Document:

Exhibit 10.1

 

STOCK PURCHASE AGREEMENT

 

STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of April 26, 2011, among Universal American Corp., a New York corporation (“Parent”), UAC Holding, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“UAC  Holding” and, together with Parent, the “Sellers”), the investors named on the signature pages hereto (individually, a “Buyer” and collectively, the “Buyers”) and Jefferies & Company, Inc., as closing agent (the “Closing Agent”).

 

WHEREAS:

 

On December 30, 2010, Parent entered into a definitive agreement to sell its Medicare Part D business to CVS Caremark Corporation for $1.25 billion in cash subject to adjustment including excess capital relating to the Medicare Part D Business (the “CVS Transaction”).  As contemplated by the Separation Agreement, dated as of December 30, 2010, by and among Parent, Universal American Spin Corp., a Delaware corporation and a wholly-owned subsidiary of Parent (the “Company”), and CVS Caremark Corporation (the “Separation Agreement”) entered into in connection with the CVS Transaction, Parent, as the sole stockholder of the Company on the date hereof, has approved the issuance and sale by the Company of 1,600,000 shares of 8.5% Series A Mandatorily Redeemable Preferred Stock, liquidation preference $25.00 per share, (“Series A Preferred Stock”) to Universal American Holdings LLC, a Delaware limited liability company and wholly-owned subsidiary of Parent (“Newco Sub”) pursuant to a purchase agreement to be entered into between the Company and Newco Sub (the “Initial Purchase Agreement”) such issuance and sale to be effective prior to the transactions described herein.

 

Pursuant to a purchase and sale agreement to be entered into by and among Newco Sub and the Sellers, Newco Sub will sell to the Sellers the Series A Preferred Stock, such sale to be effective prior to the transactions described herein.

 

The Sellers desire to sell such shares of Series A Preferred Stock to the Buyers.

 

The Sellers have prepared a confidential information memorandum, dated April 5, 2011 and a final confidential information memorandum, dated April 18, 2011 (together, the “Confidential Information Memorandum”), relating to the offer and sale of such shares of Series A Preferred Stock to the Buyers (the “Offering”).

 

Each Buyer wishes to purchase, and the Sellers, collectively, wish to sell to each such Buyer, upon the terms and subject to the conditions set forth in this Agreement, the numbers of shares of Series A Preferred Stock set forth below such Buyer’s signature on the signature pages hereto.

 

The Sellers and the Buyers intend to make such offer and sale in reliance upon one or more exemptions from registration pursuant to the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations as promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act.

 

In connection with the transactions contemplated by the Initial Purchase Agreement, the Company and Newco Sub will execute and deliver a Registration Rights Agreement, dated as of the Closing Date and in the form attached hereto as Exhibit A (the “Registration Rights Agreement”).

 

 

Pursuant to Section 9(d) of the Registration Rights Agreement, the Buyers will be third party beneficiaries of the agreements made between the Company and Newco Sub therein.

 

NOW, THEREFORE, the Sellers and each Buyer hereby agree as follows:

 

1.                                       PURCHASE AND SALE OF THE SHARES.

 

(a)           Purchase and Sale of the Series A Preferred Stock.

 

(i)            In reliance upon the Buyers’ representations and warranties and agreements contained in Section 2 and Section 8(o) hereof and subject to the satisfaction (or waiver) of the conditions set forth in Sections 5 and 6 below, at the closing of the Offering (the “Closing”), the Sellers, collectively, shall sell to each Buyer the number of shares of Series A Preferred Stock set forth below such Buyer’s signature on the signature pages hereto. The allocation of shares of Series A Preferred Stock to be sold by each Seller to any particular Buyer shall be as determined by the Sellers.

 

(ii)           In reliance upon the representations and warranties of the Sellers contained in Section 3 hereof, and subject to the terms and conditions set forth herein, each Buyer severally, but not jointly, shall purchase the shares of Series A Preferred Stock to be purchased by such Buyer from the Sellers as set forth below such Buyer’s signature on the signature pages hereto.

 

(iii)          Closing.  The Closing shall occur on the closing date of the Parent’s merger (the “Merger”) with Ulysses Merger Sub, L.L.C., a New York limited liability company (“Ulysses”), pursuant to that certain Agreement and Plan or Merger, dated as of December 30, 2010, by and among CVS Caremark Corporation, a Delaware corporation, Ulysses and the Parent (the “Merger Agreement”) in connection with the CVS Transaction, but prior to the consummation of the Merger (the “Closing Date”) at the New York, New York offices of Paul, Weiss, Rifkind, Wharton & Garrison LLP, or such other location as the Sellers and the Buyers shall mutually agree.

 

(iv)          Purchase Price.  The purchase price for the Series A Preferred Stock to be purchased by the Buyers at the Closing (the “Purchase Price”) shall be $25.00 per share, and the aggregate Purchase Price for all shares of Series A Preferred Stock being purchased by any specific Buyer shall be the product obtained by multiplying the Purchase Price by the total number of shares being purchased by such Buyer, which aggregate purchase price for such Buyer being as set forth below such Buyer’s signature on the signature pages hereto (the “Buyer’s Purchase Price”).

 

(b)           Closing Mechanics.

 

(i)            At least two (2) business days prior to the Closing, each Buyer shall deliver to JPMorgan Chase Bank, N.A (the “Escrow Agent”), by wire transfer in immediately available U.S. funds, an amount in cash equal to such Buyer’s Purchase Price, to be held and released pursuant to the terms of an escrow agreement in the form attached as Exhibit B (the “Escrow Agreement”) to be entered into on the date hereof among the Sellers, the Escrow Agent and the Closing Agent (as defined below); and

 

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(ii)           At the Closing, in accordance with the Escrow Agreement, the Escrow Agent shall deliver to the Sellers the aggregate Purchase Price of all Buyers by wire transfer of immediately available U.S. funds to a bank account designated in writing by the Sellers to the Escrow Agent, which funds will be allocated and delivered to the Sellers in consideration of the Series A Preferred Stock being purchased by the Buyers as determined by the Sellers and designated to the Escrow Agent in writing; and

 

(iii)          The Sellers shall deliver evidence satisfactory to the Closing Agent that the Certificate of Designation of Preferences, Rights and Limitations of the Series A Preferred Stock, in the form attached hereto as Exhibit C (the “Certificate of Designation”), has been filed with the Secretary of State of Delaware and has become effective on or prior to the Closing; and

 

(iv)          The shares of Series A Preferred Stock will not be delivered in certificated form, but will be held in book-entry form through the direct registration system at American Stock Transfer & Trust Company, LLC (the “Transfer Agent”). As soon as practicable following the Closing Date, the Sellers shall cause the Transfer Agent to deliver to the Buyers evidence of the Series A Preferred Stock held at the Transfer Agent’s facilities in customary form.

 

2.                                       BUYERS’ REPRESENTATIONS AND WARRANTIES.

 

Each Buyer represents and warrants, with respect to only itself, that:

 

(a)           Organization and Good Standing.  If such Buyer is an entity, such Buyer is a corporation, partnership or limited liability company duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

 

(b)           Authorization and Power.  Such Buyer (if such Buyer is an entity) has the requisite power and authority to enter into and perform and such Buyer (if such Buyer is a natural person) has the capacity to enter into and perform its obligations under this Agreement and to purchase the Series A Preferred Stock being sold to it hereunder.  If such Buyer is an entity, the execution, delivery and performance of this Agreement by such Buyer and the consummation by such Buyer of the transactions contemplated hereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Buyer, as the case may be, is required. This Agreement has been duly executed and delivered by such Buyer and constitutes, or shall constitute when executed and delivered, valid and binding obligations of such Buyer enforceable against such Buyer in accordance with its terms except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

(c)           No Public Sale or Distribution.  Such Buyer is acquiring the Series A Preferred Stock for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Series A Preferred Stock for any minimum or other specific term and reserves the right to dispose of the Series A Preferred Stock at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act and pursuant to the applicable terms of this Agreement and the Registration Rights Agreement.  Such

 

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Buyer is acquiring the Series A Preferred Stock hereunder in the ordinary course of its business.  Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Series A Preferred Stock.  As used in this Agreement, “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.  Each Buyer acknowledges and agrees that a portion of the Series A Preferred Stock is being sold by the sellers to certain affiliates (including certain directors and officers) of the Sellers identified on Exhibit  D (the “UAM Affiliates”). Such Buyer, other than the UAM Affiliates, as of the date hereof and as of the Closing Date does not beneficially own, whether directly or indirectly, any shares of common stock of Parent.

 

(d)           Accredited Investor Status.  Such Buyer is under the Securities Act an “accredited investor” within the meaning of Rule 501(a) of Regulation D.  The Buyer is not an entity formed for the sole purpose of acquiring the Series A Preferred Stock.

 

(e)           Reliance on Exemptions.  Such Buyer understands that the shares of Series A Preferred Stock are being offered and sold to it in reliance on exemptions from the registration requirements of U.S. federal and state securities laws and that the Sellers are relying in part upon the truth and accuracy of such Buyer’s representations and warranties and the compliance by such Buyer of such Buyer’s agreements set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire the shares of Series A Preferred Stock from the Sellers.

 

(f)            No Governmental Review.  Such Buyer understands that no U.S. federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Series A Preferred Stock or the fairness or suitability of an investment in the Series A Preferred Stock or has passed upon or endorsed the merits of the offering of the Series A Preferred Stock or an investment therein.

 

(g)           Transfer or Resale.  Such Buyer understands that: (i) neither the offer nor sale of the shares of Series A Preferred Stock have been and, except as provided for in the Registration Rights Agreement, will not be registered under the Securities Act or any state securities laws, and the Series A Preferred Stock may not be offered for sale, sold, assigned or transferred unless (A) the offer and sale thereof shall have subsequently been registered thereunder, (B) such Buyer shall have delivered to the Company an opinion of counsel, in a form reasonably acceptable to the Company, to the effect that such shares of Series A Preferred Stock to be offered, sold, assigned or transferred may be offered, sold, assigned or transferred pursuant to an exemption from such registration, (C) such Buyer provides the Company with reasonable assurance that such shares of Series A Preferred Stock can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, or a successor rule thereto (collectively, the “Transfer Rules”) or (D) the shares of Series A Preferred Stock are sold to the Company; (ii) any sale of the Series A Preferred Stock made in reliance on the Transfer Rules may be made only in accordance with the terms of the Transfer Rules and further, if the Transfer Rules is not applicable, any resale of the Series A Preferred Stock may require compliance with the registration requirements of the Securities Act or some other exemption under the Securities Act; and (iii) none of the Company, the Sellers nor any other Person is under any obligation to register the offer or sale of the Series A Preferred Stock under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder, except  to the extent set forth in the Registration Rights Agreement.

 

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(h)           Legends.  Such Buyer understands that until such time as the same is no longer required under applicable requirements of the Securities Act and applicable state securities laws, the certificates representing the Series A Preferred Stock, and all certificates or other instruments issued in exchange therefor or in substitution thereof, or if held in book-entry form through a direct registration system as the case may be, the Series A Preferred Stock in such form, shall bear a customary legend referencing such restrictions on transferability, and the Company shall make a notation on its records and give instructions to the Transfer Agent of the Series A Preferred Stock in order to implement the restrictions on transfer set forth and described herein and therein.

 

(i)            No Conflicts.  The execution, delivery and performance by such Buyer of this Agreement and the consummation by such Buyer of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of such Buyer (if such Buyer is an entity) or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment  or decree (including federal and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations as would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

 

(j)            Residency.  Such Buyer is a resident of that jurisdiction specified below its signature on the signature pages hereto.

 

(k)           No General Solicitation or Advertising.  Such Buyer acknowledges that the shares of Series A Preferred Stock were not offered to such Buyer by means of any form of general or public solicitation or general advertising, or publicly disseminated advertisements or sales literature, including (i) any advertisement, article, notice or other communication published in any newspaper, magazine, website, or similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which such Buyer was invited by any of the foregoing means of communications.

 

(l)            Brokers.  No Person will have, as a result of the transactions contemplated by this Agreement, any valid right, interest or claim against or upon the Company, the Sellers or any Subsidiary therefore for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf of such Buyer.

 

(m)          Filings.  If required by applicable securities legislation, regulatory policy or order, or if required or requested by any securities commission, stock exchange or other regulatory authority, at the request of and at the sole expense of the Sellers, such Buyer shall execute, deliver and file and otherwise assist the Sellers in filing reports, questionnaires, undertakings and other documents with respect to the offer and sale of the Series A Preferred Stock.

 

(n)           U.S. Federal Taxation.

 

(i)            Such Buyer understands and acknowledges that the U.S. federal income tax consequences of ownership and disposition of the shares of Series A Preferred Stock are

 

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not free from doubt.  The Sellers advise each Buyer to seek advice concerning the tax aspects of and tax considerations involved in acquiring and holding the Series A Preferred Stock from an independent tax adviser.  Each Buyer acknowledges that it has sought such independent tax advice as it has considered necessary to make an informed investment decision with respect to the U.S. federal income tax consequences, as well as with respect to the laws of any state, local or foreign jurisdiction that are applicable to such Buyer, of owning and disposing of the Series A Preferred Stock.

 

(ii)           Any discussion of tax matters contained herein or in the Confidential Information Memorandum is not intended by the Sellers to be used, and it cannot be used or relied upon, by such Buyer or any other Person for the purpose of avoiding penalties that may be imposed under U.S. federal income tax law.

 

3.                                       REPRESENTATIONS AND WARRANTIES OF THE SELLERS.

 

The Sellers, jointly, represent and warrant to each of the Buyers as follows. For purposes of these representations and warranties, all references to the “Company,” as to any event, circumstances or period as of or prior to the effective time of the Merger, shall be deemed to also refer to and include the businesses conducted as part of the “Senior Managed Care-Medicare Advantage”, “Traditional Insurance” and “Corporate & Other” segments (each as more fully described in the filings made by the Company or Parent with the SEC on or after December 31, 2010 (the “SEC Filings”), other than the Medicare Part D business, of the Parent and its Subsidiaries (including the Company).

 

(a)           Organization and Qualification.  The Parent is duly incorporated and validly existing in good standing under the laws of the State of New York and has the requisite power and authority to own its properties and to carry on its business as now being conducted.  Each of the Subsidiaries of Parent, including the Company, is duly incorporated or organized, as the case may be, and validly existing in good standing under the laws of the jurisdiction in which it is incorporated or organized, as applicable and has the requisite power and authority to own its properties and carry on its business as now being conducted, except as has not had and would not reasonably be expected to have a Material Adverse Effect. Each of the Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not reasonably be expected to have a Material Adverse Effect.  As used in this Agreement, “Material Adverse Effect” means any material adverse effect (i) on the business, assets, results of operations, or financial condition of the Company and its Subsidiaries (to the extent of the business operations to be conducted, after the Merger, by the Company and its Subsidiaries) taken as a whole, or (ii) on the transactions contemplated by this Agreement or by the agreements and instruments to be entered into in connection herewith or (iii) on the authority or ability of the Sellers to perform their respective obligations under this Agreement.  “Subsidiary” of a Person means any and all corporations, partnerships, limited liability companies and other entities, whether incorporated or unincorporated, with respect to which such Person, directly or indirectly, owns securities having the power to elect a majority of the board of directors or similar body governing the affairs of such entity.

 

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(b)           Authorization; Enforcement; Validity.  The Sellers have the requisite corporate power and authority to enter into and perform their respective obligations under this Agreement.  The Company has the requisite power and authority to enter into and perform its obligations under the Registration Rights Agreement.  The Sellers have the requisite power and authority to sell the Series A Preferred Stock in accordance with the terms hereof.  The execution and delivery of this Agreement by the Sellers has been duly authorized by the boards of directors of the Sellers, as required and the consummation by the Sellers of the transactions contemplated hereby, including, without limitation, the sale of the Series A Preferred Stock, has been duly authorized by the boards of directors of the Sellers, as required.  This Agreement has been duly executed and delivered by the Sellers and constitutes the legal, valid and binding obligations of the Sellers, enforceable against them in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.  The Registration Rights Agreement will as of the Closing Date be duly executed and delivered by the Company, and when executed and delivered by the Company, will be the legal, valid and binding obligation of the Company, enforceable against it in accordance with its respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.  The Assignment and Assumption Agreement (as defined in Section 8(o)) will as of the Closing Date be duly authorized, executed and delivered by the Company, and when executed and delivered by the Company, will be the legal, valid and binding obligation of the Company, enforceable against it in accordance with its respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

 

(c)           Issuance and Resale of the Series A Preferred Stock.  The shares of Series A Preferred Stock have been duly and validly authorized by the Company and when issued by the Company on the Closing Date will be fully paid and non-assessable.  The shares of Series A Preferred Stock will be the only outstanding shares of the Series A Preferred Stock. A complete and accurate copy of the Certificate of Designation of the Series A Preferred is as set forth on Exhibit C attached hereto. On the Closing Date, delivery of the Series A Preferred Stock pursuant to this Agreement will pass good and valid title to such Series A Preferred Stock to the respective Buyers, free and clear of any security interest, mortgage, pledge, lien, encumbrance or other adverse claim.

 

(d)           No Conflicts.  The execution, delivery and performance of this Agreement by the Sellers and the consummation by the Sellers of the transactions contemplated hereby (including, without limitation, the sale of the Series A Preferred Stock) and the execution, delivery and performance of the Registration Rights Agreement by the Company will not (i) result in a violation of any certificate of incorporation, certificate of formation, any certificate of designations, bylaws or other constituent documents of the Company or the Sellers or any of their respective Subsidiaries, or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Seller, the Company or any of their respective Subsidiaries is a party, or (iii) result in a violation of any applicable law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and

 

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the rules and regulations of the New York Stock Exchange (the “Principal Market”) applicable to the Sellers, the Company or any of their respective Subsidiaries or by which any property or asset of the Company or the Sellers or any of their respective Subsidiaries is bound or affected, except in the case of clauses (ii) and (iii), such as would not reasonably be expected to have a Material Adverse Effect.

 

(e)           Consents.  None of the Sellers or the Company is required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of Sellers’ obligations under or contemplated by this Agreement (other than (w) any consent, authorization or order that has been duly obtained as of the date hereof, (x) any filing or registration that has been made as of the date hereof, (y) any filings which may be required to be made after the date hereof by the Company or the Sellers with the SEC, state securities administrators or the Principal Market, each of which shall be duly made as and when required and (z) the filing of the Certificate of Designation with the Secretary of State of the State of Delaware.)

