Agreements and Acknowledgments Regarding Hedging Activities:
	  	Applicable
		
	 Additional Acknowledgments:
	  	Applicable


  

	4.	Calculation Agent. Dealer, whose judgments, determinations and calculations shall be made in good faith and in a commercially reasonable manner. Following
any determination or calculation by the Calculation Agent hereunder, upon a written request by Company, the Calculation Agent shall promptly (but in any event within three Scheduled Trading Days) provide to Company by e-mail to the e-mail address
provided by Company in such request a report (in a commonly used file format for the storage and manipulation of financial data) displaying in reasonable detail the basis for such determination or calculation (including any assumptions used in
making such determination or calculation), it being understood that the Calculation Agent shall not be obligated to disclose any proprietary models or proprietary information used by it for such determination or calculation.


  

	5.	Account Details. 

  

	 	(a)	Account for payments to Counterparty: 

  

			
	Beneficiary Bank Name:	  	Wells Fargo Bank
	Beneficiary Bank Address:	  	420 Montgomery Street
		  	San Francisco, California 94104
	Beneficiary Bank ABA Routing Number:	  	121000248
	Swift Code (international):	  	WBIUS6S
	Beneficiary’s Name:	  	Shutterfly, Inc.
	Beneficiary’s Account:	  	41 2371 5088
	
	Account for delivery of Shares to Counterparty:
	
	To be provided by Counterparty.

  

	 	(b)	Account for payments to Dealer: 

  

			
	Bank:	 	Citibank, N.A.
	SWIFT:	 	CITIUS33
	Bank Routing:	 	021-000-089
	Acct Name:	 	Morgan Stanley and Co.
	Acct No.:	 	30632076
	
	Account for delivery of Shares from Dealer:


  
 12 









			
	
	To be provided by Dealer.

  

	6.	Offices. 

  

	 	(a)	The Office of Counterparty for the Transaction is: Inapplicable, Counterparty is not a Multibranch Party. 


 

	 	(b)	The Office of Dealer for the Transaction is: New York 

 Morgan Stanley & Co. International plc 
 c/o Morgan Stanley & Co.
LLC 
 1585 Broadway, 5th Floor 
 New York, NY 10036 
  

	7.	Notices. 

  

	 	(a)	Address for notices or communications to Counterparty: 

  

			
	To:	 	Shutterfly, Inc.
		 	2800 Bridge Parkway
		 	Redwood City, California 94065
	Attention:	 	General Counsel
	Telephone:	 	650-610-3555
	Facsimile:	 	650-593-3574

  

	 	(b)	Address for notices or communications to Dealer: 

  

			
	To:	 	Morgan Stanley & Co. International plc
		 	c/o Morgan Stanley & Co. LLC
		 	1585 Broadway, 5th Floor
		 	New York, NY 10036
	Attention:	 	Steve Soldo
	Telephone:	 	(212) 761-8848
	Facsimile:	 	(212) 507-6958
	Email:	 	Steven.Soldo@morganstanley.com
		
	With a copy to:	 	Morgan Stanley & Co. International
		 	c/o Morgan Stanley & Co.
		 	1221 Avenue of the Americas, 34th Floor
		 	New York, NY 10020
	Attention:	 	Anthony Cicia
	Telephone:	 	(212) 762-4828
	Facsimile:	 	(212) 507-4338
	Email:	 	Anthony.Cicia@morganstanley.com

  

	8.	Representations and Warranties of Counterparty. 

 Counterparty hereby further represents and warrants to Dealer on the date hereof and on and as of the Premium Payment Date that: 

 

	 	(a)	 Counterparty has all necessary corporate power and authority to execute, deliver and perform its obligations in respect of the Transaction; such
execution, delivery and performance have been duly authorized by all necessary corporate action on Counterparty’s part; and this Confirmation has been duly and validly executed and delivered by Counterparty and constitutes its valid and binding
obligation, enforceable against Counterparty in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar




  
 13 









	 	
laws affecting creditors’ rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and
fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity) and except that rights to indemnification and contribution hereunder may be limited by federal or state securities laws or public policy relating thereto.


  

	 	(b)	Neither the execution and delivery of this Confirmation nor the incurrence or performance of obligations of Counterparty hereunder will conflict with or result in a
breach of the certificate of incorporation or by-laws (or any equivalent documents) of Counterparty, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or
instrument filed as an exhibit to Counterparty’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by any subsequent filings, to which Counterparty or any of its subsidiaries is a party or by which Counterparty or
any of its subsidiaries is bound or to which Counterparty or any of its subsidiaries is subject, or constitute a default under, or result in the creation of any lien under, any such agreement or instrument. 


 

	 	(c)	No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required in connection with the execution, delivery or
performance by Counterparty of this Confirmation, except such as have been obtained or made and such as may be required under the Securities Act or state securities laws. 


 

	 	(d)	Counterparty is not and, after consummation of the transactions contemplated hereby, will not be required to register as an “investment company” as such term
is defined in the Investment Company Act of 1940, as amended. 

