Document:

Exhibit 10.1

 

AMENDED AND RESTATED
BUSINESS MANAGEMENT

AND SHARED SERVICES
AGREEMENT

 

THIS AMENDED AND RESTATED BUSINESS MANAGEMENT AND
SHARED SERVICES AGREEMENT (this “Agreement”) is made and entered into as of January
4, 2010, by and between Five Star Quality Care, Inc., a Maryland
corporation (the “Company”), and Reit Management & Research LLC, a
Delaware limited liability company (“RMR”).

 

WHEREAS, the Company and RMR are parties to a Shared
Services Agreement dated as of January 2, 2002, as amended (the “Original
Agreement”); and

 

WHEREAS, the Company and RMR wish to amend and
restate the Original Agreement as hereinafter provided;

 

NOW, THEREFORE, in consideration of the mutual
agreements set forth herein, the parties hereto agree as follows:

 

Section 1.           ENGAGEMENT.  Subject to the terms and conditions
hereinafter set forth, the Company hereby continues to engage RMR to provide
the business management and shared services contemplated by this Agreement with
respect to the Company’s business and operations, and RMR hereby accepts such
continued engagement.

 

Section 2.           SERVICES.

 

2.1           SERVICES
TO BE RENDERED.  RMR shall provide the
Company with the services described below (each, a “Service”, and collectively,
the “Services”), in each case to the extent requested by the Company:

 

(a)        ACCOUNTING
SUPPORT.  Advice and assistance with
accounting, audit and financial reporting of the Company, including, without
limitation, advice and assistance in:  (i) setting
up and maintaining systems for financial record keeping; (ii) conducting
the administration of the day-to-day bookkeeping and accounting functions as
are required for the proper management of the assets of the Company; and (iii) contracting
for and supervising the process for audits of the Company’s annual financial
statements by the Company’s independent registered public accountants.

 

 

(b)        FINANCING,
LEASING AND STRATEGIC ADVICE AND ASSISTANCE.

 

(i)    EQUITY CAPITAL MARKETS. 
Advice and services relating to equity capital raising transactions, but
not including solicitation of investors as a broker, dealer or underwriter in
any capital raising transactions.

 

(ii)   DEBT FINANCING.  Advice
and services relating to revolving lines of credit and other issuances of
indebtedness.

 

(iii)  STRATEGIC.  Advice and
services relating to possible business and strategic opportunities as may come
to the attention of the Company or RMR, including, without limitation,
acquisitions, joint ventures, dispositions and other strategic transactions.

 

(iv)  INVESTIGATION. 
Investigation and evaluation of financing, refinancing, leasing and
other business opportunities, and making recommendations concerning these
opportunities.

 

(c)        CASH
MANAGEMENT.  Advice and assistance
in:  (i) operating and managing the
Company’s collection systems, cash concentration systems and electronic
disbursements; (ii) maintaining bank accounts, including opening and
closing of operating, security deposits, local depository and petty cash
accounts; (iii) bank administration; and (iv) maintaining bank
relationships.

 

(d)        HUMAN
RESOURCES.  Advice and assistance in
management of the Company’s 401(k) plan and other employee benefit plans,
Company employee and management recruitment, performance evaluation and
establishment of salary, bonus and other compensation scales and executive and
staff employee structure.

 

(e)        INSURANCE
ADMINISTRATION.  Assistance in:  (i) securing all forms of insurance,
including property, casualty and workers’ compensation; (ii) managing
insurance policies; (iii) negotiation of premiums and arranging payment
terms; (iv) managing claims; and (v) preparation of loss
analysis.  The amount and levels of
insurance shall be determined in the sole and absolute discretion of the
Company.

 

(f)         INVESTOR
RELATIONS.  Assistance in the preparation
and coordination of:  (i) annual and
other reports to shareholders; (ii) presentations to the public; (iii) public
relations; (iv) marketing materials; (v) internet website; and (vi) investor
relations services.

 

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(g)        REGULATORY
COMPLIANCE.  Advice and assistance with
compliance with applicable legal and regulatory requirements, including,
without limitation, advice and assistance in preparation of financial reports
as may be required by any governmental authority in connection with the
ordinary conduct of the Company’s business, including periodic reports, returns
or statements required under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), or the rules and regulations promulgated thereunder,
and tax reporting matters as further provided in subparagraph 2.1(p); provided,
however, that the foregoing Services shall not include advice and assistance
with any requirements of Medicare, Medicaid or other rate setting, safety,
health agency or quality of care authority.

 

(h)        CONTRACTS.  Assistance in review and negotiation of and
advice concerning Company contracts and agreements, including, without
limitation, contracts in connection with the services described in subparagraph
2.1(b), in each case, on behalf of the Company and in the furtherance of the
Company’s objectives.

 

(i)         LEGAL
MATTERS.  Assistance with the retention,
coordination and supervision of all third party legal services and oversight of
processing of claims by or against the Company.

 

(j)         MANAGEMENT
INFORMATION SYSTEMS.

 

(i)    APPLICATIONS DEVELOPMENT. 
Supervision and assistance related to development and maintenance of
Company information technology system applications, including, without
limitation, intranet, financial, accounting and clerical systems.

 

(ii)   TELECOMMUNICATIONS. 
Supervision and assistance related to design, operation and maintenance
of network infrastructure, including telephone and data transmission lines,
voice mail, facsimile machines, cellular phones, pager, etc.; negotiation of
contracts with third party vendors and suppliers; and provide local area
network and wide area network communications support.

 

(iii)  OPERATIONS/TECHNICAL SUPPORT AND USER SUPPORT.  Supervision and assistance related to design,
maintenance and operation of the computing environment, including business
specific applications, network wide applications, electronic mail and other
systems; managing the purchase and maintenance of equipment, including hardware
and software; configuration, installation and support of computer equipment;
and education and training of the user community.

 

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(iv)  MANAGEMENT INFORMATION SYSTEMS SERVICES.  In addition to supervision and assistance,
the provision of such personnel reasonably required and qualified to supplement
the Company’s personnel in order to perform the underlying work described in
subsections (i) through (iii) of this subparagraph 2.1(j) (the
“MIS Services”).

 

(k)        PROPERTY
MAINTENANCE AND REPAIRS.  Assist in
obtaining, when appropriate, the services of property managers or management
firms to perform customary property management services with regard to the
facilities operated by or the real estate properties owned or leased by or
otherwise in the possession of the Company; perform such supervisory,
evaluation or monitoring services on behalf of the Company with respect to the
activities of those property managers or management firms as would be performed
by a prudent owner or lessee engaged in business substantially similar to that
engaged in by the Company with respect to its owned or leased properties used
in such business, including, but not limited to, supervising the activities of
property managers or management firms, reviewing the maintenance and renovation
needs for governmental or regulatory compliance (other than Medicare and
Medicaid compliance) at the Company’s properties, assessing capital and
engineering projects, property inspections, and participating in property
management budgeting, but excluding the actual on-site property management
functions performed by Company personnel, property managers or management
firms.

 

(l)         RESEARCH.  Provision of periodic market research reports
and perform special research assignments.

 

(m)       SECURITIES
FILINGS.  Advice and assistance in the
preparation and filing of periodic and other reports required to be filed by
Sections 13 and 15 of the Exchange Act and the rules and regulations
thereunder; advice and assistance in the preparation, filing, distribution and
posting of proxy and consent materials pursuant to the Exchange Act and the rules and
regulations thereunder; and advice and assistance in the preparation and filing
of all offering documents (public and private), and all registration
statements, prospectuses or other documents filed with the Securities and
Exchange Commission (the “SEC”) or any state; it being understood that the
Company shall be responsible for the content of any and all of its offering
documents and SEC filings, and RMR shall not be held liable for any costs or
liabilities arising out of any misstatements or omissions in the Company’s
offering documents or SEC filings, whether or not material, and the Company
shall promptly indemnify RMR from any such costs or liabilities incurred by it.

 

(n)        SPECIAL
PROJECTS.  Provide direction and support
of all special projects and such other services within the scope contemplated
by this Agreement although not expressly covered in the subparagraphs of
subparagraph 2.1.

