Document:

Exhibit 10.2

 

MANAGEMENT AGREEMENT

 

This MANAGEMENT AGREEMENT (this “Agreement”) is entered into as
of October 31, 2006 by and among
(i) Michaels Stores, Inc., a Delaware corporation (the “Company”), (ii)
Bain Capital Partners, LLC (“Bain”), and (iii) Blackstone Management
Partners V LLC (“Blackstone” and together with Bain, the “Managers”).

 

RECITALS

 

WHEREAS, Bain Paste Mergerco, Inc., a Delaware corporation (“Bain
MergerCo”), Blackstone Paste Mergerco, Inc., a Delaware corporation (“Blackstone
MergerCo” and, together with Bain MergerCo, “MergerCos”), Bain Paste
Finco, LLC, a Delaware limited liability company (“Bain FinCo”),
Blackstone Paste Finco, LLC, a Delaware limited liability company (“Blackstone
FinCo” and, together with Bain FinCo, “FinCos”; MergerCos and
FinCos, collectively, the “Sponsor Entities”) have been formed for the
purpose of effectuating a leveraged recapitalization transaction (the “Transaction”)
involving the Company pursuant to that certain Agreement and Plan of Merger,
dated as of June 30, 2006 (as amended, the “Merger Agreement”), among
the Sponsor Entities and the Company;

 

WHEREAS, it is contemplated that on or about the date hereof, as part
of the Transaction, the MergerCos will be merged (the “Merger”) with and
into the Company on the terms and subject to the conditions of the Merger
Agreement;

 

WHEREAS, in connection with the Merger and related transactions, the
Managers provided advice, analysis and assistance, including without limitation
with respect to due diligence investigations and the structuring and
negotiation of senior and junior debt facilities, management employment
arrangements and other matters (the “Financial Advisory Services”); and

 

WHEREAS, the Company desires to retain the Managers to provide
management, consulting and financial and other advisory services (“Services”)
to the Company, and the Managers are willing to provide such services on the
terms set forth below.

 

AGREEMENT

 

NOW THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:

 

1.                                         Services.
Each of the Managers hereby agrees that it will provide the following Services
to the Company:

 

(a)                                  advice in connection
with the negotiation and consummation of agreements, contracts, documents and
instruments necessary to provide the Company with financing on terms and
conditions satisfactory to the Company;

 

(b)                                 financial, managerial
and operational advice in connection with day-to-day operations, including,
without limitation, advice with respect to the development and 

 

 

implementation of strategies for improving the operating, marketing and
financial performance of the Company;

 

(c)                                  advice in connection
with financing, acquisition, disposition, merger, business combination and
change of control transactions involving the Company (however structured); and

 

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

 

Each of the Managers will devote, in its discretion, such time and
efforts to the performance of services contemplated hereby as such Manager
deems reasonably necessary or appropriate; provided,
however, that no minimum number of hours is required to be devoted
by the Managers on a weekly, monthly, annual or other basis. The Company
acknowledges that the Managers’ services are not exclusive to the Company and
that each Manager will render similar services to other persons and entities. The
Managers and the Company understand that the Company may, at times, engage one
or more investment bankers or financial advisers to provide services in
addition to, but not in lieu of, services provided by the Managers under this
Agreement. In providing services to the Company, each Manager will act as an
independent contractor and it is expressly understood and agreed that this
Agreement is not intended to create, and does not create, any partnership,
agency, joint venture or similar relationship and that no party has the right
or ability to contract for or on behalf of any other party or to effect any
transaction for the account of any other party.

 

2.                                       Payment
of Fees.

 

(a)                                  The Company will pay
to the Managers (or such affiliates as they may respectively designate), in
consideration of the Managers providing the Financial Advisory Services, an
aggregate transaction fee (the “Transaction Fee”) in the amount of
$60,000,000, such fee being payable on the effective date of the Merger (the “Closing
Date”). The Transaction Fee shall be divided between the Managers as
follows:

 

	
  Bain:

  	
   

  	
  $

  	
  30,000,000

  	
   

  
	
  Blackstone:

  	
   

  	
  $

  	
  30,000,000

  	
   

  

 

(b)                                 During the Term, the
Company will pay to the Managers (or such affiliates as they may respectively
designate), an aggregate annual periodic fee (the “Periodic Fee”) of
$12,000,000 in exchange for the ongoing Services provided by the Managers under
this Agreement, such fee being payable by the Company quarterly in advance on
or before the start of each calendar quarter; provided,
however, that the Company will pay the Periodic Fee for the period
from the date hereof through March 31, 2007 on the Closing Date. The Periodic
Fee will be prorated for any partial period of less than three months, and will
be divided between the Managers in proportion to the Services that they
provide, which Services will be provided pro rata in proportion to

 