 

(f)            No General Solicitation; Agent’s Fees.  None of the Company, the Sellers or any of their respective Subsidiaries, or to the Sellers’ knowledge, any of their respective affiliates, or any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Series A Preferred Stock. The Parent acknowledges that it has engaged the Agent in connection with the sale of the Series A Preferred Stock.  Other than the Agent, none of the Sellers or any of their respective Subsidiaries has engaged any other placement agent in connection with the sale of the Series A Preferred Stock, and no Person (other than the Agent) is entitled to any agent, financial advisory, finder’s or other fee arising from this transaction as a result of any agreement, arrangement or understanding entered into by or on behalf of the Sellers.

 

(g)           No Integrated Offering.  None of the Sellers, their respective Subsidiaries, any of their affiliates, or any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the offer or sale of the Series A Preferred Stock under the Securities Act, whether through integration with prior offerings or otherwise, or cause the offer or sale of the Series A Preferred Stock to require approval of stockholders of the Sellers for purposes of any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company or the Parent are listed or designated.

 

(h)           SEC Filings and Historical Financial Statements.  As of their respective filing dates, the SEC Filings complied in all material respects with the requirements of the Securities Act, the 1934 Act and the rules and regulations of the SEC promulgated thereunder, as applicable. None of the SEC Filings, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The SEC Filings, taken as a whole, do not as of the date hereof, and will not as of the Closing Date, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The consolidated audited financial statements contained in the SEC Filings

 

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were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) in effect as of the date thereof (except as may be indicated in the notes thereto) and fairly present, in all material respects, the financial position, on a consolidated basis, of the Company and its Subsidiaries, or Parent and its Subsidiaries (as the case may be), as at the date thereof and the results of operations and cash flows, on a consolidated basis, of the entities described therein for the period presented therein (except as may be indicated in the notes thereto). The unaudited pro forma consolidated financial data of the Company and the related notes thereto included in the SEC Filings and under the caption “Pro Forma Capitalization,” “Unaudited Pro Forma Consolidated Financial Data of the Company (Accounting Successor to UAM)” and elsewhere in the Confidential Information Memorandum present fairly the information contained therein in all material respects, have been prepared in accordance with the Commission’s rules and guidelines with respect to pro forma financial statements and have been presented on the bases described therein, and to the Company’s knowledge and belief,  assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein.

 

(i)            Absence of Certain Changes.  Since December 31, 2010, other than as disclosed in the SEC Filings or the Confidential Information Memorandum, no event, circumstance or change has occurred that has caused or evidences, or could reasonably be expected to result in, either in any case or in the aggregate, a Material Adverse Effect.

 

(j)            Transactions With Affiliates.  Except as set forth in or contemplated by this Agreement, the Confidential Information Memorandum or the SEC Filings, none of the officers, directors or employees of the Company, the Sellers or any of their respective Subsidiaries is presently a party to any material business transaction or relationship with the Company or any of its respective Subsidiaries (other than for ordinary course services as employees, officers or directors or severance arrangements).

 

(k)           Capitalization.  The table under the caption “Pro Forma  Capitalization” in the Confidential Information Memorandum (including the footnotes thereto) sets forth, as of its date, (A) the historical cash and cash equivalents and capitalization of Parent and (B) the pro forma cash and cash equivalents and capitalization of the Company, after giving effect to the offer and sale of the Series A Preferred Stock and the transactions contemplated by the Merger Agreement.

 

(l)            Material Contracts.  Except as described in the Confidential Information Memorandum, the SEC Filings and except as could not reasonably be expected to have a Material Adverse Effect, all of the Company’s material contracts are in full force and effect and no defaults currently exist by the Company or any of its Subsidiaries and, to the knowledge of the Sellers, to any other Person party thereto.

 

(m)          Absence of Litigation.  Except as disclosed in the Confidential Information Memorandum and the SEC Filings, to the Sellers’ knowledge, there are no legal proceedings threatened against the Company, or its Subsidiaries that could reasonably be expected to result in, or has resulted in, a Material Adverse Effect.

 

(n)           Insurance.  The Company and its Subsidiaries are covered by valid and currently effective insurance policies and all premiums payable under such policies have been duly

 

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paid to date.  All material fire and casualty, general liability, business interruption, product liability, and sprinkler and water damage insurance policies maintained by the Company or the Sellers provide adequate coverage for all normal risks incident to the business of the Company and its properties and assets, except for such failures to maintain such insurance policies that, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.

 

(o)           Employee Relations.  Except as set forth in the Confidential Information Memorandum or the SEC Filings, there is (a) no strike or work stoppage in existence or threatened involving the Company or its Subsidiaries, and (b) to the knowledge of the Sellers, no union representation question existing with respect to the employees of the Company or its Subsidiaries and, to the knowledge of the Sellers, no union organization activity that is taking place, except such as would not reasonably be expected to have a Material Adverse Effect.

 

(p)           Title.  The Company and its Subsidiaries have good title in fee simple to all owned real property and good title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects other than Permitted Liens, except for any such assets which have been sold or otherwise disposed of since December 31, 2010 or where the failure to have such good title has not had and would not reasonably be expected to have a Material Adverse Effect.  Each material lease or sublease or real property to which the Company or any of its Subsidiaries is a party or by which it is bound is a valid and binding agreement of the Company or its Subsidiary, as the case may be, and enforceable in accordance with its terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies..

 

(q)           Intellectual Property Rights Except to the extent that any of the following would not, individually or in the aggregate result in a Material Adverse Effect: the Company and each of the Subsidiaries exclusively own, free and clear of all liens, claims or encumbrances, or have the right to use pursuant to a valid and enforceable written license (other than computer software licenses), all Intellectual Property that is necessary in the conduct of their businesses as presently conducted; all Intellectual Property owned by the Company or any Subsidiary, is valid, subsisting and enforceable and (i) to the knowledge of the Sellers, the operation of the Company and each Subsidiary’s businesses, do not infringe or misappropriate any Intellectual Property rights or other rights of other Persons in respect of any asset or product which is material to the Company, and the Company is not, and none of the Subsidiaries are, aware of any facts which indicate a likelihood of any of the foregoing and (ii)  to the knowledge of the Sellers, no third party is currently infringing or misappropriating any of the Company’s or any of the Subsidiaries’ Intellectual Property rights.

 

(r)            Regulatory Matters.

 

(i)            The Company has made all required filings under applicable insurance holding company statutes, and has received approvals of acquisition of control and/or affiliate transactions, in each jurisdiction in which such filings or approvals are required, except where the failure to have made such filings or receive such approvals in any such jurisdiction would not result, individually or in the aggregate, in a Material Adverse Effect. Each of the Company and its subsidiaries: (A) holds such permits, licenses, consents, exemptions, franchises, authorizations and

 

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other approvals from insurance departments and other governmental or regulatory authorities (each, an “Authorization”) (including, without limitation, insurance licenses from the insurance regulatory agencies of the various states or other jurisdictions where it conducts business (the “Insurance Licenses”)), and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, as are necessary to own, lease, license and operate its respective properties and to conduct its business in the manner described in the Confidential Information Memorandum and the SEC Filings, except where the failure to have any Authorization or Insurance License or to make any such filing or notice would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect, and (B) has fulfilled and performed all material obligations necessary to maintain such Authorizations and Insurance Licenses. Except as would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (A) each such Authorization and Insurance License is valid and in full force and effect and each of the Company and its Subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and (B) no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body, the execution, delivery and performance of this Agreement by the Sellers, the sale and delivery of the Series A Preferred Stock and the compliance by the Sellers with all of the provisions hereof and the consummation by the Sellers of the transactions contemplated in this Agreement) which allows or, after notice or lapse of time of both, would allow, revocation, suspension or termination of any such Authorization or Insurance License or results or, after notice or lapse of time or both, would result in any impairment of the rights of the holder of any such Authorization or Insurance License. Except as disclosed in the Confidential Information Memorandum and the SEC Filings, no insurance regulatory agency or body has issued any order or decree impairing, restricting or prohibiting the payment of dividends of any Company Subsidiary to its respective parent which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(ii)           Neither the Company nor any of its Insurance Subsidiaries is in violation of, or in default in the performance, observance or fulfillment of, any obligation, agreement, covenant or condition contained in reinsurance treaties, contracts, agreements and arrangements to which the Company or any of its Insurance Subsidiaries is a party, except for such violations or defaults which would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect; neither the Company nor any of its Insurance Subsidiaries has received any notice from any of the other parties to such treaties, contracts, agreements or arrangements that such other party intends not to perform its obligations thereunder and none of them has any reason to believe that any of the other parties to such treaties, contracts, agreements or arrangements will be unable to perform its obligations thereunder, except to the extent that such nonperformance would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect.

 

(s)           Environmental Laws.  Except as described in the Confidential Information Memorandum and the SEC Filings, the Company and its Subsidiaries (i) are in compliance with any and all applicable Environmental Laws (as hereinafter defined), (ii) have received all certificates, permits, authorities, licenses or other approvals (collectively, “Permits”) required of them under applicable Environmental Laws to conduct their respective businesses as currently conducted and (iii) are in compliance with all terms and conditions of any such Permit where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply would be reasonably expected to have,

 

11

 

individually or in the aggregate, a Material Adverse Effect.  The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”)  into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, Permits, plans or regulations issued, entered, promulgated or approved thereunder.

 

(t)            Taxes.  All material tax returns required to be filed by or with respect to the Company or any of its Subsidiaries have been timely filed (taking into account all applicable extensions), and all such tax returns are true, complete and correct in all material respects. The Company and its Subsidiaries have fully and timely paid (or have had paid on their behalf) all material taxes due and owing (whether or not shown on any of the tax returns referred to in the preceding sentence). All deficiencies for material taxes asserted or assessed in writing against the Company or any of its Subsidiaries have been fully and timely paid, settled or properly reflected in the most recent financial statements contained in the Company SEC Filings.

 

(u)           Internal Controls.  Except as disclosed in the Confidential Information Memorandum and the SEC Filings, the Sellers are unaware of any material weakness in its internal control over financial reporting.

 

(v)           Investment Company Status.  The Company is not an “investment company,” a company controlled by an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company” as such terms are defined in the Investment Company Act of 1940, as amended.

 

(w)          Disclosure.  The Confidential Information Memorandum did not contain, as of its date, and does not contain as of the date hereof, and will not contain, as of the Closing Date, any untrue statement of a material fact, and as of such date did not omit as of its date, and the date hereof and will not, as of the Closing Date omit, to state a material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading.  The Sellers confirm that neither they nor, to their knowledge, any other Person acting on their behalf has provided any of the Buyers or their agents or counsel with any information that constitutes or could reasonably be expected to constitute material, nonpublic information.  Each of the Sellers understands and confirms that each of the Buyers will rely on the foregoing representations in effecting transactions in the Series A Preferred Stock.  All disclosure provided to the Buyers regarding the Company or any of its Subsidiaries, their business and the transactions contemplated hereby furnished by or on behalf of the Company is true and correct in all material respects and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or

 

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announcement by the Company on or before the date hereof but which has not been so publicly announced or disclosed.

 

(x)            ERISA Compliance.  The Company, each of its Subsidiaries and each of their respective ERISA Affiliates are in material compliance with all applicable provisions and requirements of ERISA and the Internal Revenue Code and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan. “Employee Benefit Plan” means any “employee benefit plan” as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) which is or, within the last six years, was sponsored, maintained or contributed to by, or required to be contributed by, the Company, any of its Subsidiaries or, solely with respect to any Employee Benefit Plan covered under Title IV of ERISA, any of their respective ERISA Affiliates. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto.  Each Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code has received a favorable determination letter from the Internal Revenue Service indicating that such Employee Benefit Plan is so qualified and nothing has occurred subsequent to the issuance of such determination letter which would cause such Employee Benefit Plan to lose its qualified status.

 

(y)           No Registration.  Assuming the accuracy of the representations and warranties and agreements of the Buyers contained in Section 2 and Section 8(o) hereof and the Buyers’ compliance with their agreements contained in this Agreement, it is not necessary in connection with the offer, sale and delivery of the Series A Preferred Stock in the manner contemplated by this Agreement to register the offer or sale of any of the shares of Series A Preferred Stock under the Securities Act.

 

4.                                       COVENANTS.

 

(a)           Blue Sky.  The Sellers, on or before the Closing Date, shall take such action as they shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Series A Preferred Stock for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken upon Buyer’s request.  The Sellers shall, make all filings and reports as they reasonably determine are necessary relating to the offer and sale of the Series A Preferred Stock required under applicable securities or “Blue Sky” laws of the states of the United States following the Closing Date; provided, however, none of the Sellers or the Company shall for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction.

 

(b)           Financial Information.  For so long as any shares of Series A Preferred Stock remain outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Sellers shall cause the Company, during the period in which it is not subject to Section 13 or 15(d) under the 1934 Act, to make available to each Buyer and any holder of the Series A Preferred Stock in connection with any sale thereof and any prospective purchaser of the Series A Preferred Stock and securities analysts, in each case upon reasonable request, the information

 

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specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act (or any successor thereto).

 

(c)           Certain Fees and Expenses.  The Sellers shall pay all transfer agent fees, stamp or transfer taxes and other taxes (not including income or similar taxes) and duties levied in connection with the sale and issuance of the Series A Preferred Stock.  Except as otherwise expressly set forth in the this Agreement, each party to this Agreement shall bear its own fees and expenses in connection with the sale of the Series A Preferred Stock to the Buyers (including, without limitation, each party’s legal, accounting and other expenses).

 

(d)           Disclosure of Transactions.  Not later than two (2) business days following  the date of this Agreement, the Sellers, or the Company as the case may be, shall file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing the material terms of the transactions contemplated by this Agreement and will make such other filings and notices in the manner and time required by the SEC.  Without the prior written consent of any applicable Buyer, none of the Company, the Sellers or any of their respective subsidiaries or affiliates shall disclose the name of such Buyer in any filing, announcement, release or otherwise other than in connection with the Exchange Offer Registration Statement (as defined in the Registration Rights Agreement), as contemplated pursuant to the Registration Rights Agreement, or unless such disclosure is required  by law, regulation or the Principal Market.

 

(e)           General Solicitation.  Prior to the Closing Date, none the Sellers or any of their respective affiliates (as defined in Rule 501(b) under the Securities Act) or any person acting on behalf of the Sellers or such affiliate will solicit any offer to buy or offer or sell the Series A Preferred Stock by means of any form of general solicitation or general advertising within the meaning of Regulation D, including: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium or on the Internet or broadcast over television or radio; and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

 

(f)            Integration.  None of the Sellers or any of their respective affiliates (as defined in Rule 501(b) under the Securities Act) or any person acting on behalf of the Sellers or such affiliate shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which will be integrated with the sale of the Series A Preferred Stock in a manner which would require the registration under the Securities Act of the Series A Preferred Stock, and the Sellers shall take all action that is appropriate or necessary to ensure that the Company’s offerings of other securities will not be integrated with the Offering for purposes of the Securities Act.

 

(g)           Taxes.  Each Buyer shall deliver to the Parent a properly completed and duly executed applicable Internal Revenue Service Form W-8 or W-9 (or, in each case, a successor form) that establishes a complete exemption from United States withholding tax.  Each Buyer shall provide replacement forms on the obsolescence of such forms or inaccuracy of any information thereon.  The Sellers agree to pay all stamp, documentary and transfer taxes and other duties, if any, which may be imposed by the United States or any political subdivision thereof or taxing authority thereof or therein with respect to the issuance of the Series A Preferred Stock or the sale thereof to the Buyers.

 

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5.                                       CONDITIONS TO THE SELLERS’ OBLIGATION TO SELL.

 

The obligations of the Sellers hereunder are subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the sole benefit of the Sellers and may be waived by the Sellers at any time in their sole discretion by providing each Buyer with prior written notice thereof:

 

(a)           Such Buyer shall have executed this Agreement and delivered the same to the Parent.

 

(b)           The Escrow Agent and the Closing Agent shall have executed and delivered the Escrow Agreement.

 

(c)           Such Buyer shall have delivered to the Escrow Agent the applicable Buyer’s Purchase Price and the Escrow Agent shall have delivered the aggregate Purchase Price to the Sellers for the Series A Preferred Stock being purchased by the Buyers at the Closing, in each case, by wire transfer of immediately available U.S. funds pursuant to the wire instructions and direction letter provided by the Sellers.

 

(d)           The representations and warranties of such Buyer shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or material adverse effect, which shall be true and correct in all respects) as of the date hereof and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specified date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at or prior to the Closing Date.

 

(e)           All of the conditions to the closing of the CVS Transaction set forth in the Merger Agreement shall have been satisfied, or waived, by the applicable parties thereto in accordance with the Merger Agreement on or prior to the Closing Date, except for those conditions that of necessity will be fulfilled at the time of closing of the CVS Transaction.

 

6.                                       CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

 

The obligation of each Buyer hereunder to purchase the Series A Preferred Stock at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions; provided, that these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Parent with prior written notice thereof; provided, further that the obligation of any Buyer to purchase Series A Preferred Stock at the Closing shall not be conditioned upon any other Buyer purchasing Series A Preferred Stock at the Closing:

 

(a)           No injunction, restraining order or order of any nature by a governmental authority shall have been issued as of the Closing Date that would prevent or materially interfere with the consummation of the Offering or any of the transactions contemplated hereby and thereby; and no stop order suspending the qualification or exemption from qualification of any of the shares of Series A Preferred Stock in any jurisdiction shall have been issued and no proceeding for that

 

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purpose shall have been commenced or, to the knowledge of the Sellers, be pending or contemplated as of the Closing Date.

 

(b)           The Buyers shall have received on the Closing Date:

 

(i)            a certificate, dated the Closing Date, executed by the Secretary of the Parent, certifying as to the (i) the resolutions consistent with Section 3(b), (ii) the Certificate of Incorporation and (iii) the Bylaws, each as in effect at the Closing; and

 

(ii)           the opinion of Paul, Weiss, Rifkind, Wharton and Garrison LLP, counsel to the Company, dated the Closing Date, substantially in the form of Exhibit E attached hereto.

 

(c)           This Agreement shall have been executed and delivered by each of the Sellers, and such Buyer shall have received a fully executed copy of this Agreement with respect to such Buyer.

 

(d)           The Registration Rights Agreement shall have been executed and delivered by each of the parties thereto, and such Buyer shall have received a fully executed copy of the Registration Rights Agreement

 

(e)           The representations and warranties of the Sellers shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date hereof and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which shall be true and correct as of such specified date), and the Sellers shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by them at or prior to the Closing Date.  Such Buyer shall have received a certificate, executed by the Chief  Executive Officer, Chief Financial Officer or Secretary of the Parent, dated as of the Closing Date, to the foregoing effect.

 

(f)            The Assignment and Assumption Agreement shall have been executed and delivered by each of the parties thereto, and such Buyer shall have received a fully executed copy of the Assignment and Assumption Agreement.

