exv10w2






Exhibit 10.2




[EXECUTION COPY]




SHAREHOLDERS AGREEMENT




          THIS SHAREHOLDERS AGREEMENT (as amended from time to time, the “Agreement”) is made as
of May 15, 2003, by and among rue21, inc. (f/k/a Pennsylvania Fashions, Inc.), a Pennsylvania
corporation (the “Company”), SKM Equity Fund II, L.P., a Delaware limited partnership (“SKM”), SKM
Investment Fund II, a Delaware limited partnership (“SKM Co-Invest” and together with SKM,
the “SKM Group”), BNP Paribas of North America, Inc. (“BNP”), UnionBanCal Equities, Inc.
(“UBC”) and National City Bank of Pennsylvania (“Nat City”) and any other Person who, from
time to time, may become a holder of equity securities of the Company and a party hereto. The SKM
Group, BNP, UBC and Nat City are collectively referred to herein as the “Shareholders” and
individually as a “Shareholder.” Certain capitalized terms used herein are defined in
paragraph 12 hereof.




          The Company and the Shareholders desire to enter into this Agreement for the purposes, among
others, of (i) providing the Shareholders with certain beneficial rights, (ii) establishing the
composition of the Company’s Board of Directors (the “Board”), (iii) assuring continuity
in the management and ownership of the Company and (iv) limiting the manner and terms by which the
Shares may be transferred.




          NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
to this Agreement hereby agree as follows:




          1. Board of Directors.




          (a) From and after the date hereof and until the provisions of this paragraph 1 cease to be
effective, each holder of Shares shall vote all of his, her or its Shares which are voting shares
and any other voting securities of the Company over which such holder has voting control and shall
take all other reasonably necessary or appropriate actions within his, her or its control (whether
in his, her or its capacity as a shareholder, director, member of a board committee or officer of
the Company or otherwise, and including, without limitation, attendance at meetings in person or
by proxy for purposes of obtaining a quorum and execution of written consents in lieu of
meetings), and the Company shall take all reasonably necessary or appropriate actions within its
control (including, without limitation, calling special board and shareholder meetings), so that:





          (i) the authorized number of directors on the Board shall be established at five
directors or such other number as may be determined from time to time by the holders of a
majority of the SKM Group Shares;




          (ii) except as set forth in subparagraph (iii) below, each of the directors on the
Board will be designated by the SKM Group (the “Investor Directors”), determined by
the holders of a majority of the SKM Group Shares, which as of the date hereof shall be
John F. Megrue, David J. Oddi, Fletcher E. Duke and Robert N. Fisch;



 









 






          (iii) one of the directors on the Board (the “Bank Group Director”) will be
designated by the holders of 60% or more of the Shares held by the Bank Group;




          (iv) one of the Investor Directors shall serve as Chairman of the Board having the
power and duties of such office as set forth in the Company’s Bylaws, with Robert N. Fisch
serving as Chairman of the Board as of the date hereof;




          (v) the removal from the Board (with or without cause) of any director shall be at the
written request of the Shareholders entitled to designate such director, but only upon such
written request and under no other circumstances; and




          (vi) in the event that any director ceases to serve as a member of the Board during
his or her term of office, the resulting vacancy on the Board shall be filled by a
representative designated by the Shareholders entitled to designate the director that
ceased to serve as a member of the Board.



          (b) The Company shall pay the reasonable out-of-pocket expenses incurred by each director in
connection with attending the meetings of the Board and any committee thereof. So long as any
Investor Director or any Bank Group Director serves on the Board, the Company’s Articles of
Incorporation and/or Bylaws shall provide for indemnification and exculpation of directors to the
fullest extent permitted under applicable law.




          (c) Notwithstanding anything contained herein to the contrary, without the affirmative vote or
consent of the Bank Group Director pursuant paragraph l(a)(iii), the Company shall not permit,
validate or effect any of the following actions:





          (i) the change of the business of the Company from substantially that of men’s,
women’s or children’s retail apparel and accessories, including entering into any material
new line of business;




          (ii) the entering into of any transaction, contract or agreement with any member of
the SKM Group or any of their respective Affiliates, other than (A) the management fee
letter, dated as of the date hereof, by and between the Company and Saunders Karp & Megrue,
LLC and (B) issuances of capital stock which are subject to the preemptive rights set forth
in paragraph 11 below;




          (iii) the issuance of Common Stock to directors, officers or employees of the Company
and its Subsidiaries in excess of the amount authorized by the Company’s 2003 Ownership
Incentive Plan as in effect on the date hereof (the “Ownership Incentive Plan”);




          (iv) except for the amendment of the charter to authorize and permit the issuance of
classes of preferred stock, the amendment of the charter or by-laws of the Company; or




          (v) a Prohibited Transfer.



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          (d) The Company shall obtain within 90 days from the date of this Agreement, and shall at all
times maintain, directors’ and officers’ liability insurance providing coverage for members of the
Board in their capacities as such, which coverage is reasonably appropriate for a company of its
size and type.




          (e) Except for paragraph l(d), the provisions of this paragraph 1 shall terminate
automatically and be of no further force and effect upon the consummation of the Initial Public
Offering.




          2. Representations and Warranties.




          (a) Each Shareholder represents and warrants that (i) such Shareholder is the record and
beneficial owner of the number of Shares set forth opposite his, her or its name on the Schedule of
Shareholders attached hereto, as the same may be amended from time to time, (ii) this Agreement has
been duly authorized, executed and delivered by such Shareholder and constitutes the valid and
binding obligation of such Shareholder, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other
similar laws affecting creditors’ rights generally and by general principles of equity, and (iii)
such Shareholder has not granted and is not a party to any proxy, voting trust or other agreement
which is inconsistent with, conflicts with or violates any provision of this Agreement. No holder
of Shares shall grant any proxy or become party to any voting trust or other agreement which is
inconsistent with, conflicts with or violates any provision of this Agreement.