 

(o)        SUPERVISION
OF THIRD PARTY MANAGER ARRANGEMENTS. 
Provision of strategic advice and oversight concerning the Company’s 

 

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relationship
with any and all, current or future, third party managers of its current or
future facilities or properties.

 

(p)        TAX
ADMINISTRATION.  Supervision, direction
and assistance in the preparation, review and filing of all federal, state and
other required tax returns; supervision and direction of ad hoc requests for
assistance on tax related matters; and coordination of all activities with the
Company’s outside tax preparer.  All tax
matters shall be determined by the Company in its absolute and sole discretion.

 

(q)        INTERNAL
AUDIT FUNCTION.  Provision of an internal
audit function meeting applicable requirements, if any, of the NYSE Amex LLC
and the SEC and otherwise in scope approved by the Audit Committee of the Board
of Directors of the Company.

 

(r)         RISK
MANAGEMENT.  Advise and assist with the
Company’s risk management and oversight function.

 

(s)        THIRD PARTY
ADVISORS.  In addition to subparagraph
2.1(i), advise, assist and oversee the retention of counsel, consultants and
other third party professionals on behalf of the Company.

 

Notwithstanding
anything herein, it is understood and agreed that the duties of, and services
to be provided by, RMR pursuant to this Agreement shall not include any
investment management or related services with respect to any assets of the
Company as the Company may wish to allocate from time to time to investments in
“securities” (as defined in the Investment Advisers Act of 1940, as amended).

 

2.2           PERFORMANCE
OF SERVICES.  RMR will perform or cause
to be performed the Services in a timely, efficient and workmanlike
manner.  With the Company’s approval, RMR
may retain third parties or its affiliates to provide certain of the Services
hereunder.  In such cases, and
notwithstanding anything herein to the contrary, the Company shall pay the fees
and costs of such third parties and reimburse RMR in accordance with
subparagraph 2.4 for RMR’s actual out-of-pocket costs and expenses for
arranging for such Services (including, without limitation, the fees and costs
of such third parties paid by RMR) to the extent the Company is not billed or
does not pay directly.  RMR shall be
responsible for paying such affiliates for their fees and costs in providing
such Services unless otherwise approved by a majority vote of the Independent
Directors (as defined in the Company’s Bylaws, as in effect from time to time)
of the Company.  All services shall be
performed as requested and/or authorized by the Company from time to time.

 

In
performing its services hereunder with respect to the Company, RMR shall adhere
to, and shall require its officers and employees in the course of providing
such services to

 

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the Company to adhere to,
the Company’s Code of Business Conduct and Ethics, as in effect from time to
time.  In addition, RMR shall make
available to its officers and employees providing such services to the Company
the procedures for the receipt, retention and treatment of complaints regarding
accounting, internal accounting controls or auditing matters relating to the
Company and for the confidential, anonymous submission by such officers and employees
of concerns regarding questionable accounting or auditing matters relating to
the Company, as set forth in the Company’s Procedures for Handling Concerns or
Complaints about Accounting, Internal Accounting Controls or Auditing Matters,
as in effect from time to time.

 

2.3           COMPENSATION.

 

(a)        PAYMENT FOR
SERVICES.  RMR shall be paid a fee for
the Services provided to the Company under this Agreement (the “Fee”) equal to
0.6% of total revenues (“Revenues”) of the Company from all sources reportable
under generally accepted accounting principles in the United States.  The Fee shall be estimated and paid monthly
by the Company in advance based upon the prior calendar month’s Revenues, and
such payment shall be paid within 15 calendar days of the end of the applicable
prior calendar month unless otherwise agreed. 
The calculation of the fee for any month shall be based upon the
Company’s monthly financial statements and shall be in reasonable detail.  A copy of the computations shall promptly be
delivered to RMR accompanied by payment of the Fee thereon to be due and
payable.  The Fee shall be pro-rated for
any partial month this Agreement shall be in effect.

 

The aggregate annual Fee paid in any fiscal year
shall be subject to adjustment as of the end of that fiscal year.  On or before the 30th day after public
availability of the Company’s annual audited financial statements for each
fiscal year, the Company shall deliver to RMR a notice setting forth (i) the
Company’s Revenues for such year, (ii) the Company’s computation of the
Fee payable for such year and (iii) the amount of the Fee theretofore paid
to RMR in respect of such year.  If the
annual Fee payable for said fiscal year exceeds the aggregate amounts
previously paid with respect thereto by the Company, the Company shall pay such
deficit amount to RMR at the time of delivery of such notice.  If the annual Fee payable for said fiscal
year as shown in such notice is less than the aggregate amounts previously paid
with respect thereto by the Company, the Company shall specify in such notice
whether RMR should (i) refund to the Company payment in an amount equal to
such difference or (ii) grant the Company a credit against the Fee next
coming due in the amount of such difference until such amount has been fully
paid or otherwise discharged.

 

(b)        PAYMENT
SUBORDINATION.  No Fee payments shall be
paid by the Company to RMR if any of the contractual rent obligations of the
Company or any of its subsidiaries to Senior Housing Properties Trust or any of
its subsidiaries (collectively “Senior Housing”) pursuant to any lease
agreement are in arrears or if such Fee payment would leave the Company with
insufficient cash, credit facilities or current accounts receivable to make its
next scheduled rent payment to Senior Housing pursuant to any lease
agreement.  Any Fee payment unpaid as a
result of the preceding sentence shall accrue interest until paid at the Prime
Rate (as defined below), and shall be automatically due and payable:  (i) as and to the extent cash, credit

 

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facilities
or current accounts receivable are available after payment of, or provision
for, rent or (ii) upon any termination of the Agreement.  This subparagraph 2.3(b) is only
intended to define the relative rights of RMR and Senior Housing.  Without intending to limit the generality of
the foregoing, nothing in this subparagraph 2.3(b) shall:  (i) impair, as between the Company and
RMR, the obligation of the Company to pay any amounts owing hereunder in
accordance with the terms hereof; or (ii) affect the relative rights of
RMR and creditors of the Company other than Senior Housing.  For purposes of this Agreement, “Prime Rate”
shall mean the Prime Rate or base rate on corporate loans at large U.S. money
center commercial banks as published in The Wall Street Journal or, if
publication of such rate shall be suspended or terminated, Prime Rate shall
mean the annual rate of interest, determined daily and expressed as a
percentage, from time to time announced by one of the three largest national or
New York State chartered banking institutions having their principal office in
New York, New York and selected by RMR at the time such publication is
suspended or terminated.  All interest
hereunder shall be calculated on the basis of actual days elapsed and a 360-day
year.

 

2.4           REIMBURSEMENT.  Unless otherwise agreed, the Company shall
reimburse RMR for reasonable out-of-pocket expenses and costs of RMR employees
incurred in their performance of the Services (the “Expenses”) and for
reasonable third party expenses and costs RMR incurs (including expenses and
costs of RMR’s affiliates pursuant to subparagraph 2.2) on behalf of the
Company that are not billed directly to or paid by the Company, in each case
within 30 days of receipt of the invoice therefor, but only to the extent, as
to such third party expenses and costs (including expenses and costs of RMR’s
affiliates pursuant to subparagraph 2.2), the Company shall have approved such
expenses and costs.  RMR shall submit to
the Company such reports detailing said expenses and costs and supporting
receipts and bills, or other suitable evidence, as may be reasonably requested
by the Company.

 

2.5           COMPENSATION
FOR INTERNAL AUDIT FUNCTION.  In addition
to the Fee and Expenses, as compensation payable to RMR for the provision of an
internal audit function to the Company pursuant to subparagraph 2.1(q), the
Company agrees to reimburse RMR, within 30 days of the receipt of the invoice
therefor, for a pro rata share of the following costs of RMR:

 

(a)        employment
expenses of RMR’s internal audit manager and other employees of RMR actively
engaged in providing internal audit services, including, but not limited to,
salary, wages, payroll taxes and the cost of employee benefit plans; and

 

(b)        the
reasonable travel and other out-of-pocket expenses of RMR relating to the
activities of RMR’s internal audit manager and other of RMR’s employees
actively engaged in providing internal audit services and the reasonable third
party expenses which RMR incurs in connection with its provision of internal
audit services.