 

(g)           The Escrow Agreement shall have been executed and delivered by each of the parties thereto, and such Buyer shall have received a fully executed copy of the Escrow Agreement.

 

7.                                       TERMINATION.

 

In the event that the Closing shall not have occurred with respect to any Buyer on or before twenty (20) Business Days from the date hereof due to the Sellers’ or such Buyer’s failure to satisfy the conditions set forth in Sections 5 and 6 above (and the nonbreaching party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this

 

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Agreement with respect to such breaching party at the close of business on such date without liability of any party to any other party.

 

8.                                       MISCELLANEOUS.

 

(a)           Governing Law; Jurisdiction; Jury Trial.  All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan  for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(b)           Counterparts.  This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other parties; provided that a facsimile signature or a signature in a PDF format transmitted electronically shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile or PDF signature transmitted electronically.

 

(c)           Headings.  The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

 

(d)           Severability.  If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

(e)           Entire Agreement; Amendments.  This Agreement  supersedes all other prior oral or written agreements between the Buyers, the Sellers, their affiliates and Persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein and therein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, none of the Sellers or any Buyer makes any representation, warranty, covenant or undertaking with respect to

 

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such matters.  No provision of this Agreement may be amended other than by an instrument in writing signed by the Sellers and the Buyers.  No provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought.  No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement or holders of the Series A Preferred Stock, as the case may be.

 

(f)            Notices.  Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); (iii) upon receipt, when sent by email; or (iv) one business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same.  The addresses, facsimile numbers and email addresses for such communications shall be:

 

if to the Sellers (prior to the Closing Date):

 

Universal American Corp.

Six International Drive

Suite 190

Rye Brook, New York 10573

Attention: Tony Wolk

Fax: (914) 934-2949

E-Mail Address:  twolk@universalamerican.com

 

with a copy (for informational purposes only) to:

 

Paul, Weiss, Rifkind, Wharton & Garrison LLP 

1285 Avenue of the Americas

New York, NY 10019 

Attention: John C. Kennedy, Esq.

                Tracey A. Zaccone, Esq.

Fax:  (212) 757-3990

E-Mail Address:  jkennedy@paulweiss.com

                            tzaccone@paulweiss.com

 

if to a Buyer, to its address and facsimile number set forth below such Buyer’s signature on the signature pages hereto or to an email address specified by such Buyer, with copies to such Buyer’s representatives set forth below such Buyer’s signature on the signature pages hereto;

 

or to such other address, facsimile number and/or  email address and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five days prior to the effectiveness of such change.  Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission, (C) electronically generated text of email containing the

 

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time and date of receipt or (D) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile, receipt by email or receipt from an overnight courier service in accordance with clause (i), (ii), (iii) or (iv) above, respectively.

 

(g)           Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns; provided that except as contemplated by Section 8(o) and Section 8(h) hereof and the Assignment and Assumption Agreement, no party shall assign any of its rights or obligations hereunder without the prior written consent of the other parties hereto.

 

(h)           No Third Party Beneficiaries.  Except as set forth below, this Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except that the Agent may rely upon the representations and warranties contained in Sections 2 and 3 hereof, and except that Section 8(o) shall inure to the benefit of the Agent, which shall be a third party beneficiary with respect thereto and except that the Company may rely upon the representations and warranties and agreements contained in Section 2 and Section 8(o) hereof and the Company shall be a third party beneficiary of the covenants and agreements of each party to this Agreement and from and after the Effective Time, the Company shall be entitled to enforce all rights of the Sellers under this Agreement.

 

(i)            Further Assurances.  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

(j)            Indemnification.  (i) In consideration of each Buyer’s execution and delivery of this Agreement and acquiring the Series A Preferred Stock hereunder and in addition to all of the Sellers’ other obligations under this Agreement, the Sellers, on a joint and several basis, shall defend, protect, indemnify and hold harmless each Buyer and all of their stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons’ agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), (the “Indemnified Liabilities”) to which any Indemnitee may become subject, under the Securities Act of 1933, the Exchange Act of 1934, other federal or state statutory law or regulation or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of material fact contained in the Confidential Information Memorandum (including any supplement thereto and any materials or information provided to the buyers by the Sellers in connection with the offer and sale of the Series A Preferred Stock), or arise out of or are based upon the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and will reimburse each Indemnitee for any legal or other expenses reasonably incurred by such Indemnitee in connection with investigating or defending any such loss, claim, damage,

 

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liability or action.  The obligations of the Sellers’ under this Section 8(j) to any Buyer (and to all Buyers collectively) shall not exceed the proceeds received by the Sellers’ from the sale of the Series A Preferred Stock to such Buyer. The indemnity agreement set forth in this Section 8(j) shall be in addition to any liabilities that the Sellers’ may otherwise have.

 

(ii) promptly after receipt by an indemnified party under this Section 8(j) of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (i) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (i) above, except to the extent that it has been materially prejudiced by such failure.  In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 8(j) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation.  No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and does not include a statement as to any admission of fault, culpability or failure to act by or on behalf of any indemnified party.  No indemnifying party shall be liable for any settlement or compromise of, or consent to the entry of judgment with respect to, any such action or claim effected without its consent.

 

(k)           No Strict Construction.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

(l)            Remedies.  Each Buyer and each holder of the Series A Preferred Stock shall have all rights and remedies set forth in this Agreement and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law.  Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.  Furthermore, the Sellers recognize that in the event that they fail to perform, observe, or discharge any or all of its obligations under this Agreement, any remedy at law may prove to be inadequate relief to the Buyers.  The Sellers therefore agree that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such case without the necessity of proving actual damages and without posting a bond or other security.

 

(m)          Independent Nature of Buyers’ Obligations and Rights.  The obligations of each Buyer under this Agreement are several and not joint with the obligations of any other Buyer,

 

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and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under this Agreement.  Nothing contained herein, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to constitute the Buyers as, and the Sellers acknowledge that the Buyers do not so constitute, a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group, and none of the Sellers will assert any such claim with respect to such obligations or the transactions contemplated by this Agreement.  The Sellers acknowledge and each Buyer confirms that it has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors.  Each Buyer shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose.  Notwithstanding the foregoing, nothing in this Section 8(m) shall be construed to alter or affect the closing condition set forth in Section 5(a) hereof.

 

(n)           Survival.  Except as otherwise provided herein, unless this Agreement is terminated under Section 7, the agreements and covenants set forth in Sections 4 and 8 shall survive the Closing. Each Buyer shall be responsible only for its own agreements and covenants hereunder.

 

(o)           Information and Exculpation.

 

(i)            Each Buyer (whether itself or through its advisors, if any), acknowledges and agrees it has been furnished with all materials relating to the business, properties, finances, prospects and operations of the Company and the Parent and all other materials relating to the offer and sale of the Series A Preferred Stock that have been requested by such Buyer as it has deemed necessary or appropriate to conduct its due diligence investigation.  Such Buyer has sufficient knowledge and experience in investing in the securities of companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Series A Preferred Stock.  Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Sellers and the Company.  Such Buyer understands and acknowledges that (A) its investment in the Series A Preferred Stock involves a high degree of risk, (B) it may be required to bear the financial risks of an investment in the Series A Preferred Stock for an indefinite period of time and (C) prior to making an investment in the Series A Preferred Stock, such Buyer has concluded that it is able to bear those risks for an indefinite period.  Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Series A Preferred Stock.

 

(ii)           Each Buyer acknowledges that it is purchasing the Series A Preferred Stock based  on the results of its own due diligence investigation of the Company, including the representations and warranties being made by the Sellers in this Agreement, and that such Buyer and its advisors, if any, have had access to and opportunity to review the Confidential Information Memorandum and all the SEC Filings.

 

(iii)          Each Buyer acknowledges and agrees that it has not relied on any information or advice furnished by or on behalf of Jefferies & Company, Inc., as Placement Agent (the “Agent”), in connection with the offer and sale of the Series A Preferred Stock.  Such Buyer acknowledges that none of the Agent, its representatives or affiliates has made any independent investigation of the business or affairs of the Company and has undertaken no responsibility with

 

21

 

respect to the accuracy or completeness of any information or materials furnished to such Buyer, including the Confidential Information Memorandum and the SEC Filings and has not made and is not making any representations or warranties with respect to the Company, the Sellers or the transactions contemplated hereby.  Such Buyer is not relying on and will not rely on any statements made by the Agent, orally or in writing, to the contrary.  Such Buyer further acknowledges that the Agent is not responsible for the success of its investment in the Series A Preferred Stock, and acknowledges that for such Buyers’ convenience it has requested Jefferies & Company, Inc. to act also as the Closing Agent in connection with the Offering, as further described in Section 8(p) below.  In light of the foregoing, to the fullest extent permitted by law, such Buyer releases Jefferies & Company, Inc., its employees, officers and affiliates, in its or their capacity as placement agent, Closing Agent or otherwise, from any liability with respect to such Buyer’s purchase of the Series A Preferred Stock or other participation in any of the transactions contemplated by this Agreement.

 

(iv)          Each Buyer understands and agrees that in connection with the CVS Transaction, immediately prior to the effective time of the Merger on the Closing Date  (the “Effective Time”) the Company shall, or shall cause one of its Subsidiaries to, pursuant to an assignment and assumption agreement dated as of such date (the “Assignment and Assumption Agreement”), unconditionally assume and undertake to pay, satisfy and discharge when due in accordance with their terms or retain and not transfer, as applicable, any and all obligations and liabilities relating to the sale of the Series A Preferred Stock, including all liabilities and obligations of the Sellers arising in connection with the Offering, this Agreement, the Confidential Information Memorandum, the Escrow Agreement and the transactions contemplated hereby and thereby, including, but not limited to all Indemnified Liabilities arising under Section 8(j) of this Agreement (Indemnification) or under the Escrow Agreement. From and after the Effective Time, none of the Sellers, any member of the Part D Group (as defined below) or any of their respective affiliates shall have any further liability or obligation to any Buyer or holder of Series A Preferred Stock, whether arising under this Agreement , the Escrow Agreement or otherwise, including in respect of any indemnification obligations, and each Buyer hereby agrees to look solely to the Company for the satisfaction of any all claims, liabilities or other obligations relating to the purchase and sale of the Series A Preferred Stock.  In light of the foregoing, to the fullest extent permitted by law, from and after the Effective Time, such Buyer hereby releases the Sellers, each member of the Part D Group and their respective affiliates from any liability or obligation with respect to the Series A Preferred Stock or other participation in any of the transactions contemplated by this Agreement, or the Confidential Information Memorandum, including in respect of any Indemnified Liabilities. For purposes of this Section 8(o), all references to the “Company,” as to any event, circumstances or period as of or following the Effective Time, shall be deemed to also refer to and include the businesses conducted as part of the “Senior Managed Care-Medicare Advantage,” “Traditional Insurance” and “Corporate & Other” segments, other than the Medicare Part D business (each as more fully described in the SEC Filings (as defined below)), of the Parent and its Subsidiaries and “Part D Group”  shall mean Parent, Pennsylvania Life Insurance Company, a Pennsylvania corporation and subsidiary of UAC Holding, UAC Holding and Member Health, LLC, a Delaware limited liability company and subsidiary of Parent.

 

(p)           Appointment of Closing Agent.  Each Buyer hereby requests and appoints Jefferies & Company, Inc. to act as sole and exclusive closing agent in connection with the Buyers’ purchase of the Series A Preferred Stock in the Offering. Each Buyer represents that it has reviewed the Escrow Agreement and understands the scope and limitations of the authority of the Closing

 

22

 

Agent thereunder, including the authority of the Closing Agent to direct the Escrow Agent to release such Buyer’s Purchase Price on the Closing Date in accordance with the Escrow Agreement under the circumstances specified in Section 4 of the Escrow Agreement.  Each Buyer expressly and irrevocably authorizes the Closing Agent to exercise such authority and to take such other action as may be necessary or desirable in effecting the foregoing or as provided in the Escrow Agreement.  The Closing Agent shall not waive any condition to Closing in Section 5 of this Agreement on behalf of any Buyer without such Buyer’s prior written consent; provided, however, that receipt by the Closing Agent of the Notice to Agent in the form attached as Exhibit C to the Escrow Agreement, duly executed (or purporting to be duly executed) and delivered by the Parent, shall constitute conclusive and irrevocable evidence to the Closing Agent that all of the Buyers’ conditions to Closing set forth in Section 6 hereof have been satisfied in full. Under no circumstances shall the Closing Agent have any liability whatsoever to any Buyer, or any other person, for authorizing the disbursement of such Buyer’s Purchase Price from the escrow account if the Closing Agent does so in accordance with Section 4 of the Escrow Agreement.

 

[Signature Page Follows]

 

23

 

IN WITNESS WHEREOF, each Buyer, the Sellers and the Closing Agent have caused its respective signature page to this Stock Purchase Agreement to be duly executed as of the date first written above.

 

	
 
    	
UNIVERSAL   AMERICAN CORP.
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Robert A. Waegelein
    
	
 
    	
 
    	
Name:   Robert A. Waegelein
    
	
 
    	
 
    	
Title:   Executive Vice President
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
UAC   HOLDING, INC.
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Robert A. Waegelein
    
	
 
    	
 
    	
Name:   Robert A. Waegelein
    
	
 
    	
 
    	
Title:   President
    

 

 

IN WITNESS WHEREOF, each Buyer, the Sellers and the Closing Agent have caused their respective signature page to this Stock Purchase Agreement to be duly executed as of the date first written above.

 

 

	
 
    	
[BUYER]
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
 
    
	
 
    	
 
    	
Name:
    
	
 
    	
 
    	
Title:
    

 

No. of Shares Being Purchased:

 

Aggregate Purchase Price:

 

Jurisdiction of Residency:

 

Notice to be sent to:

 

 

Attention:

Facsimile no.

 

with a copy to:

 

 

Attention:

Facsimile no.

 

 

IN WITNESS WHEREOF, each Buyer, the Sellers and the Closing Agent have caused their respective signature page to this Stock Purchase Agreement to be duly executed as of the date first written above.

 

	
 
    	
Jefferies &   Company, Inc.
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Mark Sahler
    
	
 
    	
 
    	
Name:   Mark Sahler
    
	
 
    	
 
    	
Title:   Managing DirectorExhibit 10.2

 

TAX MATTERS AGREEMENT

 

This Tax Matters Agreement (this “Agreement”) is entered into as of April 29, 2011 between CVS Caremark Corporation, a Delaware corporation (“Parent”), Universal American Corp., a New York corporation (“Company”) and Universal American Corp., a newly-formed Subsidiary of the Company formerly known as Ulysses Spin Corp., a Delaware corporation (“Newco”, and together with Parent and Company, the “Parties”). Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to such terms in the Separation Agreement, dated as of December 30, 2010, by and between Company and Newco (the “Separation Agreement”).

 

RECITALS

 

WHEREAS, Company is the common parent corporation of an affiliated group of corporations (the “Company Consolidated Group”) within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the “Code”), that has filed consolidated federal income tax returns;

 

WHEREAS, Newco is a Subsidiary of Company;

 

WHEREAS, pursuant to the Separation Agreement, among other things, Company, or one of its subsidiaries, will transfer to one or more subsidiaries of Newco (such subsidiaries, “Newco Sub”) all of the Newco Assets and stock of each of the Newco Transferred Entities and, in exchange, Newco Sub will transfer to Company and/or one or more of its Subsidiaries, shares of Newco Common Stock, and Newco Preferred Stock and cash, if applicable;

 

WHEREAS, on the Closing Date and pursuant to the terms of the Separation Agreement and the Agreement and Plan of Merger, dated as of December 30, 2010, by and between Parent, Merger Sub, and Company (the “Merger Agreement”) and subject to conditions set forth therein, Merger Sub will merge with and into Company, with Company surviving (the “Merger”) and shareholders of Company will receive, in exchange for their Company shares, cash and Newco Common Stock;

 

WHEREAS, the tax year of the Company Consolidated Group will end on the Closing Date and Company will become a member of the affiliated group (within the meaning of Section 1504(a) of  the Code) that files consolidated tax returns of which Parent is the common parent (the “Parent Group”); and

 

WHEREAS, in contemplation of the Merger, the parties desire to enter into this Agreement (a) to provide for the allocation between them of the liabilities for Taxes arising prior to, as a result of, and subsequent to the Closing Date and (b) to provide for and agree upon other matters relating to Taxes.

 

1

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

Section 1.1             As used in this Agreement, the following terms shall have the following meanings:

 

“2010 Consolidated Tax Return” means the U.S. federal income Tax Return for the Company Consolidated Group for the taxable year ending on December 31, 2010.

 

“Aberration” shall have the meaning set forth in Section 2.1(a)(iii)(2).

 

“Actually Received” has the following meaning:  a Tax Benefit shall be treated as Actually Received by any Person from a Tax Item in a Taxable Period only if and to the extent that (i) a cash payment is received from the appropriate Governmental Authority in respect of such Tax Item or (ii) the Tax liability of the Group or Group Member, as the case may be, for such Taxable Period, after taking into account the effect of the Tax Item on the Tax liability of such Group or Group Member in the current Taxable Period is less than it would have been if such Tax liability were determined without regard to such Tax Item (but taking into account all other Tax Items of such Group or Group Member other than Tax Items relating to carrybacks from later Taxable Periods), but, in each of clause (i) and (ii) of this definition, taking account the computational principles set forth in Section 2.3(d)(iii)(Closing Period Carryback Refund and Closing Period Carryforward Payment Computational Principles).

 

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

 

“Agreement” shall have the meaning set forth in the preamble to this Agreement.

 

“Applicable Rate” means the Prime Rate plus 2% per annum.

 

“Average Trading Value” shall have the meaning set forth in Section 2.1(a)(iii)(2).

 

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

 

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

 

“Closing Date Consolidated Tax Return” means the U.S. federal consolidated income Tax Return for the Company Consolidated Group for the taxable year ending on the Closing Date.

 

“Closing Date Value of Newco” shall have the meaning set forth in Section 2.1(a)(iii).

 

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“Closing of the Books Method” means the apportionment of items between portions of a Taxable Period based on a closing of the books and records (or hypothetical closing of the books and records) on the Closing Date as if the Closing Date were the end of the Taxable Period; provided, that any Tax Items not susceptible to such apportionment (such as real property or personal property Taxes imposed on a period basis) shall be apportioned on the basis of elapsed days during the relevant portion of the Taxable Period.

 

“Closing Period Carryback Refund” means any Refund attributable to Merger and Restructuring Tax Benefits determined in accordance with Section 2.3(d)(iii) (Closing Period Carryback Refund and Closing Period Carryforward Payment Computational Principles) hereof.

 

“Closing Period Carryback Refund Payment” means a payment required to be made to Newco with respect to a Closing Period Carryback Refund pursuant to Section 2.3(d)(ii) hereof.