          (b) The Company represents and warrants that (i) this Agreement has been duly authorized,
executed and delivered by the Company and constitutes the valid and binding obligation of the
Company, enforceable in accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’
rights generally and by general principles of equity, and (ii) the Company has not granted and is
not a party to any proxy, voting trust or other agreement which is inconsistent with, conflicts
with or violates any provision of this Agreement. The Company shall not grant any proxy or become
party to any voting trust or other agreement which is inconsistent with, conflicts with or
violates any provision of this Agreement.




          3. Restrictions on Transfer of Shares.




          (a) General. No holder of Shares shall sell, transfer, assign, pledge or otherwise
dispose of (whether with or without consideration and whether voluntarily or involuntarily or by
operation of law) any interest in any Shares (a “Transfer”), except pursuant to:





          (i) a Transfer to the Company in connection with a termination of such holder’s
employment with the Company or any of its Subsidiaries;




          (ii) the provisions of this paragraph 3;




          (iii) the provisions of paragraph 4; or




          (iv) the provisions of paragraph 5;




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provided however, that Executive Shareholders shall not be entitled to Transfer any
interest in their Shares pursuant to paragraph 3(a) or 3(b).




          Notwithstanding the foregoing, (i) without the prior approval of the Board, which approval
shall not be unreasonably withheld, conditioned or delayed, for a period of three years after the
effective date of the Plan (other than a Transfer pursuant to paragraph 4 or 5), neither the SKM
Group nor BNP may Transfer any of its Shares if its percentage interest in the aggregate amount of
Common Shares outstanding after giving effect to any such transfer would be less than its
percentage interest in the aggregate amount of Common Shares outstanding immediately prior to the
effective date of the Plan (which percentage interests are 49.673% and .654% for the SKM Group and
BNP, respectively) (any such Transfer being referred to herein as a “Prohibited Transfer”),
and (ii) no member of the Bank Group may Transfer any of its Shares to any transferee pursuant to
this paragraph 3 unless such member of the Bank Group also Transfers a pro rata portion of the Bank
Debt owned by such member of the Bank Group and its Permitted Transferees to such transferee. Any
reference in this Agreement, except in paragraph 3(d) below, to a Transfer of Shares by a member of
the Bank Group shall include a Transfer of the pro rata portion of the Bank Debt owned by such
member of the Bank Group and its Permitted Transferees. For purposes of clause (i) above, approval
of the Board shall be deemed unreasonably withheld, conditioned or delayed if the Transfer could
not reasonably be expected to adversely affect the ability of the Borrower to fully utilize all of
its net operating loss carryovers for federal income tax purposes (as such carryovers existed
immediately prior to the effective date of the Plan as determined by the Company’s certified public
accountants).




          Prior to making any Transfer (other than pursuant to an Approved Sale), each Shareholder
transferring any Shares (a “Transferring Shareholder”) shall deliver a written notice (a
“Transfer Notice”) to the Company and the Shareholders other than the Transferring
Shareholder (the “Other Shareholders”) in order to allow the Company and the Shareholders
to exercise the rights granted pursuant to paragraphs 3(b) and 3(c) below. The Transfer Notice
shall disclose in reasonable detail the identity of the prospective transferee(s), the number of
Shares to be transferred, the amount of Bank Debt to be transferred, if any, the consideration to
be paid and other terms and conditions of the proposed Transfer. In no event shall any Transfer of
Shares pursuant to this paragraph 3 be made by any Shareholder for any consideration other than
cash payable upon consummation of such Transfer or in installments over time. No Shareholder shall
consummate any Transfer until 30 days after the Transfer Notice has been given to the Company and
the Other Shareholders (the “Election Period”), unless the parties to the Transfer have
been finally determined pursuant to this paragraph 3 prior to the expiration of such 30-day
period. The date of the first to occur of such events is referred to herein as the “Authorization
Date.”




          (b) First Refusal Rights. (i) The Company may elect to purchase all or any portion of
a Shareholder’s Shares (other than the SKM Group Shares) and Bank Debt, if any, to be transferred
upon the same terms and conditions as those set forth in the Transfer Notice by delivering a
written notice of such election to such Shareholder and the SKM Group within 20 days after the
Transfer Notice has been delivered to the Company. If the Company has not elected to purchase all
of such Shareholder’s Shares and Bank Debt to be transferred, the SKM Group may elect to purchase
the remaining Shares and Bank Debt to be transferred upon the same terms and conditions as those
set forth in the Transfer Notice by delivering written notice of such election to such Shareholder





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within 25 days after the Transfer Notice has been given to the SKM Group. If more than one of the
members of the SKM Group elects to purchase such Shares and Bank Debt, the Shares and Bank Debt to
be sold shall be allocated among the SKM Group pro rata according to the number of Shares owned by
each such member of the SKM Group. If the Company and/or the SKM Group have not elected to
purchase all of such Shareholder’s Shares and Bank Debt specified in the Transfer Notice, such
Shareholder may Transfer all of the Shares and Bank Debt specified in the Transfer Notice, subject
to the provisions of paragraph 3(c) below, at a price and on terms no more favorable to the
transferee(s) thereof than specified in the Transfer Notice during the 30-day period immediately
following the Authorization Date.