  

	 	(e)	Counterparty is an “eligible contract participant” (as such term is defined in Section 1a(18) of the Commodity Exchange Act, as amended).


  

	 	(f)	Counterparty is not, on the date hereof, in possession of any material non-public information with respect to Counterparty or the Shares. 


 

	 	(g)	To Counterparty’s knowledge, no state or local (including any non-U.S. jurisdiction’s) law, rule, regulation or regulatory order applicable to the Shares
would give rise to any reporting, consent, registration or other requirement (including without limitation a requirement to obtain prior approval from any person or entity) as a result of Dealer or its affiliates owning or holding (however defined)
Shares. 

  

	 	(h)	Counterparty (A) is capable of evaluating investment risks independently, both in general and with regard to all transactions and investment strategies involving a
security or securities, (B) will exercise independent judgment in evaluating the recommendations of any broker-dealer or its associated persons, unless it has otherwise notified the broker-dealer in writing and (C) has total assets of at
least $50 million. 

  

	9.	Other Provisions. 

  

	 	(a)	Opinions. Counterparty shall deliver to Dealer one or more opinions of counsel, dated as of the Effective Date, given in part by Latham & Watkins
LLP and in part by Fenwick & West LLP, with respect to the matters set forth in Sections 8(a) through (c) of this Confirmation; provided that any such opinion of counsel may contain customary exceptions and qualifications,
including, without limitation, excepts and qualifications relating to indemnification provisions. Delivery of such opinion to Dealer shall be a condition precedent for the purpose of Section 2(a)(iii) of the Agreement with respect to each
obligation of Dealer under Section 2(a)(i) of the Agreement. 

  

	 	(b)	 Repurchase Notices. Counterparty shall, on any day on which Counterparty effects any repurchase of Shares, promptly give Dealer a written
notice of such repurchase (a “Repurchase Notice”) on such day if following such repurchase the number of outstanding Shares as determined on such day is (i) less than 34.0 million (in the case of the first such notice) or
(ii) 



  
 14 









	 	
thereafter more than 2.8 million less than the number of Shares included in the immediately preceding Repurchase Notice. Counterparty agrees to indemnify and hold harmless Dealer and its
affiliates and their respective officers, directors, employees, affiliates, advisors, agents and controlling persons (each, an “Indemnified Person”) from and against any and all losses (including losses relating to Dealer’s
hedging activities as a consequence of becoming, or of the risk of becoming, a Section 16 “insider”, including without limitation, any forbearance from hedging activities or cessation of hedging activities and any losses in connection
therewith with respect to the Transaction), claims, damages, judgments, liabilities and reasonable expenses (including reasonable attorney’s fees), joint or several, which an Indemnified Person may become subject to, in each case, as a result
of Counterparty’s failure to provide Dealer with a Repurchase Notice on the day and in the manner specified in this paragraph, and to reimburse, within 30 days, upon written request, each of such Indemnified Persons for any reasonable legal or
other expenses incurred in connection with investigating, preparing for, providing testimony or other evidence in connection with or defending any of the foregoing. If any suit, action, proceeding (including any governmental or regulatory
investigation), claim or demand shall be brought or asserted against the Indemnified Person as a result of Counterparty’s failure to provide Dealer with a Repurchase Notice in accordance with this paragraph, such Indemnified Person shall
promptly notify Counterparty in writing, and Counterparty, upon request of the Indemnified Person, shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others Counterparty may designate
in such proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding. Counterparty shall not be liable for any settlement of any such proceeding contemplated by this paragraph that is effected without its
written consent, but if settled with such consent or if there be a final judgment for the plaintiff, Counterparty agrees to indemnify any Indemnified Person from and against any loss or liability by reason of such settlement or judgment.
Counterparty shall not, without the prior written consent of the Indemnified Person, effect any settlement of any such proceeding that is pending or threatened in respect of which any Indemnified Person is or could have been a party and indemnity
could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability on claims that are the subject matter of such proceeding on terms reasonably
satisfactory to such Indemnified Person. If the indemnification provided for in this paragraph is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then Counterparty
hereunder, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities. The remedies provided for in this paragraph
(b) are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Person at law or in equity. The indemnity and contribution agreements contained in this paragraph shall remain operative and in
full force and effect regardless of the termination of the Transaction. 

  

	 	(c)	Regulation M. Counterparty is not on the Trade Date engaged in a distribution, as such term is used in Regulation M under the Exchange Act, of any
securities of Counterparty, other than a distribution meeting the requirements of the exception set forth in Rules 101(b) and 102(b) of Regulation M. Counterparty shall not, until the second Scheduled Trading Day immediately following the Effective
Date, engage in any such distribution. 

  

	 	(d)	No Manipulation. Counterparty is not entering into the Transaction to create actual or apparent trading activity in the Shares (or any security
convertible into or exchangeable for the Shares) or to raise or depress or otherwise manipulate the price of the Shares (or any security convertible into or exchangeable for the Shares) or otherwise in violation of the Exchange Act.