2

 

the respective direct and indirect ownership interests (i.e. relative beneficial share ownership)
in the Company held at the time by the investment funds affiliated with each
such Manager (provided that, for purposes of this Agreement, (a) Bain
Capital Integral Investors 2006, LLC and BCIP TCV, LLC and their respective
Affiliated Funds will be deemed to be investment funds affiliated with Bain;
and (b) Blackstone Capital Partners V L.P., BCP V-S L.P., Blackstone
Family Investment Partnership V L.P., Blackstone Family Investment Partnership
V-A L.P., Blackstone Participation Partnership V L.P. and BCP V Co-Investors
L.P. and their respective Affiliated Funds will be deemed to be investment
funds affiliated with Blackstone). In this Agreement, the term “Affiliated
Funds” shall mean, with respect to any specified investment fund, any other
investment fund that directly or indirectly controls, is controlled by or is
under common control with such specified fund or that has the same general
partner or primary investment advisor as such specified fund (or a general
partner or primary investment advisor that controls, is controlled by or is
under common control with the general partner or primary investment advisor of
such specified fund). Each Manager may elect in its sole discretion to defer the
receipt of all or a portion of its portion of the Periodic Fee.

 

(c)                                  During the Term, the
Managers will advise the Company in connection with financing, acquisition,
disposition and change of control transactions involving the Company or any of
its direct or indirect subsidiaries (however structured), and the Company will
pay to the Managers (or such affiliates as they may respectively designate) an
aggregate fee (each a “Subsequent Fee”) in connection with each such
transaction equal to one percent (1%) of the gross transaction value of such
transaction. In the case of an Initial Public Offering or a Change of Control
(as defined in the Stockholders Agreement, dated on or about the date hereof,
among the Company and its stockholders (the “Stockholders Agreement”)),
the Company shall pay, in addition to the fees payable above, a lump sum amount
equal to the net present value (using a discount rate equal to the then
prevailing yield on U.S. Treasury Securities of like maturity) of the Periodic
Fees that would have been payable to such Managers with respect to the period
from the date of such Initial Public Offering or Change of Control until the
tenth anniversary of the closing of the Merger. Each such fee to be due and
payable at the closing of such transaction and in the case of financing
transactions, whether or not any such financing is actually committed or drawn
upon. Each such fee will be divided between the Managers in proportion to the
Services that they provide, which Services will be provided pro rata in
proportion to the respective direct and indirect ownership interests (i.e. relative beneficial share ownership)
in the Company held at the time by the investment funds affiliated with each
such Manager.

 

Each payment made pursuant to this Section 2 will be paid by wire
transfer of immediately available federal funds to the accounts specified on
Schedule 1 hereto, or to such other account(s) as the Managers may specify
to the Company in writing prior to such payment.

 

3.                                       Term.
This Agreement will continue in full force and effect until December 31, 2016; provided that this Agreement shall be
automatically extended each December 31 thereafter for an additional year
unless the Company or both of the Managers provide written notice of 

 

3

 

their desire not to automatically extend the term of this Agreement to
the other parties hereto at least 90 days prior to such December 31; and provided further, however, that (a) the
Managers may, if both agree to do so, cause this Agreement to terminate at any
time and (b) this Agreement will terminate automatically immediately prior
to an Initial Public Offering or a Change of Control (each as defined in the
Stockholder Agreement) unless the Company and the Managers determine otherwise
(the period on and after the date hereof through the termination hereof being
referred to herein as the “Term”); and provided
further, that each of (x) Sections 4, 5 and 8 (whether in
respect of or relating to services rendered during or after the Term) will all
survive any termination of this Agreement to the maximum extent permitted under
applicable law and (y) any and all accrued and unpaid obligations of the
Company owed under Section 2 will be paid promptly upon any
termination of this Agreement. At the end of the Term, all obligations of the
Managers under this Agreement will terminate and any subsequent services
rendered by the Managers to the Company will be separately compensated.

 

4.                                       Expenses; Indemnification.

 

(a)                                  Expenses. The Company will pay on demand all Reimbursable Expenses. As used
herein, “Reimbursable Expenses” means all (i) expenses incurred or
accrued prior to the Closing Date by the Managers or their affiliates in
connection with this Agreement, the Transaction or
any related transactions, consisting of their respective out-of-pocket expenses
for travel and other incidentals in connection with such transactions
(including, without limitation, all air travel (by first class on a commercial
airline or by charter, as determined by the Managers) and other travel related
expenses) and the out-of-pocket expenses and the fees and charges of (A) Ropes
& Gray LLP, counsel, (B) Deloitte & Touche LLP, accounting firm
(C) Bain & Company, industry consultants, (D) Marsh, insurance
specialists, and (E) any other consultants or advisors, appraisal or valuation
firms, information or exchange agents, or other entities retained by the
Managers in connection with such transactions, (ii) reasonable
out-of-pocket expenses incurred from and after the Closing Date relating to
their affiliated funds’ investment in, the operations of, or the services
provided by the Managers to, the Company or any of their affiliates from time
to time (including, without limitation, all air travel (by first class on a
commercial airline or by charter, as determined by the Managing Directors of
the Managers) and other reasonable travel related expenses),
(iii) reasonable out-of-pocket legal expenses incurred by the Managers or
their affiliates from and after Closing Date in connection with the enforcement
of rights or taking of actions under this Agreement, under the Company’s
certificate of incorporation and bylaws, or under any subscription agreements,
stockholders agreements, registration rights agreements, voting agreements or
similar agreements entered into with the Company in connection with investments
in the Company and/or its subsidiaries (subject to any applicable limitations
on expense reimbursement rights expressly set forth in such agreements) and
(iv) expenses incurred from and after the Closing Date by the Managers and
their affiliates which the Managers agree are properly allocable to the Company
under this Agreement.

