Document:

Exhibit 10.12

 

EXECUTION COPY

 

STOCKHOLDERS’ AGREEMENT

 

This Stockholders’ Agreement (this “Agreement”),
is entered into as of July 16, 2004 by and among Sealy Corporation, a
Delaware corporation (the “Company”), The Northwestern Mutual Life Insurance
Company (“Northwestern”), Teachers Insurance and Annuity Association of America
(“TIAA”) and Sealy Paterson LLC (“SP”) (each, other than the Company, a “Minority
Investor” and collectively, the “Minority Investors”) and Sealy Holding LLC, a
Delaware limited liability company (the “KKR Investor”).

 

RECITALS

 

WHEREAS, the KKR Investor, an affiliate of
Kohlberg Kravis Roberts & Co. L.P., acquired approximately 92% of the
then outstanding shares of class A common stock, par value $.01 per share, of
the Company (the “Common Stock”) on April 6, 2004;

 

WHEREAS, pursuant to the terms of the Share
Subscription Agreement dated as of the date hereof between the Company and SP
(the “Subscription Agreement”), SP will acquire shares of Common Stock;

 

WHEREAS, pursuant to the terms of the Note
and Stock Purchase Agreement dated as of the date hereof between the Company,
Northwestern and TIAA (the “Note Purchase Agreement”), each of Northwestern and
TIAA will acquire shares of Common Stock; and

 

WHEREAS, simultaneously with entering into
the Subscription Agreement or the Note Purchase Agreement, as the case may be,
each Minority Investor is entering into this Agreement;

 

WHEREAS, each Minority Investor, the KKR
Investor and the Company wish to enter into this Agreement providing for
certain rights and obligations of the Minority Investors, the KKR Investor and
the Company.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the
mutual covenants herein contained and for other good and valuable
consideration, the parties hereto agree as follows:

 

1.                                       Definitions

 

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

 

Affiliate:  When used with respect to a specified Person,
another Person that, either directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the Person
specified.

 

Exempt Transaction:  Has the meaning set forth in Section 2(c) hereof.

 

 

KKR Affiliate:  With respect to the KKR Investor shall mean a
Person that directly or indirectly through one or more intermediaries controls,
is controlled by or is under common control with the KKR Investor; provided,
however, that KKR Affiliate shall not in any event include the limited
partners of the members of the KKR Investor.

 

KKR Holder:  The KKR Investor and any Person to whom the
KKR Investor transfers shares of Common Stock and any transferee thereof who is
required by this Agreement to be bound by the provisions of this Agreement.

 

KKR Shares:  As of any date of determination, the shares
of Common Stock then held by the KKR Holders.

 

Minority Shares:  As of any date of determination, the shares
of Common Stock then held by the Minority Investors; provided that
Minority Shares shall not include any shares of Common Stock held by
Northwestern or TIAA that (i) were acquired in a Public Offering or (ii) were
acquired in a brokers transaction and were freely tradeable without restriction
and unlegended at the time such shares were acquired by Northwestern or TIAA.

 

Person:  An individual, partnership, limited liability
company, joint venture, corporation, trust or unincorporated organization, a
government or any department, agency or political subdivision thereof or other
entity.

 

Private Sale:  Any sale of securities other than a sale made
in a public distribution pursuant to an effective registration statement under
the Securities Act.

 

Public Offering:  Any sale of the issued and outstanding shares
of Common Stock made in a public distribution pursuant to an effective
registration statement under the Securities Act (other than a registration
statement on Form S-4 or Form S-8 or any similar or successor forms).

 

Securities Act:  The Securities Act of 1933, as amended from
time to time and the rules and regulations promulgated thereunder.

 

2.             (a)  “Tag-Along”
Right With Respect to Private Sales by KKR Holders.  (i)  Private Sales of Shares by KKR
Holders.  Subject to the last
sentence of Section 3(a), with respect to any proposed Private Sale of any
KKR Shares by a KKR Holder or KKR Holders (collectively, for purposes of this Section 2,
the “KKR Holder”) during the term of this Agreement to a Person (a “Proposed
Purchaser”), other than pursuant to an Exempt Transaction (as defined in Section 2(c)),
each Minority Investor shall have the right and option, but not the obligation,
to participate in such sale, on the same terms and subject to the same
conditions as the sale by the KKR Holder, for the number of Minority Shares
owned by such Minority Investor equaling the number derived by multiplying the
total number of KKR Shares which the KKR Holder proposes to sell (the “Proposed
Number of Shares”) by a fraction, the numerator of which is the total number of
Minority Shares held by such Minority Investor and the denominator of which is
the sum of (A) the total number of Minority Shares, (B) the total
number of KKR Shares, and (C) the total number of shares of Common Stock
(determined on a fully diluted

 

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basis) owned by Persons
entitled to the benefits of any other “tag-along” rights arising as a result of
such sale.

 

(ii)           Notices.  The KKR Holder shall notify, or cause to be
notified, the Minority Investors in writing of each proposed Private Sale
subject to Section 2(a)(i) above. 
Such notice shall set forth:  (A) the
Proposed Number of Shares, (B) the name and address of the Proposed
Purchaser, (C) the proposed amount of consideration, the material terms
and conditions of such sale (and if the proposed consideration is not cash, the
notice shall describe the terms of the proposed consideration) and the proposed
closing date of such sale, (D) the total number of KKR Shares and the
total number of shares of Common Stock (determined on a fully diluted basis)
owned by Persons entitled to the benefits of any other “tag-along” rights
arising as a result of such sale and (D) that the Proposed Purchaser has
been informed of the “tag-along” right provided for in this Section 2(a) and
has agreed to purchase Minority Shares held by the Minority Investors in
accordance with the terms hereof.  The “tag-along”
right may be exercised by each Minority Investor by delivery of a written
notice from such Minority Investor to the KKR Holder (the “Tag-Along Notice”)
within 15 days following receipt of the notice specified in the preceding
sentence.  The Tag-Along Notice shall
state the amount of Minority Shares that the Minority Investor proposes to
include in such sale to the Proposed Purchaser. 
If any Minority Investor delivers a Tag-Along Notice to the KKR Holder,
each Minority Investor participating in the proposed Private Sale shall (A) prior
to closing of any such sale, execute and deliver (or cause to be executed and
delivered) any purchase agreement or other documentation required by the
Proposed Purchaser to consummate the sale (including without limitation all
legal opinions, cross-receipts and certificates), which purchase agreement and
other documentation shall be on terms no less favorable in respect of any
material term to such Minority Investor than those executed by the KKR Holder
and (B) at the closing of any such sale, deliver to the Proposed Purchaser
the certificate or certificates representing the Minority Shares to be sold
pursuant to such sale by such Minority Investor, duly endorsed for transfer,
against receipt of the purchase price thereof.

 

(iii)          Number of Shares to be Sold.  If a Tag-Along Notice is received pursuant to
Section 2(a)(ii), each Minority Investor shall be permitted to sell to the
Proposed Purchaser up to the number of Minority Shares determined as set forth
in Section 2(a)(i) above (the “Proposed Minority Shares”), and the
KKR Holder shall be permitted to sell to the Proposed Purchaser up to a number
of shares of Common Stock (the “Proposed KKR Shares”) equal to the Proposed Number
of Shares, less the aggregate number of Proposed Minority Shares and all other
shares of Common Stock being sold to such Proposed Purchaser in such
transaction pursuant to tag-along rights arising as a result of such sale; provided
that the KKR Holder and each Minority Investor shall have the right to sell
their pro rata share of a number of additional shares of Common Stock up to the
excess of the Proposed Number of Shares over the number of Proposed KKR Shares,
if the Proposed Purchaser wants to purchase such additional shares.  If no Tag-Along Notice is received by the KKR
Holder pursuant to Section 2(a)(ii), the KKR Holder shall have the right
to sell to the Proposed Purchaser up to the Proposed Number of Shares on terms
and conditions no more favorable in any material respect to the KKR Holder than
those stated in the Tag-Along Notice.