 

“Closing Period Carryforward Payment” has the meaning set forth in Section 2.3(d)(ii) hereof.

 

“Closing Period Indemnity Amount” shall have the meaning set forth in Section 2.3(d)(ii) hereof.

 

“Code” shall have the meaning set forth in the recitals.

 

“Company” shall have the meaning set forth in the preamble to this Agreement.

 

“Company Consolidated Group” shall have the meaning set forth in the Recitals.

 

“Company Consolidated Group Tax Return” means the U.S. federal consolidated income Tax Return for the Company Consolidated Group for any Taxable Period ending on or before the Closing Date, and shall include, for the avoidance of doubt, the 2010 Consolidated Tax Return and the Closing Date Consolidated Tax Return.

 

“Company Filed Tax Return” shall have the meaning set forth in Section 2.1(b).

 

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

 

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

 

“Company Tax Packages” means, collectively, all Tax Packages for a particular taxable period (or portion thereof) with respect to the Medicare Part D Business.  A “Company Tax Package” means a Tax Package with respect to a part of the Medicare Part D Business.

 

“Current Practices” means the current practices, tax accounting methods, and positions used by the members of the Company Consolidated Group in connection with any and all

 

3

 

Tax matters, including the preparation of Tax Packages and the preparation of and filing of Tax Returns, revised as appropriate to take into account (i) changes in the applicable Tax law after the Closing Date, (ii) good faith resolutions of Tax Contests after the Closing Date, and (iii) methods or positions adopted in the preparation of Tax Returns previously filed (after the Closing Date) in accordance with this Agreement.

 

“Deloitte” means “Deloitte LLP,” “Ernst & Young LLP” or a nationally-recognized accounting firm of similar standing mutually acceptable to the Parties.

 

“Deviation” shall have the meaning set forth in 2.1(a)(i).

 

“Disagreement” shall have the meaning set forth in Section 8.1.

 

“Dispute” shall have the meaning set forth in Section 2.1(a)(i).

 

“Final Determination” means any final determination of liability in respect of Taxes that, under applicable Tax law, is no longer subject to further appeal, review or modification through proceedings or otherwise (including the expiration of the statute of limitations or a period for the filing of claims for refunds, amended Tax Returns or appeals from adverse determinations). For example, a Final Determination shall include a settlement, compromise, or other agreement with the relevant Governmental Authority, whether contained in an IRS Form 870 or other comparable form, or otherwise, or such procedurally later event, such as a closing agreement with the relevant Governmental Authority, an agreement contained in IRS Form 870-AD or other comparable form, and an agreement that constitutes a “determination” under Section 1313(a)(4) of the Code.

 

“First Trading Date” shall have the meaning set forth in Section 2.1(a)(iii)(1).

 

“First Trading Date Value” shall have the meaning set forth in Section 2.1(a)(iii)(1).

 

“First Party” shall have the meaning set forth in Section 2.3(d).

 

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

 

“Group” shall have the meaning set forth in the Separation Agreement.

 

“Group Member” shall mean any Person that is a member of a Group.

 

“Holdback Account” shall have the meaning set forth in Section 3.2. The amounts in the Holdback Account shall be invested as directed by Newco in only: (i) obligations issued or guaranteed by the United States of America or any agency or instrumentality thereof with a maturity of one (1) year or less; (ii) commercial paper at the time of investment and any renewal rated A-1 or higher by Standard & Poor’s Corporation or Prime-1 or higher by Moody’s Investor’s Service, Inc.; (iii) certificates of deposit (with a maturity of one (1) year or less) of or accounts with national banks, holding companies of national banks or corporations endowed with trust powers having, in any case, capital and surplus in excess of Five Hundred Million United States Dollars ($500,000,000) at the time of

 

4

 

investment; (iv) money market funds all of whose funds are invested in any of the foregoing; or (v) any other investments mutually agreed by the Parties.

 

“Holdback Amount” means, as of any date on which a  Closing Period Carryback Refund Payment or a Closing Period Carryforward Payment is payable pursuant to Section 3.2(b)(i) the excess, if any, of (x) the Holdback Target at such point over (y) the sum of (A)  the cumulative amount of cash previously added to the Holdback Account and (B) the Anticipated Remaining Closing Period Carryforward Payments at such time.   For purposes of this definition and the definition of Holdback Target, “Anticipated Remaining Closing Period Carryforward Payments” as of any date  means the payments that remain to be made with respect to any Remaining Merger and Restructuring Tax Losses (without taking into account any reduction for any Holdback Amount for any period) that have not previously been taken into account pursuant to Section 2.3(d)(iii) assuming full utilization of such Tax Items at the maximum applicable rate of Tax pursuant to Section 11 of the Code.

 

“Holdback Target” means as of any date on which a Closing Period Carryback Refund Payment or a Closing Period Carryforward Payment would otherwise be payable pursuant to Section 3.2(b)(i) (without taking into account any reduction for any Holdback Amount for any period), an amount equal to (x) twenty percent (20%) multiplied by (y) the sum of (I) all Closing Period Carryback Refunds and Closing Period Carryforward Payments paid to Newco on or prior to such date or added to the Holdback Amount plus (II) all Anticipated Closing Period Carryforward Payments as of such date (without taking into account any reduction for any Holdback Amount for any period).  If Newco exercises its option pursuant to section 2.3(a)(iii)(3), the Holdback Target shall equal the sum of the amount that Holdback Target would have been had Newco not exercised such option and one hundred percent (100%) of the amount, if any, by which the amount described in clause (y) of this definition is increased by reason of such election.

 

“Holdco Items” means all Tax Items of or arising at the level of Company and UAC Holdings, other than the Part D Holdco Items.

 

“Interest Netting Rules” means Section 6621(d) of the Code and any similar provision of state, local or foreign Law.

 

“IRS” means the U.S. Internal Revenue Service.

 

“Jointly Filed Tax Return” shall have the meaning set forth in Section 2.1(c).

 

“Liabilities” shall have the meaning set forth in the Separation Agreement.

 

“Medicare Part D Business” shall have the meaning set forth in the Merger Agreement.

 

“Member Health” means Member Health, LLC, a wholly-owned LLC disregarded as an entity separate from Company for U.S. federal income tax purposes.

 

5

 

“Merger and Restructuring Tax Benefits” means the Tax Benefits generated with respect to the Merger and Restructuring Tax Items.

 

“Merger and Restructuring Losses” shall have the meaning set forth in Section 2.3(d)(iii)(1).

 

“Merger and Restructuring Taxes” means Taxes imposed in connection with the Merger and Restructuring Tax Items.

 

“Merger and Restructuring Tax Items” means any Tax Items realized by any member of the Company Consolidated Group, Part D Group or Newco Group resulting from, or arising in connection with (i) the Restructuring (including any Tax Items arising from a Section 338(h)(10) Election with respect to any Transferred Subsidiary), (ii) the distribution of the Newco Common Stock in the Merger, (iii) any payment or similar amount (including any payment of employment Taxes) in respect of the cancellation, vesting or other similar event of the Company Options, Performance Shares or Restricted Shares on the Closing Date that reduces the Per Share Merger Consideration pursuant to the Merger Agreement, (iv) any fees, expenses, and interest (including amounts treated as interest for income Tax purposes and any breakage fees and accelerated deferred financing fees or debt prepayment fees or capitalized debt costs) incurred by Company or any of its Subsidiaries with respect to the payment of any Company Indebtedness on the Closing Date, to extent such amounts reduce the Per Share Merger Consideration pursuant to the Merger Agreement, (v) any sale bonuses, stay bonuses, change of control payments, severance payments, retention payments, or other similar payments (and related employment Taxes) made by Company or any of its Subsidiaries on or prior to the Closing Date (or otherwise incurred in connection with the transactions contemplated in the Separation Agreement, Merger Agreement or any Split-Off Agreement) that reduces the Per Share Merger Consideration pursuant to the Merger Agreement, (vi) without duplication, Transaction Expenses borne by Company and Newco (and not Parent pursuant to Section 5.13(b)) of the Merger Agreement and Section 2.03(a)(vi) and Section 2.03(a)(vii) of the Separation Agreement, and (vii) Transfer Taxes payable by Newco in accordance with the provisions of this Agreement to the extent such Transfer Taxes are deductible for U.S. federal income tax purposes.

 

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

 

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

 

“MLTN Opinion” means a legal opinion of Paul, Weiss in form and substance reasonably satisfactory to Parent that, for U.S. federal income tax purposes, as a result of the Restructuring and the Section 338(h)(10) election with respect to the Transferred Subsidiaries, it is “more likely than not” that the Company Consolidated Group (A) will be entitled to deduct in the taxable year of the Company Consolidated Group ending on the Closing Date losses (if any)  recognized with respect to the assets of the Transferred Subsidiaries with respect to which the Section 338(h)(10) elections are made for U.S. federal income tax purposes  and (B) will be entitled to carry back losses (if any) in the

 

6

 

taxable year of the Company Consolidated Group ending on the Closing Date to the Company Consolidated Group’s U.S. federal income tax returns for the years ended December 31, 2010, December 31, 2009 and, to the extent applicable, December 31, 2008.  For the avoidance of doubt, the MLTN Opinion shall not be required to explicitly address any legal conclusions other than the issues expressly set forth in clauses (A) and (B) hereof, however the MLTN Opinion will not expressly assume, or expressly exclude from the scope of the opinion, any legal conclusion necessary to reach the conclusions set forth in clauses (A) and (B).  The Parties acknowledge and agree that, the MLTN Opinion will not be a “covered opinion” as that term is defined in IRS Circular 230 (and will bear an appropriate legend to that effect); however, the MLTN Opinion shall otherwise comply with requirements set forth in the first sentence of this definition.

 

“Newco” shall have the meaning set forth in the preamble to this Agreement.

 

“Newco Assets” shall have the meaning set forth in the Separation Agreement.

 

“Newco Business” shall have the meaning set forth in the Separation Agreement.

 

“Newco Common Stock” shall have the meaning set forth in the Separation Agreement.

 

“Newco Filed Tax Return” shall have the meaning set forth in Section 2.1(d).

 

“Newco Group” shall have the meaning set forth in the Separation Agreement.

 

“Newco Indemnitees” shall have the meaning set forth in Section 4.1(a).

 

“Newco Preferred Stock” means any preferred stock of Newco issued as set forth in the Separation Agreement.

 

“Newco Sub” shall have the meaning set forth in the Recitals.

 

“Newco Tax Packages” means, collectively, all Tax Packages for a particular taxable period (or portion thereof) with respect to the Newco Business.  A “Newco Tax Package” means a Tax Package with respect to a part of the Newco Business.

 

“Newco Taxes” shall have the meaning set forth in Section 2.3(b).

 

“Newco Transferred Entities” shall have the meaning set forth in the Separation Agreement.

 

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

 

“Parent” shall have the meaning set forth in the preamble.

 

“Parent Group” shall have the meaning set forth in the Recitals.

 

7

 

“Part D Group” shall have the meaning set forth in the Separation Agreement.

 

“Part D Group Indemnitees” shall have the meaning set forth in Section 4.1(b).

 

“Part D Group Taxes” shall have the meaning set forth in Section 2.3(a).

 

“Part D Holdco Items” shall mean, without duplication, (I) Tax Items of Member Health attributable to the Part D Business, (II) Tax Items attributable to expenses that Penn Life and Member Health actually paid or funded, directly or indirectly, for such Taxable Period in a manner consistent with the “closed system” approach required pursuant to Section 2.05(b) of the Separation Agreement, (III) Tax Items attributable to Pre-Closing Allocated Expenses for which Company is responsible pursuant to Section 2.05(c) of the Separation Agreement, and (IV) any Tax Items realized by any member of the Company Consolidated Group, Part D Group or Newco Group resulting from, or arising in connection with (A) any fees, expenses, and interest (including amounts treated as interest for income Tax purposes and any breakage fees and accelerated deferred financing fees or debt prepayment fees or capitalized debt costs) incurred by Company or any of its Subsidiaries with respect to the payment of any Company Indebtedness on the Closing Date, to extent such amounts do not reduce the Per Share Merger Consideration pursuant to the Merger Agreement and are actually borne economically by Parent, (B) any sale bonuses, stay bonuses, change of control payments, severance payments, retention payments, or other similar payments (and related employment Taxes) made by Company or any of its Subsidiaries on or prior to the Closing Date (or otherwise incurred in connection with the transactions contemplated in the Separation Agreement, Merger Agreement or any Split-Off Agreement) that does not reduce the Per Share Merger Consideration pursuant to the Merger Agreement and are actually borne economically by Parent, (C) without duplication, Transaction Expenses borne by Parent (and not Company or Newco) pursuant to the Merger Agreement and Section 2.03(b)(iv) and Section 2.03(b)(v) of the Separation Agreement, and (D) Transfer Taxes payable by Parent in accordance with the provisions of this Agreement to the extent such Transfer Taxes are deductible for U.S. federal income tax purposes.

 

“Part D Operating Losses” shall have the meaning set fort in Section 2.3(d)(iii)(1).

 

“Parties” shall have the meaning set forth in the preamble to this Agreement.

 

“Paul, Weiss” means “Paul, Weiss, Rifkind, Wharton & Garrison LLP” or a nationally-recognized law firm of similar standing.

 

“Payment Period” shall have the meaning set forth in Section 4.3(b).

 

“Per Share Merger Consideration” shall have the meaning set forth in the Merger Agreement.

 

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

 

8

 

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

 

“Pre-Closing Allocated Expenses” shall have the meaning set forth in the Separation Agreement.

 

“Pre-Closing Period” means any taxable year or other Taxable Period that ends on or before the Closing Date and, in the case of any taxable year or other Taxable Period that begins before and ends after the Closing Date, that portion of the taxable year or other Taxable Period through the close of the Closing Date.

 

“Prime Rate” means the rate of interest announced by The Wall Street Journal from time to time as the “prime rate,” “prime lending rate,” “base rate” or similar reference rate.  In the event the Prime Rate is discontinued as a standard, Parties shall designate a comparable reference rate as a substitute therefor.

 

“Private Letter Ruling” means a private letter ruling issued by the IRS, in form and substance reasonably satisfactory to Parent (including with respect to the representations and assumptions contained therein),  that explicitly rules on each of the following legal issues: (w) the transfers of the stock of the Newco Transferred Entities in the Restructuring qualify as “qualified stock purchases” within the meaning of Section 338(d)(3) of the Code; (x) Company and Newco Sub will be eligible to make the election under Section 338(h)(10) of the Code in respect of the stock of the Transferred Subsidiaries; (y) the Company Consolidated Group will be entitled to deduct in the taxable year of the Company Consolidated Group ending on the Closing Date losses recognized (if any) with respect to the assets of the Transferred Subsidiaries under Treasury Regulation Section 1.1502-13(c) and 1.1502-13(d) (as applicable), Section 267(f)(2)(B) of the Code, and Treasury Regulation 1.267(f)-1(c); and (z) the Company Consolidated Group will be entitled to carry back losses (if any) in the taxable year of the Company Consolidated Group ending on the Closing Date to the Company consolidated group’s U.S. federal income tax returns for the years ended December 31, 2010, December 31, 2009 and, to the extent applicable, December 31, 2008.

 

“Refund” means, with respect to any Person, any refund of Taxes including any reduction of Tax liabilities by means of a credit, offset or otherwise (and including, for purposes of Section 2.3(d)(ii), any reduction in Taxes Actually Received by Parent and its Affiliates), but excluding any interest payable by the appropriate taxing authority.

 

“Remaining Merger and Restructuring Losses” shall have the meaning set forth in Section 2.3(d)(iii)(2).

 

“Resolution” shall have the meaning set forth in Section 5.6.

 

“Restricted Share” has the meaning set forth in the Merger Agreement.

 

“Restructuring” means the transactions set forth in Section 2.01(a)(i) through 2.01(a)(viii), and Section 2.01(b) of the Separation Agreement.

 

9

 

“Ruling Request” shall have the meaning set forth in Section 3.3.

 

“Second Party” shall have the meaning set forth in Section 2.3(d).

 

“Section 338(h)(10) Elections” shall have the meaning set forth in Section 3.2.

 

“Separation Agreement” shall have the meaning set forth in the preamble to this Agreement.

 

“Should Opinion” means a legal opinion from Paul, Weiss, in form and substance reasonably satisfactory to Parent, that concludes, for U.S. federal income tax purposes, that each relevant legal issue with respect to the conclusions described in clauses (w), (x) and (y) of the definition of “Private Letter Ruling”  on which the IRS has not explicitly ruled in the Private Letter Ruling, including any legal conclusions that are expressly assumed but not explicitly ruled on (in representations or otherwise) in the Private Letter Ruling but excluding (x) the application of Section 7701(o) (and the common law economic substance doctrine) and (y) the application of Section 269 of the Code, however the Should Opinion will not expressly assume, or expressly exclude from the scope of the opinion, any legal conclusion necessary to reach the conclusions set forth in clauses (w), (x), and (y).  The Parties acknowledge and agree that the Should Opinion will not be a “covered opinion” as that term is defined in IRS Circular 230 (and will bear an appropriate legend to that effect); however, the Should Opinion shall otherwise comply with requirements set forth in the first sentence of this definition.

 

“Split-Off Agreement” shall have the meaning set forth in the Separation Agreement.

 

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

 

“Taxes” means all taxes, charges, fees, duties, levies, imposts, rates or other assessments or governmental charges of any kind imposed by any federal, state, local or foreign Governmental Authority, including income, gross receipts, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, custom duties, property, sales, use, license, capital stock, transfer, franchise, registration, payroll, withholding, social security, unemployment, disability, value added, alternative or add-on minimum or other taxes, whether disputed or not, and including any interest, penalties, charges or additions attributable thereto.

 

“Tax Advisor” shall have the meaning set forth in Section 2.1(a)(i).

 

“Tax Asset” means any Tax Item that has accrued for Tax purposes, but has not been used during a Taxable Period, and that could reduce a Tax in another Taxable Period, including a net operating loss, net capital loss, investment tax credit, foreign tax credit, research and experimentation credit, charitable deduction or credit related to alternative minimum tax or any other Tax credit, but does not include the tax basis of an asset.

 

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“Tax Basis Study” means a report of gross asset basis and gross liabilities of the Transferred Subsidiaries delivered by Deloitte, that is reasonably satisfactory to Parent. Newco and Company shall (and shall cause their Affiliates to) cause representatives of Parent to have reasonable access to discuss the Tax Basis Study with the appropriate representatives from Deloitte, as well as reasonable access to the work papers and other information used to prepare the Tax Basis Study.

 

“Tax Benefit” means a decrease in the Tax liability of any Group Member for any Taxable Period, including any Refund.