 

(b)                                 Indemnity and Liability. The Company hereby indemnifies and agrees
to exonerate and hold each of the Managers, each Affiliated Fund, and each of
their 

 

4

 

respective
former, current or future, direct or indirect directors, officers, employees,
agents, advisors or affiliates, each former, current or future, direct or
indirect holder of any equity interests or securities of the Manager or any
Affiliated Fund (whether such holder is a limited or general partner, member,
stockholder or otherwise), each former, current or future assignee of the Manager
or any Affiliated Fund and each former, current or future director, officer,
employee, agent, advisor, general or limited partner, manager, member,
stockholder, affiliate, controlling person, representative or assignee of any
of the foregoing (each such person or entity, a “Related Person”)
(collectively, the “Indemnitees”), each of whom is an intended third
party beneficiary of this Agreement, free and harmless from and against any and
all actions, causes of action, suits, claims, liabilities, damages and costs
and expenses in connection therewith (including reasonable attorneys’ fees and
expenses) incurred by the Indemnitees or any of them before or after the date
of this Agreement (collectively, the “Indemnified Liabilities”), as a
result of, arising out of, or in any way relating to (i) this Agreement, the
Transaction, any transaction to which the Company is a party, or any other
circumstances with respect to the Company or (ii) operations of, or
services provided by the Managers to, the Company, or any of their affiliates
from time to time (including but not limited to any indemnification obligations
assumed or incurred by any Indemnitee to or on behalf of the Company, or any of
its accountants or other representatives, agents or affiliates) except for any
such Indemnified Liabilities arising from such Indemnitee’s gross negligence or
willful misconduct. If and to the extent that the foregoing undertaking may be
unavailable or unenforceable for any reason, the Company hereby agrees to make
the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities that is permissible under applicable law. For purposes
of this Section 4(b), “gross negligence or willful misconduct” will be
deemed to have occurred only if so found in a final non-appealable judgment of
a court of competent jurisdiction to such effect, in which case to the extent
any of the foregoing limitations is so determined to apply to any Indemnitee as
to any previously advanced indemnity payments made by the Company, then such
payments shall be promptly repaid by such Indemnitee to the Company. The rights
of any Indemnitee to indemnification hereunder will be in addition to any other
rights any such person may have under any other agreement or instrument
referenced above or any other agreement or instrument to which such Indemnitee
is or becomes a party or is or otherwise becomes a beneficiary or under law or
regulation. If the Indemnitees related to a Manager are similarly situated with
respect to their interests in connection with a matter that may be an
Indemnified Liability and such Indemnified Liability is not based on a
Third-Party Claim, the Indemnitees may enforce their rights pursuant to this
Section 4(b) with respect to such matter only with the consent of such Manager.
In this Agreement, “Person” means any individual or corporation,
association, partnership, limited liability company, joint venture, joint stock
or other company, business trust, trust, organization, or other entity of any
kind. A “Third-Party Claim” means any (i) claim brought by a Person
other than the Company, the Managers or any indemnified Person related to a
Manager and (ii) any derivative claim brought in the name of the Company that
is initiated by a Person other than a Manager or any indemnified Person related
to a Manager.

 

5

 

5.                                       Disclaimer and Limitation of Liability;
Opportunities.

 

(a)                                  Disclaimer; Standard of Care. None of the Managers make any
representations or warranties, express or implied, in respect of the services
to be provided by any Manager hereunder. In no event will any of the Managers
or any of the Indemnitees be liable to the Company or any of its affiliates for
any act, alleged act, omission or alleged omission that does not constitute
gross negligence or willful misconduct of such Manager as determined by a
final, non-appealable determination of a court of competent jurisdiction.

 

(b)                                 Freedom to Pursue Opportunities. In recognition that the Managers and their
respective Indemnitees currently have, and will in the future have or will
consider acquiring, investments in numerous companies with respect to which the
Managers or their respective Indemnitees may serve as an advisor, a director or
in some other capacity, and in recognition that the Managers and their
respective Indemnitees have myriad duties to various investors and partners,
and in anticipation that the Company, on the one hand and the Managers (or one
or more affiliates, associated investment funds or portfolio companies, or
clients of the Managers), on the other hand, may engage in the same or similar
activities or lines of business and have an interest in the same areas of
corporate opportunities, and in recognition of the benefits to be derived by
the Company hereunder and in recognition of the difficulties that may confront
any advisor who desires and endeavors fully to satisfy such advisor’s duties in
determining the full scope of such duties in any particular situation, the
provisions of this Section 5(b) are set forth to regulate, define and guide the
conduct of certain affairs of the Company as they may involve the Managers. Except
as the Managers may otherwise agree in writing after the date hereof:

 

(i)             The
Managers and their respective Indemnitees will have the right:  (A) to directly or indirectly engage in
any business (including, without limitation, any business activities or lines
of business that are the same as or similar to those pursued by, or competitive
with, the Company and its subsidiaries) or invest, own or deal in securities of
any other Person so engaged in any business, (B) to directly or indirectly do
business with any client or customer of the Company and its subsidiaries, (C)
to take any other action that the Managers believes in good faith is necessary
to or appropriate to fulfill its obligations as described in the first sentence
of this Section 5(b), and (D) not to present potential transactions, matters or
business opportunities to the Company or any of their subsidiaries, and to pursue,
directly or indirectly, any such opportunity for itself, and to direct any such
opportunity to another person.

 

(ii)          The
Managers and their respective Indemnitees will have no duty (contractual or
otherwise) to communicate or present any corporate opportunities to the Company
or any of its affiliates or to refrain from any actions specified in Section
5(b)(i), and the Company, on its own behalf and on behalf of its affiliates,
hereby renounce and waive any right to require the Managers or any of their Indemnitees
to act in a manner inconsistent with the provisions of this Section 5(b).

 

6

 

(iii)       The
Managers and their Indemnitees will not be liable to the Company or any of its
affiliates for breach of any duty (contractual or otherwise) by reason of any
activities or omissions of the types referred to in this Section 5(b) or
of any such person’s participation therein.

 

(c)                                  Limitation of Liability. In no event will the Managers or any of their
Indemnitees be liable to the Company or any of its affiliates for any indirect,
special, incidental or consequential damages, including, without limitation,
lost profits or savings, whether or not such damages are foreseeable, or for
any third party claims (whether based in contract, tort or otherwise), relating
to the services to be provided by the Managers hereunder.

 

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

 

7.                                      Amendments and Waivers. No amendment or waiver of any term,
provision or condition of this Agreement will be effective, unless in writing
and executed by the Managers and the Company (or their respective successors); provided, that a Manager may individually agree to waive or
reduce any fee to which it is entitled pursuant to this Agreement, and, unless
otherwise directed by such Manager, such waived portion shall revert to the
Company. No waiver on any one occasion will extend to or effect or be construed
as a waiver of any right or remedy on any future occasion. No course of dealing
of any person nor any delay or omission in exercising any right or remedy will
constitute an amendment of this Agreement or a waiver of any right or remedy of
any party hereto.

 

8.                                         Governing Law; Jurisdiction.

 

(a)                                  Choice of Law. This Agreement and all matters arising
under or related to this Agreement will be governed by and construed in
accordance with the laws of the State of New York.

 

(b)                                 Consent to Jurisdiction. Each of the parties agrees that all
actions, suits or proceedings arising out of, based upon or relating to this
Agreement or the subject matter hereof will be brought and maintained
exclusively in the federal and state courts of the State of New York, City of
New York, County of New York. Each of the parties hereto by execution hereof
(i) hereby irrevocably submits to the jurisdiction of the federal and
state courts in the State of New York, City of New York, County of New York for
the purpose of any action, suit or proceeding arising out of or based upon this
Agreement or the subject matter hereof and (ii) hereby waives to the extent not
prohibited by applicable law, and agrees not to assert, by way of motion, as a
defense or otherwise, in any such action, suit or proceeding, any claim 

 

7

 

that
it is not subject personally to the jurisdiction of the above-named courts,
that it is immune from extraterritorial injunctive relief or other injunctive
relief, that its property is exempt or immune from attachment or execution,
that any such action, suit or proceeding may not be brought or maintained in
one of the above-named courts, that any such action, suit or proceeding brought
or maintained in one of the above-named courts should be dismissed on grounds
of forum  non  conveniens, should be transferred to any
court other than one of the above-named courts, should be stayed by virtue of
the pendency of any other action, suit or proceeding in any court other than
one of the above-named courts, or that this Agreement or the subject matter
hereof may not be enforced in or by any of the above-named courts. Notwithstanding
the foregoing, to the extent that any party hereto is or becomes a party in any
litigation in connection with which it may assert indemnification rights set
forth in this Agreement, the court in which such litigation is being heard will
be deemed to be included in clause (i) above. Each of the parties hereto hereby
consents to service of process in any such suit, action or proceeding in any
manner permitted by the laws of the State of New York, agrees that service of
process by registered or certified mail, return receipt requested, at the
address specified in or pursuant to Section 10 is reasonably calculated to give
actual notice and waives and agrees not to assert by way of motion, as a
defense or otherwise, in any such action, suit or proceeding any claim that
service of process made in accordance with Section 10 does not constitute good
and sufficient service of process. The provisions of this Section 8 will not
restrict the ability of any party to enforce in any court any judgment obtained
in a court included in clause (i) above.

 

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

 

9.                                         Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes any prior communication or agreement with respect thereto.