 

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(b)           Piggyback Registration Rights
With Respect to Public Sales by KKR Holders.  (i)  Public
Offering of Shares by KKR Holders. 
With respect to any proposed Public Offering of any KKR Shares by a KKR
Holder during the term of this Agreement, each Minority Investor shall have the
right and option, but not the obligation, to participate in such public
distribution on the same terms and subject to the same conditions as the sale
by the KKR Holder for a number of Minority Shares up to the total number of
Minority Shares owned by such Minority Investor, subject to Section 2(b)(iii) below.

 

(ii)           Notices.  The KKR Holder shall notify, or cause to be
notified, the Minority Investors in writing (a “Notice”) of each proposed
Public Offering (a “Proposed Registration”). 
Such notice may be given before the filing of such registration
statement and need not specify any price or other terms or conditions of such
sale.  If within 15 days of the delivery
of such Notice to the Minority Investors, the KKR Holder receives from any
Minority Investor a written request (a “Request”) to register shares of Common
Stock held by such Minority Investor (which Request will be irrevocable),
shares of Common Stock will be so registered as and to the extent provided in
this Section 2(b) if KKR Shares are so registered.  If a Minority Investor delivers a Request to
the KKR Holder, such Minority Investor will participate in such public
distribution, if any, at the same price and on the same terms and conditions as
the KKR Holder, which price and other terms and conditions will be determined
on behalf of the KKR Holder and the Minority Investor by the KKR Holder in its
sole discretion.  Nothing in this
Agreement shall create any obligation on the part of the KKR Holder to cause a
registration statement to become effective under the Securities Act or to sell
any shares of Common Stock pursuant to an effective registration statement
under the Securities Act.

 

(iii)          Number of Shares to be Sold.  If a registration pursuant to this Section 2(b) involves
an underwritten offering and the managing underwriter advises the Company in
writing that, in its opinion, the number of shares of Common Stock requested to
be included in such registration exceeds the number of shares of Common Stock
which can be sold in such offering, so as to be likely to have an adverse
effect on the price, timing or distribution of the shares of Common Stock
offered in such offering as contemplated by the Company or that the inclusion
of additional selling stockholders is likely to have such an adverse effect,
then the Company will include in such registration (A) the number of
shares of Common Stock held by each Minority Investor equal to the number
derived by multiplying the total number of shares which, in the opinion of such
managing underwriter, can be sold without having the adverse effect referred to
above (the “Piggyback Aggregate Registration Number”) by a fraction, the
numerator of which is the total number of Minority Shares held by such Minority
Investor and the denominator of which is the sum of (i) the total number
of Minority Shares, (ii) the total number of KKR Shares, and (iii) the
total number of shares of Common Stock (determined on a fully diluted basis)
held by Persons entitled to the benefits of any other piggyback registration
rights arising as a result of such registration and (B) the number of
shares of Common Stock held by the KKR Holder equal to the Piggyback Aggregate
Registration Number, less the aggregate number of Minority Shares and all other
shares of Common Stock being registered in such transaction pursuant to
piggyback registration rights arising as a result of such registration; provided
that in the event the aggregate number of shares of Common Stock to be sold in
any such public distribution is increased or decreased, then the number of
Minority Shares which

 

4

 

such Minority Investor shall
sell in such public distribution shall be increased or decreased by the product
of (i) the number of shares of Common Stock by which the total number of
shares of Common Stock in such public distribution is increased or decreased
and (ii) a fraction the numerator of which equals the number of Minority
Shares held by such Minority Investor originally so registered and the
denominator of which is the total number of shares of Common Stock originally
so registered.

 

(iv)          Custody Agreement and Power of
Attorney.  Upon delivery of a Request, the participating
Minority Investors will, if requested by the KKR Holder, execute and deliver to
the KKR Holder a custody agreement and power of attorney in form and substance
reasonably satisfactory to the KKR Holder with respect to the shares of Common
Stock to be registered pursuant to this Section 2(b) (a “Custody
Agreement and Power of Attorney”).  The
custodian and attorney-in-fact under the Custody Agreement and Power of
Attorney will be the KKR Holder or its designee.  The Custody Agreement and Power of Attorney
will provide, among other things, that such Minority Investor will deliver to
and deposit in custody with the custodian and attorney-in-fact named therein a
certificate or certificates representing such shares of Common Stock (duly
endorsed in blank by the registered owner or owners thereof or accompanied by
duly executed stock powers in blank) and irrevocably appoint said custodian and
attorney-in-fact as such Minority Investor’s agent and attorney-in-fact with
full power and authority to act under the Custody Agreement and Power of
Attorney on such Minority Investor’s behalf with respect to the matters
specified therein (including without limitation executing an underwriting
agreement and cross-receipts).

 

(v)           Holdback Agreement.  (A) In connection with the initial
Public Offering, each Minority Investor agrees not to effect any public sale or
distribution, including any sale pursuant to Rule 144 (or any successor
provision) under the Securities Act, of any shares of Common Stock (other than
dispositions made pursuant to the piggyback registration rights described in
this Section 2(b)), within 7 days before or such number of days (not to
exceed 180 days) as the managing underwriters may require, after the effective
date of such registration, and (B) in connection with each subsequent
Public Offering, each Minority Investor agrees not to effect any public sale or
distribution, including any sale pursuant to Rule 144 (or any successor provision)
under the Securities Act, of any Minority Shares (other than dispositions made
pursuant to the piggyback registration rights described in this Section 2(b))
within 7 days before and a number of days after to be determined by the
managing underwriter and the KKR Investor; provided  however, that
such restrictions will be no more restrictive than those applicable to the KKR
Investor for each such Public Offering.

 

(vi)          Additional Agreements.  Each Minority Investor agrees that it will
execute and deliver or cause to be executed and delivered such other agreements
and other documents (such as legal opinions, cross-receipts and certificates)
as the KKR Holder itself is delivering or as the KKR Holder may otherwise
reasonably request to implement the provisions of this Section 2(b); provided
that such additional agreements will be on terms and conditions reasonably
acceptable to the Minority Investors.

 

(c)           Exempt Transaction Defined.  As used herein, the term “Exempt Transaction”
shall mean (i) sales by the KKR Investor to any KKR Affiliates, (ii) sales
by any

 

5

 

KKR Affiliate to another KKR
Affiliate or to the KKR Investor, (iii) transfers by the KKR Investor and
its KKR Affiliates to its partners or members (and any subsequent sales by such
partners or members) in the form of dividends or distributions (whether upon
liquidation or otherwise), or (iv) sales by any KKR Holders made in a
Public Offering; provided that in the case of clauses (i) and (iii) above
that such buyer or member agrees in writing to be bound by the provisions of
this Agreement, including this paragraph (c).

 

3.             “Drag-Along” Right with Respect
to Minority Shares.  (a)  Sales
by KKR Holders.  In the event that the
KKR Holders determine, during the term of this Agreement, to transfer more than
50% of the KKR Shares to a Proposed Purchaser not affiliated with the KKR
Holders, other than in an Exempt Transaction (a “Drag-Along Sale”), then upon
the request of the KKR Holders, each Minority Investor will transfer to such
Proposed Purchaser at the same price and upon the same terms and conditions
(including, without limitation, time of payment, form of consideration and
adjustments to purchase price) as such transfer by the KKR Holders the number
of Minority Shares equaling the number derived by multiplying the total number
of Minority Shares owned by such Minority Investor by a fraction, the numerator
of which is the total number of KKR Shares that the KKR Holder has determined
to transfer to such Proposed Purchaser and the denominator of which is the
total number of KKR Shares.  In the event
that the KKR Holders have signed an agreement (a “Transaction Agreement”), with
respect to KKR Shares, to vote in favor of or tender in connection with a business
combination transaction entered into by the Company, then, upon the request of
the KKR Holders, the Minority Investors will execute a Transaction Agreement
with the same terms and conditions as the Transaction Agreement signed by the
KKR Holder; provided, that in connection with any Drag-Along Sale, each
Minority Investor shall make such representations and warranties concerning its
title to the shares of Common Stock to be sold in the Drag-Along Sale and its
authority to enter into and consummate such Drag-Along Sale, but shall not be
required to make any other representations or warranties.  Each Minority Investor will be responsible
for funding its proportionate share of any escrow or indemnification arrangements
in connection with the Drag-Along Sale and for its proportionate share of any
withdrawals therefrom, including without limitation any such withdrawals that
are made with respect to claims arising out of agreements, covenants,
representations, warranties or other provisions of the Drag-Along Sale that
were not made by the Minority Investor. In the event that both Sections 2(a) and
3 hereto apply to a single transaction, the “drag-along” rights set forth in
this Section 3 will have priority over the “tag-along” rights set forth in
Section 2(a) above, and the “tag-along” rights set forth in Section 2
will become exercisable by the Minority Investors following a determination by
the KKR Holder not to exercise its rights under this Section 3.