 

 “Tax Contest” shall have the meaning set forth in Section 5.1.

 

“Tax Detriment” means an increase in the Tax liability of any Group Member for any Taxable Period or a decrease in a Tax Asset of any Group Member.

 

“Tax Item” means, with respect to any Tax, any item of income, gain, loss, deduction or credit, or other attribute that may have the effect of increasing or decreasing any Tax.

 

“Tax Notice” has the meaning set forth in Section 2.2.

 

“Tax Package” means all of the information necessary to prepare a Tax Return for a particular Taxable Period (or portion thereof) with respect to an activity or operation conducted by Company or any direct or indirect Subsidiary of Company, including statutory or other financial statements, underlying Tax workpapers, and the information set forth on Schedule I hereof.

 

“Taxable Period” means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax law; provided that any Tax period used solely for purposes of estimated Tax payments shall not be considered a “Taxable Period” for purposes of this agreement.

 

“Tax Sharing Agreement” has the meaning set forth in Section 2.3(g).

 

“Tax Records” means Tax Returns, Tax Return workpapers, documentation relating to any Tax Contests and any other books of account or records (including any such books and records in electronic format), including any such items required to be maintained under the Code or other applicable Tax laws or under any record retention agreement with any Governmental Authority.

 

“Tax Return” means any return, report, certificate, form or similar statement or document (including any related supporting information or schedule attached thereto and any information return, amended tax return, claim for refund or declaration of estimated tax) required to be supplied to, or filed with, a Governmental Authority or any bill for or notice related to ad valorem or other similar Taxes received from a Governmental Authority, in each case, in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax.

 

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“Tax Treatment” shall have the meaning set forth in Section 3.1.

 

“Transfer Taxes” means all sales, use, value added, transfer, stamp, registration, documentary, excise, real property transfer or gains, or similar Taxes.

 

“Transferred Subsidiaries” means the Newco Transferred Entities and each Subsidiary of a Newco Transferred Entity that is treated as a corporation for U.S. federal income tax purposes and is included in the Company Consolidated Group.

 

“Treasury Regulations” means the regulations promulgated under the Code, including temporary regulations.

 

ARTICLE II

 

TAX RETURNS AND TAX PAYMENTS

 

Section 2.1             OBLIGATIONS TO FILE TAX RETURNS.

 

(a)          Preparation and Filing of the 2010 Consolidated Tax Return and Closing Date Consolidated Tax Return.

 

(i)            Subject to Section 2.1(e), Newco shall have the primary responsibility for preparing the 2010 Consolidated Tax Return and the Closing Date Consolidated Tax Return (including requests for extensions thereof).  Newco shall prepare such Tax Returns in a manner consistent with Current Practices and this Agreement, and shall report on such Tax Returns the information and positions contained in the Tax Packages except to the extent Newco determines that a deviation is appropriate as a result of (i) consolidating the various Tax Packages or (ii) information or a position contained in a Company Tax Package being inconsistent with information or a position contained in a Newco Tax Package or this Agreement (a “Deviation”); provided that, (x) subject to the next succeeding proviso, the financial information used by Newco in the preparation of each such Tax Return shall be based on information prepared in accordance with either (A) United States generally accepted accounting principles applied on a consistent basis or (B) statutory principles, as applicable and (y) neither Newco nor the Company shall take any position or include any information with respect to any Tax Item on any 2010 Consolidated Tax Return if taking such position or including such information would result in Company being required to establish or increase a FIN 48 reserve that would, taken together with all other FIN 48 reserves established or increased pursuant to this Section 2.1(a)(i), Section 2.3(e), Section 2.4(a), and Section 8.18 of the Merger Agreement, be in excess of seven million five hundred thousand dollars ($7,500,000); provided, further,  that Newco and the Company shall file Tax Returns in a manner consistent with the Tax Basis Study and either (I) the MLTN Opinion or (II) the Private Letter Ruling and the Should Opinion, as applicable, and, if the Tax Returns are filed in a manner consistent with the MLTN Opinion pursuant to 

 

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clause (I), the Tax Returns shall, at the Company’s request, contain adequate factual disclosure of the Restructuring, Separation and Section 338(h)(10) elections for purposes of Section 6662(d)(2)(B)(ii)(I) of the Code.  Newco shall deliver to Company for its review a final draft of the 2010 Consolidated Tax Return (but only to the extent that such Tax Return is not filed before the Closing Date) and a final draft of the Closing Date Consolidated Tax Return, at least thirty (30) days, in the case of the 2010 Consolidated Tax Return, and forty-five (45) days, in the case of the Closing Date Consolidated Tax Return, as applicable, prior to the date (with extensions) such Tax Return is required to be filed.  If Company believes that either the 2010 Consolidated Tax Return or Closing Tax Consolidated Tax Return, as applicable, is inconsistent with the second sentence of this Section 2.1(a)(i) or contains a Deviation with which it disagrees, Company may provide Newco comments to that effect no later than fifteen (15) days, in the case of the 2010 Consolidated Tax Return, or twenty (20) days, in the case of the Closing Date Consolidated Tax Return, after receipt of the draft Tax Return and such comments shall specify which positions in such draft, if any, Company believes are inconsistent with the principles contained in the second sentence of this Section 2.1(a)(i) and with which Deviations it disagrees (“Disputes”).  Disputes that are not promptly resolved shall be resolved by a nationally recognized law or accounting firm, reasonably acceptable to the Parties (the “Tax Advisor”) as promptly as practicable so that Company may timely file (or cause to be filed) the Tax Return subject to the Dispute. The Parties shall not be required to retain the same Tax Advisor with respect to each Dispute or Disagreement.  Company shall timely file (or cause to be timely filed) such Tax Return, as modified to reflect the resolution of any Dispute.  If any Dispute remains unresolved seven (7) days before the due date (with extensions) for filing such Tax Return (regardless of whether the Dispute has been submitted to a Tax Advisor), Newco shall decide how, for purposes of filing such Tax Return, the Tax Items that are the subject of the Dispute will be reported on such Tax Return if the Parties do not agree and no decision has been made by the Tax Advisor prior to the due date of such Tax Return (with extensions), provided that Newco delivers to Company a written opinion of a Tax Advisor, in form and substance reasonably satisfactory to Company, that such Tax Items are more likely than not to be sustained.  Company shall timely file (or cause to be timely filed) such Tax Return, properly reflecting thereon the agreement of the Parties, the position of Newco (pursuant to the preceding sentence, if Newco is able to satisfy the proviso thereof), the position of Company (pursuant to the preceding sentence, if Newco is not able to satisfy the proviso thereof) or the decision of the Tax Advisor, as applicable, on the date such Tax Return is required to be filed (with extensions).  If the Dispute is subsequently resolved by the Parties or by the Tax Advisor in accordance with Section 8.1 in a manner contrary to the 2010 Consolidated Tax Return or the Closing Date Consolidated Tax Return, as applicable, as filed, then, in accordance with the procedures contained in this Section 2.1(a)(i), Newco shall prepare an amended 2010 Consolidated Tax Return or Closing Date Consolidated Tax Return, as applicable, in a manner necessary to effectuate such resolution and Company shall timely file (or cause to be timely filed) such amended Tax Return.  If either Party desires the filing of a request for an extension of time within which to file the Closing Date Consolidated Tax Return, then Newco shall prepare any Tax Return necessary to obtain such extension and Company shall timely file (or cause to be timely filed) such Tax Return.  Newco shall bear 100% of any and all third-party costs 

 

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and expenses incurred in connection with the preparation of the 2010 Consolidated Tax Return. Company and Newco shall each bear 50% of any and all third-party costs and expenses incurred in connection with the preparation of the Closing Date Consolidated Tax Return (except for any such costs and expenses in connection with the Merger and Restructuring Tax Items, which shall be borne solely by Newco).

 

(ii)           Subject to the terms and conditions of the Transition Services Agreement, Newco shall have the primary responsibility for preparing the Company Tax Packages with respect to the 2010 Consolidated Tax Return and Closing Date Consolidated Tax Return. Company shall pay Newco all reasonable and documented internal and external costs that Newco incurs in connection with preparing the Company Tax Packages pursuant to the preceding sentence, consistent with the terms of the Transition Services Agreement. Company shall use reasonable best efforts to cooperate with Newco in the preparation of such Company Tax Packages and provide Newco personnel with access to Tax Records and Company personnel necessary to prepare the Company Tax Packages (to the extent such information is not already in Newco’s possession). Company shall also provide Newco, in the case of the Closing Date Consolidated Tax Return, no later than the earlier of (x) ninety (90) says following the Closing Date and (y) sixty (60) days before the due date of the Closing Date Consolidated Tax Return (with extensions) with statutory or other financial statements that Company actually prepares for all or an part of calendar year 2011 and that are necessary to prepare the Company Tax Packages.  Newco shall prepare the Newco Tax Packages with respect to the same taxable year, as applicable, and shall prepare a pro forma calculation of the Merger and Restructuring Tax Items with respect to the Closing Date Consolidated Tax Return.  The Tax Packages for the 2010 Consolidated Tax Return and the Closing Date Consolidated Return shall be prepared on a basis consistent with Current Practices and Section 2.1(a) hereof.

 

(iii)          Closing Date Value of Newco. For purposes of filing the Closing Date Consolidated Tax Return and any other applicable Tax Returns, the value of Newco on the Closing Date (the “Closing Date Value of Newco”) shall be determined in accordance with the following principles:

 

(1)           Unless an Aberration occurs and Newco exercises it option pursuant to Section 2.1(a)(iii)(3) , the value of Newco on the Closing Date shall be the sum of (A) (i) the aggregate number of outstanding shares (excluding treasury shares) of Newco Common Stock on the Closing Date, multiplied by (ii) the mean between the highest and lowest quoted selling prices of Newco Common Stock on (I) NASDAQ or (II) the principal market for such stock within the meaning of Treasury Regulation Section 20.2031-2,  on the earlier of Closing Date or the first full Business Day on which such stock is traded after the Closing Date (such earlier date, the “First Trading Date”, and such mean trading price described in this clause (ii) on the First Trading Date, the “First Trading Date Value”); plus (B) the aggregate price at which Newco Preferred Stock (if any) outstanding on the Closing Date was sold as permitted by the Separation Agreement.

 

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(2)           An “Aberration” means that the value of Newco determined in accordance with Section 2.1(a)(iii)(1) above is ten percent (10%) higher or lower than the value of Newco would be by using the average trading price of the Newco Common Stock for the twenty (20) trading days after the First Trading Date (the “Average Trading Value”) in the formula described in Section 2.1(a)(iii)(1) above instead of using the First Trading Date Value in clause (A)(ii) in such formula.

 

(3)           If an Aberration occurs, the Closing Date Value of Newco may, at Newco’s option,  be determined by using the formula in Section 2.1(a)(iii)(1) and using the Average Trading Value instead of the First Trading Date Value in clause (A)(ii) in such formula; provided that a nationally-recognized investment bank or valuation firm provides an opinion that the value determined in accordance with this Section 2.1(a)(iii)(3) more accurately reflects the Closing Date Value of Newco than the Closing Date Value of Newco determined in accordance with Section 2.1(a)(iii)(1) using the First Day Trading Value.

 

(b)           Other Company Filed Tax Returns.  Subject to Section 2.1(e) and Section 3.2, Company shall have the sole and exclusive responsibility for the preparation and filing of each Tax Return that is required to be filed after the Closing Date that includes any member of the Part D Group (and no Member of the Newco Group) or relates only to the Medicare Part D Business and that is not a Jointly Filed Tax Return (each, a “Company Filed Tax Return”). Company Filed Tax Returns shall exclude all Company Consolidated Group Tax Returns, which shall be prepared and filed in accordance with Section 2.1(a).

 

(c)           Jointly Filed Tax Returns. Subject to Section 2.1(e) and Section 3.2, Newco shall have the primary responsibility for the preparation and filing of each Tax Return that is required to be filed after the Closing Date that (x) includes any member of the Part D Group and a member of the Newco Group or (y) relates to the Medicare Part D Business and the Newco Business (each, a “Jointly Filed Tax Return”). Jointly Filed Tax Returns shall exclude all Company Consolidated Group Tax Returns, which shall be prepared and filed in accordance with Section 2.1(a). For these purposes, Jointly Filed Tax Returns shall include Tax Returns with respect to American Progressive and Penn Life (other than Company Consolidated Group Tax Returns described in the preceding sentence). All Jointly Filed Tax Returns that include any Taxes for which Company could be liable hereunder shall be prepared on a basis that is consistent with the 2010 Consolidated Tax Return or the Closing Date Consolidated Tax Return (to the extent applicable). Newco shall provide to Company sufficiently in advance of the due date for the filing thereof (but in no event later than thirty (30) days before the due date of such Tax Return (with extensions)), and Company shall have a reasonable opportunity to review and comment on, any such Jointly Filed Tax Return (or the relevant portion thereof) to the extent that Company is responsible for any portion of the Taxes reported on such Jointly Filed Tax Return pursuant to this Agreement.   If Company disagrees with any position or information included on any such Jointly Filed Tax Return, the procedures set forth in Section 2.1(a) shall apply mutatis mutandis.  Company shall timely file (or cause to be timely filed) any such Jointly Filed Tax Return that Company (or any of its Affiliates) is required by Tax law to file, and Newco shall timely file (or 

 

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cause to be timely filed) any such Jointly Filed Tax Return that Newco (or any of its Affiliates) is required by Tax law to file. In the case of any Jointly Filed Tax Return that includes any member of the Newco Group or the Newco Business only for the portion of the relevant Taxable Period that ends on the Closing Date, Taxes shall be allocated to Newco based on the Closing of the Books Method.  In the case of any Jointly Filed Tax Return that includes any member of the Part D Group or the Medicare Part D Business only for the portion of the relevant Taxable Period that ends on the Closing Date, Taxes shall be allocated to Company based on the Closing of the Books Method.

 

(d)           Newco Filed Returns. Newco shall have the sole and exclusive responsibility for the preparation and filing of each Tax Return that is required to be filed after the Closing Date that includes any member of the Newco Group (and no member of the Part D Group) or otherwise relates to the Newco Business that is not a Company Filed Tax Return or Jointly Filed Tax Return (each, a “Newco Filed Tax Return”). Newco Filed Tax Returns shall exclude all Consolidated Group Tax Returns, which shall be prepared and filed in accordance with Section 2.1(a)

 

(e)           Merger and Restructuring Tax Items. Notwithstanding any other provision of this Agreement to the contrary (but subject to the second proviso to the second sentence of Section 2.1(a)(i)), Newco shall determine, in a manner consistent with the Tax Treatment, if applicable, the amount of the Merger and Restructuring Tax Items resulting from, or arising in connection with, any Section 338(h)(10) Election and the method for reporting any such Merger and Restructuring Tax Items on any Tax Return. Such amounts, treatment and reporting method shall be used in preparing and filing any Newco Filed Tax Return, any Company Filed Tax Return,  the Closing Date Consolidated Tax Return, the 2010 Consolidated Tax Return, any Jointly Filed Tax Return, and any amended Tax Returns with respect to the foregoing.

 

Section 2.2             OBLIGATION TO REMIT TAXES.

 

(a)           In General. Subject to Section 2.1 and Section 2.2(b), and subject always to the ultimate division of responsibility for Taxes set out in Section 2.3, Company and Newco shall each remit or cause to be remitted (by their respective Affiliates or otherwise) to the applicable Governmental Authority in a timely manner any Taxes due in respect of any Tax Return that such Party is required to file (or, in the case of a Tax for which no Tax Return is required to be filed, which is otherwise payable by such Party or a member of such Party’s Group to any Governmental Authority).  In the case of any Jointly Filed Tax Return, the 2010 Consolidated Tax Return and the Closing Date Consolidated Tax Return, the Party that is primarily responsible for preparing and filing such Tax Return pursuant to Section 2.1 shall prepare and deliver to the other Party at least five (5) Business Days before payment of the relevant amount is due to a Governmental Authority a written notice (a “Tax Notice”) containing the following information: (i) a copy of such Tax Return and (ii) a good faith estimate of the allocation of the Taxes reflected on such Tax Return to each of the Parties in accordance with the principles set forth in Section 2.3.  Subject to Section 2.2(b), the Party not required to file such Tax Return shall remit (or cause to be remitted) to the other Party in immediately available funds the amount of any Taxes reflected on such Tax Return for which the 

 

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former Party is responsible hereunder at least two (2) Business Days before payment of the relevant amount is due to a Governmental Authority and the Party required to file such Tax Return shall timely remit (or cause to be remitted) the entire amount of the payment obligation to the applicable Governmental Authority and shall thereafter promptly provide the Party not required to file the Tax Return with documentation evidencing its payment to the applicable Governmental Authority.

 

 

(b) Direct Payments to the IRS.  Notwithstanding anything in this Section 2.2 to the contrary, Newco may, at is sole election, remit payment in respect of its portion of any Newco Taxes directly to the IRS, unless such direct payment is not permitted under applicable federal income Tax law. Company shall cooperate with Newco in making any such direct payment.

 

Section 2.3             TAX SHARING OBLIGATIONS.

 

(a)           Part D Group Taxes. Company and the members of the Part D Group shall be responsible for the payment of (and shall be entitled to any Refund for or with respect to) all Taxes and Liabilities described in Section 2.3(a)(i) and 2.3(a)(ii) (collectively, “Part D Group Taxes”):

 

(i)            With respect to any Pre-Closing Period (or portion thereof), the Taxes and Liabilities that the Company Consolidated Group would have if during the entirety of the particular Taxable Period (or portion thereof), it owned only the Part D Assets, was liable for only the Part D Liabilities and conducted only the Medicare Part D Business, and assuming that each member of the Company Consolidated Group had the same status (e.g., as a life insurance company, or a non-life insurance company that was includible in the Company Consolidated Group) that it actually had during the relevant Taxable Period. The determination of any such Taxes for which Company is responsible pursuant to the preceding sentence for any Pre-Closing Period shall be made (v) treating the Medicare Part D Business as owned by a stand-alone affiliated group (within the meaning of Section 1504(a) of the Code) that files a consolidated federal Tax Return with Company as the common parent, (w) using methods and conventions consistent with Current Practices, (x) taking into account any and all carrybacks of Tax attributes of any member of the Part D Group arising after the Closing Date actually available in such Taxable Period (or portion thereof) in a manner consistent with Section 2.3(d)(iii)( Closing Period Carryback Refund and Closing Period Carryforward Payment Computational Principles), (y) assuming that all Holdco Items are Tax Items of the Newco Group and all Part D Holdco Items are Tax Items of the Part D Group, and (z) assuming that all intercompany transactions between members of the Part D Group, on the one hand,  and members of the Newco Group, on the other hand, are taken into account as necessary within the Part D Group (and generate Tax Items within the Part D Group) pursuant to Treasury Regulation Section 1.1502-13 immediately before the Effective Time and in accordance with the Restructuring and other transactions necessary to separate the Part D Business from the Newco Business pursuant to the Separation Agreement. If the utilization of any of the Tax Items taken into account in the foregoing are limited pursuant to the use of the foregoing principles to a greater extent than limited 

 

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in the actual Tax Returns of the Company Consolidated Group, then the actual limitation shall apply rather than the hypothetical limitation; and

 

(ii)           Taxes and Liabilities resulting from any breach after the Closing Date of any covenant or obligation of any member of the Part D Group under this Agreement.