 

10.                                   Notice. All notices, demands, and communications required or permitted under
this Agreement will be in writing and will be effective if served upon such
other party and such other party’s copied persons as specified below to the
address set forth for it below (or to such other address as such party will
have specified by notice to each other party) if (i) delivered personally, (ii)
sent and received by facsimile or (iii) sent by certified or registered mail or
by 

 

8

 

Federal Express, DHL, UPS or
any other comparably reputable overnight courier service, postage prepaid, to
the appropriate address as follows:

 

If
to the Company, to it at:

 

Michaels Stores, Inc.

8000 Bent Branch Drive

Irving, TX 75261

Facsimile: 
(972) 409-1901

Attention:                 General Counsel

Chief
Financial Officer

 

with
copies to:

 

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

Facsimile: 
(617) 951-7050

Attention:                 David C. Chapin

William
M. Shields

R.
Newcomb Stillwell

 

If
to Bain, to:

 

Bain
Capital Partners, LLC

111
Huntington Avenue

Boston,
MA 02199

Facsimile:  (617) 516-2010

Attention:  Matthew S. Levin

 

with
copies to:

 

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

Facsimile: 
(617) 951-7050

Attention:                 David C. Chapin

William
M. Shields

R.
Newcomb Stillwell

 

If
to Blackstone, to:

 

Blackstone
Management Partners V LLC

345
Park Avenue, 31st Floor

New York, NY 10154

Facsimile:  (212) 583-5712

Attention:  Robert L. Friedman

 

9

 

with
copies to:

 

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

Facsimile: 
(617) 951-7050

Attention:                 David C. Chapin

William
M. Shields

R.
Newcomb Stillwell

 

Unless
otherwise specified herein, such notices or other communications will be deemed
effective, (a) on the date received, if personally delivered or sent by
facsimile during normal business hours, (b) on the business day after being
received if sent by facsimile other than during normal business hours, (c) one
business day after being sent by Federal Express, DHL or UPS or other
comparably reputable delivery service and (d) five business days after being
sent by registered or certified mail. Each of the parties hereto shall be
entitled to specify a different address by giving notice as aforesaid to each
of the other parties hereto.

 

11.                                   Severability. If in any judicial or arbitral proceedings
a court or arbitrator refuses to enforce any
provision of this Agreement, then such unenforceable provision will be deemed
eliminated from this Agreement for the purpose of such proceedings to the
extent necessary to permit the remaining provisions to be enforced, and the
parties hereto shall negotiate in good faith to seek to enter into substitute
provisions incorporating, as nearly as possible, the purpose, intent and effect
of such unenforceable provision. To the full extent, however, that the provisions
of any applicable law may be waived, they are hereby waived to the end that
this Agreement be deemed to be a valid and binding agreement enforceable in
accordance with its terms, and in the event that any provision hereof is found
to be invalid or unenforceable, such provision will be construed by limiting it
so as to be valid and enforceable to the maximum extent consistent with and
possible under applicable law.

 

12.                                   Miscellaneous

 

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

 

(b)                                 Interpretation. The headings contained in this Agreement
are for convenience of reference only and will not in any way affect the
meaning or interpretation hereof. As used herein the word “including” shall be
deemed to mean “including without limitation”. This Agreement reflects the
mutual intent of the parties and no rule of construction against the drafting
party shall apply.

 

[The remainder of this page is intentionally left
blank. Signatures follow.]

 

10

 

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its
behalf as an instrument under seal as of the date first above written by its
officer or representative thereunto duly authorized.

 

	
  THE
  COMPANY:

  	
  MICHAELS
  STORES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   /s/
  Jeffrey N. Boyer

  	
   

  
	
   

  	
  Name:
  Jeffrey N. Boyer

  
	
   

  	
  Title:   President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  BAIN:

  	
  BAIN
  CAPITAL PARTNERS, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/
  Matthew S. Levin

  	
   

  
	
   

  	
  Name:
  Matthew S. Levin

  
	
   

  	
  Title:
  Managing Director

  
	
   

  	
   

  
	
   

  	
   

  
	
  BLACKSTONE:

  	
  BLACKSTONE
  MANAGEMENT PARTNERS V LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/
  Michael Chae

  	
   

  
	
   

  	
  Name:
  Michael Chae

  
	
   

  	
  Title:
  Managing Director

  

 

[Management Agreement]

 

 

Schedule 1 to

Management Agreement

 

Wire Transfer Instructions for

Bain Capital Partners, LLC

 

	
  Bank:

  	
  Citibank,
  NA-New York

  
	
  ABA
  #:

  	
  021-000-089

  
	
  For:

  	
  Brown
  Brothers Harriman-Boston

  
	
  Acct
  #:

  	
  09250276

  
	
  To
  Further Credit:

  	
  Bain
  Capital Partners, LLC

  
	
  Acct
  #:

  	
  612541-3

  

 

Wire Transfer Instructions for

Blackstone Management Partners V LLC

 

	
  Bank:

  	
  JP
  Morgan Chase

  
	
  ABA
  #:

  	
  021-000-021

  
	
  For:

  	
  Blackstone
  Management Partners V LLC

  
	
  Acct
  #:

  	
  066-650739

  

 

1Exhibit 10.3

 

MANAGEMENT AGREEMENT

 

This MANAGEMENT AGREEMENT (this “Agreement”) is entered into as
of October 31, 2006 by and among
Michaels Stores, Inc., a Delaware corporation (the “Company”) and
Highfields Capital Management LP (the “Manager”).