 

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2.6           COMPENSATION
FOR MANAGEMENT INFORMATION SYSTEMS IMPLEMENTATION.

 

In addition
to the Fee, Expenses and the compensation for internal audit functions pursuant
to subparagraph 2.5, the Company agrees to reimburse RMR, within 30 days of the
receipt of invoices therefor, for eighty percent (80%) of the employment
expenses of RMR’s employees, other than its Chief Information Officer, actively
engaged in providing the MIS Services, including, but not limited to, salary,
wages, payroll taxes and the cost of employee benefit plan.  The share of such expenses may be adjusted
annually not later than December of each year for the following 12
calendar months beginning the following January by agreement of RMR and
the Company.

 

Section 3.           LIMITATIONS; THIRD PARTY
COSTS; NO FIDELITY BOND.

 

3.1           NON-COVERED
SERVICES.  For the avoidance of doubt,
services outside the scope of this Agreement include, without limitation, and
the Company, and not RMR, shall be responsible for:  (a) any and all clinical services to
residents or patients at all facilities leased by the Company, whether or not
managed or operated by the Company, and (b) any and all reimbursement or
rate setting policies and reports to Medicare, Medicaid, any rate setting
authority, safety, health agency or quality of care authority or any other
third parties.

 

3.2           LIMITS
OF RMR RESPONSIBILITY.  RMR assumes no
responsibility other than to render the services described herein in
subparagraphs 2.1 and 5.2 in good faith and shall not be responsible for any
action of the Company in following or declining to follow any advice or
recommendation of RMR.

 

3.3           THIRD
PARTY COSTS.  Except to the extent
expressly provided herein to the contrary, all third party costs incurred in
connection with actions to be taken by the Company shall solely be the
responsibility of the Company, including, but not limited to, all legal,
auditing, accounting, underwriting, brokerage, investor communications, and
listing, reporting and registration fees or other costs of the SEC, any state
or local governments, any national securities exchange and the Financial
Industry Regulatory Authority, Inc.

 

3.4           FIDELITY
BOND.  RMR shall not be required to
obtain or maintain a fidelity bond in connection with the performance of its
services hereunder.

 

Section 4.           TERM; TERMINATION.

 

4.1           TERM.  This Agreement shall continue in force and
effect until December 31, 2010, and shall be automatically renewed for
successive one year terms annually thereafter unless notice of non-renewal is
given by the Company or RMR before the end of the term.  It is

 

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expected
that the terms and conditions may be reviewed by the Independent Directors of
the Compensation Committee of the Board of Directors of the Company at least
annually.

 

4.2           TERMINATION.  Notwithstanding any other provision of this
Agreement to the contrary, this Agreement, or any extension thereof, may be
terminated:  (a) by either party
thereto upon sixty (60) days’ written notice to the other party; and (b) by
RMR upon five (5) business days’ written notice to the Company if there is
a Change of Control (as defined below) of the Company.  Any termination of this Agreement by the
Company pursuant to clause (a) of this subparagraph 4.2 must be approved
by a majority vote of the Independent Directors of the Compensation Committee
of the Board of Directors of the Company. 
Any termination of this Agreement by RMR pursuant to clause (a) or (b) of
this subparagraph 4.2 must be approved by a majority vote of the directors of
RMR.

 

4.3           CHANGE
OF CONTROL.  For purposes of this
Agreement, a “Change of Control” shall mean: 
(a) the acquisition by any person or entity, or two or more persons
or entities acting in concert, of beneficial ownership (such term, for purposes
of this subparagraph 4.3, having the meaning provided such term in Rule 13d-3
under the Exchange Act) of 9.8% or more, or rights, options or warrants to
acquire 9.8% or more, or any combination thereof, of the outstanding shares of
common stock of the Company or other voting interests of the Company, including
voting proxies for such shares, or the power to direct the management and
policies of the Company, directly or indirectly (excluding RMR and its
affiliates and persons or entities that beneficially own 9.8% or more of the
Company’s outstanding shares of common stock as of immediately prior to the
execution and delivery of this Agreement by the parties hereto and excluding
persons or entities that have rights to acquire 9.8% or more of the Company’s
shares of common stock by virtue of their holding convertible notes of the
Company outstanding as of the date of this Agreement); (b) the merger or
consolidation of the Company with or into any other entity (other than the
merger or consolidation of any entity into the Company that does not result in
a Change in Control of the Company under clauses (a), (c), or (d) of this
definition); (c) any one or more sales or conveyances to any person or
entity of all or any material portion of the assets (including capital stock or
other equity interests) or business of the Company and its subsidiaries taken
as a whole; or (d) the cessation, for any reason, of the individuals who
at the beginning of any 36 consecutive month period constituted the Board of
Directors of the Company (together with any new director whose election by the
Board of Directors of the Company or whose nomination for election by the
shareholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
any such period or whose election or nomination for election was previously so
approved) to constitute a majority of the Board of Directors of the Company
then in office; provided, however, a Change of Control shall not include the
acquisition by any person or entity, or two or more persons or entities acting
in concert, of beneficial ownership of 9.8% or more, or rights, options or
warrants to acquire 9.8% or more, or any combination thereof, of the
outstanding shares of common stock of the Company or other voting interests of
the Company if such acquisition is approved by the Board of Directors of the
Company in accordance with the Company’s organizational documents and if such
acquisition is otherwise in compliance with applicable law.

 

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4.4                                 ACTION UPON TERMINATION. 
Except as provided in subparagraph 9.4, from and after the effective
date of any termination of this Agreement pursuant to subparagraphs 4.1 or 4.2,
RMR shall be entitled to no compensation for services rendered hereunder for
the pro rata remainder of the then current term of this Agreement but shall be
paid all compensation due for services performed prior to the effective date of
such termination, including, without limitation, the then current year’s Fee
through the date of termination, and the costs and expenses, including, without
limitation, the Expenses, incurred on or prior to such effective date.  Upon the expiration or sooner termination of
this Agreement, RMR shall, as promptly as practicable, deliver to the Company all
property and documents of the Company then in its custody or possession.  This subparagraph 4.4 shall govern the
rights, liabilities and obligations of the parties upon termination of this
Agreement; and, except as provided in Section 9, a termination shall be
without further liability of either party to the other for breach or violation
of this Agreement prior to termination.

 

Section 5.                                ADDITIONAL
SERVICES; SENIOR EXECUTIVES.

 

5.1                                 COMMON MANAGEMENT.  The
parties acknowledge and agree that certain senior executives of the Company may
be employees, officers or directors of both the Company and RMR.  Each party shall be solely responsible for
payment of compensation to such senior executives for services rendered to or
on behalf of such party and the payment by the Company for services by senior
executives who are also senior executives of RMR shall be approved by majority
vote of the Independent Directors of the Compensation Committee of the Board of
Directors of the Company.

 

5.2                                 ADDITIONAL SERVICES.

 

(a)             To
the extent requested by the Company, RMR shall make its executive officers and
directors who are not also senior executives of the Company reasonably
available to the Company for the provision of additional services, including
day-to-day activities enumerated in subparagraph 2.1. The parties acknowledge
and agree that no additional compensation shall be due and payable for any
additional services requested by the Company and provided by executive officers
and directors of RMR pursuant to this subparagraph 5.2(a).

 

(b)            If,
and to the extent that, the Company shall request RMR to render services on
behalf of the Company other than those to be rendered by RMR in accordance with
Section 2 and subparagraph 5.2(a) of this Agreement, such additional
services shall be compensated separately on terms to be agreed upon between RMR
and the Company from time to time.

 

Section 6.                                PREVENTION OF
PERFORMANCE.  RMR shall not be determined
to be in violation of this Agreement if it is prevented from performing any
Services hereunder for any reason beyond its reasonable control, including,
without limitation, acts of God, nature, or of 

 

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public enemy, strikes, or
limitations of law, regulations or rules of the federal or of any state or
local government or of any agency thereof.