 

(b)           Notice.  Prior to making any Drag-Along Sale, the KKR
Holders shall, if they determine in their sole discretion that the Minority
Investors should participate in such transfer, provide each Minority Investor
with written notice (the “Drag-Along Notice”) not less than 10 business days
prior to the proposed date of the Drag-Along Sale (the “Drag-Along Sale Date”).  The Drag-Along Notice shall set forth:  (i) the name and address of the Proposed
Purchaser; (ii) the number of shares of Common Stock to be sold to the
Proposed Purchaser, (iii) the proposed amount and form of consideration to
be paid per share of Common Stock and the material terms and conditions of the
transfer; (iv) the Drag-Along Sale Date and the date upon

 

6

 

which the Minority Investors
shall deliver to the KKR Holders the certificates representing the Minority
Shares, duly endorsed, and the power of attorney referred to below; and (v) that
the Proposed Purchaser has been informed of the Drag-Along Sale rights and has
agreed to purchase the Minority Shares held by the Minority Investors in
accordance with the terms hereof.  The
Minority Investors shall (i) prior to closing of any such transfer,
execute any purchase agreement or other documentation required by the Proposed
Purchaser to consummate the transfer, which purchase agreement and other
documentation shall be on terms no less favorable in respect of any material
term to the Minority Investors than those executed by the KKR Holders, and (ii) at
the closing of any such transfer, deliver to the Proposed Purchaser the
certificate or certificates representing the Minority Shares, duly endorsed for
transfer with signatures guaranteed, against receipt of the purchase price
thereof.  Prior to entering into a Transaction
Agreement, the KKR Holders shall, if they determine in their sole discretion
that the Minority Investors should execute a Transaction Agreement, provide the
Minority Investors with written notice (the “Transaction Agreement Notice”) not
less than 10 business days prior to the proposed date of the execution of the
Transaction Agreement (the “Transaction Agreement Date”).  The Transaction Agreement Notice shall set
forth:  (i) the name and address of
the counter-parties to the Transaction Agreement; (ii) the proposed form
of Transaction Agreement; and (iii) the material terms and conditions of
the business combination with the Company to which the Transaction Agreement
relates.  The Minority Investors shall,
at the signing and closing of such Transaction Agreement, execute and deliver
all other documentation required by such Transaction Agreement, which documents
shall be on terms no less favorable in respect of any material term to the
Minority Investors than those executed by the KKR Holder.

 

(c)           Effect of Drag-Along Sale.  If the Minority Investors receive their
proportionate share of the purchase price from a Drag-Along Sale, but have
failed to deliver certificates representing their shares of Common Stock as
described in this Section 3, they shall for all purposes, but solely with
respect to such shares, be deemed no longer to be stockholders of the Company,
shall have no voting rights, shall not be entitled to any dividends or other
distributions with respect to the Common Stock held by them, and shall have no
other rights or privileges granted to stockholders under law or this Agreement.

 

7

 

4.             Preemptive
Rights on Certain Issuances. (a)  If at any time the Company proposes
to sell or issue to the KKR Holders, or any of their Affiliates, for cash any
shares of Common Stock, securities of the Company convertible into, or
exchangeable or exercisable for, shares of Common Stock, or options warrants or
other rights to acquire shares of Common Stock (collectively, “Equity
Securities”), the Company shall grant to each Minority Investor, the right to
purchase at the same price and upon the same terms and conditions as such sale
or issuance to the KKR Holders or such Affiliates the number of Equity
Securities equaling the number derived by multiplying the total number of such
Equity Securities proposed to be sold or issued to the KKR Holders or such
Affiliates by a fraction, the numerator of which is the number of Minority
Shares held by such Minority Investor and the denominator of which is the total
number of outstanding shares of Common Stock (the “Equity Purchase Shares”).  The equity purchase right provided in this Section 4(a) shall
apply at the time of issuance of any right, warrant or option or convertible or
exchangeable security and not to the conversion, exchange or exercise thereof.

 

(b)           The Company shall give written notice of a proposed issuance
or sale described in Section 4(a) to the Minority Investors not less
than 10 business days prior to the proposed issuance or sale.  Such notice (the “Issuance Notice”)
shall set forth the material terms and conditions of such proposed sale or
issuance and the number of Equity Securities proposed to be sold or
issued.  At any time during the 10-day
period following the receipt of an Issuance Notice, each Minority Investor
shall have the right to irrevocably elect to purchase all or a portion of  the number of the Equity Purchase Shares as
determined pursuant to, and in accordance with, Section 4(a) and upon
the other terms and conditions specified in the Issuance Notice by delivering a
written notice to the Company.  Except as
provided in the following sentence, such purchase shall be consummated
concurrently with the consummation of the issuance or sale described in the
Issuance Notice.  The closing of any
purchase by any Minority Investor may be extended beyond the closing of the
transaction described in the Issuance Notice to the extent necessary to obtain
required governmental approvals and other required approvals and the Company
and the Minority Investors shall use their respective commercially reasonable
efforts to obtain such approvals.

 

(c)           If any Minority Investor fails to exercise fully the Equity
Purchase Right within the period described above, the Company shall be free to
complete the proposed issuance or sale of the Equity Securities described in
the Issuance Notice to the KKR Holders with respect to which such Minority
Investor failed to exercise the option set forth in this Section 4 on
terms no less favorable to the Company than those set forth in the Issuance
Notice (except that the amount of securities to be issued or sold by the
Company may be reduced).

 

5.             Other
Rights.  (a)  Information
Rights.  Prior to the initial Public
Offering, each Minority Investor owning at least 10% of the shares of Common
Stock originally acquired by such Minority Investor pursuant to the
Subscription Agreement or the Note Purchase Agreement, as the case may be,
shall have the right to receive a copy of annual and quarterly reports, if any,
provided to the KKR Holders and the management of the Company.

 

(i)            Confidentiality.  (i) Subject to paragraph 5(b)(ii), each
Minority Investor agrees to hold any such information concerning the Company
that it receives pursuant to its rights under this Agreement (the “Confidential
Information”) in strict confidence and agrees not

 

8

 

to disclose such Confidential
Information to any party; provided, however, that (i) any
Confidential Information may be disclosed to a Minority Investor’s directors,
members, officers, agents and advisors (collectively, “Representatives”)
who need to know such information (it being understood that such
Representatives shall be informed by the Minority Investor of the confidential
nature of such information and shall agree to treat such information
confidentially in accordance with the terms of this letter agreement) and (ii) any
disclosure of such information may be made to which the Company consents in
writing.  Each Minority Investor shall be
responsible for any breach of the terms this Agreement by any of its
Representatives.  In addition, each such
Minority Investor agrees not to purchase any equity or debt securities of the
Company unless such purchase complies with the Securities Act and the rules and
regulations thereunder and the state securities laws of any applicable
state.  The term Confidential Information
does not include information which (i) is already in the possession of
such Minority Investor, provided that such information is not subject to
another confidentiality agreement with or other obligation of secrecy to the
Company, (ii) is or becomes publicly available other than as a result of a
disclosure by such Minority Investor or its directors, members, officers,
employees, agents, legal, financial, accounting or other advisors or (iii) is
or becomes available to such Minority Investor on a non-confidential basis from
a source other than the Company or its advisors or other representatives,
provided that such source is not known by such Minority Investor to be bound by
a confidentiality agreement with or other obligation of secrecy to the Company.