  

	 	(e)	Transfer or Assignment. 

  

	 	(i)	 Counterparty shall have the right to transfer or assign its rights and obligations hereunder with respect to all, but not less than all, of the Options
hereunder (such Options, the “Transfer Options”); provided that such transfer or assignment (other than a transfer or 



  
 15 









	 	
assignment as result of a Merger Event in connection with which Shutterfly, Inc. is no longer Counterparty or otherwise or by operation of law) shall be subject to reasonable conditions that
Dealer may impose, including but not limited, to the following conditions: 

  

	 	(A)	With respect to any Transfer Options, Counterparty shall not be released from its notice and indemnification obligations pursuant to Section 9(b) or any
obligations under Section 9(m) or 9(r) of this Confirmation; 

  

	 	(B)	Any Transfer Options shall only be transferred or assigned to a third party that is a United States person (as defined in the Internal Revenue Code of 1986, as
amended); 

  

	 	(C)	Such transfer or assignment shall be effected on terms, including any reasonable undertakings by such third party (including, but not limited to, an undertaking with
respect to compliance with applicable securities laws in a manner that, in the reasonable judgment of Dealer, will not expose Dealer to material risks under applicable securities laws) and execution of any documentation and delivery of legal
opinions with respect to securities laws and other matters by such third party and Counterparty, as are reasonably requested and reasonably satisfactory to Dealer; 


 

	 	(D)	Dealer will not, as a result of such transfer and assignment, be required to pay the transferee on any payment date an amount under Section 2(d)(i)(4) of the
Agreement greater than an amount that Dealer would have been required to pay to Counterparty in the absence of such transfer and assignment; 

  

	 	(E)	An Event of Default, Potential Event of Default or Termination Event will not occur as a result of such transfer and assignment; 


 

	 	(F)	Without limiting the generality of clause (B), Counterparty shall cause the transferee to make such Payee Tax Representations and to provide such tax documentation as
may be reasonably requested by Dealer to permit Dealer to determine that results described in clauses (D) and (E) will not occur upon or after such transfer and assignment; and 


 

	 	(G)	Counterparty shall be responsible for all reasonable costs and expenses, including reasonable counsel fees, incurred by Dealer in connection with such transfer or
assignment. 

  

	 	(ii)	 Dealer may transfer or assign all or any part of its rights or obligations under the Transaction, with Counterparty’s prior written consent (such
consent not to be unreasonably withheld), (A) to any affiliate of Dealer (1) that has a rating for its long term, unsecured and unsubordinated indebtedness that is equal to or better than Dealer’s credit rating at the time of such
transfer or assignment, or (2) whose obligations hereunder will be guaranteed, pursuant to the terms of a customary guarantee in a form used by Dealer generally for similar transactions, by Dealer or Morgan Stanley, or (B) to any other
third party with a rating for its long term, unsecured and unsubordinated indebtedness equal to or better than the credit rating of Dealer at the time of such transfer or assignment. If at any time at which (A) the Section 16 Percentage
exceeds 9.0% or (B) the Share Amount exceeds the Applicable Share Limit (if any applies) (any such condition described in clauses (A) or (B), an “Excess Ownership Position”), Dealer is unable after using its commercially
reasonable efforts to effect a transfer or assignment of Options in accordance with the preceding sentence on pricing terms reasonably acceptable to Dealer and within a time period reasonably acceptable to Dealer such that no Excess Ownership
Position exists, then Dealer may designate any Exchange Business Day as an Early Termination Date with respect to a portion of the Transaction (the “Terminated Portion”), such that following such partial termination no Excess




  
 16 









	 	
Ownership Position exists. In the event that Dealer so designates an Early Termination Date with respect to a portion of the Transaction, a payment shall be made pursuant to Section 6 of the
Agreement as if (1) an Early Termination Date had been designated in respect of a Transaction having terms identical to the Transaction and a Number of Options equal to the number of Options underlying the Terminated Portion,
(2) Counterparty were the sole Affected Party with respect to such partial termination and (3) the Terminated Portion were the sole Affected Transaction. The “Section 16 Percentage” as of any day is the fraction, expressed
as a percentage, (A) the numerator of which is the number of Shares that Dealer and each person subject to aggregation of Shares with Dealer under Section 13 or Section 16 of the Exchange Act and rules promulgated thereunder directly
or indirectly beneficially own (as defined under Section 13 or Section 16 of the Exchange Act and rules promulgated thereunder) and (B) the denominator of which is the number of Shares outstanding (including, solely for such purpose,
Shares that would be deemed outstanding pursuant to the last sentence of Rule 13d-3(d)(1)(i) as if such sentence were applicable to the calculation of clause (B) of the definition of Section 16 Percentage). The “Share
Amount” as of any day is the number of Shares that Dealer and any person whose ownership position would be aggregated with that of Dealer (Dealer or any such person, a “Dealer Person”) under any law, rule, regulation,
regulatory order or organizational documents or contracts of Counterparty that are, in each case, applicable to ownership of Shares (“Applicable Restrictions”), owns, beneficially owns, constructively owns, controls, holds the power
to vote or otherwise meets a relevant definition of ownership under any Applicable Restriction, as determined by Dealer in its reasonable discretion. The “Applicable Share Limit” means a number of Shares equal to (A) the
minimum number of Shares that gives rise to reporting or registration obligations (except for any filings of Form 13F, Schedule 13D or Schedule 13G under the Exchange Act) or other requirements (including obtaining prior approval from any person or
entity) of a Dealer Person, under any Applicable Restriction, as determined by Dealer in its reasonable discretion, minus (B) 1% of the number of Shares outstanding. 