 

Section 7.                                COMPANY
RESTRICTIONS.

 

7.1                                 OWNERSHIP AND FINANCING LIMITATIONS.  At no time during the term of this Agreement,
may the Company or any of its subsidiaries, directly or indirectly, make any
investment in or finance (including sale and leaseback transactions), or
participate in the investment and or financing of, any real estate property
(collectively, the “Properties”) of a type then owned or financed by HRPT
Properties Trust, Hospitality Properties Trust, TravelCenters of America LLC,
Government Properties Income Trust or their respective subsidiaries, Senior
Housing, or any other publicly owned real estate investment trust, corporation
or other entity that is managed by RMR (a “Benefited Party”) unless in
accordance with this subparagraph 7.1. 
If the Company or any of its subsidiaries proposes to enter into any
transaction involving the investment in or financing of a Property otherwise
prohibited by this subparagraph 7.1 (“Proposed Transaction”), it shall provide
notice of the Proposed Transaction to the relevant Benefited Party describing
the Proposed Transaction in sufficient detail and offer the relevant Benefited
Party the right to invest in or finance the acquisition of the Property and
negotiate in good faith with the relevant Benefited Party.  If, after ten (10) business days, the
Company and the relevant Benefited Party have not reached agreement on the
terms of the investment or financing, the Company (or any subsidiary of the Company)
shall be free to invest in or finance such Property itself or with others, free
of the restrictions provided in the first sentence of this subparagraph 7.1.

 

The Company agrees that irreparable damage would occur if any of the
provisions of this subparagraph 7.1 were not performed in accordance with their
terms and that RMR’s and the Benefited Parties’ remedy at law for the Company
or its subsidiaries’ breach of its obligations under this subparagraph 7.1
would be inadequate.  Upon any such
breach, RMR or the relevant Benefited Party shall be entitled (in addition to
any other rights or remedies it or they may have at law) to seek an injunction
enjoining and restraining the Company or such subsidiaries from continuing such
breach.  The Company agrees that the
period of restriction and the geographical area of restriction imposed upon the
Company are fair and reasonable.  If the
provisions of this subparagraph 7.1 relating to the period or the area of
restriction are determined to exceed the maximum period or areas which a court
having jurisdiction over the matter would deem enforceable, such period or area
shall, for purposes of this Agreement, be deemed to be the maximum period or
area which such court determines valid and enforceable.

 

7.2                                 ADDITIONAL COVENANTS. 
In the event RMR shall enter into a management arrangement or agreement
with any other publicly owned entity, other than the Benefited Parties, RMR
shall provide the Company with notice thereof. 
The notice shall specify in reasonable detail the identity of the
entity, the types of properties owned or financed by such additional entity,
and such entity shall then be deemed and become a “Benefited Party” for all
purposes of this Agreement.

 

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Section 8.                                RMR
RESTRICTIONS.  Other than activities or
arrangements existing as of the date hereof or those consented to by the
Company, RMR shall not directly or indirectly provide any advice or assistance
to any business or enterprise that is competitive with the Company’s business,
including, but not limited to, any business or enterprise that manages or
operates senior apartments, congregate communities, assisted living properties,
nursing homes, rehabilitation hospitals or other healthcare properties.  Subject to the immediately preceding
sentence, nothing herein shall prevent or restrict RMR from engaging in any
other activities or businesses or from providing management services to any
other person or entity.  In addition,
nothing herein shall prevent any shareholder or affiliate of RMR from engaging
in any other business or from rendering services of any kind to any other
person or entity (including competitive business activities).  For avoidance of doubt, nothing herein is
intended or shall be construed to prevent RMR from providing management
services to Senior Housing, including services to Senior Housing related to
properties owned or to be owned by Senior Housing which may be leased, operated
or managed by the Company or which may be leased, operated or managed by
competitors of the Company.

 

Section 9.                                INDEMNIFICATION;
REMEDIES.

 

9.1                                 BY THE COMPANY.  The
Company shall indemnify, defend and hold RMR, and its members, directors,
officers, employees and agents harmless from and against any and all damages,
claims, losses, expenses, costs, obligations and liabilities, including,
without limiting the generality of the foregoing, liabilities for all
reasonable attorneys’, accountants’ and experts’ fees and expenses incurred
(collectively, “Losses and Expenses”) or suffered by them by reason of or
arising out of the course of performing the Services and any duties on behalf
of the Company and its subsidiaries as prescribed hereby, except for matters
covered by subparagraph 9.2 hereof.

 

9.2                                 BY RMR.  RMR shall
indemnify, defend and hold the Company and its subsidiaries and their
respective directors, trustees, officers, employees and agents harmless from
and against Losses and Expenses suffered by them by reason of or arising out of
any willful bad faith or gross negligence in the performance of any obligation
or agreement of RMR herein.  Any dispute,
claim or controversy between the Company and RMR as to whether RMR acted with
willful bad faith or gross negligence in the performance of any obligation or
agreement of RMR herein shall be arbitrated in accordance with Section 14,
except that, notwithstanding anything to the contrary in Section 14, the
costs and expenses of the prevailing party to such arbitration shall be paid by
the non-prevailing party to such arbitration.

 

9.3                                 COMPANY REMEDIES. 
Except as otherwise provided in subparagraph 9.2 hereof, RMR does not
assume any responsibility under this Agreement other than to render the
Services called for under this Agreement in good faith.  Except as otherwise provided in subparagraph
9.2 hereof, the Company’s remedy on account of the failure of RMR to render the
Services as and when required hereunder shall be to terminate this Agreement;
provided however, that if RMR acts with willful bad faith or gross negligence,
the Company’s remedy shall be to procure services elsewhere and to charge RMR
the difference between the reasonable increased 

 

12

 

cost, if
any, to procure new services, and the Fee, pro-rated, that would have been
payable to RMR had RMR performed such Services under this Agreement.

 

9.4                                 RMR REMEDIES.  Except
as otherwise provided in subparagraph 9.1, the Company does not assume any
responsibility under this Agreement other than to pay the Fee, Expenses and
other fees and compensation payable by the Company to RMR, including, without
limitation, pursuant to subparagraphs 2.5 and 2.6, and satisfy the other
obligations imposed upon it hereunder, in each case, in accordance with the
terms of this Agreement.  Except as
otherwise provided in subparagraph 9.1, RMR’s sole remedy on account of the
failure of the Company to satisfy its obligations in accordance with the terms
of this Agreement shall be to terminate this Agreement and receive the Fee
payable for the then remaining term of this Agreement and any other amounts
then owing to RMR by the Company.

 

Section 10.                          SELF-DEALING.  Neither RMR nor any affiliate of RMR shall,
directly or indirectly, sell any property or assets to the Company or purchase
any property or assets from the Company, lease any property from the Company or
borrow any money from the Company, except as approved by a majority of the
Independent Directors of the Company.  In
addition, except as otherwise provided in Section 2 hereof or except as
approved by a majority of the Independent Directors of the Company, neither RMR
nor any affiliate of RMR shall receive any commission or other remuneration,
directly or indirectly, in connection with the activities of the Company or any
joint venture or partnership in which the Company is a party.  The foregoing prohibitions shall not apply
to:  (a) the lease of facilities or
office space by the Company from RMR or its affiliates; or (b) RMR’s or
its affiliates’ provision of services to Affiliates Insurance Company (“AIC”)
or RMR’s participation in AIC, including, without limitation, as a shareholder
of AIC or as a policy holder of insurance policies issued by AIC or its third
party agents in furtherance of AIC’s business. 
Except for compensation received by RMR pursuant to Section 2
hereof, all commissions or other remuneration proposed to be received by RMR or
an affiliate of RMR and not approved by a majority of the Independent Directors
of the Company shall be promptly reported to the Company for its consideration.

 

Section 11.                          RELATIONSHIP OF
THE PARTIES.