          (ii) Notwithstanding anything contained herein to the contrary, if a member of the SKM
Group proposes to transfer 15% or less of the SKM Group Shares, the Company may elect to
purchase all or any portion of such Shareholder’s Shares to be transferred upon the same
terms and conditions as those set forth in the Transfer Notice by delivering a written
notice of such election to such Shareholder and the members of the Bank Group within 20 days
after the Transfer Notice has been delivered to the Company. If the Company has not elected
to purchase all of the Shares to be transferred, members of the Bank Group may elect to
purchase the remaining Shares to be transferred upon the same terms and conditions as those
set forth in the Transfer Notice by delivering written notice of such election to such
Shareholder within 25 days after the Transfer Notice has been given to the Bank Group. If
more than one of the members of the Bank Group elects to purchase such Shares, the Shares to
be sold shall be allocated among the Bank Group pro rata according to the number of Shares
owned by each such member of the Bank Group. If the Company and/or members of the Bank Group
have not elected to purchase all of such Shares specified in the Transfer Notice, such
Shareholder may Transfer all of the Shares specified in the Transfer Notice, subject to the
provisions of paragraph 3(c) below, at a price and on terms no more favorable to the
transferee(s) thereof than specified in the Transfer Notice during the 30-day period
immediately following the Authorization Date.




          (iii) Any Shareholder’s Shares not transferred within the 30-day period specified in
paragraph 3(a)(i) or 3(a)(ii), as applicable, shall be subject to the provisions of this
paragraph 3 upon subsequent Transfer. If the Company or any of the members of the SKM Group
or the Bank Group, as the case may be, have collectively elected to purchase all of the
Shares and Bank Debt, if any, specified in the Transfer Notice, the Transfer of such Shares
and the Bank Debt, if any, shall be consummated as soon as practical after the delivery of
the election notice(s) to the Transferring Shareholder, but in any event within 15 days
after the expiration of the Election Period. Each member of the SKM Group may assign their
rights under this paragraph 3(b) to (i) an Affiliate or (ii) to a successor or acquirer of
all or substantially all of the assets or equity of SKM or SKM Co-Invest, as applicable.



          (c) Participation Rights. If the Company and/or the SKM Group or members of the Bank
Group, as the case may be, have not elected to purchase all of the Shares and Bank Debt, if any,
to be transferred by a Shareholder pursuant to paragraph 3(b) above or if any member of the SKM
Group intends to Transfer 15% or more of the SKM Group Shares, each Other Shareholder may elect to
participate in the contemplated Transfer by delivering written notice to the Transferring
Shareholder and the Company within 30 days after receipt by such Other Shareholder of the Transfer





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Notice. If any Other Shareholder has elected to participate in such Transfer, the Transferring
Shareholder and the electing Other Shareholders) shall be entitled to sell in the contemplated
Transfer, at the same price and on the same terms, a number of Shares equal to the product of (i)
the quotient determined by dividing the percentage of Shares owned by such Person by the aggregate
percentage of Shares owned by the Transferring Shareholder and all electing Other Shareholder(s)
and (ii) the number of Shares to be sold in the contemplated sale.





For example, if the Transfer Notice contemplated a sale of 100
Shares, and if the Transferring Shareholder was at such time the
owner of 30% of all Shares and if one Other Shareholder elected to
participate and such Other Shareholder owned 20% of all Shares, the
Transferring Shareholder would be entitled to sell 60 Shares (30% ÷
50% x 100 Shares) and the electing Other Shareholder would be
entitled to sell 40 Shares (20% ÷ 50% x 100 Shares).


The Transferring Shareholder shall use his, her or its commercially reasonable efforts to obtain
the agreement of the prospective transferee(s) to the participation of the Other Shareholders in
the contemplated Transfer and shall not Transfer any Shares to the prospective transferee(s) if
such transferee(s) refuses to allow the participation of the Other Shareholders. Each Shareholder
transferring Shares pursuant to this paragraph 3(c) shall pay its pro rata share (based on the
number of Shares to be sold) of the expenses incurred by the Shareholders in connection with such
Transfer and shall be obligated to join on a pro rata basis (based on the number of Shares to be
sold) in any indemnification or other obligations that the Transferring Shareholder agrees to
provide in connection with such Transfer (other than any such obligations that relate specifically
to a particular Shareholder such as indemnification with respect to representations and warranties
given by a Shareholder regarding such Shareholder’s title to and ownership of Shares).




          (d) Permitted Transfers. The restrictions set forth in this paragraph 3 shall not
apply with respect to any Transfer of Shares by any Shareholder (i) in the case of an individual,
pursuant to applicable laws of descent and distribution or among such individual’s Family Group,
(ii) in the case of the SKM Group or any member of the Bank Group, among its Affiliates, (iii) in
the case of a member of the Bank Group (other than BNP with respect to its .654% interest in
Common Shares until the third anniversary of the effective date of the Plan as described in
paragraph 3(a)), to any other member of the Bank Group (collectively clauses (i), (ii) and (iii)
are referred to herein as “Permitted Transferees”), or (iv) in connection with an Approved
Sale; provided that the restrictions contained in this paragraph 3 shall continue to be applicable
to the Shares after any Transfer pursuant to clauses (i) and (ii) above; and provided
further that (A) the transferees of such Shares shall have agreed in writing to be bound by
the provisions of this Agreement affecting the Shares so transferred and (B) such transfer is made
in accordance with applicable securities laws. For purposes of this Agreement, “Family
Group” means an individual’s spouse and descendants (whether natural or adopted) and any trust
solely for the benefit of the individual and/or the individual’s spouse and/or descendants. For
purposes of this Agreement, “Affiliate” of an entity means any other Person, directly or
indirectly controlling, controlled by or under common control with an entity or any partner of any
entity which is a partnership, and for purposes of this definition, “control” of a Person shall
mean the possession, directly or indirectly, of the power to direct or cause the direction of its
management and policies, whether through the ownership of voting securities or





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partnership or member interests, by contract or otherwise. Without limiting the generality of the
foregoing, a Person shall be deemed to control any other Person in which it or any of its
Affiliates owns, directly or indirectly, a majority of the ownership interests of such person.
Notwithstanding the foregoing, (i) no party hereto shall avoid the provisions of this Agreement by
making one or more transfers to one or more Permitted Transferees and then disposing of all or any
portion of such parry’s interest in any such Permitted Transferee and (ii) if the Shareholder is a
Person other than an individual, such Shareholder shall not avoid the provisions of this Agreement
by transferring a controlling equity interest in such Shareholder to a non-Permitted Transferee.