 

(ii)           In
the event that a Minority Investor receives a request to disclose any
Confidential Information under any applicable law or regulation (including any
insurance regulation) or legal or judicial process or by any self-regulatory
organization (including, without limitation, the National Association of
Insurance Commissioners), such Minority Investor agrees (a) promptly to
notify the Company in writing thereof, (b) to consult with the Company on
the advisability of taking steps to resist or narrow such request, and (c) if,
based upon the advice of counsel to the Minority Investor, disclosure is
required, to cooperate reasonably with the Company in any attempt that it may
make to obtain an order or other reliable assurance that confidential treatment
will be accorded to designated portions of such information.  If, based upon the advice of counsel to the
Minority Investor, disclosure is required in the circumstances described above,
disclosure of only that portion of the Confidential Information as is so
required may be made without liability hereunder, subject to compliance with
this paragraph.

 

6.             Transfer;
Right of First Offer.  (a)  Unless
otherwise agreed in writing by the KKR Investor, until the second anniversary
of the date of this Agreement, except for transfers made pursuant to Sections 2
or 3, each Minority Investor agrees not to transfer, sell, assign, pledge,
hypothecate or otherwise dispose of (“Transfer”) any of its shares of Common
Stock; provided that any Minority Investor may Transfer its shares of
Common Stock to an Affiliate of such Minority Investor, a member of such
Minority Investor, another Minority Investor or an Affiliate of another
Minority Investor so long as such transferee agrees in writing to be bound by
the provisions of this Agreement and, in the case of Transfers to Affiliates of
any Minority Investor, to transfer such shares of Common Stock back to the Minority
Investor from which such shares were transferred prior to such transferee
ceasing to be an Affiliate of any Minority Investor.

 

9

 

(b)           Prior to and in order to effect any Transfer, except for
transfers made pursuant to Sections 2 or 3 or the proviso contained in clause (a) above,
after the second anniversary and prior to the fifth anniversary of the date
hereof, each Minority Investor shall first give written notice (a “Sale Notice”)
to the KKR Investor stating such Minority Investor’s intention to effect such a
Transfer, the number of shares of Common Stock subject to such Transfer (the “Offered
Securities”), the price and terms which such Minority Investor proposes to be
paid for the Offered Securities (the “First Offer Price”) and the other
material terms upon which such Transfer is proposed.  Upon receipt of the Sale Notice, the KKR
Investor will have an irrevocable non-transferable option to purchase all of
the Offered Securities at the First Offer Price and otherwise on the terms and
conditions described in the Sale Notice (the “First Offer”).  The KKR Investor shall, within 15 days from
receipt of the Sale Notice, indicate if it has accepted the First Offer by
sending irrevocable written notice of any such acceptance to the applicable
Minority Investor (the “Acceptance Notice”), and the KKR Investor shall then be
obligated to purchase all such Offered Securities on the terms and conditions
set forth in the Sale Notice.  If the KKR
Investor declines to exercise such option, the Minority Investor shall have the
option to enter into definitive agreements to Transfer the Offered Securities
as to which such options are not exercised to a transferee for consideration
having a value not less than 100% of the First Offer Price; provided
that any such definitive agreement provides for the consummation of such
Transfer to take place within two months from the date of such definitive
agreement and is otherwise on terms not more favorable to the transferee in any
material respect than were contained in the Sale Notice.  If the KKR Investor does not exercise its
option to purchase all of the Offered Securities at the First Offer Price and
the Minority Investor has not entered into a definitive agreement described
above within two months from the date the Acceptance Notices was due to be
received by the Minority Investor, or the Minority Investor has entered into
such an agreement but has not consummated the sale of such securities within
two months from the date of such definitive agreement, then the provisions of
this Section 6(b) shall again apply, and such selling Minority
Investor shall not Transfer or offer to Transfer such Offered Securities not so
Transferred without again complying with this Section 6(b).

 

(c)           Each Minority Investor agrees not to offer or Transfer any
of its shares of Common Stock unless such offer or Transfer complies with the
Securities Act and the rules and regulations thereunder and the state
securities laws of any applicable state.

 

(d)           Any transferee of a Minority Investor (other than a
transferee pursuant to the provisions of Section 6(a)) will not acquire
any rights under this Agreement.

 

7.             Miscellaneous.  (a)  Termination of Agreement.  The provisions of this Agreement (other than Section 2(b))
shall terminate automatically without further action by the parties hereto on
the first date on which at least 35% of the Common Stock is tradeable on a
national securities exchange pursuant to an effective registration statement
under the Securities Exchange Act of 1934, as amended (the “Termination Date”).  Section 2(b) of this Agreement
shall terminate on the earlier of (A) the first date following the fifth
anniversary of this Agreement on which any Minority Investor may sell any
shares of Common Stock pursuant to, and in accordance with, Rule 144 (or
any successor provision) under the Securities Act or (B) the first date
following the Termination Date on which any Minority Investor may sell any
shares of Common Stock pursuant to, and in accordance with, Rule 144 (or
any successor provision) under

 

10

 

the Securities Act.  Notwithstanding the second immediately
preceding sentence, this Section 7 shall survive the termination of this
Agreement.

 

(b)           Representation and Warranty.  The Minority Investors own, of record or
beneficially, no shares of Common Stock or securities convertible or
exchangeable for shares of Common Stock, other than the Minority Shares subject
to this Agreement.

 

(c)           Assignment, Binding Effect.  This Agreement shall not be assignable by the
parties hereto, except to any Person who in connection with a transfer of KKR
Shares or Minority Shares is required by this Agreement, in connection with
such transfer, to agree to be bound by the provisions of this Agreement.  Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective legal representatives, heirs, legatees, successors and permitted
assigns.

 

(d)           Costs and Expenses.  All costs and expenses incurred in connection
with this Agreement and the consummation of any of the transactions
contemplated hereby shall be paid by the party incurring such expenses; provided
however that the Company will reimburse the Minority Investors for the
reasonable fees and expenses incurred in any underwritten registration by one
legal counsel acting on behalf of all Minority Investors.

 

(e)           Amendments.  The provision of this Agreement, including
the provisions of this sentence, may be amended, modified or supplemented only
by a written instrument executed by (i) holders of at least a majority of
the KKR Shares, (ii) holders of at least a majority of the Minority Shares
and (iii) the Company. 
Notwithstanding the foregoing sentence, a majority of the Minority
Shares may not agree to amend this Agreement in a way that adversely affects
any Minority Investor without such Minority Investor’s consent.

 

(f)            Governing Law.  This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.  Each of the parties hereto agrees to submit
to the jurisdiction of the courts of the State of New York in any action or
proceeding arising out of or relating to this Agreement.

 

(g)           Interpretation.  The headings of the sections contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not affect the meaning or interpretation of
this Agreement.

 

(h)           Notices.  All notices and other communications required
or permitted to be given under this Agreement shall be in writing and shall be
deemed to have been given if delivered personally or by telecopy or seven days
after having been sent by certified mail, return receipt requested, postage
prepaid, to the parties to this Agreement at the following address or to such
other address as any party to this Agreement shall specify by notice to the
other parties:

 

11

 

	
  (1)

  	
   

  	
  If to the
  KKR Investor or a KKR Holder, to it in care of:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Kohlberg
  Kravis Roberts & Co.