 

11.1                           NO PARTNERSHIP OR JOINT VENTURE.  The parties are not partners or joint
venturers with each other and neither the terms of this Agreement nor the fact
that the Company and RMR and their respective affiliates have joint interests
in any one or more investments, ownership or other interests in any one or more
entities, have common directors, officers or employees or have tenancy
relationships shall be construed so as to make them partners or joint venturers
or impose any liability as such on either of them.

 

11.2                           CONFLICTS OF INTEREST. 
The Company acknowledges and agrees that RMR has certain interests that
may be divergent from those of the Company, including, without limitation, as
of the date hereof, (a) the Company is a tenant of an affiliate of RMR
pursuant to a lease agreement relating to office space, (b) the Company
and its subsidiaries lease 

 

13

 

all or
substantially all of their real estate from Senior Housing and may enter into
additional leases or other transactions with Senior Housing, (c) RMR
provides management services to Senior Housing pursuant to management
agreements, (d) the Company leases office and certain clinical space from
HRPT Properties Trust, and (e) RMR provides certain services to AIC.  The parties agree that these relationships
shall not affect either party’s rights and obligations under this Agreement;
provided, however, the Company acknowledges and agrees that whenever any
conflicts of interest arise resulting from the relationships described in this
subparagraph 11.2 or any such relationship as may arise or be present in the
future by and between the Company and any of RMR, affiliates of RMR or any
publicly owned entity with whom RMR has a relationship or contract:  (i) RMR will act on its own behalf and
on behalf of Senior Housing or such entity and not on the Company’s behalf; and
(ii) the Company shall make its own decisions and require and obtain the
advice and assistance of independent third parties at its own cost, as it may
deem necessary.

 

Section 12.                          RECORDS.  RMR shall maintain appropriate books and
records relating to Services performed pursuant to this Agreement, which books
and records shall be available for inspection by representatives of the Company
upon reasonable notice during ordinary business hours.

 

Section 13.                          ASSIGNMENT.  Neither party may assign this Agreement or
its rights hereunder or delegate its duties hereunder without the written
consent of the other party, except in the case of an assignment or delegation
by RMR to a corporation, partnership, limited liability company, association,
trust, or other successor entity which may take over the property and carry on
the affairs of RMR and which remains under the control of one or more persons
who controlled the operations of RMR immediately prior to such assignment or
delegation.

 

Section 14.                          ARBITRATION.

 

14.1                           PROCEDURES FOR ARBITRATION OF DISPUTES.  Any disputes, claims or controversies between
the parties (a) arising out of or relating to this Agreement or the
provision of services by RMR pursuant to this Agreement, or (b) brought by
or on behalf of any shareholder of the Company (which, for purposes of this Section 14,
shall mean any shareholder of record or any beneficial owner of shares of the
Company, or any former shareholder of record or beneficial owner of shares of
the Company), either on his, her or its own behalf, on behalf of the Company or
on behalf of any series or class of shares of the Company or shareholders of
the Company against the Company or any director, officer, manager (including
RMR or its successor), agent or employee of the Company, including disputes,
claims or controversies relating to the meaning, interpretation, effect, validity,
performance or enforcement of this Agreement or the charter or Bylaws of the
Company (all of which are referred to as “Disputes”), or relating in any way to
such a Dispute or Disputes shall, on the demand of any party to such Dispute be
resolved through binding and final arbitration in accordance with the
Commercial Arbitration Rules (the “Rules”) of the American Arbitration
Association (“AAA”) then in effect, except as those Rules may be modified
in this Section 14.  For the
avoidance of doubt, and not as a limitation, Disputes are intended to include
derivative actions against directors, officers or 

 

14

 

managers of
the Company and class actions by a shareholder against those individuals or
entities and the Company.  For the
avoidance of doubt, a Dispute shall include a Dispute made derivatively on
behalf of one party against another party.

 

14.2                           ARBITRATORS.  There
shall be three arbitrators.  If there are
only two parties to the Dispute, each party shall select one arbitrator within
15 days after receipt by respondent of a copy of the demand for
arbitration.  Such arbitrators may be
affiliated or interested persons of such parties.  If either party fails to timely select an
arbitrator, the other party to the Dispute shall select the second arbitrator
who shall be neutral and impartial and shall not be affiliated with or an
interested person of either party.  If
there are more than two parties to the Dispute, all claimants, on the one hand,
and all respondents, on the other hand, shall each select, by the vote of a
majority of the claimants or the respondents, as the case may be, one
arbitrator.  Such arbitrators may be
affiliated or interested persons of the claimants or the respondents, as the
case may be.  If either all claimants or
all respondents fail to timely select an arbitrator then such arbitrator (who
shall be neutral, impartial and unaffiliated with any party) shall be appointed
by the AAA.  The two arbitrators so
appointed shall jointly appoint the third and presiding arbitrator (who shall
be neutral, impartial and unaffiliated with any party) within 15 days of the
appointment of the second arbitrator.  If
the third arbitrator has not been appointed within the time limit specified
herein, then the AAA shall provide a list of proposed arbitrators in accordance
with the Rules, and the arbitrator shall be appointed by the AAA in accordance
with a listing, striking and ranking procedure, with each party having a
limited number of strikes, excluding strikes for cause.

 

14.3                           PLACE OF ARBITRATION. 
The place of arbitration shall be Boston, Massachusetts unless otherwise
agreed by the parties.

 

14.4                           DISCOVERY.  There shall
be only limited documentary discovery of documents directly related to the
issues in dispute, as may be ordered by the arbitrators.

 

14.5                           AWARDS.  In rendering
an award or decision (the “Award”), the arbitrators shall be required to follow
the laws of The Commonwealth of Massachusetts. 
Any arbitration proceedings or Award rendered hereunder and the
validity, effect and interpretation of this arbitration agreement shall be
governed by the Federal Arbitration Act, 9 U.S.C. §1 et seq.  The Award shall be in writing and may, but
shall not be required to, briefly state the findings of fact and conclusions of
law on which it is based.

 

14.6                           COSTS AND EXPENSES. 
Except as provided in subparagraph 9.2 and to the extent otherwise
agreed by the parties, each party involved in a Dispute shall bear its own
costs and expenses (including attorneys’ fees), and the arbitrators shall not
render an award that would include shifting of any such costs or expenses
(including attorneys’ fees) or, in a derivative case or class action, award any
portion of the Company’s award to the claimant or the claimant’s attorneys.  Except as provided in subparagraph 9.2 and to
the extent otherwise agreed by the parties, each party (or, if there are more
than two parties to the Dispute, all claimants, on 

 

15

 

the one
hand, and all respondents, on the other hand, respectively) shall bear the
costs and expenses of its (or their) selected arbitrator and the parties (or,
if there are more than two parties to the Dispute, all claimants, on the one
hand, and all respondents, on the other hand) shall equally bear the costs and
expenses of the third appointed arbitrator.

 

14.7                           FINAL AND BINDING.  An
Award shall be final and binding upon the parties thereto and shall be the sole
and exclusive remedy between such parties relating to the Dispute, including
any claims, counterclaims, issues or accounting presented to the
arbitrators.  Judgment upon the Award may
be entered in any court having jurisdiction. 
To the fullest extent permitted by law, no application or appeal to any
court of competent jurisdiction may be made in connection with any question of
law arising in the course of arbitration or with respect to any award made
except for actions relating to enforcement of this agreement to arbitrate or
any arbitral award issued hereunder and except for actions seeking interim or
other provisional relief in aid of arbitration proceedings in any court of
competent jurisdiction.

 

14.8                           PAYMENT OF AWARDS.  Any
monetary award shall be made and payable in U.S. dollars free of any tax,
deduction or offset.  Each party against
which the Award assesses a monetary obligation shall pay that obligation on or
before the 30th day following the date of the Award or such other date as the
Award may provide.

 

14.9                           BENEFICIARY.  This Section 14
is intended to benefit and be enforceable by the shareholders, directors,
officers, managers (including RMR or its successor), agents or employees of the
Company and the Company and shall be binding on the shareholders of the Company
and the Company, as applicable, and shall be in addition to, and not in
substitution for, any other rights to indemnification or contribution that such
individuals or entities may have by contract or otherwise.