 

	 	(iii)	Notwithstanding any other provision in this Confirmation to the contrary requiring or allowing Dealer to purchase, sell, receive or deliver any Shares or other
securities, or make or receive any payment in cash, to or from Counterparty, Dealer may designate any of its affiliates to purchase, sell, receive or deliver such Shares or other securities, or to make or receive such payment in cash, and otherwise
to perform Dealer’s obligations in respect of the Transaction and any such designee may assume such obligations. Dealer shall be discharged of its obligations to Counterparty to the extent of any such performance. 


 

	 	(f)	Staggered Settlement. If upon advice of counsel with respect to applicable legal and regulatory requirements, including any requirements relating to
Dealer’s hedging activities hereunder, Dealer reasonably determines that it would not be advisable to pay or deliver, as the case may be, or to acquire cash or Shares to pay or deliver, as the case may be, any or all of the cash to be paid
and/or Shares to be delivered, as the case may be, by Dealer on any Settlement Date for the Transaction, Dealer may, by notice to Counterparty on or prior to any Settlement Date (a “Nominal Settlement Date”), elect to pay the cash
and/or deliver the Shares, as the case may be, on two or more dates (each, a “Staggered Settlement Date”) as follows: 

  

	 	(i)	in such notice, Dealer will specify to Counterparty the related Staggered Settlement Dates (each of which will be on or prior to such Nominal Settlement Date) and the
amount of cash and/or number of Shares that it will pay or deliver, as the case may be, on each Staggered Settlement Date; 

  

	 	(ii)	 the aggregate amount of cash and/or aggregate number of Shares that Dealer will pay or deliver, as the case may be, to Counterparty hereunder on all
such Staggered Settlement 



  
 17 









	 	
Dates will equal the amount of cash and/or number of Shares that Dealer would otherwise be required to pay or deliver, as the case may be, on such Nominal Settlement Date; and


  

	 	(iii)	if the Net Share Settlement, Combination Settlement or Cash Settlement terms set forth above were to apply on the Nominal Settlement Date, then the Net Share
Settlement, or Combination Settlement or Cash Settlement terms, as the case may be, will apply on each Staggered Settlement Date, except that the amount of cash and/or number of Shares payable or deliverable, as the case may be, pursuant to such
terms will be allocated among such Staggered Settlement Dates as specified by Dealer in the notice referred to in clause (i) above. 

  

	 	(g)	Role of Agent. Morgan Stanley & Co. LLC (“MS&CO”) is acting as agent for both parties but does not guarantee the
performance of either party. (i) Neither Dealer nor Counterparty shall contact the other with respect to any matter relating to the Transaction without the direct involvement of MS&CO; (ii) MS&CO, Dealer and Counterparty each
hereby acknowledges that any transactions by Dealer or MS&CO with respect to Shares will be undertaken by Dealer as principal for its own account; (iii) all of the actions to be taken by Dealer and MS&CO in connection with the
Transaction shall be taken by Dealer or MS&CO independently and without any advance or subsequent consultation with Counterparty; and (iv) MS&CO is hereby authorized to act as agent for Counterparty only to the extent required to
satisfy the requirements of Rule 15a-6 under the Exchange Act in respect of the Transaction. 

  

	 	(h)	Additional Termination Events. 

  

	 	(i)	If an event of default with respect to Counterparty occurs under the terms of the Convertible Notes as set forth in Section 6.01 of the Indenture and such event of
default results in the Convertible Notes becoming or being declared due and payable pursuant to the terms of the Indenture, then such event of default shall constitute an Additional Termination Event applicable to the Transaction and, with respect
to such Additional Termination Event, (A) Counterparty shall be deemed to be the sole Affected Party, (B) the Transaction shall be the sole Affected Transaction and (C) Dealer shall be the party entitled to designate an Exchange
Business Day as an Early Termination Date pursuant to Section 6(b) of the Agreement (which Exchange Business Day shall be on or as promptly as reasonably practicable after the occurrence of such acceleration). 