  
	
   

  	
   

  	
  9 West 57th
  Street

  
	
   

  	
   

  	
  New York,
  New York 10019

  
	
   

  	
   

  	
  Attention:Brian
  Carroll

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy
  to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Simpson
  Thacher & Bartlett LLP

  
	
   

  	
   

  	
  425
  Lexington Avenue

  
	
   

  	
   

  	
  New York,
  New York 10017

  
	
   

  	
   

  	
  Attention:

  	
  David J.
  Sorkin

  
	
   

  	
   

  	
   

  	
  Sean D.
  Rodgers

  
	
   

  	
   

  	
   

  
	
  (2)

  	
   

  	
  If to
  Northwestern, to it in care of:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  The
  Northwestern Mutual Life Insurance Company

  
	
   

  	
   

  	
  720 East
  Wisconsin Avenue

  
	
   

  	
   

  	
  Milwaukee,
  Wisconsin 53202

  
	
   

  	
   

  	
  Attention:
  Treasury & Investment Operations Department

  
	
   

  	
   

  	
  Facsimile:
  414-665-6998

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy
  to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Pepe &
  Hazard, LLP

  
	
   

  	
   

  	
  Goodwin
  Square, 225 Asylum Street

  
	
   

  	
   

  	
  Hartford, CT
  06103

  
	
   

  	
   

  	
  Attention:  Gary S. Hammersmith, Esq.

  
	
   

  	
   

  	
   

  
	
  (3)

  	
   

  	
  If to TIAA,
  to it in care of:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  TIAA CREF

  
	
   

  	
   

  	
  730 Third
  Avenue

  
	
   

  	
   

  	
  New York,
  New York 10017

  
	
   

  	
   

  	
  Attention:
  Estelle D. Simsolo, Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with copies
  to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  TIAA CREF

  
	
   

  	
   

  	
  730 Third
  Avenue

  
	
   

  	
   

  	
  New York,
  New York 10017

  
	
   

  	
   

  	
  Attention:  Robert Hayne, Senior Counsel; and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Pepe &
  Hazard, LLP

  
	
   

  	
   

  	
  Goodwin
  Square, 225 Asylum Street

  
	
   

  	
   

  	
  Hartford, CT
  06103

  
	
   

  	
   

  	
  Attention:
  Gary S. Hammersmith, Esq.

  

 

12

 

	
  (4)

  	
   

  	
  If to SP, to
  it in care of:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Sealy
  Paterson LLC

  
	
   

  	
   

  	
  c/o
  Sealy Mattress Company of New Jersey, Inc.

  
	
   

  	
   

  	
  697
  River Street

  
	
   

  	
   

  	
  Paterson,
  New Jersey 07524

  
	
   

  	
   

  	
  Attention:  David Hertz

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy
  to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2600 Lake
  Austin Boulevard

  
	
   

  	
   

  	
  Suite 2600

  
	
   

  	
   

  	
  Austin,
  Texas 78703

  
	
   

  	
   

  	
  Attention:  Shane Egan

  
	
   

  	
   

  	
   

  
	
  (5)

  	
   

  	
  If to the
  Company, to it in care of:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Sealy
  Corporation

  
	
   

  	
   

  	
  One Office
  Parkway

  
	
   

  	
   

  	
  Trinity,
  North Carolina 27370

  
	
   

  	
   

  	
  Attention: Kenneth
  Walker

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy
  to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Kohlberg
  Kravis Roberts & Co.

  
	
   

  	
   

  	
  9 West 57th
  Street

  
	
   

  	
   

  	
  New York,
  New York 10019

  
	
   

  	
   

  	
  Attention:  Brian Carroll

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  and

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Simpson
  Thacher & Bartlett LLP

  
	
   

  	
   

  	
  425
  Lexington Avenue

  
	
   

  	
   

  	
  New York,
  New York 10017

  
	
   

  	
   

  	
  Attention:

  	
  David J.
  Sorkin

  
	
   

  	
   

  	
   

  	
  Sean D.
  Rodgers

  

 

(i)            Waiver and Consent.  No action taken pursuant to this Agreement,
including, without limitation, any investigation by or on behalf of any party,
shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained herein.  The waiver by any
party hereto of a breach of any provision of this Agreement shall not operate
or be construed as waiver of any preceding or succeeding breach and no failure
by any party to exercise any right or privilege hereunder shall be deemed a
waiver of such party’s rights or privileges hereunder or shall be deemed a
waiver of such party’s rights to exercise the same at any subsequent time or
times hereunder.  Each party hereto, in
addition to being entitled to exercise all rights provided herein, in the
charter or granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement.  Each party hereto agrees that monetary
damages

 

13

 

would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.

 

(j)            Inspection.  Copies of this Agreement will be available
for inspection or copying by any party at the offices of the Company through
the Secretary of the Company.

 

(k)           Counterparts.  This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to constitute one and the same agreement.

 

(l)            Severability.  In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.

 

(m)          Entire Agreement.  This Agreement is intended by the parties as
a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the rights of the Minority Investors herein.  This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matters.

 

(n)           Limited Liability of Partners.  Notwithstanding anything that may be
expressed or implied in this Agreement, each KKR Holder and each Minority
Investor, by its acceptance of the benefits of this Agreement, covenants,
agrees and acknowledges that, notwithstanding that the KKR Holders and certain
of the Minority Investors are partnerships or limited liability companies, no
recourse under this Agreement or any documents or instruments delivered in
connection with this Agreement shall be had against any officer, agent or
employee of any KKR Holder or any Minority Investor, against any partner or
member of any KKR Holder or Minority Investor or any director, officer,
employee, partner, member, affiliate or assignee of any of the foregoing,
whether by the enforcement of any assessment or by any legal or equitable
proceeding, or by virtue of any statute, regulation or other applicable law, it
being expressly agreed and acknowledged that no personal liability whatsoever
shall attach to, be imposed on or otherwise be incurred by an officer, agent or
employee of any KKR Holder or any Minority Investor or any partner or member of
any KKR Holder or any Minority Investor or any director, officer, employee,
partner, member, affiliate or assignee of any of the foregoing, as such for any
obligations of any KKR Holder or Minority Investor under this Agreement or any
documents or instruments delivered in connection with this Agreement or for any
claim based on, in respect of or by reason of such obligations or their
creation.

 

[signature page follows]

 

14

 

IN WITNESS WHEREOF, the parties have executed
this Stockholders’ Agreement as of the date first above written.

 

	
   

  	
  SEALY
  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SEALY HOLDING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE
  NORTHWESTERN MUTUAL LIFE

  INSURANCE COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  TEACHERS INSURANCE AND ANNUITY

  ASSOCIATION OF AMERICA

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SEALY
  PATERSON LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:Exhibit 10.27

 

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day
of April, 2005, by and between SEALY CORPORATION, a Delaware corporation (the “Company”),
and the Employee (as defined below).

W I T N E S S E T H:

WHEREAS, the Company and the Employee (collectively “the Parties”)
desire to enter into this Employment Agreement (the “Agreement”) as hereinafter
set forth;

NOW, THEREFORE, the Company and Employee
agree as follows:

 

1.             MAJOR DEFINED
TERMS.

(a)                                  “Annual Base
Salary” shall be two hundred ninety thousand dollars and sixteen cents
($290,000.16), subject to annual review by the Human Resources Committee of the
Board and may during the Employment Term be increased, but not decreased, to
the extent, if any, that said Committee may determine.

(b)                                 “Cause” shall
be as defined in Subsection 4(b) below.

(c)                                  “Good Reason”
shall be as defined in Subsection 4(g) below.

(d)                                 “Employee”
shall mean Philip Dobbs.

(e)                                  “Employee
Address” is 2 Craven Road, Mountain Lakes, NJ 07646.

(f)                                    “Employment
Term” shall:

(i)             be for an
initial one (1) year term commencing on the date of this Agreement, which term
shall automatically  be extended one
calendar day for each calendar day that the Employee is employed by the Company
after the date of this Agreement  so that
the remaining Employment Term shall always be one (1) year;

(ii)          provided that
the Employment Term, as provided in Section 4 hereof, may be terminated
prior to the date specified above in this Subsection 1(f).

(g)                                 “Position”
shall mean Senior Vice President, Marketing.

(h)                                 “Target Annual
Bonus Percentage” shall be thirty-five percent (35%) of Employee’s Annual Base
Salary with a range of zero percent (0%) to seventy percent (70%) of Annual
Base Salary.