 

Section 15.                                      CONSENT TO
JURISDICTION AND FORUM.  This Section 15
is subject to, and shall not in any way limit the application of, Section 14
or the mandatory arbitration requirements of subparagraph 9.2; in case of any
conflict between this Section 15 and Section 14 or subparagraph 9.2, Section 14
or subparagraph 9.2, as applicable, shall govern.  The exclusive jurisdiction and venue in any
action brought by any party hereto pursuant to this Agreement shall lie in any
federal or state court located in Boston, Massachusetts.  By execution and delivery of this Agreement,
each party hereto irrevocably submits to the jurisdiction of such courts for
itself and in respect of its property with respect to such action.  The parties irrevocably agree that venue
would be proper in such court, and hereby waive any objection that such court
is an improper or inconvenient forum for the resolution of such action.  The parties further agree and consent to the
service of any process required by any such court by delivery of a copy thereof
in accordance with Section 16 and that any such delivery shall constitute
valid and lawful service of process against it, without necessity for service
by any other means provided by statute or rule of court.

 

16

 

Section 16.                          NOTICES.  Any notice, report or other communication
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given:   when
delivered in person; upon confirmation of receipt when transmitted by facsimile
transmission; on the next business day if transmitted by a nationally
recognized overnight courier; or on the third business day following mailing by
first class mail, postage prepaid; in each case as follows (or at such other
United States address or facsimile number for a party as shall be specified by
like notice):

 

If
to the Company, to:

 

Five
Star Quality Care, Inc. 

400 Centre Street

Newton, Massachusetts 02458 

Attn:  President

Facsimile No.:  (617) 796-8385

 

If
to RMR, to:

 

Reit
Management & Research LLC 

400 Centre Street

Newton, Massachusetts 02458 

Attn:  President

Facsimile No.:  (617) 928-1305

 

Section 17.                          ENTIRE
AGREEMENT; WAIVER.  This Agreement
constitutes and sets forth the entire agreement and understanding of the
parties pertaining to the subject matter hereof, and no prior or
contemporaneous written or oral agreements, understandings, undertakings,
negotiations, promises, discussions, warranties or covenants not specifically
referred to or contained herein or attached hereto shall be valid and
enforceable.  No waiver of this Agreement
or any provision of this Agreement shall be binding unless executed in writing
by the party to be bound thereby.  No
waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision hereof (whether or not similar),
nor shall any such waiver constitute a continuing waiver unless otherwise
expressly provided.

 

Section 18.                          BINDING
EFFECT.  This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and each of their
respective successors and permitted assigns.

 

Section 19.                          SEVERABILITY.  If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair
the benefits of the remaining provisions hereof.

 

17

 

Section 20.                          COUNTERPARTS.  This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, but both of which
taken together shall be considered one and the same instrument.

 

Section 21.                          AMENDMENTS.  The Agreement shall not be amended, changed,
modified, terminated, or discharged in whole or in part except by an instrument
in writing signed by each of the parties hereto, or by their respective successors
or assigns, or otherwise as provided herein.

 

Section 22.                          THIRD PARTY
BENEFICIARIES.  Except as otherwise
provided in subparagraph 14.9, no person or entity other than the parties
hereto and their successors and permitted assigns is intended to be a beneficiary
of this Agreement.

 

Section 23.                          GOVERNING
LAW.  This Agreement shall be
interpreted, construed, applied and enforced in accordance with the laws of The
Commonwealth of Massachusetts applicable to contracts between residents of
Massachusetts which are to be performed entirely within Massachusetts.

 

Section 24.                          INTERPRETATION.  The Company and RMR agree and covenant to
construe the provisions of and give effect to this Agreement in such a manner
to enable Senior Housing to continue to comply with its real estate investment
trust qualification requirements under applicable tax laws.

 

Section 25.                          CAPTIONS.  The headings and titles of the various
sections and paragraphs of this Agreement are inserted merely for the purpose
of convenience, and do not expressly or by implication limit, define, extend or
affect the meaning or interpretation of this Agreement or the specific terms or
text of the section or paragraph so designated.

 

Section 26.                          SURVIVAL.  The provisions of subparagraph 2.1(m) (relating
to the Company’s obligation to indemnify RMR for costs and liabilities incurred
by RMR arising out of any misstatements or omissions in the Company’s offering
documents or SEC filings and the Company’s absence of liability for any such
costs or liabilities), 3.2, 3.3 and 4.4 and Sections 9, 14, 15, 16, 22, 23 and
24 of this Agreement and this Section 26 shall survive the termination
hereof.

 

[Signature
page to follow.]

 

18

 

IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Business Management and Shared Services Agreement under seal as of the
date first above written.

 

 

	
   

  	
  FIVE
  STAR QUALITY CARE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Bruce J. Mackey

  
	
   

  	
   

  	
  Name:

  	
  Bruce
  J. Mackey

  
	
   

  	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  REIT
  MANAGEMENT & RESEARCH LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Adam D. Portnoy

  
	
   

  	
   

  	
  Name:

  	
  Adam
  D. Portnoy

  
	
   

  	
   

  	
  Title:

  	
  PresidentExhibit 10.2

 

SEPARATION
AGREEMENT

 

SEPARATION
AGREEMENT (“Agreement”) made December 31, 2009 between Five Star Quality
Care, Inc. (“Company”) and Francis R. Murphy III (“Murphy”).

 

RECITAL

 

Murphy was an employee of the Company and has been its
Treasurer and Chief Financial Officer since May 1, 2008.  Murphy’s employment with the Company and its
subsidiaries terminated on the date of this Agreement (the “Separation Date”)
and Murphy has been replaced as the Company’s Treasurer and Chief Financial
Officer as of January 1, 2010. 
Murphy and the Company desire to set forth certain understandings in
connection with his termination.

 

NOW,
THEREFORE, the parties agree as follows:

 

Section 1.  Payments; Insurance and Benefits; Restricted Share
Agreements

 

(a)           On the Separation Date, the Company has
paid Murphy his salary plus any days of accrued, but unused, vacation time
through the Separation Date.

 

(b)           If this Agreement becomes effective
pursuant to Section 14, the Company will pay Murphy aggregate severance of
$200,000, which will be paid on the business day after this Agreement becomes
effective pursuant to Section 14.

 

(c)           The Company has provided Murphy with
separate written notification of his rights under COBRA to continue his
participation in the Company’s group health plan(s) at Murphy’s own
expense after the Separation Date. 
Murphy’s eligibility to participate in all other Company benefit plans
and arrangements ended on the Separation Date.

 

(d)           If, and on the business day following the
date, this Agreement becomes effective pursuant to Section 14, the Company
will enter into an Accelerated Vesting Agreement in the form of Exhibit A
with respect to the Restricted Share Agreements listed on Exhibit B.  Murphy agrees that so long as he owns shares
of the Company, at any meeting of the shareholders of the Company, he will vote
all shares then owned by him in favor of all nominees for director and all
proposals recommended by the Board of Directors in the proxy statement for such
meeting.

 

(e)           All payments to Murphy under Section 1(b) shall
be reduced by withholdings required by law, including withholdings required as
a result of the Accelerated Vesting Agreement. 
If withholding is required at a time when no payment under Section 1(b) is
being made or such payment is insufficient to cover all withholding, Murphy
agrees to pay to the Company by check or wire transfer of immediately available
funds, an amount equal to the required withholding (as determined by the
Company) or at the option of the Company, the Company may deduct such amount
from any other cash payment then being made or otherwise owing to Murphy from
the Company or any subsidiary.