 

	 	(ii)	 The receipt by Dealer from Counterparty, within the applicable time period set forth under “Notice of Exercise” above, of any Notice of
Exercise in respect of the exercise of any Options that, according to such Notice of Exercise, relate to relevant Convertible Notes that are either (i) Make-Whole Convertible Notes or (ii) not Make-Whole Convertible Notes but in respect of
which the Conversion Date occurs prior to the Free Convertibility Date, shall, in either case, constitute an Additional Termination Event as provided in this paragraph. Upon receipt of any such Notice of Exercise, Dealer shall designate an Exchange
Business Day following such Additional Termination Event as an Early Termination Date (and Dealer shall use its commercially reasonable efforts to designate such Early Termination Date so that the related payment or delivery, as the case may be,
hereunder in respect of the Relevant Conversion Options will occur on (or as promptly as reasonably practicable after) the related settlement for the conversion of the relevant Convertible Notes) with respect to the portion of the Transaction
corresponding to a number of Options (the “Relevant Conversion Options”) equal to the lesser of (A) the aggregate principal amount of relevant Convertible Notes specified in such Notice of Exercise, divided by USD 1,000,
and (B) the Number of Options as of the date Dealer designates such Early Termination Date and, as of such date, the Number of Options shall be reduced by the number of Relevant Conversion Options. Any payment hereunder with respect to such
termination (the “Conversion Unwind Payment”) shall be calculated pursuant to Section 6 of the Agreement as if (1) an Early Termination Date had been designated in respect of a Transaction having terms identical to the
Transaction (except 



  
 18 









	 	
that, for purposes of this Section 9(h)(ii), the provisions opposite the caption “Applicable Limit” above shall be deemed to be deleted from this Confirmation) and a Number of
Options equal to the number of Relevant Conversion Options, (2) Counterparty were the sole Affected Party with respect to such Additional Termination Event and (3) the terminated portion of the Transaction were the sole Affected
Transaction (and, in determining the amount payable pursuant to Section 6 of the Agreement, the Calculation Agent shall not take into account any adjustments to the “Conversion Rate” (as defined in the Indenture) pursuant to
Section 13.03 of the Indenture); provided that the Conversion Unwind Payment shall not be greater than (x) the Applicable Percentage multiplied by (y) the number of Relevant Conversion Options multiplied by
(z) the excess of (I) the “Conversion Rate” (as defined in the Indenture after taking into account any adjustments thereto pursuant to Section 13.03 of the Indenture), multiplied by the Applicable Limit Price on the
settlement date for the cash and/or Shares to be delivered pursuant to Section 13.02 of the Indenture in respect of the relevant Convertible Notes relating to such Conversion Unwind Payment, over (II) USD 1,000. 


 

	 	(iii)	Within five Scheduled Trading Days promptly following any Repayment Event (as defined below), Counterparty shall notify Dealer of such Repayment Event and the aggregate
principal amount of Convertible Notes subject to such Repayment Event (any such notice, a “Repayment Notice”); provided that such Repayment Notice shall contain an acknowledgement by Counterparty of its responsibilities under
applicable securities laws, and in particular Section 9 and 10(b) of the Exchange Act and the rules and regulations promulgated thereunder in respect of such repurchase and delivery of such Repayment Notice. The receipt by Dealer from
Counterparty of any Repayment Notice shall constitute an Additional Termination Event as provided in this paragraph. Upon receipt of any such Repayment Notice, Dealer shall designate an Exchange Business Day following receipt of such Repayment
Notice as an Early Termination Date with respect to the portion of the Transaction corresponding to a number of Options (the “Repayment Options”) equal to the lesser of (A) the aggregate principal amount of such Convertible
Notes specified in such Repayment Notice, divided by USD 1,000, and (B) the Number of Options as of the date Dealer designates such Early Termination Date and, as of such date, the Number of Options shall be reduced by the number of
Repayment Options. Any payment hereunder with respect to such termination (the “Repayment Unwind Payment”) shall be calculated pursuant to Section 6 of the Agreement as if (1) an Early Termination Date had been designated
in respect of a Transaction having terms identical to the Transaction and a Number of Options equal to the number of Repayment Options, (2) Counterparty were the sole Affected Party with respect to such Additional Termination Event and
(3) the terminated portion of the Transaction were the sole Affected Transaction. “Repayment Event” means that (i) any Convertible Notes are repurchased (whether in connection with or as a result of a fundamental change,
howsoever defined, or for any other reason) by Counterparty or any of its subsidiaries, (ii) any Convertible Notes are delivered to Counterparty or any of its subsidiaries in exchange for delivery of any property or assets of such party
(howsoever described), (iii) any principal of any of the Convertible Notes is repaid prior to the final maturity date of the Convertible Notes (for any reason other than as a result of an acceleration of the Convertible Notes that results in an
Additional Termination Event pursuant to the preceding Section 9(h)(ii)), or (iv) any Convertible Notes are exchanged by or for the benefit of the holders thereof for any other securities of Counterparty or any of its subsidiaries (or any
other property, or any combination thereof) pursuant to any exchange offer or similar transaction. For the avoidance of doubt, any conversion of Convertible Notes pursuant to the terms of the Indenture shall not constitute a Repayment Event.