          (e) Termination of Restrictions. The restrictions on the Transfer of Shares set forth
in this paragraph 3 shall terminate with respect to each Share upon the earlier of: (i) the
consummation of an Approved Sale or (ii) the consummation of the Initial Public Offering.




          4. Sale of the Company.




          (a) If the Board and the holders of a majority of the SKM Shares approve and produce an
Independent Third Party or group of Independent Third Parties to acquire the Company pursuant to a
Sale of the Company (an “Approved Sale”), each holder of Shares shall vote for, consent to
and raise no objections against such Approved Sale and shall waive any dissenters’ rights,
appraisal rights or similar rights in connection therewith, to the extent permitted by applicable
law. If the Approved Sale is structured as a sale of shares, each holder of Shares shall agree to sell
all of his, her or its Shares and rights to acquire Shares on the terms and conditions approved by
the Board and the holders of a majority of the SKM Shares. Each holder of Shares shall take all
necessary and appropriate actions in connection with the consummation of the Approved Sale as
reasonably requested by the Company (whether in his, her or its capacity as a shareholder,
director, member of a board committee or other governing body or committee, and including
attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of
written consents in lieu of meetings).




          (b) Upon the consummation of the Approved Sale, each Shareholder shall receive in exchange for
the Shares held by such Shareholder the same portion of the aggregate consideration from such
Approved Sale that such Shareholder would have received if such aggregate consideration had been
distributed by the Company in complete liquidation pursuant to the rights and preferences set forth
in the Company’s Articles of Incorporation as in effect immediately prior to the consummation of
such Approved Sale. All holders of Shares representing then currently exercisable options or
warrants to acquire Common Shares shall be given an opportunity, at the Board’s discretion, to
either (A) exercise such options or warrants prior to the consummation of the Approved Sale and
participate in such sale as holders of Common Shares or (B) upon the consummation of the Approved
Sale, receive in exchange for such options or warrants consideration equal to the amount determined
by multiplying (1) the same amount of consideration per Common Share received by the holders of
Common Shares in connection with the Approved Sale less the exercise price per Common Share of such
options or warrants to acquire Common Shares by (2) the number of Common Shares represented by such
then currently exercisable options or warrants.




          (c) If the Company or the holders of the Company’s securities enter into any negotiation or
transaction for which Rule 506 (or any similar rule then in effect) promulgated by the






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Securities and Exchange Commission may be available with respect to such negotiation or
transaction (including a merger, consolidation or other reorganization), each holder of Shares
will, at the request of the Company, appoint a “purchaser representative” (as such term is defined
in Rule 501) reasonably acceptable to the Company. If any such holder of Shares appoints a
purchaser representative designated by the Company, then the Company shall pay the fees of such
purchaser representative, but if such holder of Shares declines to appoint the purchaser
representative designated by the Company, such holder shall appoint another purchaser
representative, and such holder shall be responsible for the fees of the purchaser representative
so appointed.




          (d) Generally, the Company shall pay all transaction costs associated with any Approved Sale
to the extent such costs are incurred for the benefit of all holders of Shares. To the extent such
costs are not incurred by the Company prior to the distribution to the holders of Shares of
proceeds from any Approved Sale or by the acquiring company, such costs shall be borne by each
holder according to his, her or its pro-rata share (based upon the amount of consideration received
by such holder for such Shares in the Approved Sale) of the costs of any Approved Sale. Each holder
of Shares shall be obligated to join on a pro rata basis (based upon the amount of consideration
received by such holder for such Shares in the Approved Sale) in any indemnification or other
obligations that the holders of a majority of the SKM Shares agree to provide in connection with
such Approved Sale (other than any such obligations that relate specifically to a holder of Shares
such as indemnification with respect to representations and warranties given by a holder regarding
such holder’s title to and ownership of Shares); provided that such indemnification shall
not exceed such holder’s net proceeds from such Approved Sale.




          (e) In order to secure each Shareholder’s obligation to vote his, her or its Shares and other
voting securities of the Company in accordance with the provisions of this paragraph 4, each
Shareholder hereby appoints SKM as his, her or its true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of his, her or its Shares and other voting securities of
the Company for the approval and consummation of an Approved Sale and all such other matters as
expressly provided for in this paragraph 4. SKM may exercise the irrevocable proxy granted to it
hereunder at any time any Shareholder fails to comply with the provisions of this paragraph 4. The
proxies and powers granted by each Shareholder pursuant to this paragraph 4(e) are coupled with an
interest and are given to secure the performance of each Shareholder’s obligations and duties under
this paragraph 4. Such proxies and powers shall be irrevocable for so long as such Shareholder
holds any Shares and shall survive the death, incompetency, disability, bankruptcy or dissolution
of such Shareholder and the subsequent holders of his, her or its Shares.




          (f) The provisions of this paragraph 4 shall terminate immediately prior to the consummation
of the Initial Public Offering.




          5. Initial Public Offering. In the event that the Board and the holders of a majority
of the SKM Shares then outstanding approve an Initial Public Offering, the holders of Shares shall
take all necessary or appropriate actions in connection with the consummation of the Initial
Public Offering. In the event that such Initial Public Offering is an underwritten offering and
the managing underwriters advise the Company in writing that in their opinion the capital share
structure would adversely affect the marketability of the offering, each holder of Shares shall
consent to and vote for a recapitalization, reorganization and/or exchange of his, her or its
capital shares into





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securities that the managing underwriters, the Board and holders of a majority of the SKM Shares
then outstanding find acceptable and shall take all necessary or appropriate actions in connection
with the consummation of the recapitalization, reorganization and/or exchange; provided that
the resulting securities must reflect and be substantially consistent with the rights,
preferences and obligations set forth in the Company’s Articles of Incorporation as in effect
immediately prior to such Initial Public Offering.