 

 

Section 2.  Covenants.  Murphy acknowledges that (i) the Company
and its subsidiaries are engaged in the business of operating rehabilitation
hospitals and senior living communities, including independent living and
congregate care communities, assisted living communities and nursing homes (the
“Company’s Business”); (ii) Murphy’s work for the Company’s Business has
given him, and will continue to give him, trade secrets of, and confidential
and/or proprietary information concerning, the Company’s Business; (iii) the
agreements and covenants contained in this Section 2 are essential to
protect the Company’s Business and the goodwill associated with it.  Accordingly, Murphy covenants and agrees as
follows:

 

(a)           Confidential Information. 
From and after the date hereof, Murphy shall not (i) disclose to
any person not employed by the Company or a subsidiary, or not engaged to
render services to the Company or a subsidiary or (ii) use for the benefit
of himself or others, any confidential information of the Company, any of the
Company’s subsidiaries or of the Company’s Business obtained by him, including,
without limitation, “know-how,” trade secrets, details of customers’ or
suppliers’ contracts, pricing policies, financial data, operational methods,
marketing and sales information, marketing plans or strategies, development
techniques or plans, plans to enter into any contract with any person or any
strategies relating thereto, technical processes, designs and design projects,
and other proprietary information of the Company, the Company’s subsidiaries or
of the Company’s Business or the business of any of the Company’s subsidiaries;
provided, however, that this provision shall not preclude Murphy
from (a) making any disclosure required by law or court order provided
Murphy has given the Company notice that he is required to make such disclosure
sufficiently in advance of such disclosure to permit the Company to seek
protection from such requirement or (b) using or disclosing information (i) known
generally to the public (other than information known generally to the public
as a result of a violation of this Section 2(b) by Murphy), (ii) acquired
by Murphy independently of his affiliation with the Company or any of the
Company’s subsidiaries without breach of any confidentiality obligation on the
part of the disclosing person, or (iii) of a general nature (that is, not
related specifically to the Company, any of its subsidiaries or the Company’s
Business) that ordinarily would be learned, developed or obtained by
individuals similarly active and/or employed in similar capacities by other
companies in the same business as the Company or any of the Company’s
subsidiaries.  Murphy agrees that all
confidential information of the Company or any of the Company’s subsidiaries
shall remain the Company’s or the Company’s subsidiaries, as the case may be,
and to promptly return any confidential information embodied in any physical or
electronic medium to the owner thereof upon the termination of Murphy’s
employment with the Company or at any other time on request.

 

(b)           No Solicitation. 
For the period of three (3) years and six (6) months following
the date hereof, Murphy shall not, directly or indirectly, (a) solicit any
employee to leave the employment of the Company or any of the Company’s
subsidiaries or (b) hire any employee who has left the employ of the
Company or any of the Company’s subsidiaries within six (6) months after
termination of such employee’s employment with the Company or such subsidiary,
as the case may be (unless such employee was discharged without cause),
provided a general solicitation by Murphy’s then employer not directed to
employees of the Company or any of the Company’s subsidiaries shall not be a
breach of this provision so long as Murphy does not participate in any manner
(including any vetting or interviewing of prospective employees).

 

2

 

(c)           Cooperation. 
From and after the date hereof, Murphy shall reasonably cooperate with
the Company and its subsidiaries with respect to all matters arising during or
related to his employment, including all matters (formal or informal) in
connection with any government investigation, internal investigation,
litigation (potential or ongoing), regulatory or other proceeding which may
have arisen or which may hereafter arise. 
The Company will reimburse Murphy for all out-of -pocket expenses (not
including lost time or opportunity), and will provide appropriate legal
representation in a manner determined by the Company.  From and after the date hereof through December 31,
2010, Murphy shall also reasonably cooperate with the Company and its
subsidiaries with respect to transitioning his services to the successor
Treasurer and Chief Financial Officer of the Company.

 

Section 3.  Rights and Remedies upon Breach of Covenants.

 

(a)           If Murphy breaches, or threatens to
commit a breach of, any of the provisions of Section 2 (the “Restrictive
Covenants”), the Company shall have the right and remedy to have the
Restrictive Covenants specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company, that such
injury shall be presumed and need not be proven, and that money damages will
not provide an adequate remedy to the Company. 
Such rights and remedies shall be independent of the others and
severally enforceable, and all of which rights and remedies shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity.

 

(b)           Murphy acknowledges and agrees that the
Restrictive Covenants are reasonable and valid in duration, scope and in all
other respects.  If any court determines
that any of the Restrictive Covenants, or any part thereof, is invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby be
affected and shall be given full effect to the greatest extent possible,
without regard to the invalid portions.

 

(c)           If any court construes any of the
Restrictive Covenants, or any part thereof, to be unenforceable because of the
duration of such provision or the scope, such court shall have the power to
reduce the duration or scope of such provision and, in its reduced form, such
provision shall be enforceable and shall be enforced to the greatest extent
possible.

 

Section 4.  Representations.  With respect to the period during which he
has been employed by the Company, Murphy represents, to the best of his
knowledge and belief, that (i) neither the financial books and records of
the Company and its subsidiaries nor any regulatory filings of the Company or
any of its subsidiaries with the Securities and Exchange Commission present any
accounting irregularities and that all financial information of the Company and
its subsidiaries was prepared in compliance with all applicable accounting
standards and all financial information in any regulatory filings of the
Company with the Securities and Exchange Commission conformed to the
regulations of the Securities Exchange Act of 1934, (ii) neither the
Company nor any subsidiary is in violation of any law and (iii) neither
the Company nor any subsidiary has failed to disclose any material information
required by law to be disclosed in any regulatory filings of the Company or
such subsidiary with the Securities and Exchange Commission.

 

3

 

Section 5.  General Release of Claims. 
In exchange for the promises set forth herein, Murphy, on behalf of
himself and his heirs, executors, administrators and assigns, hereby releases
and forever discharges the Company and its affiliates and subsidiaries, and all
of their respective directors, officers, employees, agents, successors, and
assigns, in their official and individual capacities (the “Company Releasees”),
from any and all suits, claims, demands, debts, sums of money, damages,
interest, attorneys’ fees, expenses, actions, causes of action, judgments,
accounts, promises, contracts, agreements, and any and all claims of law or in
equity, whether now known or unknown, which Murphy now has or ever have had
against any of the Company Releasees, including, but not limited to, any claims
under Title VII of the Civil Rights Act of 1964, the Americans With
Disabilities Act, the Age Discrimination in Employment Act, the Older Worker
Benefits Protection Act, the Family and Medical Leave Act, Massachusetts
General Laws Chapters 149 and 151B and any other federal, state or local
statute, regulation, ordinance or common law creating employment-related causes
of action, all claims related to or arising out of Murphy’s employment by the
Company or the termination of such employment and all rights and claims to
recover any monetary benefits or damages in connection with any proceeding
brought against any of the Company Releasees on Murphy’s behalf or on behalf of
a class of which Murphy may be a member with respect to any of the
foregoing.  This General Release of
Claims shall not apply to (a) any vested interest Murphy may have in any
401(k), pension or employee welfare plan by virtue of Murphy’s employment by
the Company; (b) any claim that may not be waived by law; and (c) any
claim by Murphy to enforce this Agreement. The releases set forth in
this Section 5 do not take effect unless this Agreement becomes effective
pursuant to Section 14 below.

 

Section 6.  Non-disparagement.  Murphy shall not take any action or make any
statement, written or oral, that disparages the Company, any of its
subsidiaries or any of their respective officers, directors, employees or
agents, or that has the intended or foreseeable effect of harming the Company’s
or any subsidiary’s reputation or the personal or business reputation of any of
their respective officers, directors, employees or agents.

 

Section 7.  Assignment.  In the event that the Company shall be merged
with, or consolidated into, any other person or entity, or in the event that it
shall sell and transfer substantially all of its assets to another person or
entity, the terms of this Agreement shall inure to the benefit of, and be
assumed by, the person or entity resulting from such merger or consolidation,
or to which the Company’s assets shall be sold and transferred. This Agreement
shall not be assignable by Murphy.

 

Section 8.  Governing Law. This Agreement will
be governed by the laws of the Commonwealth of Massachusetts without regard to
conflicts of laws principles that might lead to the application of the laws of
another jurisdiction.

 

Section 9.  Jurisdiction; Service of Process.  Any action or proceeding seeking to enforce
any provision of, or based on any right arising out of, this Agreement may be
brought against either of the parties in the state courts of Massachusetts or
in the United States District Court in Boston, Massachusetts and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on either party anywhere in the world.