  

	 	(i)	Amendments to Equity Definitions. 

  

	 	(i)	 Section 12.6(a)(ii) of the Equity Definitions is hereby amended by (1) deleting from the fourth line thereof the word “or” after
the word “official” and inserting a comma therefor, 



  
 19 









	 	
and (2) deleting the semi-colon at the end of subsection (B) thereof and inserting the following words therefor “or (C) at Dealer’s option, the occurrence of any of the
events specified in Section 5(a)(vii)(1) through (9) of the ISDA Master Agreement with respect to that Issuer.” 

  

	 	(ii)	Section 12.9(b)(i) of the Equity Definitions is hereby amended by (1) replacing “either party may elect” with “Dealer may elect” and
(2) replacing “notice to the other party” with “notice to Counterparty” in the first sentence of such section. 

  

	 	(j)	No Setoff. Each party waives any and all rights it may have to set off obligations arising under the Agreement and the Transaction against other
obligations between the parties, whether arising under any other agreement, applicable law or otherwise. 

  

	 	(k)	Alternative Calculations and Payment on Early Termination and on Certain Extraordinary Events. If in respect of the Transaction, an amount is payable by
Dealer to Counterparty (i) pursuant to Section 12.7 or Section 12.9 of the Equity Definitions or (ii) pursuant to Section 6(d)(ii) of the Agreement (any such amount, a “Payment Obligation”), Dealer shall
satisfy the Payment Obligation by the Share Termination Alternative (as defined below), unless (a) Counterparty gives irrevocable telephonic notice to Dealer, confirmed in writing within one Scheduled Trading Day, no later than 12:00 p.m. (New
York City time) on the Merger Date, the Announcement Date (in the case of Nationalization, Insolvency or Delisting), the Early Termination Date or date of cancellation, as applicable, of its election that the Share Termination Alternative shall not
apply and (b) Counterparty acknowledges its responsibilities under applicable securities laws, and in particular Section 9 and Section 10(b) of the Exchange Act and the rules and regulations thereunder, in which case the provisions of
Section 12.7 or Section 12.9 of the Equity Definitions, or the provisions of Section 6(d)(ii) of the Agreement, as the case may be, shall apply. 


 

			
	Share Termination Alternative:	  	If applicable, Dealer shall deliver to Counterparty the Share Termination Delivery Property on, or within a commercially reasonable period of time after, the date when the relevant
Payment Obligation would otherwise be due pursuant to Section 12.7 or 12.9 of the Equity Definitions or Section 6(d)(ii) and 6(e) of the Agreement, as applicable (the “Share Termination Payment Date”), in satisfaction of such
Payment Obligation in the manner reasonably requested by Counterparty free of payment.
		
	Share Termination Delivery Property:	  	A number of Share Termination Delivery Units, as calculated by the Calculation Agent, equal to the Payment Obligation divided by the Share Termination Unit Price. The
Calculation Agent shall adjust the Share Termination Delivery Property by replacing any fractional portion of a security therein with an amount of cash equal to the value of such fractional security based on the values used to calculate the Share
Termination Unit Price.
		
	Share Termination Unit Price:	  	The value to Dealer of property contained in one Share Termination Delivery Unit, as determined by the Calculation Agent in its discretion by commercially reasonable means and
notified by the Calculation Agent to Dealer at the time of notification of the Payment Obligation. For the avoidance of doubt, the parties agree that in



  
 20 









			
		  	determining the Share Termination Delivery Unit Price the Calculation Agent may consider the purchase price paid in connection with the purchase of Share Termination Delivery
Property.
		
	Share Termination Delivery Unit:	  	One Share or, if a Nationalization, Insolvency or Merger Event has occurred and a corresponding adjustment to the Transaction has been made, a unit consisting of the type and amount
of such property received by a holder of one Share (without consideration of any requirement to pay cash or other consideration in lieu of fractional amounts of any securities) in such Nationalization, Insolvency or Merger Event, as determined by
the Calculation Agent.
		
	Failure to Deliver:	  	Applicable
		
	Other applicable provisions:	  	If Share Termination Alternative is applicable, the provisions of Sections 9.8, 9.9 and 9.11 (as modified above) of the Equity Definitions and the provisions set forth opposite the
caption “Representation and Agreement” in Section 2 will be applicable, except that all references to “Physically-settled” shall be read as references to “Share Termination Settled” and all references to
“Shares” shall be read as references to “Share Termination Delivery Units.” “Share Termination Settled” in relation to the Transaction means that the Share Termination Alternative is applicable to the
Transaction.


  

	 	(l)	Waiver of Jury Trial. Each party waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any
suit, action or proceeding relating to the Transaction. Each party (i) certifies that no representative, agent or attorney of either party has represented, expressly or otherwise, that such other party would not, in the event of such a suit,
action or proceeding, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other party have been induced to enter into the Transaction, as applicable, by, among other things, the mutual waivers and certifications provided
herein. 