          6. Holdback Agreement. Neither the Company nor any holder of Shares shall effect any
public sale or distribution (including sales pursuant to Rule 144 of the Securities Act) of any
Shares or of any other capital shares or equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for such shares or securities, during the period
before, during and after the effective date of the Initial Public Offering or any subsequent
underwritten registration (except as part of such underwritten registration) that is agreed to by
the underwriters managing the registration and the holders of a majority of the SKM Shares.




          7. Legend. Each certificate evidencing Shares and each certificate issued in exchange
for or upon the transfer of any Shares (if such shares remain Shares after such transfer) shall be
stamped or otherwise imprinted with a legend in substantially the following form:





“The securities represented by this certificate are subject to
certain restrictions set forth in a Shareholders Agreement dated as
of May 15, 2003, among the issuer of such securities (the
“Company”) and certain of the Company’s shareholders, as
amended and modified from time to time. A copy of such Shareholders
Agreement shall be furnished without charge by the Company to the
holder hereof upon written request.”


In addition, each certificate evidencing Shares and each certificate issued in exchange for or
upon the transfer of any Shares (if such shares remain Shares after such transfer) shall be
stamped or otherwise imprinted with a legend in substantially the following form:





“The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the “Act”)
and may not be sold or transferred in the absence of an effective
registration statement under the Act or exemption from registration
thereunder.”


The Company shall imprint such legends, as appropriate, on certificates evidencing Shares
outstanding as of the date hereof. The legends set forth above shall be removed from the
certificates evidencing any Shares which cease to be Shares pursuant to the definition of
“Shares.”




          8. Transfers. Prior to any holder of Shares transferring any Shares (except Transfers
pursuant to paragraphs 3(c) or 4) to any Person and prior to the Company issuing or selling any
Common Shares or any options or other rights to acquire Common Shares or any securities
convertible into or exchangeable for Common Shares to any Person, such holder or the Company, as
the case may be, shall cause the prospective transferee to be bound by this Agreement and to
execute and deliver to the Company and the other holders of Shares a counterpart of this Agreement





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or, in the case of the Company, to execute and deliver and be bound by a separate agreement with
similar restrictions and obligations.




          9. Additional Shareholders. In connection with the issuance of any additional equity
securities of the Company to any Person or the transfer of any equity securities of the Company to
any Person, such Person shall become a party to this Agreement and succeed to all of the rights and
obligations of a “Shareholder” and/or an “Executive Shareholder” under this Agreement by providing
each party hereto with an executed counterpart signature page to this Agreement, and, upon such
execution, such Person shall for all purposes be a “Shareholder”, and/or an “Executive Shareholder”
to this Agreement, as applicable.




          10. Transfer of Restricted Securities.




          (a) General Provisions. Restricted Securities are transferable only pursuant to (i)
public offerings registered under the Securities Act, (ii) Rule 144 or Rule 144A of the Securities
and Exchange Commission (or any similar rule or rules then in force) if such rule is available and
(iii) subject to the conditions specified in paragraph (b) below, any other legally available means
of transfer.




          (b) Opinion Delivery. In connection with the Transfer of any Restricted Securities
(other than a transfer described in paragraph 10(a)(i) or (ii) above), the holder thereof shall
deliver written notice to the Company describing in reasonable detail the Transfer or proposed
Transfer, together with an opinion of Kirkland & Ellis, Kramer Levin Naftalis & Frankel LLP or
other counsel which (to the Company’s reasonable satisfaction) is knowledgeable in securities law
matters to the effect that such Transfer of Restricted Securities may be effected without
registration of such Restricted Securities under the Securities Act. In addition, if the holder of
the Restricted Securities delivers to the Company an opinion of Kirkland & Ellis, Kramer Levin
Naftalis & Frankel LLP or such other approved counsel that no subsequent Transfer of such
Restricted Securities shall require registration under the Securities Act, the Company shall
promptly upon such contemplated Transfer deliver new certificates for such Restricted Securities
which do not bear the Securities Act legend set forth in paragraph 7. If the Company is not
required to deliver new certificates for such Restricted Securities not bearing such legend, the
holder thereof shall not Transfer the same until the prospective transferee has confirmed to the
Company in writing its agreement to be bound by the conditions contained in this paragraph.




          11. Preemptive Rights.




          (a) Each Shareholder shall have a preemptive right to purchase its pro rata share of all
Equity Securities (as defined below) that the Company may, from time to time, propose to sell and
issue after the date of this Agreement, except for (i) sales or issuances of Equity Securities pro
rata to all holders of Common Shares, as a share dividend, share split, recapitalization or like
transaction, (ii) sales or issuances of Equity Securities to directors, officers and employees of
the Company and its Subsidiaries pursuant to the Ownership Incentive Plan or (iii) sales or
issuances of Equity Securities as consideration in connection with bona fide acquisitions. Each
Shareholder’s pro rata share is equal to the ratio of (a) the number of Shares which such
Shareholder is deemed to be a holder of immediately prior to the issuance of such Equity
Securities to (b) the total number of





-10-









 







Shares outstanding immediately prior to the issuance of the Equity Securities. The term “Equity
Securities” shall mean (i) any Common Stock, preferred stock or other security of the Company,
(ii) any security convertible, with or without consideration, into any Common Stock, preferred
stock or other security (including any option to purchase such a convertible security), (iii) any
security carrying any warrant or right to subscribe to or purchase any Common Stock, preferred
stock or other security or (iv) any such warrant or right. If the Company proposes to issue any
Equity Securities, it shall give each Shareholder written notice of its intention, describing the
Equity Securities, the price and the terms and conditions upon which the Company proposes to issue
the same. Each Shareholder shall have thirty (30) days from the giving of such notice to agree to
purchase its pro rata share of the Equity Securities for the price and upon the terms and
conditions specified in the notice by giving written notice to the Company and stating therein the
quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not
be required to offer or sell such Equity Securities to any Shareholder who would cause the Company
to be in violation of applicable securities laws by virtue of such offer or sale.