 

4

 

Section 10.  Counterparts.  This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement, but in proving this Agreement, it shall not be
necessary to produce more than one of such counterparts.

 

Section 11.  Section Headings; Construction.  The headings of Sections in this Agreement
are provided for convenience only and will not affect its construction or
interpretation. All references to “Section” or “Sections” refer to the
corresponding Section or Sections of this Agreement unless otherwise
specified. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word “including” does not limit the preceding words or
terms.

 

Section 12.  Notices. All notices, consents,
waivers, and other communications under this Agreement shall be in writing and
will be deemed to have been duly given when (a) delivered by hand, (b) sent
by facsimile (with a copy sent by nationally recognized overnight delivery
service) or (c) when sent by nationally recognized overnight delivery
service, in each case to the appropriate addresses set forth below (or to such
other addresses as a party may designate by notice to the other parties):

 

	
   

  	
  Murphy:

  	
                                                 
  

  
	
   

  	
   

  	
                                                 
  

  
	
   

  	
   

  	
  Facsimile:

  
	
   

  	
   

  	
   

  
	
   

  	
  the Company:

  	
  Five Star
  Quality Care, Inc.

  
	
   

  	
   

  	
  400 Centre
  Street

  
	
   

  	
   

  	
  Newton, MA 02458

  
	
   

  	
   

  	
  Attention:
  President

  
	
   

  	
   

  	
  Facsimile:
  617.796.8385

  

 

Section 13.  Entire Agreement.  This Agreement constitutes the entire
agreement between the Company and Murphy with respect to the subject matter and
supersedes all prior written and oral agreements and understandings between the
Company and Murphy with respect thereto. This Agreement may not be amended
except by a written agreement executed by the party to be charged with the
amendment.

 

Section 14.  Consultation with Counsel; Time to Sign; Revocation.  Murphy has the right to and should consult an
attorney with respect to this Agreement. 
Murphy will have twenty-one (21) days from receipt of this Agreement to
decide whether to sign this Agreement. 
If this Agreement has not been returned to the Company, c/o its
President, signed by Murphy within twenty-one (21) days after receipt by
Murphy, this Agreement shall not be valid. 
Any changes made to this Agreement after Murphy receives it, whether
material or immaterial, will not start the running of a new 21-day
consideration period.  Murphy shall have
seven (7) days after signing this Agreement to revoke his signature, which
can be accomplished by delivering a written notice of revocation to the
Company, c/o its President, before the expiration of the seven (7) day
revocation period.  This Agreement shall
not be effective (and neither the Company nor Murphy have any obligations
hereunder) until the expiration of the seven (7) day revocation period.

 

5

 

Section 15.  Voluntary Execution; No representations.  By signing this Agreement Murphy acknowledges
that he is doing so knowingly and voluntarily, and that he is receiving
benefits hereunder to which he is not otherwise entitled.  Murphy also acknowledges that he is not
relying on any representations or promises by the Company or by any
representative of the Company concerning the meaning of any aspect of this
Agreement except as stated herein.

 

EXECUTED
under seal as of the date first above written.

 

 

	
   

  	
  Five Star
  Quality Care, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Bruce J.
  Mackey, Jr.

  
	
   

  	
   

  	
  Bruce J.
  Mackey, Jr., President

  
	
   

  	
   

  
	
   

  	
  /s/ Francis R.
  Murphy III

  
	
   

  	
  Francis R.
  Murphy III

  

 

6

 

EXHIBIT
A

 

ACCELERATED VESTING AGREEMENT

 

THIS
ACCELERATED VESTING AGREEMENT (this “Agreement”), dated as of
                      ,
2010, is by and among Five Star Quality Care, Inc., a Maryland corporation
(the “Company”) and Francis R. Murphy III (“Murphy”).

 

RECITAL

 

Pursuant to those certain Restricted Share Agreements, one dated as of November 17,
2007, and one dated November 24, 2008, by and between the Company and
Murphy (the “Restricted Share Agreements”), the Company granted Murphy
the Shares (as defined in each Restricted Share Agreement) subject to the
vesting and repurchase provisions described therein.

 

In connection with the termination of Murphy’s employment with the
Company pursuant to that certain Separation Agreement dated December 31,
2009 (the “Separation Agreement”), Murphy and the Company have agreed to
have all of the Shares granted pursuant to the Restricted Share Agreements vest
immediately, subject to and upon the terms and conditions set forth herein.

 

NOW,
THEREFORE, the parties agree as follows:

 

1.             Accelerated Vesting; Related Agreements.

 

(a)           Provided that Murphy shall have satisfied
his obligations under Section 1(b), the Company and Murphy hereby agree
that, effective as of the Separation Date (as defined in the Separation
Agreement), the Shares shall be fully vested and that the Company shall have no
further right to repurchase the Shares pursuant to Section 2 of the
Restricted Share Agreement.

 

(b)           Contemporaneously with the execution of
this Agreement, Murphy shall deliver to the Company, by bank or certified
check, an amount equal to the estimated withholding tax (as determined by the
Company) that will be due and payable in connection with the consummation of
the transactions contemplated by Section 1(a) unless the Company has
otherwise deducted such amounts from payments otherwise due Murphy pursuant to
the Separation Agreement.

 

(c)           Murphy acknowledges and agrees that (i) the
Shares have not been registered under the Securities Act of 1933, as amended,
or any state securities laws and may not be sold, pledged, transferred or
otherwise disposed of in the absence of an effective registration statement or
an opinion of counsel acceptable to the Company that registration is not
required, and (ii) any certificate or account statement representing the
Shares shall bear a legend substantially in the following form:

 

THE SHARES REPRESENTED
HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.  THE SHARES MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THESE
SHARES OR AN 

 

 

OPINION OF THE COMPANY’S
COUNSEL THAT REGISTRATION IS NOT REQUIRED.

 

(d)           Murphy acknowledges and agrees that he is
responsible for all tax obligations and/or liability created under state and
federal tax laws by virtue of the transactions contemplated hereby and agrees
to indemnify the Company for any tax liability that may be imposed on it by
virtue of such transactions.

 

2.             Miscellaneous Provisions.

 

(a)           Amendment, Modification and Severability. 
This Agreement may not be amended or modified or waived except by a
written agreement signed by the party against whom enforcement of such
amendment, modification or waiver is sought.

 

(b)           Notices.  All notices,
requests or other communications required or permitted hereunder shall be given
in writing and delivered by hand, overnight delivery service or certified mail
and shall be deemed to have been delivered on the date of receipt, to the
addresses set forth below:

 

The Company:

 

Five Star Quality Care, Inc.

400 Centre Street

Newton, MA 02458

Attn: 
President

 

Murphy:

 

Francis R. Murphy III

                                   

                      
 

 

(c)           Entire Agreement. 
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written.

 

(d)           Binding Effect. 
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators,
successors and permitted assigns, but this Agreement shall not be assigned by
any of the parties hereto without the prior written consent of the other
parties and any assignment made absent such consent shall be void ab initio.  This Agreement and the legal relations
between and among the parties hereto shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts without giving
effect to principles of conflicts of laws. 
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.  This
Agreement and other 

 

 

documents referred
to herein which form a part hereof, embody the entire agreement and
understanding of the parties hereto in respect of the subject matter
hereof.  There are no restrictions,
promises, warranties, covenants or undertakings other than those expressly set
forth or referred to herein.  This
Agreement supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof.

 

(e)           Further Assurances. 
From time to time after the date hereof, Murphy agrees to execute and
deliver such other instruments and take such other actions as the Company may
reasonably request in connection with the transactions contemplated hereby.

 

IN
WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as
of the date first above written.

 

 

	
   

  	
  Five Star Quality Care, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Francis R. Murphy III

  

 

 

EXHIBIT
B

 

Restricted Share Agreement between Francis R. Murphy
III and Five Star Quality Care, Inc. dated November 19, 2007.

 

Restricted Share Agreement between Francis R. Murphy
III and Five Star Quality Care, Inc. dated November 24, 2008.

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