 

RECITALS

 

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

 

AGREEMENT

 

NOW THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:

 

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

 

(a)                                  advice in connection
with the negotiation and consummation of agreements, contracts, documents and
instruments necessary to provide the Company with financing on terms and
conditions satisfactory to the Company;

 

(b)                                 financial, managerial
and operational advice in connection with day-to-day operations, including,
without limitation, advice with respect to the development and implementation
of strategies for improving the operating, marketing and financial performance
of the Company;

 

(c)                                  advice in connection
with financing, acquisition, disposition, merger, business combination and
change of control transactions involving the Company (however structured); and

 

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

 

The Manager will devote such time and efforts to the performance of
services contemplated hereby as such Manager, in its discretion, deems
reasonably necessary or appropriate; provided,
however, that no minimum number of hours is required to be devoted
by the Manager on a weekly, monthly, annual or other basis. The Company
acknowledges that the Manager’s services are not exclusive to the Company and
that the Manager will render similar services to other persons and entities. The
Manager and the Company understand that the Company may, at times, engage one
or more investment bankers or financial advisers to provide services in
addition to, but not in lieu of, services provided by the Manager under this
Agreement. In providing services to the Company, the Manager will act as an
independent 

 

 

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

 

2.                                       Payment
of Fees.

 

(a)                                  During the Term, the
Company will pay to the Manager (or such affiliates as it may designate), an
aggregate annual periodic fee (the “Periodic Fee”) of $1,000,000 in
exchange for the ongoing Services provided by the Manager under this Agreement,
such fee being payable by the Company quarterly in advance on or before the
start of each calendar quarter; provided,
however, that the Company will pay the Periodic Fee for the period
from the date hereof through March 31, 2007 on the date hereof. The Periodic
Fee will be prorated for any partial period of less than three months. If at
any time during the Term all or a portion of the periodic management fees owed
by the Company under any management agreement similar to this Agreement (a “Similar
Agreement”), including the Management Agreement dated the date hereof
between the Company, Bain Capital Partners, LLC and Blackstone Management
Partners V, L.L.C., are deferred, then the Company may elect in its sole
discretion to defer the payment to the Manager of up to the same percentage of
the Periodic Fee as the percentage of such other periodic management fees that
have been deferred and for up to the same length of time.

 

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

 

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

 

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

 

2

 

for an additional year unless
the Company or the Manager provides written notice of its desire not to
automatically extend the term of this Agreement to the other party hereto at
least 90 days prior to such December 31; and provided
further, however, that (a) the Company may cause this Agreement to
terminate at any time, (b) this Agreement will terminate automatically
immediately prior to an Initial Public Offering or a Change of Control (each as
defined in the Stockholder Agreement) unless the Company and the Manager
determine otherwise and (c) the Company or the Manager may terminate this
Agreement at any time in the event of a material breach by the other party that
has not been cured within 30 days of the provision of notice thereof (the
period on and after the date hereof through the termination hereof being
referred to herein as the “Term”); and provided
further, that each of (x) Sections 4, 5 and 8 (whether in respect of
or relating to services rendered during or after the Term) will all survive any
termination of this Agreement to the maximum extent permitted under applicable
law and (y) any and all accrued and unpaid obligations of the Company owed
under Section 2 will be paid promptly upon any termination of this Agreement. At
the end of the Term, all obligations of the Manager under this Agreement will
terminate and any subsequent services rendered by the Manager to the Company
will be separately compensated.

 

4.                                       Expenses;
Indemnification.

 

(a)                                  Expenses. The
Company will pay on demand all Reimbursable Expenses. As used herein, “Reimbursable
Expenses” means all (i) expenses incurred or accrued by the Manager or
its affiliates in connection with this Agreement out-of-pocket expenses and the
fees and charges of Goodwin Procter LLP, counsel, (ii) reasonable
out-of-pocket expenses incurred from and after the date hereof relating to its
affiliated funds’ investment in, the operations of, or the services provided by
the Manager to, the Company or any of their affiliates from time to time
(including, without limitation, all air travel (by first class on a commercial
airline or by charter, as determined by the Manager) and other travel related
expenses), and (iii) reasonable out-of-pocket legal expenses incurred by
the Manager or its affiliates from and after Closing Date in connection with
the enforcement of rights or taking of actions under this Agreement, under the
Company’s certificate of incorporation and bylaws, or under any subscription
agreements, stockholders agreements, registration rights agreements, voting
agreements or similar agreements entered into with the Company in connection
with investments in the Company and/or its subsidiaries (subject to any
applicable limitations on expense reimbursement rights expressly set forth in
such agreements).