          (b) If not all of the Shareholders elect to purchase their pro rata share of the Equity
Securities, then the Company shall promptly notify in writing the Shareholders who do so elect and
shall offer such Shareholders the right to acquire such unsubscribed shares. Each Shareholder shall
have ten (10) days after receipt of such notice to notify the Company of its election to purchase
all or a portion thereof of the unsubscribed shares.




          (c) If the Shareholders fail to exercise in full the preemptive rights, the Company shall have
thirty (30) days thereafter to sell the Equity Securities in respect of which the Shareholders’
rights were not exercised, at a price and upon terms and conditions no more favorable to the
purchasers thereof than specified in the Company’s notice to the Shareholders pursuant to paragraph
8(b). If the Company has not sold such Equity Securities within thirty (30) days of the notice
provided pursuant to paragraph 8(b), the Company shall not thereafter issue or sell any Equity
Securities, without first offering such securities to the Shareholders in the manner provided
above.




          (d) The rights of the Shareholders under this paragraph 11 shall terminate immediately prior
to the consummation of the Initial Public Offering.




          12. Definitions.




          “5% Owner” has the meaning set forth in the definition of “Independent Third Party”
below.




          “Affiliate” has the meaning set forth in paragraph 3(d).




          “Agreement” has the meaning set forth in the preamble.




          “Approved Sale” has the meaning set forth in paragraph 4(a).




          “Authorization Date” has the meaning set forth in paragraph
3(a).




          “Bank Debt” means the indebtedness incurred by the Company pursuant to the terms of
the Credit Agreement.





-11-









 








          “Bank Group” means BNP, UBC, Nat City and their respective successors and assigns; provided,
that no member of the SKM Group, none of their respective Affiliates and none of their respective
successors and assigns shall be members of the Bank Group.




          “Board” has the meaning set forth in the preamble.




          “BNP” has the meaning set forth in the preamble.




          “Common Shares” means shares of Common Stock.




          “Common Stock” means common stock, par value $0.01, per share of the Company.




          “Company” has the meaning set forth in the preamble.




          “Credit Agreement” means the Second Amended and Restated Credit Agreement dated as of
May 15, 2003 among the Company, the Banks (as defined therein), and BNP Paribas, as agent for the
Lenders (as defined therein).




          “Election Period” has the meaning set forth in paragraph 3(a).




          “Executive Shareholder” means (i) a Shareholder who is an officer or employee of the
Company or its Subsidiaries or (ii) any Shareholder who acquired Shares pursuant to an option
agreement.




          “Family Group” has the meaning set forth in paragraph 3(d).




          “Independent Third Party” means any Person who, immediately prior to the contemplated
transaction, does not own in excess of 5% of the Company’s Common Shares on a fully-diluted basis
(a “5% Owner”), who is not controlling, controlled by or under common control with any
such 5% Owner and who is not the spouse or descendent (by birth or adoption) of any such 5% Owner
or a trust for the benefit of such 5% Owner and/or such other Persons.




          “Initial Public Offering” means the initial public offering of the Company’s Common
Shares pursuant to a registration statement filed under the Securities Act of 1933, as amended, or
any similar federal law then in force.




          “Investor Directors” has the meaning set forth in paragraph 1(a)(ii).




          “Other Shareholders” has the meaning set forth in paragraph 3(a).




          “Permitted Transferees” has the meaning set forth in paragraph 3(d).




          “Person” means an individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated organization and a
governmental entity or any department, agency or political subdivision thereof.




          “Plan “ means the First Amended Plan of Reorganization (including all exhibits
thereto) of the Company dated March 25, 2003, as amended.





-12-









 








          “Prohibited Transfer” has the meaning set forth in paragraph 3(a).




          “Restricted Securities” means (i) the Common Shares, other than the Common Shares held
by members of the Bank Group, and (ii) any securities issued with respect to the securities
referred to in clause (i) above by way of a share dividend or share split or in connection with a
combination of shares, recapitalization, merger, consolidation or other reorganization. As to any
particular Restricted Securities, such securities shall cease to be Restricted Securities when they
have (a) been effectively registered under the Securities Act and disposed of in accordance with
the registration statement covering them, (b) been distributed to the public through a broker,
dealer or market maker pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act or become eligible for sale pursuant to Rule 144(k) (or any similar provision then
in force) under the Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act legend set forth in paragraph 7 have been delivered by the Company
in accordance with paragraph 10(b). Whenever any particular securities cease to be Restricted
Securities, the holder thereof shall be entitled to receive from the Company, without expense, new
securities of like tenor not bearing a Securities Act legend of the character set forth in
paragraph 7.




          “Sale of the Company” means the sale of the Company on an arms-length basis to an
Independent Third Party or group of Independent Third Parties pursuant to which such party or
parties acquire (i) capital shares of the Company possessing the voting power under normal
circumstances to elect a majority of the Company’s board of directors (whether by merger,
consolidation or sale or transfer of the Company’s capital shares) or (ii) all or substantially
all of the Company’s assets determined on a consolidated basis.




          “Securities Act” means the Securities Act of 1933, as amended from time to
time.




          “Shareholders” has the meaning set forth in the preamble.




          “Shares” means (i) any Common Shares purchased or otherwise acquired by any
Shareholder and (ii) any Common Shares issued or issuable with respect to the securities referred
to in clause (i) above, by way of exercise, conversion, share dividend or share split or in
connection with a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular shares constituting Shares, such shares shall cease to be
Shares when they have been (x) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them or (y) sold to the public through a
broker, dealer or market maker pursuant to Rule 144 (other than Rule 144(k)), or any similar
provision then in force, under the Securities Act.