2.             POSITION,
DUTIES, AND RESPONSIBILITIES. 
Subject to the conditions set forth herein, at all times during the
Employment Term, the Employee shall:

(a)                                  Hold the Position
reporting to the Chief Executive Officer, President or Chief Operation Officer
of the Company (collectively the “Chief Executive Officer”);

(b)                                 Have those
duties and responsibilities, and the authority, customarily possessed by the
Position at comparable size corporations and such additional duties as may be
assigned to the Employee from time to time by the Board of Directors of the
Company (the “Board”) or the Chief Executive Officer which are consistent with
the Position at a major corporation;

(c)                                  Adhere to such
reasonable written policies and directives, and such reasonable unwritten
policies and directives as are of common knowledge to executive officers of the
Company, as may be promulgated from time to time by the Board or the Chief
Executive Officer and which are applicable to executive officers of the
Company;

 

(d)                                 Invest in the
Company only in accordance with any insider trading policy of the Company in
effect at the time of the investment; and

(e)                                  Devote
the Employee’s entire business time, energy, and talent to the business, and to
the furtherance of the purposes and objectives, of the Company, and neither
directly nor indirectly act as an employee of or render any business,
commercial, or professional services to any other person, firm or organization
for compensation, without the prior written approval of the Board or the Chief
Executive Officer.

Nothing in this Agreement shall preclude the Employee from devoting
reasonable periods of time to charitable and community activities or the
management of the Employee’s investment assets, provided such activities do not
interfere with the performance by the Employee of the Employee’s duties
hereunder.

3.             SALARY, BONUS
AND BENEFITS.  For services rendered
by the Employee on behalf of the Company during the Employment Term, the
following salary, bonus and benefits shall be provided to the Employee by the
Company:

(a)                                  The Company
shall pay to the Employee, in equal installments, according to the Company’s
then current practice for paying its executive officers in effect from time to
time during the Employment Term, the Annual Base Salary.

(b)                                 The Employee
shall participate in the Sealy Corporation Annual Bonus Plan (the “Bonus Plan”)
in accordance with the provisions of that Plan as in effect as of the date of
this Agreement based on the Target Annual Bonus Percentage.

(c)                                  The Employee
shall be eligible for participation in such other benefit plans, including, but
not limited to, the Company’s Profit Sharing Plan and Trust, Executive
Severance Benefit Plan, Benefit Equalization Plan, Short-Term and Long Term
Disability Plans, Group Term Life Insurance Plan, Medical Plan or PPO, Dental
Plan, the 401(k) feature of the Profit Sharing Plan and the 1998 Stock Option
Plan, as the Board may adopt from time to time and in which the Company’s
executive officers are eligible to participate. 
Such participation shall be subject to the terms and conditions set
forth in the applicable plan documents. 
As is more fully set forth in Section 6 hereof, the Employee shall
not be entitled to duplicative payments under this Agreement and the Executive
Severance Benefit Plan.

(d)                                 Without
limiting the generality of Subsection 3(c) above, for so long as such coverage
shall be available to the executive officers of the Company, the Employee shall
be eligible to participate in the Company’s Group Term Life Insurance Plan with
a death benefit to be provided at the level of one and one half (1 1⁄2) times
annual base salary at Company expense, plus extended coverage with a death
benefit to be provided of at least the level in effect on the date of this
Agreement for the Employee under such Plan at the Employee’s discretion and
expense.

(e)                                  The Employee
shall be entitled to take, during each calendar year period during the
Employment Term, vacation time equal to four (4) weeks per year.

(f)                                    In addition,
the Parties do hereby further confirm that any shares of Class A Common Stock
of the Company (“Class A Shares”), and any options to purchase additional
Class A Shares previously granted to Employee are in addition to, and not
in lieu of, any shares or options which may be granted under any other plan or
arrangement of the Company after the date of this Agreement, and (b) the
various stock agreements and stock option agreements, and any related
Stockholder Agreement (the “Stockholder Agreement”) between the Parties (such
agreements being hereinafter referred to 

 

2

 

                                                collectively as
the “Pre-existing Agreements”), all remain in full force and effect except as
otherwise provided herein. 
Notwithstanding the foregoing, to the extent that any provision
contained herein is inconsistent with the terms of any of the Pre-existing
Agreements, the terms of this Agreement shall be controlling.

4.             TERMINATION OF
EMPLOYMENT.  As indicated in
Subsection 1(b)(ii), the Employment Term may terminate prior to the date
specified in Subsection 1(b)(i) as follows:

(a)                                  The Employee’s
employment hereunder will terminate without further notice upon the death of
the Employee.

(b)                                 The Company may
terminate the Employee’s employment hereunder effective immediately upon giving
written notice of such termination for “Cause”. 
For these purposes, “Cause” shall mean the following:

                                                                                                                                                             (i)        Commission by the Employee (evidenced by
a conviction or written, voluntary and freely given confession) of a criminal
act constituting a felony;

                                                                                                                                                          (ii)        Commission by the Employee of a material
breach or material default of any of the Employee’s agreements or obligations
under any provision of this Agreement, including, without limitation, the
Employee’s agreements and obligations under Subsections 2(a) through 2(e) and
Sections 8 and 9 of this Agreement, which is not cured in all material
respects within thirty (30) days after the Chief Executive Officer or the
designee thereof gives written notice thereof to the Employee; or

                                                                                                                                                       (iii)        Commission by the Employee, when
carrying out the Employee’s duties under this Agreement, of acts or the
omission of any act, which both: 
(A) constitutes gross negligence or willful misconduct and
(B) results in material economic harm to the Company or has a materially
adverse effect on the Company’s operations, properties or business
relationships.

(c)                                  The Employee’s
employment hereunder may be terminated by the Company upon the Employee’s
disability, if the Employee is prevented from performing the Employee’s duties
hereunder by reason of physical or mental incapacity for a period of one
hundred eighty (180) consecutive days in any period of two consecutive fiscal
years of the Company, but the Employee shall be entitled to full compensation
and benefits hereunder until the close of such one hundred and eighty (180) day
period.

(d)                                 The Company may
terminate the Employee’s employment hereunder without Cause at any time upon
thirty (30) days written notice.

(e)                                  The Employee
may terminate employment hereunder effective immediately upon giving written
notice of such termination for “Good Reason”, as defined in Subsection 4(g)
below.

(f)                                    The Employee
may terminate employment hereunder without Good Reason at any time upon thirty
(30) days written notice.

(g)                                 For purposes of
this Agreement, “Good Reason” means the occurrence of (i) any reduction in
either the annual base salary of the Employee or the Target Annual Bonus
Percentage or maximum annual bonus percentage applicable to the Employee under
the Bonus Plan, (ii) any material reduction in the position, authority or
office of the Employee, (iii) any material reduction in the Employee’s
responsibilities or duties for the Company, (iv) any material adverse change or
reduction in the aggregate “Minimum Benefits,” as hereinafter defined, provided
to the Employee as of the date of this Agreement (provided that any material
reduction in such aggregate Minimum Benefits 

 

3

 

                                                that is
required by law or applies generally to all employees of the Company shall not
constitute “Good Reason” as defined hereunder), (v) any relocation of the
Employee’s principal place of work with the Company to a place more than
twenty-five (25) miles from the geographical center of Greensboro, North
Carolina, or (vi) the material breach or material default by the Company of any
of its agreements or obligations under any provision of this Agreement.  As used in this Subsection 4(g), an “adverse
change or material reduction” in the aggregate Minimum Benefits shall be deemed
to result from any reduction or any series of reductions which, in the
aggregate, exceeds five percent (5%) of the value of such aggregate Minimum
Benefits determined as of the date of this Agreement.  As used in this Subsection 4(g), Minimum
Benefits are life insurance, accidental death, long term disability, short term
disability, medical, dental, and vision benefits and the Company’s expense
reimbursement policy The Employee within ninety (90) days of obtaining notice
of Good Reason shall give written notice to the Company on or before the date
of termination of employment for Good Reason stating that the Employee is
terminating employment with the Company and specifying in detail the reasons
for such termination.  If the Company does
not object to such notice by notifying the Employee in writing within five (5)
days following the date of the Company’s receipt of the Employee’s notice of
termination, the Company shall be deemed to have agreed that such termination
was for Good Reason.  The parties agree
that “Good Reason” will not be deemed to have occurred merely because the
Company becomes a subsidiary or division of another entity provided the
Employee continues to serve in the position set forth in Section 2 above of
such subsidiary or division and such subsidiary or division is comparable in
size to the organization consisting of the Company and its subsidiaries.  The parties further agree that “Good Reason”
will be deemed to have occurred if the purchaser, in connection with the sale
or transfer of all or substantially all of the assets of the Company, does not
assume this Agreement in accordance with Section 11 hereof.  If the Employee does not give a written
termination notice to the Company within ninety (90) days of the Employee
obtaining notice of such Good Reason, then such Good Reason shall no longer
provide a basis for the employee’s termination of employment with the Company.