 

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

 

3

 

of this Agreement, free and harmless from and against any and all
actions, causes of action, suits, claims, liabilities, damages and costs and
expenses in connection therewith (including reasonable attorneys’ fees and
expenses) incurred by the Indemnitees or any of them before or after the date
of this Agreement (collectively, the “Indemnified Liabilities”), as a
result of, arising out of, or in any way relating to (i) this Agreement, any
transaction to which the Company is a party, or any other circumstances with
respect to the Company or (ii) operations of, or services provided by the
Manager to, the Company, or any of their affiliates from time to time
(including but not limited to any indemnification obligations assumed or
incurred by any Indemnitee to or on behalf of the Company, or any of its
accountants or other representatives, agents or affiliates) except for any such
Indemnified Liabilities arising from such Indemnitee’s gross negligence or
willful misconduct. If and to the extent that the foregoing undertaking may be
unavailable or unenforceable for any reason, the Company hereby agrees to make
the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities that is permissible under applicable law. For purposes
of this Section 4(b), “gross negligence or willful misconduct” will be
deemed to have occurred only if so found in a final non-appealable judgment of
a court of competent jurisdiction to such effect, in which case to the extent
any of the foregoing limitations is so determined to apply to any Indemnitee as
to any previously advanced indemnity payments made by the Company, then such
payments shall be promptly repaid by such Indemnitee to the Company. The rights
of any Indemnitee to indemnification hereunder will be in addition to any other
rights any such person may have under any other agreement or instrument
referenced above or any other agreement or instrument to which such Indemnitee
is or becomes a party or is or otherwise becomes a beneficiary or under law or
regulation. If the Indemnitees related to the Manager are similarly situated
with respect to their interests in connection with a matter that may be an
Indemnified Liability and such Indemnified Liability is not based on a
Third-Party Claim, the Indemnitees may enforce their rights pursuant to this
Section 4(b) with respect to such matter only with the consent of the Manager. In
this Agreement, “Person” means any individual or corporation,
association, partnership, limited liability company, joint venture, joint stock
or other company, business trust, trust, organization, or other entity of any
kind. A “Third-Party Claim” means any (i) claim brought by a Person
other than the Company, the Manager or any indemnified Person related to the
Manager and (ii) any derivative claim brought in the name of the Company that
is initiated by a Person other than the Manager or any indemnified Person
related to the Manager.

 

5.                                       Disclaimer
and Limitation of Liability; Opportunities.

 

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

 

4

 

(b)                                 Freedom to Pursue
Opportunities. In recognition that the Manager and its respective Indemnitees
currently have, and will in the future have or will consider acquiring,
investments in numerous companies with respect to which the Manager or its
respective Indemnitees may serve as an advisor, a director or in some other
capacity, and in recognition that the Manager and its respective Indemnitees
have myriad duties to various investors and partners, and in anticipation that
the Company, on the one hand and the Manager (or one or more affiliates,
associated investment funds or portfolio companies, or clients of the
Managers), on the other hand, may engage in the same or similar activities or
lines of business and have an interest in the same areas of corporate
opportunities, and in recognition of the benefits to be derived by the Company
hereunder and in recognition of the difficulties that may confront any advisor
who desires and endeavors fully to satisfy such advisor’s duties in determining
the full scope of such duties in any particular situation, the provisions of
this Section 5(b) are set forth to
regulate, define and guide the conduct of certain affairs of the Company as
they may involve the Manager. Except as the Manager may otherwise agree in
writing after the date hereof:

 

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

 

(ii)          The Manager and its respective Indemnitees
will have no duty (contractual or otherwise) to communicate or present any
corporate opportunities to the Company or any of its affiliates or to refrain
from any actions specified in Section 5(b)(i), and the Company, on its own
behalf and on behalf of its affiliates, hereby renounce and waive any right to
require the Manager or any of its Indemnitees to act in a manner inconsistent
with the provisions of this Section 5(b).

 

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

 

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

 

5

 

(whether
based in contract, tort or otherwise), relating to the services to be provided
by the Manager hereunder.

 

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

 

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

 

8.                                         Governing Law; Jurisdiction.

 

(a)                                  Choice of Law. This Agreement and all matters arising
under or related to this Agreement will be governed by and construed in
accordance with the laws of the State of New York.

 

(b)                                 Consent to Jurisdiction. Each of the parties agrees that all
actions, suits or proceedings arising out of, based upon or relating to this
Agreement or the subject matter hereof will be brought and maintained
exclusively in the federal and state courts of the State of New York, City of
New York, County of New York. Each of the parties hereto by execution hereof
(i) hereby irrevocably submits to the jurisdiction of the federal and
state courts in the State of New York, City of New York, County of New York for
the purpose of any action, suit or proceeding arising out of or based upon this
Agreement or the subject matter hereof and (ii) hereby waives to the extent not
prohibited by applicable law, and agrees not to assert, by way of motion, as a
defense or otherwise, in any such action, suit or proceeding, any claim that it
is not subject personally to the jurisdiction of the above-named courts, that
it is immune from extraterritorial injunctive relief or other injunctive
relief, that its property is exempt or immune from attachment or execution, that
any such action, suit or proceeding may not be brought or maintained in one of
the above-named courts, that any such action, suit or proceeding brought or
maintained in one of the above-named courts should be dismissed on grounds of forum
non  conveniens, should be transferred to any court other than one
of the above-named courts, should be stayed by virtue of the pendency of any
other action, suit or proceeding in any court other than one of the above-named
courts, or that this Agreement or the subject matter hereof may not be enforced
in or by any of the above-named courts. Notwithstanding the foregoing, to the
extent that any party hereto is or becomes a party in any litigation in
connection with which it may assert indemnification rights 