  

	 	(m)	 Registration. Counterparty hereby agrees that if, in the good faith reasonable judgment of Dealer based on the advice of outside counsel,
any Shares acquired by Dealer for the purpose of hedging its obligations pursuant to the Transaction, other than any such Shares that were, at the time of acquisition by Dealer, “restricted securities” (as defined in Rule 144(a)(3) under
the Securities Act) (any such Shares, “Hedge Shares”), cannot be sold in the public market by Dealer without registration under the Securities Act, Counterparty shall, at its election, either (i) in order to allow Dealer to
sell the Hedge Shares in a registered offering, make available to Dealer an effective registration statement under the Securities Act and enter into an agreement substantially similar to underwriting agreements customary for registered secondary
offerings of a substantially similar size, in form and substance reasonably satisfactory to Dealer; provided, however, that if Dealer, in its sole reasonable discretion, is not satisfied with access to due diligence materials, the
results of its due diligence investigation, or the procedures and documentation for the registered offering referred to above, then clause (ii) or clause (iii) of this paragraph shall apply at the election of Counterparty, (ii) in
order to allow Dealer to sell the Hedge Shares in a private placement, enter into a private placement agreement substantially similar to private placement purchase agreements customary for private placements of equity securities of a substantially
similar size, in form and substance reasonably satisfactory to Dealer (in which case, the Calculation Agent shall make any 



  
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adjustments to the terms of the Transaction that are necessary, in its reasonable judgment, to compensate Dealer for any discount from the public market price of the Shares incurred on the sale
of Hedge Shares in a private placement), or (iii) purchase the Hedge Shares from Dealer at the Relevant Price on such Exchange Business Days, and in the amounts, requested by Dealer. 


 

	 	(n)	Tax Disclosure. Effective from the date of commencement of discussions concerning the Transaction, Counterparty and each of its employees,
representatives, or other agents may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the Transaction and all materials of any kind (including opinions or other tax analyses) that are provided
to Counterparty relating to such tax treatment and tax structure. 

  

	 	(o)	Right to Extend. Dealer may postpone or add, in whole or in part, any Valid Day or Valid Days during the Settlement Averaging Period or any other date of
valuation, payment or delivery by Dealer, with respect to some or all of the Options hereunder, if Dealer reasonably determines, based on the advice of counsel in the case of the immediately following clause (ii), that such action is reasonably
necessary or appropriate to (i) preserve Dealer’s hedging or hedge unwind activity hereunder in light of existing liquidity conditions (but only in the case of a material decrease in liquidity relative to Dealer’s expectations as of
the Trade Date) or (ii) to enable Dealer to effect transactions in Shares in connection with its hedging, hedge unwind or settlement activity hereunder in a manner that would, if Dealer were Counterparty or an affiliated purchaser of
Counterparty, be in compliance with applicable legal, regulatory or self-regulatory requirements, or with related policies and procedures applicable to Dealer. 


 

	 	(p)	Status of Claims in Bankruptcy. Dealer acknowledges and agrees that this Confirmation is not intended to convey to Dealer rights against Counterparty with
respect to the Transaction that are senior to the claims of common stockholders of Counterparty in any United States bankruptcy proceedings of Counterparty; provided that nothing herein shall limit or shall be deemed to limit Dealer’s
right to pursue remedies in the event of a breach by Counterparty of its obligations and agreements with respect to the Transaction; provided, further, that nothing herein shall limit or shall be deemed to limit Dealer’s rights in
respect of any transactions other than the Transaction. 

  

	 	(q)	Securities Contract; Swap Agreement. The parties hereto intend for (i) the Transaction to be a “securities contract” and a “swap
agreement” as defined in the Bankruptcy Code (Title 11 of the United States Code) (the “Bankruptcy Code”), and the parties hereto to be entitled to the protections afforded by, among other Sections, Sections 362(b)(6),
362(b)(17), 546(e), 546(g), 555 and 560 of the Bankruptcy Code, (ii) a party’s right to liquidate the Transaction and to exercise any other remedies upon the occurrence of any Event of Default under the Agreement with respect to the other
party to constitute a “contractual right” as described in the Bankruptcy Code, and (iii) each payment and delivery of cash, securities or other property hereunder to constitute a “margin payment” or “settlement
payment” and a “transfer” as defined in the Bankruptcy Code. 

  

	 	(r)	Notice of Certain Other Events. Counterparty covenants and agrees that: 


 

	 	(i)	promptly following the public announcement of the results of any election by the holders of Shares with respect to the consideration due upon consummation of any Merger
Event, Counterparty shall give Dealer written notice of the types and amounts of consideration that holders of Shares have elected to receive upon consummation of such Merger Event (the date of such notification, the “Consideration
Notification Date”); provided that in no event shall the Consideration Notification Date be later than the date on which such Merger Event is consummated; and 


 

	 	(ii)	promptly following any adjustment to the Convertible Notes in connection with any Potential Adjustment Event (other than a stock split or equivalent transaction) or,
Merger Event, Counterparty shall give Dealer written notice of the details of such adjustment. 