5.                                       SEVERANCE
COMPENSATION.  If the
Employee’s employment is terminated, the following severance provisions will
apply:

(a)                                  If the Employee’s
employment is terminated by the Company other than for Cause or is terminated
by the Employee for Good Reason, then, through the remaining Employment Term as
specified in Subsection 1(f) hereof, (such remaining Employment Term is
hereinafter referred to as the “Payment Term”) the Company shall:

                                                                                                                                                             (i)        continue to pay the Employee’s annual
base salary in the then prevailing amount and at the times specified in
Subsection 3(a) hereof, or if such annual base salary has decreased during the
one year period ending on the Employee’s termination of employment, at the
highest rate in effect during such one year period;

                                                                                                                                                          (ii)        continue the Employee’s participation in
the Bonus Plan as provided in Subsection 3(b) hereof provided that the Company
will:

(A)                              pay the Employee
a prorated bonus under the Bonus Plan for the partial year period ending on the
date of the Employee’s termination of employment calculated as if the Employee
had continued to be employed for the entire year except that the Employee’s
bonus percentage (calculated at the time and in the manner customary as of the
date of this Agreement, but disregarding the termination of employment of the
Employee) shall be applied to the Employee’s annual base salary payable in
accordance with Subsection 3(a) hereof 

 

4

 

                                                for the partial
year period ending on the Employee’s termination of employment; and

(B)                                thereafter,
during the remainder of the Payment Term, a bonus equal to the Employee’s
Target Annual Bonus Percentage, multiplied by the Employee’s annual base salary
in the amount specified in Subsection 5(a)(i) payable during the year (or
portion thereof) for which the bonus is being calculated; with such amounts
being payable when bonuses under the Bonus Plan are customarily payable, except
that the final bonus shall be payable with the final payment of the annual base
salary under Subsection 5(a)(i) hereof;

(iii)               continue in effect the medical and
dental coverage, and any life insurance protection (including life insurance
protection being paid for by the Employee), being provided to the Employee
immediately prior to the Employee’s termination of employment, or if any of
such benefits have decreased during the one year period ending on the Employee’s
termination of employment, at the highest level in effect during such one year
period; and

(iv)              pay for executive outplacement services for the Employee from
a nationally recognized executive outplacement firm at the level provided for
vice-presidents of comparable size corporations, provided that such
outplacement services will be provided for a one year period commencing on the
date of termination of employment regardless of the Payment Term.

(b)                                 If the Employee’s
employment hereunder terminates due to the Employee’s death, disability,
termination by the Company for Cause or termination by the Employee other than
for Good Reason, then no further compensation or benefits will be provided to
the Employee by the Company under this Agreement following the date of such
termination of employment other than payment of compensation earned to the date
of termination of employment but not yet paid. 
As more fully and generally provided in Section 15 hereof, this
Subsection 5(b) shall not be interpreted to deny the Employee any benefits to
which he may be entitled under any plan or arrangement of the Company
applicable to the Employee.  Likewise,
this Subsection 5(b) shall not be interpreted to entitle the Employee to a
bonus under the Bonus Plan following his termination of employment except as
provided in the Bonus Plan which requires employment on the last day of the
Company’s taxable year as a condition to receipt of a bonus thereunder for such
year except in the cases of death, disability or retirement at or after either
age 62 with ten years of service with the Company or age 65.

(c)                                  Notwithstanding
anything contained in this Agreement to the contrary, other than
Section 15 hereof, if the Employee breaches any of the Employee’s
obligations under Section 8 or 9 hereof, no further severance payments or
other benefits will be payable to the Employee under this Section 5.

6.             SEVERANCE PLAN.  It is the intention of the Parties that this
Agreement provide special benefits to the Employee.  If at any time the Company’s Executive
Severance Benefit Plan would provide better cash severance benefits to the
Employee than this Agreement, the Employee may elect to receive such better
cash severance benefits in lieu of the cash severance benefits provided under
Subsections 5(a)(i) and 5(a)(ii) this Agreement, while continuing to
receive any other benefits or coverages available under this Agreement.  If this Agreement would provide better cash
severance benefits to the Employee than the Company’s Executive Severance
Benefit Plan, the Employee shall receive the cash severance benefits under this
Agreement, as well as any other benefits or coverages available under this
Agreement.  In such case, the cash
severance benefits under this Agreement shall be in lieu of the cash severance
benefits payable under the Company’s Executive Severance Benefit Plan.

 

5

 

7.             PLAN AMENDMENTS.  To the extent any provisions of this
Agreement modify the terms of any existing plan, policy or arrangement
affecting the compensation or benefits of the Employee, as appropriate,
(a) such modification as set forth herein shall be deemed an amendment to
such plan, policy or arrangement as to the Employee, and both the Company and
the Employee hereby consent to such amendment, (b) the Company will
appropriately modify such plan, policy or arrangement to correspond to this
Agreement with respect to the Employee, or (c) the Company will provide an “Alternative
Benefit,” as defined in Section 13 hereof, to or on behalf of the Employee
in accordance with the provisions of such Section 13.

8.             CONFIDENTIAL
INFORMATION.  The Employee agrees
that the Employee will not, during the Employment Term or at any time
thereafter, either directly or indirectly, disclose or make known to any other
person, firm, or corporation any confidential information, trade secret or
proprietary information of the Company that the Employee may acquire in the
performance of the Employee’s duties hereunder (except in good faith in the
ordinary course of business for the Company to a person who will be advised by
the Employee to keep such information confidential) or make use of any of such
confidential information except in the performance of the Employee’s duties or
when required to do so by legal process, by any governmental agency having
supervisory authority over the business of the Company or by any administrative
or legislative body (including a committee thereof) that requires the Employee
to divulge, disclose or make accessible such information.  In the event that the Employee is so ordered,
the Employee shall so advise the Company in order to allow the Company the
opportunity to object to or otherwise resist such order.  Upon the termination of the Employee’s
employment with the Company, the Employee agrees to deliver forthwith to the
Company any and all proprietary literature, documents, correspondence, and
other proprietary materials and records furnished to or acquired by the
Employee during the course of such employment. In the event of a breach or
threatened breach of this Section 8 by the Employee, the Company will be
entitled to preliminary and permanent injunctive relief, without bond or
security, sufficient to enforce the provisions hereof and the Company will be
entitled to pursue such other remedies at law or in equity which it deems
appropriate.

9.             NON-COMPETITION.  In consideration of this Agreement, the
Employee agrees that, during the Employment Term, and for one year thereafter,
the Employee shall not act as a proprietor, investor, director, officer, employee,
substantial stockholder, consultant, or partner in any mattress retailer which
does not sell Sealy products or with any of the following mattress
manufacturing companies or their affiliates: Simmons, Serta, Spring Air,
Kingsdown, Tempurpedic and Select Comfort. The Employee understands that the
foregoing restrictions may limit the Employee’s ability to engage in certain
business pursuits during the period provided for above, but acknowledges that
the Employee will receive sufficiently higher remuneration and other benefits
from the Company hereunder than the Employee would otherwise receive to justify
such restriction.  The Employee
acknowledges that the Employee understands the effect of the provisions of this
Section 9, and that the Employee has had reasonable time to consider the
effect of these provisions, and that the Employee was encouraged to and had an
opportunity to consult an attorney with respect to these provisions.  The Company and the Employee consider the
restrictions contained in this Section 9 to be reasonable and
necessary.  Nevertheless, if any aspect
of these restrictions is found to be unreasonable or otherwise unenforceable by
a court of competent jurisdiction, the Parties intend for such restrictions to
be modified by such court so as to be reasonable and enforceable and, as so
modified by the court, to be fully enforced. 
In the event of a breach or threatened breach of this Section 9 by
the Employee, the Company will be entitled to preliminary and permanent
injunctive relief, without bond or security, sufficient to enforce the
provisions hereof and the Company will be entitled to pursue such other
remedies at law or in equity which it deems appropriate.