 

(b)           Newco Taxes. Newco and the members of the Newco Group shall be responsible for the payment of (and shall be entitled to any Refund for or with respect to) all Taxes and Liabilities described in Sections 2.3(b)(i), 2.3(b)(ii), and Section 2.3(b)(iii) (collectively, “ Newco Taxes ”):

 

(i)            With respect to any Pre-Closing Period (or portion thereof), all Taxes and Liabilities that the Company Consolidated Group or any of its members or their Business actually has other than the Taxes and Liabilities apportioned to the Part D Group in accordance with Section 2.3(a)(i) hereof. The determination of any such Taxes for which Newco is responsible pursuant to the preceding sentence for any Pre-Closing Period shall be made by (x) using methods and conventions consistent with Current Practices, (y) taking into account any and all carrybacks of Tax attributes of any member of the Newco Group arising after the Closing Date actually available in such Taxable Period (or portion thereof), and (z) assuming that all Holdco Items are Tax Items of the Newco Group.

 

(ii)           Taxes and Liabilities resulting from any breach after the Closing Date of any covenant or obligation of any member of the Newco Group under this Agreement; and

 

(iii)          Taxes and Liabilities resulting from all Merger and Restructuring Tax Items.

 

 With respect to all Tax Returns for Pre-Closing Periods that end on or before December 31, 2010, for which Tax Returns have been filed prior to the date hereof,  Company and Newco acknowledge and agree that Newco and each member of the Newco Group, on the one hand, and Company and each member of the Part D Group, on the other hand, shall be treated for purposes of this Agreement as having paid all Newco Taxes and Part D Group Taxes, as applicable, in respect of all Taxes shown as due on such Tax Returns.

 

(c)           Estimated Tax Deposits. With respect to any deposit (including a payment of estimated Taxes) made in respect of any Pre-Closing Period (or portion thereof) that ends on the Closing Date, (i) if a deposit was made with a Governmental Authority (including a payment of estimated Taxes) by any member of the Newco Group (or a payment under a Tax Sharing Agreement was made by any member of the Newco Group), such deposit (or payment under a Tax Sharing Agreement in respect of such deposit) shall be credited to Newco and treated as paid by Newco for purposes of this Agreement (but in the case of a payment under a Tax Sharing Agreement only to the extent of deposits actually made by any member of the Part D Group to a Governmental Authority) and Newco shall be liable under this Agreement only for the amount of such 

 

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Tax ultimately due in excess of the applicable deposit (or payment under a Tax Sharing Agreement in respect of such deposit), and (ii) the Company shall be credited with all deposits in excess of amounts credited to Newco pursuant to clause (i) of this Section 2.3(c) and treated as paid by Company for purposes of this Agreement and Company shall be liable under this Agreement only for the amount of such Tax ultimately due in excess of the amounts described in this clause (ii).  If any estimated or actual Tax payments are due after the Closing Date, but before the filing of an applicable Tax Return (e.g., estimated payments or payments with the filing of any Tax Return requesting an extension), the amount for which Company, on the one hand, and Newco, on the other hand, shall be liable and required to pay shall be determined in accordance with the principles of this Agreement and each Party shall pay its required amount due in accordance with Section 2.2.  Two (2) days before the filing of the applicable Closing Date Consolidated Tax Return, Company Filed Tax Return, or Jointly Filed Return, to the extent the amount of a deposit payment (or payment under a Tax Sharing Agreement to fund such deposit) described above exceeds the amount of Tax attributable to such deposit payment (or payment under a Tax Sharing Agreement to fund such deposit) that is ultimately due and such Party’s responsibility for Taxes hereunder (x) Company shall pay (or cause to be paid) such excess to Newco or (y) Newco shall pay (or cause to be paid) such excess to Company, as applicable. This Section 2.3(c) is intended to further the provisions of Section 2.05(b) of the Separation Agreement related to the operation of a “closed system” and shall be applied and interpreted consistently therewith.

 

(d)           Refunds and Tax Benefits

 

(i)            Except as provided in Section 2.3(e),  and except with respect to any Closing Period Carryback Refund payable to Newco in accordance with Section 2.3(d)(ii) below, any Refunds for any Pre-Closing Period shall be allocated between Newco and Company, respectively, based on the principles set forth in Section 2.3(a), Section 2.3(b), and Section 2.3(c).  Any interest paid or payable by a Governmental Authority with respect to a Refund described in this Section 2.3(d) shall be allocated between Newco and Company by determining the amount of interest that accrued on a year-by-year basis and, then, allocating each year’s accrued interest between Newco and Company in the same proportion as the Refund to which such interest relates is allocated.  Refunds to which one Party (the “First Party”) is entitled pursuant to this Agreement that are paid to the other Party (the “Second Party”) or the members of the Second Party’s Group pursuant to applicable Tax law and interest related thereto (if applicable), shall be remitted by the Second Party to the First Party within ten (10) Business Days after the Second Party Actually Receives such Refund (and related interest). If any such Refund is subsequently reduced as a result of any Final Determination, the First Party shall pay the amount of such reduction (and related interest) to the Second Party within five (5) days of receiving notice of such reduction from the Second Party.

 

(ii)

 

(1)           If the Company Consolidated Group or the Part D Group (or any Affiliate of the members of the Part D Group, including Parent) has 

 

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Actually Received any Closing Period Carryback Refund, Parent shall pay to Newco the amount of any such Closing Period Carryback Refund in accordance with Section 3.2 (including the time periods for payment set forth therein).  Parent shall file any applicable Tax Returns that Newco requests to be filed (including on Forms 1120X and 1139) pursuant to instructions from Newco in order to carry back the applicable Tax Asset arising in the Company Consolidated Group Pre-Closing Period that ends on the Closing Date to prior Taxable Periods of the applicable Group and to obtain Refunds, including by filing amended Tax Returns, as necessary. All such Tax Returns shall be prepared in a manner consistent with the second sentence in Section 2.1(a)(i) and shall be subject to the procedures specified in Section 2.1(a)(i).   To the extent that the Tax Assets attributable to the Merger and Restructuring Tax Items (and not to any other Tax Items) are not exhausted after carrying them back to the earliest Taxable Periods available, Parent shall (or shall cause its Affiliates to) file future Tax Returns of the Parent Group using such Tax Items and Parent shall pay (or cause to be paid) to Newco the amount of any Tax Benefit Actually Received by Parent (or any of its Affiliates) by reason of such Tax Assets (such amounts, the “Closing Period Carryforward Payments”) in accordance with Section 3.2 (including the time periods for payment set forth therein).  The Parties shall cooperate with each other to effectuate any claim for such Closing Period Carryback Refund or Tax Benefit that would generate a Closing Period Carryforward Payment.

 

(2)           If all or any part of a (x)  Closing Period Carryback Refund attributable to Tax Assets attributable to the Merger and Restructuring Tax Items or (y) Tax Benefit that generated a Closing Period Carryforward Payment is reduced or disallowed after a Final Determination, within five (5) Business Days after receiving notice from Parent that such Refund or Tax Benefit was reduced or disallowed, which notice shall contain copies of any documents received from a Governmental Authority regarding such reduction or disallowance and supporting documents in sufficient detail for Newco to verify its obligations hereunder, Newco shall pay to Parent an amount equal to the amount of such Closing Period Carryback Refund or Closing Period Carryforward Payment attributable to such disallowed or reduced Refund or Tax Benefit, that Parent paid to Newco in accordance with Section 2.3(d)(ii)(1) and Section 3.2, and any interest, penalties or additions to tax imposed as a result of such reduction or disallowance, (the “Closing Period Indemnity Amount”); provided that at Newco’s option such payments may first be made from funds held in the Holdback Account. If Newco and Parent dispute the amount of the Closing Period Indemnity Amount, Newco shall pay to Parent the undisputed portion of the Closing Period Indemnity Amount within such time period described in the preceding sentence and the Parties shall negotiate in good faith to determine the Closing Period Indemnity Amount. If the Parties cannot reach agreement within sixty (60) days of the reduction or disallowance of the Closing Period Carryback Refund or Tax Benefit that generates a Closing Period Carryfoward Payment pursuant to a Final Determination or the filing of the applicable Tax Return, the Closing Period Indemnity Amount shall be determined by a Tax Advisor in accordance with Section 8.1 hereof. If the Closing Period Indemnity Amount, as finally determined by the Parties or the Tax Advisor pursuant to the preceding sentence, is greater than the undisputed amount that Newco paid to Parent, Newco shall pay such additional amount to Parent, no later than five (5) days after such final determination of the Closing Period Indemnity Amount.

 

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(iii)          Closing Period Carryback Refund and Closing Period Carryforward Payment Computational Principles. As a computational matter, for purposes of determining the Closing Period Carryback Refund and the Closing Period Carryforward Payments pursuant to this Agreement:

 

(1)           The Parties shall treat all losses included in Merger and Restructuring Tax Items (“Merger and Restructuring Losses”) as used before operating losses of Part D Business for the Taxable Period beginning January 1, 2011 and ending on the Closing Date (“Part D Operating Losses”), and shall treat such Merger and Restructuring Losses as carried back to taxable years of the Company Consolidated Group to generate a Refund to which only Newco will be entitled to the extent of cash taxes paid by the Company Consolidated Group in calendar years 2010, 2009, and 2008, as applicable.

 

(2)           The Parties shall treat Part D Operating Losses as carried forward and used first before any Merger and Restructuring Losses that remain after being carried back pursuant to Section 2.3(d)(iii)(1) (such remaining losses, the “Remaining Merger and Restructuring Losses”), subject to applicable limitations under Section 382 of the Code, and Parent (and its Affiliates) shall be entitled to all Tax Benefits attributable to such Part D Operating Losses.

 

(3)           After all Part D Operating Losses have been reduced to zero, the Parties shall treat the Remaining Merger and Restructuring Losses as carried forward, subject to applicable limitations under Section 382 of the Code.  The Parties shall treat the carry forward period with respect to Remaining Merger and Restructuring Loss as terminating December 31, 2016, and Parent shall not be obligated to pay Newco any Closing Period Carryforward Payments with respect to the Remaining Merger and Restructuring Loss after that date.

 

(e)           Carrybacks.  Except with respect to any Closing Period Carryback Refund payable to Newco in accordance with Section 2.3(d)(ii) above, if Newco and/or Company incurs a Tax Item on or after the Closing Date which may be carried back (a “Carryback”) to generate a Refund for the Company Consolidated Group for any Pre-Closing Period, then such Refund shall be allocated between Newco and Company in accordance with the procedure set forth in Section 2.3(d)(i).  For purposes of this Section 2.3(e), Carrybacks of Tax Items arising in earlier taxable periods shall be considered before Carrybacks of Tax Items arising in subsequent taxable periods.  At the good faith request of the Party desiring to carry back its Tax Item, Company shall prepare and file the appropriate Tax Return to claim the Refund arising from the carryback; provided that the filing of such Tax Return would not result in Parent or Company being required to establish or increase a FIN 48 reserve that would, taken together with all other FIN 48 reserves established or increased pursuant to this Section 2.3(e), Section 2.1(a)(i), Section 2.4(a), and Section 8.18 of the Merger Agreement, be in excess of seven million five hundred thousand dollars ($7,500,000).  All such Tax Returns shall be prepared in a manner consistent with the second sentence in Section 2.1(a)(i) and shall be subject to the procedures specified in Section 2.1(a)(i) (including, for the avoidance of doubt,  the Dispute resolution procedures set forth therein).  The Parties shall cooperate with each 

 

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other (and cause their respective Affiliates to cooperate) to effectuate any claim for such Refund.  Parent shall (i) pay to Newco the amount of such Refund and interest related thereto (determined in a manner consistent with Section 2.3(d)(i)), net of any net Taxes imposed on the Refund and interest related thereto and of any third-party costs and expenses related thereto, to which Newco is entitled in accordance with this Section 2.3(e) within five (5) Business Days after the date such Refund is Actually Received, and (ii) be entitled to retain the amount of such Refund (and any interest determined in a manner consistent with Section 2.3(d)(i)) to which it is entitled in accordance with this Section 2.3(e); provided that any such Refund, together with any Refund previously paid pursuant to this Section 2.3(e) and Section 2.4(a), would be in excess of five million dollars ($5,000,000) shall be subject to a one hundred percent (100%) holdback, similar to the Holdback Amount, that will be held in a separate Holdback Account and released to Newco on the earlier of (x) the expiration of the applicable statute of limitations under Section 6501(h) (subject to applicable extensions consented to by Newco, which shall not be unreasonably withheld, conditioned, or delayed), and (y) the completion of the applicable audit of transactions generating the such Refund or if, in Newco’s sole discretion, an appeal is taken, when there is a Final Determination with respect to any such audit.  Any reasonable and documented third party costs of Parent (or its Affiliates) related to preparing or reviewing any such amended Tax Returns pursuant to this Section 2.3(e) shall be borne by Newco.

 

(f)            Except as otherwise provided in Section 2.3(d) or Section 2.3(e) at the request and expense of Newco or Company, as the case may be, and subject to the consent of Company or Newco, respectively, not to be unreasonably withheld or delayed, each of Company and Newco (and their respective Affiliates) respectively, shall take any action necessary to obtain any Refund of a Tax or item included in any Tax Return filed by the Part D Group or the Newco Group, respectively, (including through filing appropriate amended Tax Returns with the applicable Governmental Authority) to which any member of the Newco Group or the Part D Group is entitled pursuant to this Agreement.

 

(g)           Termination of Tax Sharing Agreements. Any and all prior Tax sharing or allocation agreements or practices (“Tax Sharing Agreements”) between any member of the Part D Group and any member of the Newco Group shall be terminated with respect to the Newco Group as of the Closing Date, and no member of the Newco Group shall have any continuing rights or obligations thereunder.

 

Section 2.4             AMENDED RETURNS.

 

(a)           Until December 31, 2012 (and thereafter in respect of amended Tax Returns relating to the good faith resolution of a Tax Contest or a Final Determination), to the extent permitted by applicable Tax law, Newco shall have the right to require Company to file, and Company shall have the right to file, an amended Company Consolidated Group Tax Return for any Taxable Period ending on or before the Closing Date, if and only if (x) the new positions desired to be reflected on such amended Tax Return could have been reported on the original Tax Return had they been included in the original Tax Package and prepared in a manner consistent with Current 

 

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Practices, (y) Newco provides Company with a legal opinion from Paul, Weiss that the new position is more likely than not to be sustained, and (z) the filing of such Tax Return would not result in Parent or Company being required to establish or increase a FIN 48 reserve that would, taken together with all other FIN 48 reserves established or increased pursuant to this Section 2.4(a), Section 2.3(e), Section 2.1(a)(i), and Section 8.18 of the Merger Agreement, be in excess of seven million five hundred thousand dollars ($7,500,000). Company, at Newco’s request, shall promptly file amended Tax Returns that satisfy the requirements of the previous sentence. Either Party, acting in good faith, shall be entitled to extend, or cause to be extended, the applicable statute of limitations for any Taxable Period that includes or ends prior to the Closing Date if such extension is reasonably necessary in connection with filing an amended Company Consolidated Group Tax Return in accordance with this Section 2.4(a). Notwithstanding anything to the contrary contained herein, any Refund resulting from an amendment of a Tax Return pursuant to this Section 2.4(a), together with any Refund previously paid pursuant to this Section 2.4(a) and Section 2.3(e), that is in excess of million dollars ($5,000,000) shall be subject to the (100%) holdback described in Section 2.3(e).  Any reasonable and documented third party costs of Parent (or its Affiliates) related to preparing or reviewing any such amended Tax Returns shall be borne by Newco.

 

(b)           Newco shall have primary responsibility for preparing any amended Tax Return permitted to be amended and filed in accordance with Section 2.4(a)(i).  The Party requesting the filing of an amended Tax Return shall prepare and deliver a new Tax Package to Company, which shall be prepared in a manner consistent with Current Practices.  All amended Tax Returns shall be prepared in a manner consistent with the second sentence in Section 2.1(a)(i) and shall be subject to the procedures specified in Section 2.1(a)(i).

 

(c)           Unless (i) otherwise provided by this Agreement, (ii) required by applicable law, or (iii) the other party provides its consent (which shall not be unreasonably withheld, delayed on or conditioned), neither Newco nor Company shall, and Newco and Company shall not permit any member of their respective Groups, file any amended Tax Return that includes any member of the other Group.

 

ARTICLE III

 

COVENANTS

 

Section 3.1             TAX TREATMENT. In General. The Parties (i) shall, if Newco Preferred Stock has been sold in accordance with Section 2.01(b) of the Separation Agreement, and the conditions of Section 3.2(a)(i), (ii) and (iii) herein are satisfied, treat the transfer of the stock of the Newco Transferred Entities as “qualified stock purchases” within the meaning of Section 338(d)(3) of the Code, (ii) shall treat the transactions in connection with the Merger in a manner consistent with Revenue Ruling 79-273, 1979-2 CB 125, and (iii) shall not take any position inconsistent with the treatment described in clauses (i) and (ii) (such treatment, the “Tax Treatment”) above on 

 

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any Tax Return, in any Tax Contest, or otherwise unless required by a Final Determination.

 

Section 3.2             SECTION 338(h)(10) ELECTION PROCEDURES.TIMING OF CLOSING PERIOD CARRYBACK REFUND AND CLOSING PERIOD CARRYFORWARD REFUND PAYMENTS.

 

(a)           Section 338(h)(10) Election. Parent shall, or shall cause one or more of its Affiliates to, join with Newco (or its Affiliates) in making an election under Section 338(h)(10) of the Code and any corresponding or similar elections under state, local or foreign Tax law (collectively the “Section 338(h)(10) Elections”), with respect to the purchase and sale of the stock of each of the Transferred Subsidiaries in connection with the Restructuring if the following conditions are satisfied:

 

(i)            MLTN Opinion. Paul, Weiss delivers the MLTN Opinion to Parent in accordance with Section 3.2(a)(iii).

 

(ii)           Tax Basis Study. Deloitte delivers a Tax Basis Study to Parent in accordance with Section 3.2(a)(iii).