  

	 	(s)	 Wall Street Transparency and Accountability Act. In connection with Section 739 of the Wall Street Transparency and Accountability
Act of 2010 (“WSTAA”), the parties hereby agree that 



  
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neither the enactment of WSTAA or any regulation under the WSTAA, nor any requirement under WSTAA or an amendment made by WSTAA, shall limit or otherwise impair either party’s otherwise
applicable rights to terminate, renegotiate, modify, amend or supplement this Confirmation or the Agreement, as applicable, arising from a termination event, force majeure, illegality, increased costs, regulatory change or similar event under this
Confirmation, the Equity Definitions incorporated herein, or the Agreement (including, but not limited to, rights arising from Change in Law, Hedging Disruption, Increased Cost of Hedging, an Excess Ownership Position, or Illegality (as defined in
the Agreement)). 

  

	 	(t)	Agreements and Acknowledgements Regarding Hedging. Counterparty understands, acknowledges and agrees that: (A) at any time on and prior to the
Expiration Date, Dealer and its affiliates may buy or sell Shares or other securities or buy or sell options or futures contracts or enter into swaps or other derivative securities for Dealer’s own account in order to adjust its hedge position
with respect to the Transaction, (B) Dealer and its affiliates also may be active in the market for Shares other than in connection with hedging activities in relation to the Transaction, (C) Dealer shall make its own determination as to
whether, when or in what manner any hedging or market activities in securities of Issuer shall be conducted and shall do so in a manner that it deems appropriate to hedge its price and market risk with respect to the Relevant Prices, (D) any
market activities of Dealer and its affiliates with respect to Shares may affect the market price and volatility of Shares, as well as the Relevant Prices, each in a manner that may be adverse to Counterparty and (E) Counterparty does not have,
and shall not attempt to exercise, any influence over how, when, whether or at what price to effect such transactions, including, without limitation, the price paid or received per Share pursuant to such transactions, or whether such transactions
are made on any securities exchange or privately. 

  

	 	(u)	Early Unwind. In the event the sale of the “Firm Securities” (as defined in the Purchase Agreement (the “Purchase Agreement”),
dated as of May 14, 2013, among Counterparty, Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, as representatives of the Initial Purchasers party thereto (the “Representatives”)) is not consummated with the
Initial Purchasers for any reason, or Counterparty fails to deliver to Dealer opinions of counsel as required pursuant to Section 9(a), in each case by 5:00 p.m. (New York City time) on the Premium Payment Date, or such later date as agreed
upon by the parties (the Premium Payment Date or such later date, the “Early Unwind Date”), the Transaction shall automatically terminate (the “Early Unwind”) on the Early Unwind Date and (i) the Transaction
and all of the respective rights and obligations of Dealer and Counterparty under the Transaction shall be cancelled and terminated and (ii) each party shall be released and discharged by the other party from and agrees not to make any claim
against the other party with respect to any obligations or liabilities of the other party arising out of and to be performed in connection with the Transaction either prior to or after the Early Unwind Date. Each of Dealer and Counterparty
represents and acknowledges to the other that upon an Early Unwind, all obligations with respect to the Transaction shall be deemed fully and finally discharged. 


 

	 	(v)	Payment by Counterparty. In the event that (i) an Early Termination Date occurs or is designated with respect to the Transaction as a result of a
Termination Event or an Event of Default (other than an Event of Default arising under Section 5(a)(ii) or 5(a)(iv) of the Agreement) and, as a result, Counterparty owes to Dealer an amount calculated under Section 6(e) of the Agreement,
or (ii) Counterparty owes to Dealer, pursuant to Section 12.7 or Section 12.9 of the Equity Definitions, an amount calculated under Section 12.8 of the Equity Definitions, such amount shall be deemed to be zero.



  
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 Please confirm that the foregoing correctly sets forth the terms of the agreement between
Dealer and Counterparty with respect to the Transaction, by manually signing this Confirmation or this page hereof as evidence of agreement to such terms and providing the other information requested herein and returning an executed copy to Dealer.

  

					
	Yours faithfully,
	
	MORGAN STANLEY & CO. INTERNATIONAL PLC
		
	By:	 	 /s/ Joseba Picaza

		 	Name:	 	Joseba Picaza
		 	Title:	 	Executive Director
	
	 MORGAN STANLEY & CO. LLC
 as Agent

		
	By:	 	 /s/ Serkan Savasoglu

		 	Name:	 	Serkan Savasoglu
		 	Title:	 	Managing Director


 Accepted and confirmed 
 as of the Trade Date: 
  

			
	SHUTTERFLY, INC.
		
	By:	 	 /s/ Brian M. Regan

	Authorized Signatory
	Name:	 	Brian M. Regan
	Title:	 	Senior Vice President and Chief Financial Officer