10.           NOTICES.  For purposes of this Agreement, all
communications provided for herein shall be in writing and shall be deemed to
have been duly given when hand delivered or mailed by United States registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:

(a)                                  If the notice
is to the Company:

Mr. David McIlquham

Chief Executive Officer

Sealy Corporation

One Office Parkway

Trinity, North Carolina 27370

 

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With a copy to:

Mr. Kenneth L. Walker

Senior Vice President, General Counsel & Secretary

Sealy Corporation

One Office Parkway

Trinity, NC  27370

 

 

(b)                                 If the notice
is to the Employee:

At the Employee Address

or to such other address as either party may have furnished to the
other in writing and in accordance herewith; except that notices of change of
address shall be effective only upon receipt.

11.           ASSIGNMENT;
BINDING EFFECT.  This Agreement shall
be binding upon and inure to the benefit of the parties to this Agreement and
their respective successors, heirs (in the case of the Employee) and permitted
assigns.  No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred in
connection with the sale or transfer of all or substantially all of the assets
of the Company, provided that the assignee or transferee is the successor to
all or substantially all of the assets of the Company and such assignee or
transferee expressly assumes the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law.  The Company further agrees that, in
the event of a sale or transfer of assets as described in the preceding
sentence, it shall be a condition precedent to the consummation of any such
transaction that the assignee or transferee expressly assumes the liabilities,
obligations and duties of the Company hereunder.  No rights or obligations of the Employee
under this Agreement may be assigned or transferred by the Employee other than
the Employee’s rights to compensation and benefits, which may be transferred
only by will or operation of law, except as provided in this Section 11.

The Employee shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefits payable hereunder following the Employee’s death
by giving the Company written notice thereof. 
In the absence of such a selection, any compensation or benefit payable
under this Agreement following the death of the Employee shall be payable to
the Employee’s spouse, or if such spouse shall not survive the Employee, to the
Employee’s estate.  In the event of the
Employee’s death or a judicial determination of his incompetence, reference in
this Agreement to the Employee shall be deemed, where appropriate, to refer to
the Employee’s beneficiary, estate or other legal representative.

12.           INVALID
PROVISIONS.  Any provision of this
Agreement that is prohibited or unenforceable shall be ineffective to the
extent, but only to the extent, of such prohibition or unenforceability without
invalidating the remaining portions hereof and such remaining portions of this
Agreement shall continue to be in full force and effect.  In the event that any provision of this
Agreement shall be determined to be invalid or unenforceable, the Parties will
negotiate in good faith to replace such provision with another provision that
will be valid or enforceable and that is as close as practicable to the
provisions held invalid or unenforceable.

13.           ALTERNATIVE
SATISFACTION OF COMPANY’S OBLIGATIONS. 
In the event this Agreement provides for payments or benefits to or on
behalf of the Employee which cannot be provided under the Company’s benefit
plans, policies or arrangements either because such plans, policies or
arrangements no longer exist or no longer provide such benefits or because
provision of such benefits to the Employee would adversely affect the tax
qualified or tax advantaged status of such plans, policies or arrangements for
the Employee or other participants therein, the Company may provide the
Employee with an “Alternative Benefit,” as defined in this Section 13, in
lieu thereof.  The Alternative Benefit is
a benefit or payment which places the Employee and the Employee’s dependents in
at least as good of an economic position as if the benefit promised by this
Agreement (a) were provided exactly as called for by this Agreement, and (b)
had the favorable economic, tax and legal characteristics customary for plans,
policies or arrangements of that type. 
Furthermore, if such adverse consequence 

 

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would affect the Employee or the Employee’s dependents, the Employee
shall have the right to require that the Company provide such an Alternative
Benefit.

14.           ENTIRE AGREEMENT,
MODIFICATION.  Subject to the
provisions of Section 15 hereof, this Agreement contains the entire
agreement between the Parties with respect to the employment of the Employee by
the Company and supersedes all prior and contemporaneous agreements,
representations, and understandings of the Parties, whether oral or
written.  No modification, amendment, or
waiver of any of the provisions of this Agreement shall be effective unless in
writing, specifically referring hereto, and signed by both Parties.

15.           NON-EXCLUSIVITY
OF RIGHTS.  Notwithstanding the
foregoing provisions of Section 14, nothing in this Agreement shall
prevent or limit the Employee’s continuing or future participation in any
benefit, bonus, incentive or other plan, program, policy or practice provided
by the Company for its executive officers, nor shall anything herein limit or
otherwise affect such rights as the Employee has or may have under any stock
option, restricted stock or other agreements with the Company or any of its
subsidiaries.  Amounts which the Employee
or the Employee’s dependents or beneficiaries are otherwise entitled to receive
under any such plan, policy, practice or program shall not be reduced by this
Agreement except as provided in Section 6 hereof with respect to payments
under the Executive Severance Benefit Plan if cash payments of annual base
salary are made hereunder.

16.           WAIVER OF BREACH.  The failure at any time to enforce any of the
provisions of this Agreement or to require performance by the other party of
any of the provisions of this Agreement shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement or
any part of this Agreement or the right of either party thereafter to enforce
each and every provision of this Agreement in accordance with the terms of this
Agreement.

17.           GOVERNING LAW.  This Agreement has been made in, and shall be
governed and construed in accordance with the laws of, the State of North Carolina.  The Parties agree that this Agreement is not
an “employee benefit plan” or part of an “employee benefit plan” which is
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended.

18.           TAX WITHHOLDING.  The Company may withhold from any amounts
payable under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.  Where withholding applies to Class A Shares,
the Company shall make cashless withholding available to the Employee.

19.           EXPENSE OF
ENFORCEMENT.  The Company shall
reimburse reasonable attorney fees and expenses incurred by the Employee to
enforce the provisions of this Agreement, even if his claims are not
successful, provided they are not ultimately determined by the court to be
frivolous.

20.           REPRESENTATION.  The Company represents and warrants that it
is fully authorized and empowered to enter into this Agreement and that the
performance of its obligations under this Agreement will not violate any
agreement between it and any other person, firm or organization.

21.           SUBSIDIARIES AND
AFFILIATES.  Notwithstanding any
contrary provision of this Agreement, to the extent it does not adversely
affect the Employee, the Company may provide the compensation and benefits to
which the Employee is entitled hereunder through one or more subsidiaries or
affiliates, including, without limitation, Sealy, Inc.

22.           NO MITIGATION OR
OFFSET.  In the event of any
termination of employment, the Employee shall be under no obligation to seek
other employment.  Amounts due the
Employee under this Agreement shall not be offset by any remuneration
attributable to any subsequent employment he may obtain.

 

23.           SOLE REMEDY.  The Parties agree that the remedies of each
against the other for breach of this Agreement shall be limited to enforcement
of this Agreement and recovery of the amounts and remedies provided for
herein.  The Parties, however, further
agree that such limitation shall not prevent either Party from proceeding
against the other to recover for a claim other than under this Agreement.

 

 

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IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement as of the day and year first above written.

 

 

	
   

  	
   

  	
  SEALY CORPORATION

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Jeffrey C. Claypool

  	
   

  
	
   

  	
   

  	
   

  	
  Senior Vice President,
  Human Resources

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  “EMPLOYEE”

  	
   

  

 

 

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