 

(iii)          Newco delivers (or causes its Affiliates to deliver) the MLTN Opinion and the Tax Basis Study to Parent at least thirty (30) calendar days before the earlier of (x) due date for filing the Closing Date Consolidated Tax Return, including applicable extensions and (y) the filing deadline for the U.S. Federal Section 338(h)(10) Elections with respect to the Transferred Subsidiaries.

 

(iv)          If the foregoing conditions in Section 3.2(a)(i) and (ii) are not satisfied within the time period set forth in Section 3.2(a)(iii), the Parties (x) shall not be required to make the Section 338(h)(10) Election with respect to the Transferred Subsidiaries and the remainder of the provisions of this Section 3.2 shall not apply, and (y) and agree that no Tax Benefits shall arise in respect of the transfer of the Transferred Subsidiaries or the sale of the Newco Preferred Stock with respect to which Parent is obligated to make payments pursuant to this Agreement.

 

(b)           Payments if Specified Conditions Are Satisfied.

 

(i)            If Parent or any of its Affiliates receives the Closing Period Carryback Refund or Tax Benefits that would generate a Closing Period Carryforward Payment and (x) the IRS has issued the Private Letter Ruling,  (y) Paul, Weiss has delivered the Should Opinion, and (z) Deloitte has delivered the Tax Basis Study, then Parent shall (or shall cause its Affiliates to) pay to Newco the excess if any of any Closing Period Carryback Refunds received over the applicable Holdback Amount within five (5) days after Actually Received and Parent shall (or shall cause its Affiliates to) pay to Newco one hundred percent (100%) of the Closing Period Carryforward Payments less the applicable Holdback Amount with respect to any Closing Period Carryforward Payment within five (5) days after Parent Actually Receives the Tax Benefits generating such Closing Period Carryforward Payments, and in each case shall deposit all Holdback Amounts in the Holdback Account.  If Parent or any of its Affiliates 

 

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receives Closing Period Carryforward Refunds or Tax Benefits that generate a Closing Period Carryforward Payment before the conditions set forth in clauses (x), (y), and (z) are satisfied and such all conditions are thereafter satisfied, Parent shall pay (or cause its Affiliates to pay) to Newco the amounts that would otherwise have been payable under this Section 3.2(b)(i) had such conditions been satisfied at the time Parent Actually Received such Closing Period Carryback Refund or Tax Benefits that generated a Closing Period Carryforward Payment, and shall pay such amounts hereunder to Newco within five (5) days such conditions are satisfied, together with the amount of interest actually earned on the amounts held back pursuant to Section 3.2(c), net of Taxes actually paid with respect to such interest.

 

(ii)           Parent shall retain the Holdback Amount until the earlier of (x) the expiration of the applicable statute of limitations under Section 6501(h) (subject to applicable extensions consented to by Newco, which shall not be unreasonably withheld, conditioned, or delayed), and (y) the completion of the applicable audit of transactions generating the Merger and Restructuring Tax Items, or if, in Newco’s sole discretion, an appeal is taken, when there is a Final Determination with respect to any such audit. Parent shall hold the Holdback Amount of such Closing Period Carryforward Payments and Closing Period Tax Refunds that Parent receives hereunder in a separate account (the “Holdback Account”) for the benefit of Newco and shall pay such amounts hereunder to Newco five (5) days after the earlier of the events described in the preceding sentence occurs, together with the amount of interest actually earned on the amounts in the account, net of Taxes actually paid with respect to such interest.

 

(c)           Payments if Specified Conditions are Not Satisfied. Subject to the second sentence of Section 3.2(b)(i), if Parent or any of its Affiliates receives the Closing Period Carryback Refund or Tax Benefits that would generate a Closing Period Carryforward Payment and (x) the IRS has not issued the Private Letter Ruling, (y) Paul, Weiss has not delivered the Should Opinion, or (z) Deloitte has not delivered the Tax Basis Study,  then Parent shall retain such Closing Period Carryforward Payments and Closing Period Tax Refunds until the earlier of (x) the expiration of the applicable statute of limitations under Section 6501(h) (subject to applicable extensions consented to by Newco, which shall not be unreasonably withheld, conditioned, or delayed), and (y) the completion of the applicable audit of transactions generating the Merger and Restructuring Tax Items, or if, in Newco’s sole discretion, an appeal is taken, when there is a Final Determination with respect to any such audit. Parent shall hold the such Closing Period Carryforward Payments and Closing Period Tax Refunds that Parent receives hereunder in a separate account for the benefit of Newco and shall pay such amounts hereunder to Newco five (5) days after the earlier of the events described in the preceding sentence occurs, together with the amount of interest actually earned on the amounts in the account, net of Taxes actually paid with respect to such interest.

 

(d)           Other Procedural Matters Regarding the Section 338(h)(10) Elections. Newco shall prepare, and Newco and Parent, as applicable, shall timely file (or cause to be filed) all forms (including IRS Form 8883) and documents required in connection with the Section 338(h)(10) Election and, to the extent applicable, include such forms in the Newco Tax Package.  With respect to any such forms not included in 

 

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the Newco Tax Package, Newco shall deliver to Company for its review, comment and approval (which approval shall not be unreasonably withheld, conditioned or delayed) a copy of any such forms at least ten (10) Business Days prior to the due date (giving effect to any validly obtained extension thereof).  For the purpose of making the Section 338(h)(10) Election, on or prior to the Closing Date, Newco and Company each shall, or shall cause their respective Affiliates to,  execute two (2) copies of IRS Form 8023 (or successor form) with respect to each Transferred Subsidiary with respect to which a Section 338(h)(10) Election may be made.  Company shall execute (or cause to be executed) and deliver to Newco such additional or substitute documents or forms as are reasonably requested to complete the Section 338(h)(10) Election at least ten (10) days prior to the date such documents or forms are required to be filed, and shall take (or cause to be taken) all actions necessary and appropriate to effect and preserve the Section 338(h)(10) Elections.  Neither Newco nor Company shall (nor shall they permit any of their respective Affiliates to) take any action that would reasonably be expected to cause the Section 338(h)(10) Elections, if made, to be invalid and each of the foregoing shall not, and shall cause their respective Affiliates not to, take any position contrary thereto unless required pursuant to Final Determination.

 

Section 3.3             PRIVATE LETTER RULING AND SHOULD OPINION COOPERATION. Newco shall have the primary responsibility for preparing the request for a Private Letter Ruling and any related submissions (collectively, the “Ruling Request”). In addition to the provisions of Section 6.1, which shall, for the avoidance of doubt, apply to the Ruling Request and the Should Opinion, Company shall (and shall cause it Affiliates to) use reasonable best efforts to cooperate with Newco with respect to the preparation of the Ruling Request and the Should Opinion, including by causing representatives of Company and its Affiliates to make factual representations to the IRS and Paul, Weiss that such representatives in good faith believe to be true, executing powers of attorney so that representatives of Newco can represent the members of the Part D Group and Parent, as applicable, in connection with the Ruling Request, if the Ruling Request as not been submitted before the Closing Date, providing Newco with IRS Forms 2848 (and similar forms necessary so that Newco and its representatives can represent the Company before the IRS), and signing the Ruling Request if necessary. Newco shall deliver to Parent for its review any proposed submission to the IRS with respect to the Private Letter Ruling prior to delivering such submission to the IRS, and Newco shall, in good faith, take into consideration Parent’s reasonable comments.  In furtherance of the foregoing, Newco shall deliver to Parent (i) the initial proposed submission at least ten (10) Business Days prior to filing and (ii) any subsequent proposed submission at least five (5) Business Days prior to filing.  Representatives of Parent shall be entitled to participate in all meetings and any other discussions between representatives of Newco and the IRS regarding the Private Letter Ruling.

 

Section 3.4             SECTION 336(E) ELECTION. To the extent that the provisions of Section 3.2 do not apply pursuant to Section 3.2(a)(iv), upon Newco’s request, Company and Parent shall cooperate with Newco and take all reasonable steps to make an election under Section 336(e) of the Code with respect to any member of the Newco Group if permitted by applicable Treasury Regulations, and shall not make any 

 

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such election under Section 336(e) with respect to any member of the Newco Group absent a request to do so from Newco.

 

Section 3.5             ADDITIONAL ELECTION. To the extent that the provisions of Section 3.2 do not apply pursuant to Section 3.2(a)(iv), at Newco’s option and upon Newco’s request, Company shall make, and shall cause UAC Holdings or any other affiliate of Company to make, as applicable, by filing the applicable Tax Return, the election described in Treasury Regulation Section 1.1502-36(d)(6)(i)(A) to reduce the basis of stock of Newco and, if requested by Newco of any other member of the Newco Group in an amount to be determined in Newco’s sole discretion, so that no attribute reduction under Treasury Regulation Section 1.1502-36(d) applies with respect to any member of the Newco Group unless Newco agrees to such attribute reduction.

 

Section 3.6             MITIGATION/COOPERATION. Except as otherwise provided in this Agreement, each Party (for itself and its Affiliates) (i) shall not take any action reasonably expected to result in an increased Tax liability to another Party or Group,  a reduction in a Tax Asset of another Party or Group,  or an increased liability to another Party or Group under this Agreement and (ii) shall take any action reasonably requested by another Party that would reasonably be expected to result in a Tax Benefit or avoid a Tax Detriment to such requesting Party of Group; provided, that such action does not result in any additional direct or indirect cost not fully compensated for by the requesting Party.

 

Section 3.7             PARENT CONSOLIDATED GROUP. Company (and the other members of the Part D Group to the extent permitted under Section 1504(c) of the Code and the Treasury Regulations promulgated thereunder) shall become members of the Parent Group on the day after the Closing Date.

 

ARTICLE IV

 

INDEMNITY OBLIGATIONS AND PAYMENTS

 

Section 4.1             INDEMNITY OBLIGATIONS.

 

(a)           Company shall indemnify and hold harmless Newco, each member of the Newco Group and their respective directors, officers and employees (collectively, the “Newco Indemnitees”) from and against, and will reimburse the Newco Indemnitees for, without duplication:

 

(i)            all Part D Group Taxes;

 

(ii)           any failure by Company to make a payment required to be made by Company pursuant to this Agreement to Newco or a Governmental Authority when due;

 

and

 

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(iii)          except for any Taxes described in Sections 4.1(b)(i), (ii), (iii) and (iii),  any Taxes of Company or any member of the Part D Group imposed on any member of the Newco Group by reason of being severally liable for such Taxes pursuant to Treasury Regulations Section 1.1502-6, Section 1.1502-78, or any analogous provision of Tax law.

 

(b)           Newco shall indemnify and hold harmless Company, each member of the Part D Group and their respective directors, officers and employees (collectively, the “Part D Group Indemnitees”) from and against, and will reimburse the Part D Group Indemnitees for, without duplication:

 

(i)            all Newco Taxes;

 

(ii)           any failure by Newco to make a payment required to be made by Newco pursuant to this Agreement to Company or a Governmental Authority when due;

 

(iii)          except for any Taxes described in Sections 4.1(a)(i), (ii) and (iii), any Taxes of Newco or any member of the Newco Group imposed on any member of the Part D Group by reason of being severally liable for such Taxes pursuant to Treasury Regulations Section 1.1502-6, Section 1.1502-78, or any analogous provision of Tax law.

 

(c)           Transfer Taxes.  Newco shall bear all Transfer Taxes arising or in connection with the Restructuring and transactions pursuant to the Separation Agreement, other than any Transfer Taxes arising in respect of the transfer of Part D Assets pursuant to the Separation Agreement, which Newco and Parent shall bear equally.  Parent and Newco shall each bear 50% of all Transfer Taxes arising or in connection with the Merger.

 

Section 4.2             NOTICE. The Parties shall give each other prompt written notice of any payment that may be due to the provider of such notice under this Agreement.

 

Section 4.3             TREATMENT OF PAYMENTS.

 

(a)           Any payment (other than interest described in Section 4.3(b) or interest received on any Refund) made between the Parties pursuant to this Agreement shall be treated for all Tax purposes as a nontaxable payment (i.e., a distribution from Newco to Company or a capital contribution from Company to Newco, as the case may be) made immediately prior to the Merger and, accordingly, not includible in the income of the recipient or deductible by the payor.  No Party shall take any position inconsistent with this treatment on any Tax Return or in any Tax Contest, and the Parties shall challenge in good faith any other characterization of such payments by a Governmental Authority.

 

(b)           Any payment that is not made within the period prescribed in this Agreement (the “Payment Period”) shall bear interest at the Applicable Rate for the 

 

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period from and including the date immediately following the last date of the Payment Period through and including the date of payment. Notwithstanding Section 4.3(a), the interest payment shall be treated as interest expense to the payor (deductible to the extent provided by applicable Tax law) and as interest income by the recipient (includible in income to the extent provided by applicable Tax law).

 

ARTICLE V

 

TAX CONTESTS

 

Section 5.1             NOTICE. Company shall promptly notify Newco in writing upon receipt by Company or any member of the Part D Group of a written communication from any Governmental Authority with respect to any pending or threatened deficiency, inquiry, notice, audit, dispute, suit, action, examination, proposed assessment or other administrative or judicial proceeding (a “Tax Contest”) concerning any Taxes for which Newco may be liable under this Agreement. Newco shall promptly notify Company in writing upon receipt by Newco or any member of the Newco Group of a written communication from any Governmental Authority with respect to any Tax Contest concerning any Taxes for which Company may be liable under this Agreement. The failure of one Party to promptly notify the other Party in accordance with the two preceding sentences shall not relieve the other Party of any obligation under this Agreement, except to the extent that the failure promptly to notify such other Party actually prejudices the ability of the other Party to contest such Tax Contest.

 

Section 5.2             CONTROL OF TAX CONTESTS.  Subject to Section 5.5, Newco and Company shall jointly control the conduct, settlement, compromise or other resolution of any Tax Contest for any Taxable Period (or portion thereof) (x) ending on or before the Closing Date or (y) beginning before and ending after the Closing Date; provided, however, that if the potential adverse effect (including collateral effects) on one Party with respect to a particular issue raised in a Tax Contest is de minimis (after taking into account any payment obligations under this Agreement), then such Party shall only have the right to participate in, and shall not share in the control of, such issue. Newco and Company shall equally bear the cost of counsel and other advisors jointly selected to assist with matters related to issues that are jointly controlled, but shall otherwise bear their own out-of-pocket expenses incurred in connection with a Tax Contest.  Where Newco and Company jointly control an issue in a Tax Contest, neither party may settle that issue without the other party’s consent, which consent shall not be unreasonably withheld, conditioned or delayed.  Where a Tax Contest is part of a larger dispute or action with the taxing authorities, the rights and obligations of the parties as set forth in this Section 5.2, shall, to the extent practicable, only apply with respect to the specific issues raised in the Tax Contest.

 

Section 5.3             CONTROL OF CONTESTS BY NEWCO. Newco shall have the primary responsibility over the conduct, settlement, compromise or other resolution of any Tax Contest involving any Newco Filed Tax Return. Upon request by 

 

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Company, Company shall, at Company’s expense, be allowed to participate in the handling of any such Tax Contest with respect to any item that may affect the liability of Company or any member of the Part D Group under this Agreement, and Newco shall not settle any such Tax Contest (or portion thereof, as applicable) without the consent of Company, which consent shall not be unreasonably withheld, conditioned or delayed.

 

Section 5.4             CONTROL OF CONTESTS BY COMPANY. Subject to Section 5.5, Company shall have the primary responsibility over the conduct, settlement, compromise or other resolution of any Tax Contest involving any Company Filed Tax Return. Upon request by Newco, Newco shall, at Newco’s expense, be allowed to participate in the handling of any such Tax Contest with respect to any item that may affect the liability of Newco or any member of the Newco Group under this Agreement, and Company shall not settle any such Tax Contest (or portion thereof, as applicable) without the consent of Newco, which consent shall not be unreasonably withheld, conditioned or delayed.

 

Section 5.5             TAX CONTEST RELATED TO MERGER AND RESTRUCTURING TAX ITEMS. Notwithstanding any other provision of this Article V to the contrary, Newco shall have the exclusive right, in its sole discretion, to control, contest and represent the interests of each Group (and any member thereof) in any Tax Contest or portion thereof relating, in whole or in part, to Merger and Restructuring Tax Items and, subject to the last sentence of this section 5.5,  to resolve, settle or agree to any deficiency, claim or adjustment proposed, asserted or assessed in connection with or as a result of any such Tax Contest or portion thereof, as applicable. Newco’s rights pursuant to this Section 5.5 shall extend to any matter pertaining to the management and control of the Tax Contest or portion thereof related to Merger and Restructuring Tax Items, including execution of waivers, choice of forum, scheduling of conferences and the resolution of any Tax Item; provided, that Company may participate in Tax Contests or portion thereof relating to Merger and Restructuring Tax Items described in this Section 5.5 at its own expense, and Newco shall not settle such Tax Contest without the consent of the Company (which consent shall not to be unreasonably withheld, delayed or conditioned) if settlement imposes any obligation on a member of the Part D Group (other than (x) the obligation to make payments to Newco in respect of any Refund pursuant to the terms of this Agreement, (y) any other obligation expressly contemplated by this Agreement other than an increase in Part D Taxes, and (z)any other obligation for which the Part D Group is fully indemnified hereunder and which indemnity is fully cash collateralized or fully supported by an unconditional letter of credit ).

 

SECTION 5.6         RECALCULATION OF THE SHARE OF LIABILITY TO REFLECT ADJUSTMENTS.

 

(a)                           Newco and Company shall bear any Taxes owed by reason of a resolution of an issue or issues in a Tax Contest (the “Resolution”) in accordance with this Section 5.6.  Liability for Newco Taxes and Liability for Part D Group Taxes shall each, for the Taxable Period to which the Resolution relates, be recomputed, as applicable, to take into account the adjustments required by the Resolution in accordance with the principles of Section 2.3(a), 2.3(b), and 2.3(c); provided, however, that any

 

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interest or penalties owed as part of the Resolution shall be excluded from such recomputation and shall be allocated in accordance with the last three sentences of this Section 5.6(a).  Subject to the following sentence, (i) Newco’s share of any additional Taxes shall be equal to the excess, if any, of the amount of Newco Taxes, as recomputed in accordance with this Section 5.6(a), over the amount of Newco Taxes, as originally computed (or previously recomputed in accordance with this Agreement, as the case may be) and (ii) Company’s share of any additional Taxes shall be equal to the excess, if any, of the amount of Part D Group Taxes, as recomputed in accordance with this Section 5.6(a), over the amount of Part D Group Taxes, as originally computed (or previously recomputed in accordance with this Agreement, as the case may be).  The amounts described in the previous sentence shall be subject to equitable adjustment to the extent that either Party receives or incurs a correlative adjustment (whether as a benefit or burden) that is disproportionate to the manner in which the liability due from the Resolution was borne. For purposes of making an equitable adjustment pursuant to the preceding sentence, the correlative adjustment (whether as a benefit or burden) at issue shall be determined in accordance with Section 5.6(d). Subject to Section 5.6(c), any interest owed as part of a Resolution (except interest on Tax penalties) shall be allocated between Newco and Company by determining the amount of interest that accrued on a year-by-year basis and, then, allocating each year’s accrued interest between Newco and Company in the same proportion as the Tax Liability to which such interest relates is allocated.  Subject to Section 5.6(c), any Tax penalties (other than interest on such penalties, which interest shall be allocated in accordance with the following sentence) owed as part of a Resolution shall be allocated between Newco and Company in the same proportion as the Tax Liability to which such penalty relates is allocated.  Any interest owed on Tax penalties imposed as part of a Resolution shall be allocated between Newco and Company by determining the amount of interest that accrued on such penalties on a year-by-year basis and, then, allocating each year’s accrued interest between Newco and Company in the same proportion as such penalties to which such interest relates is allocated.