 

6

 

set
forth in this Agreement, the court in which such litigation is being heard will
be deemed to be included in clause (i) above. Each of the parties hereto hereby
consents to service of process in any such suit, action or proceeding in any
manner permitted by the laws of the State of New York, agrees that service of
process by registered or certified mail, return receipt requested, at the
address specified in or pursuant to Section 10 is reasonably calculated to give
actual notice and waives and agrees not to assert by way of motion, as a
defense or otherwise, in any such action, suit or proceeding any claim that
service of process made in accordance with Section 10 does not constitute good
and sufficient service of process. The provisions of this Section 8 will not
restrict the ability of any party to enforce in any court any judgment obtained
in a court included in clause (i) above.

 

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

 

9.                                         Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes any prior communication or agreement with respect thereto.

 

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

 

If
to the Company, to it at:

 

Michaels Stores, Inc.

8000 Bent Branch Drive

Irving, TX 75261

Facsimile: 
(972) 409-1901

Attention:                 General Counsel

Chief
Financial Officer

 

7

 

with
copies to:

 

Ropes & Gray LLP

One International Place

Boston, Massachusetts 02110

Facsimile: 
(617) 951-7050

Attention:                 David C. Chapin

William
M. Shields

R.
Newcomb Stillwell

 

If
to Highfields, to:

 

Highfields
Capital Management LP

200
Clarendon Street

Boston,
MA 02116

Facsimile:  (617) 850-7503

Attention:  Joseph Mazzella

 

with
copies to:

 

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109

Facsimile: 
(617) 523-1231

Attention: 
Laura C. Hodges Taylor

 

Unless
otherwise specified herein, such notices or other communications will be deemed
effective, (a) on the date received, if personally delivered or sent by
facsimile during normal business hours, (b) on the business day after being
received if sent by facsimile other than during normal business hours, (c) one
business day after being sent by Federal Express, DHL or UPS or other
comparably reputable delivery service and (d) five business days after being
sent by registered or certified mail. Each of the parties hereto shall be
entitled to specify a different address by giving notice as aforesaid to each
of the other parties hereto.

 

11.                                   Severability. If in any judicial or arbitral proceedings
a court or arbitrator refuses to enforce any
provision of this Agreement, then such unenforceable provision will be deemed
eliminated from this Agreement for the purpose of such proceedings to the
extent necessary to permit the remaining provisions to be enforced, and the
parties hereto shall negotiate in good faith to seek to enter into substitute
provisions incorporating, as nearly as possible, the purpose, intent and effect
of such unenforceable provision. To the full extent, however, that the
provisions of any applicable law may be waived, they are hereby waived to the
end that this Agreement be deemed to be a valid and binding agreement
enforceable in accordance with its terms, and in the event that any provision
hereof is found to be invalid or unenforceable, such provision will be
construed by limiting it so as to be valid and enforceable to the maximum
extent consistent with and possible under applicable law.

 

8

 

12.                                   Miscellaneous.

 

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

 

(b)                                 Interpretation. The headings contained in this Agreement
are for convenience of reference only and will not in any way affect the
meaning or interpretation hereof. As used herein the word “including” shall be
deemed to mean “including without limitation”. This Agreement reflects the
mutual intent of the parties and no rule of construction against the drafting
party shall apply.

 

[The remainder of this page is intentionally left
blank. Signatures follow.]

 

9

 

IN
WITNESS WHEREOF, each
of the parties has caused this Agreement to be executed on its behalf as an
instrument under seal as of the date first above written by its officer or
representative thereunto duly authorized.

 

	
  THE
  COMPANY:

  	
  MICHAELS
  STORES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   /s/
  Jeffrey N. Boyer

  	
   

  
	
   

  	
  Name:
  Jeffrey N. Boyer

  
	
   

  	
  Title:   President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  MANAGER:

  	
  HIGHFIELDS
  CAPITAL MANAGEMENT LP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   /s/
  Richard L. Grubman

  	
   

  
	
   

  	
  Name:
  Richard L. Grubman

  
	
   

  	
  Title:   Managing Member

  

 

 

Schedule 1 to

Management Agreement

 

Wire Transfer Instructions for

Highfields Capital Management LP

 

	
  Bank:

  	
  Bank
  of America

  
	
  ABA
  #:

  	
  026-009-593

  
	
  For:

  	
  Highfields
  Capital Management L.P.

  
	
  Acct
  #:

  	
  00898-87189

  

 

1

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