          “SKM” has the meaning set forth in the preamble.




          “SKM Co-Invest” has the meaning set forth in the preamble.




          “SKM Group” has the meaning set forth in the preamble.



          “SKM Group Shares” means (i) any Common Shares purchased or otherwise acquired by the
SKM Group and (ii) any Common Shares issued or issuable with respect to the securities referred to
in clause (i) above by way of exercise, conversion, share dividend or share split or in connection
with a combination of shares, recapitalization, merger, consolidation or other





-13-









 







reorganization.




          “Subsidiary” means, with respect to any Person, any corporation, limited liability
company, partnership, association or other business entity of which (i) if a corporation, a
majority of the total voting power of shares of stock entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the limited liability company,
partnership or other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination
thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership
interest in a limited liability company, partnership, association or other business entity if such
Person or Persons shall be allocated a majority of the limited liability company, partnership,
association or other business entity gains or losses or shall be or control the managing member,
director or general partner of such limited liability company, partnership, association or other
business entity.




          “Transfer” has the meaning set forth in paragraph 3(a).




          “Transferring Shareholder” has the meaning set forth in paragraph 3(a).




          “Transfer Notice” has the meaning set forth in the paragraph 3(a).




          13. Transfers in Violation of Agreement. Any Transfer or attempted Transfer of any
Shares in violation of any provision of this Agreement shall be void, and the Company shall not
record such Transfer on its books or treat any purported transferee of such Shares as the owner of
such Shares for any purpose.




          14. Amendment and Waiver. Except as otherwise provided herein, no modification,
amendment or waiver of any provision of this Agreement shall be effective against the Company or
the Shareholders unless such modification, amendment or waiver is approved in writing by the
Company and SKM; provided that no such amendment or action which adversely and
disproportionately affects any particular Shareholder vis-a-vis the other Shareholders shall be
effective against such Shareholder without the prior written consent of such Shareholder;
provided, further, that this paragraph 14 shall not be amended without the prior
written consent of all of the Shareholders. The Company shall give prompt written notice of any
amendment or termination hereof or waiver hereunder to any Shareholder that did not consent in
writing to such amendment, termination or waiver. The failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every provision of this Agreement
in accordance with its terms. The addition of any Person as a party to this Agreement shall not constitute a modification or
amendment to any provision of this Agreement.




          15. Severability. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law, but if any provision
of this Agreement is held to be invalid, illegal or unenforceable in any respect under any
applicable law





-14-









 







or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the
validity, legality or enforceability of any other provision of this Agreement in such jurisdiction
or affect the validity, legality or enforceability of any provision in any other jurisdiction, but
this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.




          16. Entire Agreement. Except as otherwise expressly set forth herein, this Agreement
embodies the complete agreement and understanding among the parties hereto with respect to the
subject matter hereof and supersedes and preempts any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.




          17. Successors and Assigns. Except as otherwise provided herein, this Agreement shall
bind and inure to the benefit of and be enforceable by the Company and its successors and assigns
and the Shareholders and any subsequent holders of Shares and the respective successors and assigns
of each of them, so long as they hold Shares.




          18. Counterparts. This Agreement may be executed in separate counterparts (including
by manual telecopied signature pages), each of which shall be an original and all of which taken
together shall constitute one and the same agreement.




          19. Remedies. The Company and each Shareholder shall be entitled to enforce their
rights under this Agreement specifically, to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights existing in their favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that the Company and any Shareholder may in his, her or its sole
discretion apply to any court of law or equity of competent jurisdiction for specific performance
and/or injunctive relief (without posting a bond or other security) in order to enforce or prevent
any violation of the provisions of this Agreement.




          20. Notices. Any notice provided for in this Agreement shall be in writing and shall
be either personally delivered, or mailed first class mail (postage prepaid) or sent by reputable
overnight courier service (charges prepaid) or sent by facsimile transmission to the Company at the
address set forth below and to any other recipient at such address indicated on the Schedule of
Shareholders attached hereto, or at such address or to the attention of such other person as
the recipient party has specified by prior written notice to the sending party. Notices shall be
deemed to have been given hereunder when delivered personally, three days after deposit in the U.S.
mail, one day after deposit with a reputable overnight courier service (charges prepaid) and upon
machine generated acknowledgment when sent by facsimile. The Company’s address is:



rue21, inc.

155 Thomhill Road

Warrendale, Pennsylvania 15086

Attn:  Robert N. Fisch

Telecopy:     (724) 776-1766

Telephone:   (724) 776-9780





-15-









 







with copies to (which shall not constitute notice to the Company):



Saunders, Karp & Megrue

262 Harbor Drive, 4th

Floor Stamford, CT 06902

Attn:  David J. Oddi

Telecopy:     (203) 708-6677

Telephone:   (203) 708-6600



Kirkland & Ellis

200 East Randolph Drive

Chicago, IL 60601

Attn:  William S. Kirsch, P.C.

           E. Paul Quinn

Telecopy:     (312) 861-2200

Telephone:   (312) 861-2000




          21. Governing Law. All issues and questions concerning the construction, validity,
interpretation and enforceability of this Agreement and the exhibits and schedules hereto shall be
governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania,
without giving effect to any choice of law or conflict of law rules or provisions (whether of the
Commonwealth of Pennsylvania or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the Commonwealth of Pennsylvania.




          22. Business Days. If any time period for giving notice or taking action hereunder
expires on a day which is a Saturday, Sunday or legal holiday in the state in which the Company’s
chief-executive office is located, the time period shall automatically be extended to the business
day immediately following such Saturday, Sunday or legal holiday.