 

(b)           Each Party shall make (and shall cause its Affiliates to make) any payments required to be made to a Governmental Authority, or to any other Party (or its Affiliates) for payment to a Governmental Authority, in respect of the amount of redetermined Part D Group Taxes and/or Newco Taxes pursuant to Section 5.6(a) in accordance with the timing and procedural principles of Section 2.2.

 

(c)           Interest Netting.  For purposes of Sections 2.3(d), 2.3(e),  and 5.6, interest payable to or receivable from a Governmental Authority shall be calculated as if the Interest Netting Rules did not apply in respect of any underpayment for which Company or Newco is responsible under this Agreement and any overpayment to which the other Party is entitled under this Agreement. To the extent that the net amounts actually payable or receivable by the Parties in respect of interest differ from the amount payable to or receivable from the relevant Governmental Authority, the difference shall be shared in an equitable manner pro rata to the relative entitlements and obligations of the Parties pursuant to this Agreement. In addition, any interest that would be receivable by a party pursuant to the first sentence of this section but is not actually received in cash

 

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shall be treated as actually received when it reduces the amount that otherwise would be payable in cash or by way of offset to a Governmental Authority.

 

(d)           Correlative Adjustments.  Notwithstanding anything to the contrary in this Agreement, no provision of this Agreement shall provide for payment for an indemnity or other recovery for any Taxes or Liabilities or other amounts for which the damaged Party has been fully compensated under any other provision of this Agreement or under any other agreement or action at law or equity, as well as any other correlative adjustments to Taxes in other periods. For example, (x) if a Tax Contest for a Pre-Closing Period results in an additional Tax for a member of the Newco Group, which would increase the stock basis or other Tax Item of the applicable member of the Newco Group and indirectly reduce the Merger and Restructuring Taxes, Company shall not be entitled to payments hereunder for the Tax arising from such Tax Contest to the extent Newco has otherwise paid Company for Merger and Restructuring Taxes calculated using the lower stock basis (before adjustment as a result of such additional Tax) in the member of the Newco Group and (y) if a Section 338(h)(10) Election is made with respect to an Applicable Subsidiary, and, as a result of a Tax Contest for a Pre-Closing Period, the Tax Items of such Transferred Subsidiary are increased, which increases the basis of the assets of the Transferred Subsidiary, the Company shall not be required to pay Newco for any Taxes for which it would be liable if it also is required to pay Newco a Closing Period Carryback Refund or Closing Period Tax Payment attributable to the Tax Items generated by such Tax Contest. For purposes of Section 5.6, correlative adjustments shall be taken into account at the earliest time under applicable federal Income Tax Law as in effect on the date such calculation is made.

 

ARTICLE VI

 

COOPERATION

 

Section 6.1             GENERAL. Each Party shall, and shall cause each Group Member to, as applicable, cooperate with the other Party and its agents, including accounting firms and legal counsel, in connection with Tax matters relating to any Group Member including (i) the preparation and filing of Tax Returns, (ii) determining the liability for and the amount of any Taxes due (including estimated Taxes) or the right to an amount of any refund of Taxes, (iii) any Tax Contest, and (iv) any other matter reasonably and in good faith related to the Tax affairs of the requesting Party. Such cooperation shall include making all information and documents, including Tax Records, in any Group Member’s possession relating to any Group Member available to the other Party for inspection during normal business hours upon reasonable notice, upon request by the other Party, providing copies, at the expense of the Party providing such information and documents, of such information and documents, including Tax Records, and including, where appropriate or necessary, providing a power of attorney to the other Party (or its Affiliates). Each Party shall also make available to the other Party, as reasonably requested and available, personnel (including each Group Member’s officers, directors, employees and agents) responsible for preparing, maintaining and interpreting

 

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information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any Tax Contest. Any information or documents provided under this Section 6.1 shall be kept confidential by the Party receiving such information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any Tax Contest.

 

ARTICLE VII

 

RETENTION OF RECORDS; ACCESS

 

Section 7.1             RETENTION OF RECORDS; ACCESS. For so long as the contents thereof may become material in the administration of any matter under applicable Tax law, but in any event until the later of (i) sixty (60) days after the expiration of any applicable statute of limitations (taking into account extensions) and (ii) seven (7) years after the Closing Date, the Parties shall (and shall cause their Affiliates to) retain Tax Records necessary for the preparation and filing of all Tax Returns in respect of Taxes of any member of either the Part D Group or the Newco Group for any Taxable Period or for any Tax Contests relating to such Tax Returns. At any time after the Closing Date that a Party (or any Affiliate) proposes to destroy such Tax Records, it shall first notify the other Party in writing.  Such notification shall include a list of the Tax Records to be disposed of describing in reasonable detail each file, book or other record accumulation being disposed. At its own cost and expense, the other Party shall be entitled to receive such materials or information proposed to be destroyed.   Company shall be entitled, at its election at any time and at its expense, to obtain a copy of any and all Tax Records that relate to the Company Consolidated Group (or any non-consolidated members thereof, or the life-life consolidated group of which American Exchange was the common parent prior to 2008) for Pre-Closing Periods. Any information or documents provided under this Section 7.1 shall be kept confidential by the Party receiving such information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any Tax Contest.

 

ARTICLE VIII

 

DISAGREEMENT RESOLUTION

 

Section 8.1             DISAGREEMENT RESOLUTION. The Parties shall attempt in good faith to resolve any disagreement arising under this Agreement, including any dispute in connection with a claim by a third party, (any such disagreement or dispute, a “Disagreement”). Either Party may give the other Party written notice of any Disagreement not resolved in the normal course of business. If such a Disagreement is not resolved within thirty (30) days following the date on which one Party gives such notice, the Parties shall jointly retain a Tax Advisor, to act as an arbitrator in order to resolve the Disagreement. The Tax Advisor’s determination as to any Disagreement shall

 

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be made in accordance with the terms of this Agreement and shall be final and binding on the Parties and not subject to collateral attack for any reason (other than manifest error). To the extent the Tax Advisor cannot resolve a Disagreement before the filing of an applicable Tax Return, provisions similar to those in Section 2.1(a)(i) shall apply, and the Parties shall file amended Tax Returns, as necessary, taking into account the Tax Advisor’s final resolution of a Disagreement. All fees and expenses of the Tax Advisor shall be shared equally by Company, on the one hand, and Newco, on the other hand; provided, however, if the Tax Advisor entirely sustains the position of one Party in any Dispute or Disagreement without change, the other Party shall bear all of the fees and expenses of the Tax Advisor with respect to any such Dispute or Disagreement. This Section 8.1 shall be subject in its entirety to the more specific provisions set forth in Section 2.1(a)(i) (and such other provisions of this Agreement where those provisions are applied) regarding the filing of the 2010 Consolidated Tax Return and Closing Date Consolidated Tax Return.

 

ARTICLE IX

 

MISCELLANEOUS PROVISIONS

 

Section 9.1             APPLICATION TO SUBSIDIARIES. This Agreement is being entered into by Company and Newco on behalf of themselves and the members of their respective Groups (including future Affiliates).

 

Section 9.2             SURVIVAL. All representations, covenants and obligations contained in this Agreement shall survive until sixty (60) days after the expiration of the applicable statute of limitations with respect to any such matter (including extensions thereof).

 

SECTION 9.3            NOTICES.  Notices.  All notices and other communications hereunder shall be in writing and shall be addressed as follows (or at such other address for a party as shall be specified by like notice):

 

If to the Company prior to the Effective Time, to:

 

Universal American Corp.

6 International Drive

Rye Brook, New York 10573-1068

Attention:  Tony Wolk

Facsimile:  (914) 934-2949 

E-Mail Address: twolk@universalamerican.com

with copies (which shall not constitute notice) to:

 

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

 

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New York, NY 10019-6064

Attention:  Robert B. Schumer

                  David R. Sicular

                  Ariel J. Deckelbaum

Facsimile:  (212) 757-3990

E-Mail Address:  rschumer@paulweiss.com

                            dsicular@paulweiss.com

                            ajdeckelbaum@paulweiss.com

 

CVS Caremark Corporation

1 CVS Drive

Woonsocket, Rhode Island 028295

Attention:  Douglas Sgarro

Facsimile:  (401) 770-5415

E-Mail Address: dasgarro@cvs.com

 

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York  10017

Attention:  Louis Goldberg

Facsimile:  212-701-5539

E-Mail Address: louis.goldberg@davispolk.com

 

If to Parent or to the Company from and after the Effective Time, to:

 

CVS Caremark Corporation

1 CVS Drive

Woonsocket, Rhode Island 02895

Attention:  Douglas Sgarro

Facsimile:  (401) 770-5415

E-Mail Address: dasgarro@cvs.com

 

with a copy (which shall not constitute notice) to:

 

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York  10017

Attention:  Louis Goldberg

Facsimile:  212-701-5539

E-Mail Address: louis.goldberg@davispolk.com

 

If to Newco, to:

 

Universal American Corp.

6 International Drive

Rye Brook, New York 10573-1068

 

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Attention:  Tony Wolk

Facsimile:  (914) 934-2949 

E-Mail Address: twolk@universalamerican.com

 

with a copy (which shall not constitute notice) to:

 

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY  10019-6064

Attention: Robert B. Schumer

                 David R. Sicular

                 Ariel J. Deckelbaum

Facsimile:  (212) 757-3990

E-Mail Address:  rschumer@paulweiss.com 

                            dsicular@paulweiss.com

                            ajdeckelbaum@paulweiss.com

 

All such notices or communications shall be deemed to have been delivered and received:  (a) if delivered in person, on the day of such delivery, (b) if by facsimile or electronic mail, on the day on which such facsimile or electronic mail was sent; provided, that receipt is personally confirmed by telephone, (c) if by certified or registered mail (return receipt requested), on the seventh (7th) Business Day after the mailing thereof or (d) if by reputable overnight delivery service, on the second (2nd) Business Day after the sending thereof.

 

SECTION 9.4            AMENDMENT; WAIVERThis Agreement shall be binding upon and shall inure to the benefit of the parties and their permitted successors and assigns.  No party may assign or delegate, by operation of law or otherwise, all or any portion of its rights or liabilities under this Agreement without the prior written consent of the other parties, which such parties may withhold in their absolute discretion.  Any purported assignment without such prior written consents shall be void.  Any agreement on the part of a party to waive compliance with any of the covenants or conditions contained in this Agreement shall be valid only if set forth in an instrument in writing signed by such party.  The failure of any party to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights.

 

SECTION 9.5            ENTIRE AGREEMENTThis Agreement (and the exhibits hereto), the Merger Agreement, the Separation Agreement, and the Split-Off Agreements contain all of the terms, conditions and representations and warranties agreed to by the parties relating to the subject matter of this Agreement and supersede all prior or contemporaneous agreements, negotiations, correspondence, undertakings, understandings, representations and warranties, both written and oral, among the parties with respect to the subject matter of this Agreement.

 

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Section 9.6                CONSOLIDATION, MERGER, ETC.; TERMINATION. SECTION. 11.05(a) and 11.05(b) of the Separation Agreement shall apply to this Agreement as if fully set forth herein.

 

SECTION 9.7            FURTHER ASSURANCES AND CONSENTS.  In addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties will use reasonable best efforts to (a) execute and deliver such further instruments and documents and take such other actions as the other Party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (b) take, or cause to be taken, all actions, and do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement.

 

SECTION 9.8            SEVERABILITY.  The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement.  If any provision of this Agreement, or the application of that provision to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted for that provision in order to carry out, so far as may be valid and enforceable, the intent and purpose of the invalid or unenforceable provision and (b) the remainder of this Agreement and the application of that provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of that provision, or the application of that provision, in any other jurisdiction.  Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a reasonably acceptable manner so that the transactions contemplated by this Agreement may be consummated as originally contemplated to the fullest extent possible..

 

SECTION 9.9             GOVERNING LAW.  This Agreement shall be governed by, and construed in accordance with, the Law of the State of New York, without regard to conflict of law principles thereof.

 

SECTION 9.10          SUBMISSION TO JURISDICTION; SERVICE.  Each party (a) irrevocably and unconditionally submits to the personal jurisdiction of the federal courts of the United States District Court for the Southern District of New York or any New York State Court sitting in New York City, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (c) agrees that any actions or proceedings arising in connection with this Agreement or the transactions contemplated by this Agreement shall be brought, tried and determined only in such courts, (d) waives any claim of improper venue or any claim that those courts are an inconvenient forum and (e) agrees that it will not bring any action relating to this Agreement or the transactions contemplated by this Agreement in any court other than the aforesaid courts.  The parties to this Agreement agree that mailing of process or other papers in connection with any such action or proceeding in the manner

 

37

 

provided in Section 9.3 or in such other manner as may be permitted by applicable Law, shall be valid and sufficient service thereof.

 

Section 9.11                   WAIVER OF JURY TRIAL.  EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.  EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH PARTY HAS CONSIDERED AND UNDERSTANDS THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11.

 

SECTION 9.12          COUNTERPARTS; EFFECTIVENESS.  This Agreement may be executed in any number of counterparts, as if the signatures to each counterpart were upon a single instrument, and all such counterparts together shall be deemed an original of this Agreement.  Facsimile signatures or signatures received as a .pdf attachment to electronic mail shall be treated as original signatures for all purposes of this Agreement.  This Agreement shall become effective when, and only when, each party shall have received a counterpart signed by all of the other parties.

 

SECTION 9.13          THIRD PARTY BENEFICIARIES.  This Agreement is solely for the benefit of the Parties and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, cause of action or other right.

 

SECTION 9.14           REMEDIES.  Any and all remedies expressly conferred upon a party to this Agreement shall be cumulative with, and not exclusive of, any other remedy contained in this Agreement, at law or in equity.  The exercise by a party to this Agreement of any one remedy shall not preclude the exercise by it of any other remedy.

 

SECTION 9.15          SPECIFIC PERFORMANCE.  The parties agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.  It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches or threatened breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in the United States District Court for the Southern District of New York or any New York State Court sitting in New York City, this being in addition to any other remedy at law or in equity, and the parties to this Agreement hereby waive any requirement for the posting of any bond or similar collateral in connection

 

38

 

therewith.  The parties agree that they shall not object to the granting of injunctive or other equitable relief on the basis that there exists adequate remedy at Law.

 

SECTION 9.16          LIMITATIONS OF LIABILITYNotwithstanding anything in this Agreement to the contrary, no Party shall be liable to an Party for any special, indirect, incidental, punitive, consequential, exemplary, statutorily-enhanced or similar Damages (other than any such Damages awarded to a third party in connection with a Third Party Claim) in excess of compensatory Damages arising in connection with the transactions contemplated by this Agreement or the other Split-Off Agreements

 

SECTION 9.17           INTERPRETATION.  Unless the express context otherwise requires:

 

(a)           the words “hereof,” “herein” and “hereunder” and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement;

 

(b)           terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa;

 

(c)           the terms “Dollars” and “$” mean U.S. dollars;

 

(d)           references herein to a specific Section, Subsection, Recital, Schedule or Exhibit shall refer, respectively, to Sections, Subsections, Recitals, Schedules or Exhibits of this Agreement;

 

(e)           wherever the word “include,” “includes” or “including” is used in this Agreement, it shall be deemed to be followed by the words “without limitation”;

 

(f)            references herein to any gender shall include each other gender;

 

(g)           references herein to any Person shall include such Person’s heirs, executors, personal representatives, administrators, successors and assigns; provided, however, that nothing contained in this Section 9.17 is intended to authorize any assignment or transfer not otherwise permitted by this Agreement;

 

(h)           references herein to a Person in a particular capacity or capacities shall exclude such Person in any other capacity;

 

(i)            with respect to the determination of any period of time, (i) the word “from” means “from and including” and the words “to” and “until” each means “to but excluding” and (ii) time is of the essence;

 

(j)            the word “or” shall be disjunctive but not exclusive;

 

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(k)           references herein to any Law shall be deemed to refer to such Law as amended, modified, codified, reenacted, supplemented or superseded in whole or in part and in effect from time to time, and also to all rules and regulations promulgated thereunder;

 

(l)            references herein to any Contract mean such Contract as amended, supplemented or modified (including any waiver thereto) in accordance with the terms thereof;

 

(m)          the headings contained in this Agreement are intended solely for convenience and shall not affect the rights of the parties to this Agreement; and

 

(n)           if the last day for the giving of any notice or the performance of any act required or permitted under this Agreement is a day that is not a Business Day, then the time for the giving of such notice or the performance of such action shall be extended to the next succeeding Business Day.

 

SECTION 9.18          RULES OF CONSTRUCTIONThe parties have participated jointly in negotiating and drafting this Agreement.  If an ambiguity or a question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

 

[Signatures appear on following page.]

 

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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.

 

	
 
    	
UNIVERSAL AMERICAN CORP., a Delaware corporation   (formerly known as Universal American Spin Corp.)
    
	
 
    	
 
    
	
 
    	
 
    
	
 
    	
By:
    	
/s/   Robert A. Waegelein
    
	
 
    	
 
    	
Name:   Robert A. Waegelein
    
	
 
    	
 
    	
Title:   Executive Vice President
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
UNIVERSAL AMERICAN CORP., a New York corporation
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/   Robert A. Waegelein
    
	
 
    	
 
    	
Name:   Robert A. Waegelein
    
	
 
    	
 
    	
Title:   Executive Vice President
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
CVS CAREMARK CORPORATION
    
	
 
    	
 
    	
 
    
	
 
    	
 
    	
 
    
	
 
    	
By:
    	
/s/ Carol A. DeNale
    
	
 
    	
 
    	
Name: Carol A. DeNale
    
	
 
    	
 
    	
Title: Senior Vice President and Treasurer
    

 

41

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