          23. Descriptive Headings. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a part of this Agreement.




          24. No Effect Upon Lending Relationships. Notwithstanding anything herein to the
contrary, nothing contained in this Agreement shall affect, limit or impair the rights and remedies
of the Bank Group in their capacity as lenders to the Company pursuant to any agreement under which
the Company has borrowed money, including, without limitation, the Credit Agreement.




* * * *





-16-









 








          IN WITNESS WHEREOF, the parties hereto have executed this Shareholders Agreement on the day
and year first above written.




	 	 	 	 	 
	 	PENNSYLVANIA FASHIONS, INC.

 	 
	 	By:  	/s/
Charles F. Heider
 	 
	 	 	Name:  	Charles F. Heider 	 
	 	 	Its:  Secretary & Treasurer 	 
	 
	 	SKM EQUITY FUND II, L.P.
 	 
	 
	 	By: 	SKM Partners, L.P. 	 
	 	Its:	General Partner
 	 
	 
	 	By:  	Saunders, Karp & Megrue Partners, L.L.C. 	 
	 	Its: 	General Partner 	 
	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 



	 	 	 	 	 
	 	SKM INVESTMENT FUND II

 	 
	 	By:  	Saunders, Karp & Megrue, L.L.C. 	 
	 	Its:  	General Partner 	 
	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 



	 	 	 	 	 
	 	BNP PARIBAS

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	UNION BANK OF CALIFORNIA

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 














 








          IN WITNESS WHEREOF, the parties hereto have executed this Shareholders Agreement on the day
and year first above written.




	 	 	 	 	 
	 	PENNSYLVANIA FASHIONS, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 



	 	 	 	 	 
	 	SKM EQUITY FUND II. L.P.

 	 
	 	By:  	SKM Partners, L.P.
 	 
	 	Its: 	General Partner
 	 
	 
	 	By:  	Saunders Karp & Magrue Partners, L.L.C. 	 
	 	Its:  	General Partner
 	 
	 
	 	By:  	/s/
Authorized Signatory
 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 



	 	 	 	 	 
	 	SKM INVESTMENT FUND II

 	 
	 	By:  	Saunders Karp & Magrue Partners, L.L.C. 	 
	 	Its: 	General Partner
 	 
	 	 	 	 
	 	By:  	                                              /s/ Authorized Signatory
 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 














 








	 	 	 	 	 
	 	BNP PARIBAS OF NORTH AMERICA, INC.

 	 
	 	By:  	/s/ Authorized Signatory
 	 
	 	 	Name:  	Authorized Signatory  	 
	 	 	Its: Vice President 	 
	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	UNIONBANCAL EQUITIES, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	NATIONAL CITY BANK OF PENNSYLVANIA

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 













 






	 	 	 	 	 



	 	 	 	 	 
	 	BNP PARIBAS OF NORTH AMERICA, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 



	 	 	 	 	 
	 	UNIONBANCAL EQUITIES, INC.

 	 
	 	By:  	/s/ J. Kevin Sampson
 	 
	 	 	Name:  	J. Kevin Sampson 	 
	 	 	Its: Vice President 	 
	 
	 	NATIONAL CITY BANK OF PENNSYLVANIA

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 













 






	 	 	 	 	 



	 	 	 	 	 
	 	BNP PARIBAS OF NORTH AMERICA, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	UNIONBANCAL EQUITIES, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Its: 
	 
	 
	 	NATIONAL CITY BANK OF PENNSYLVANIA

 	 
	 	By:  	/s/ James E. Graham  	 
	 	 	Name:  	James E. Graham  	 
	 	 	Its: Assistant Vice President	 













 






	 	 	 	 	 



SCHEDULE OF SHAREHOLDERS




	 	 	 	 	 
	 	 	Number of
	 	 	Common Shares
	 
	 	 	 	 
	SKM Equity Fund II, L.P.
	 	 	686,274.51	 
	262 Harbor Drive, 4th Floor

Stamford, Connecticut 06902

Attn: David J. Oddi

Telecopy:     (203) 708-6677

Telephone:   (203) 708-6600
	 	 	 	 
	 
	 	 	 	 
	SKM Investment Fund II
	 	 	13,725.49	 
	262 Harbor Drive, 4th Floor

Stamford, Connecticut 06902

Attn: David J. Oddi

Telecopy:     (203) 708-6677

Telephone:   (203) 708-6600

	 	 	 	 
	 
	 	 	 	 
	BNP Paribas of North America, Inc.
	 	 	169,047.30	 
	787 Seventh Avenue

New York, New York 10019

Attention: Fletcher Duke

	 	 	 	 
	Asset Workout Department
	 	 	 	 
	Telecopy:     (212) 841-3565

Telephone:   (212) 841-3493
	 	 	 	 
	 
	 	 	 	 
	With a copy to:
	 	 	 	 
	 
	 	 	 	 
	Kramer Levin Naftalis & Frankel LLP
	 	 	 	 
	919 Third Avenue

New York, New York 10022

Attention: David Feldman, Esq.

Telecopy:     (212) 715-8000

Telephone:   (212) 715-9100
	 	 	 	 
	 
	 	 	 	 
	UnionBanCal Equities, Inc.
	 	 	75,000.00	 
	445 South
Figueroa
Street-2IST Floor

Los Angeles, CA 90071

Attention: John K. Sampson

Telecopy:     (213) 236-7619

Telephone:   (213) 236-6585
	 	 	 	 
















 






	 	 	 	 	 
	 	 	Number of
	 	 	Common Shares
	 
	 	 	 	 
	National City Bank of Pennsylvania
	 	 	55,952.70	 
	National City Center

20 Stanwix Street

Pittsburgh, PA 15222

Attention: James E. Graham
	 	 	 	 
	(Special Assets Dept. 25-185)
	 	 	 	 
	Telecopy:     (412) 471-0966

Telephone:   (412) 644-7952
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	Total
	 	 	1,000,000.00