DEFM14A 1 d769551ddefm14a.htm DEFM14A DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

Filed by the Registrant  ☒                            

Filed by a Party other than the Registrant  ☐

Check the appropriate box:  

 

  Preliminary Proxy Statement

 

 

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

 

 

Definitive Proxy Statement

  Definitive Additional Materials
  Soliciting Material Under Rule 14a-12

SOTHEBY’S

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

 

  (2)  

Aggregate number of securities to which transaction applies:

 

 

  (3)  

 

 

  (4)  

Proposed maximum aggregate value of transaction:

 

 

  (5)  

Total fee paid:

 

 

  Fee paid previously with preliminary materials.


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  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
  (1)  

Amount previously paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 


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LOGO

 

    

August 7, 2019

Dear Fellow Stockholder:

On behalf of the board of directors of Sotheby’s (the “Board”), we are pleased to invite you to attend a Special Meeting of Stockholders (the “special meeting”). The special meeting will be held at our offices located at 1334 York Avenue, New York 10021, on Thursday, September 5, 2019, at 9:00 a.m., Eastern Daylight Saving Time.

On June 16, 2019, Sotheby’s entered into an Agreement and Plan of Merger, as it may be amended from time to time (the “merger agreement”), with BidFair USA LLC, a Delaware limited liability company (“Parent”), and BidFair MergeRight Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the merger agreement, Merger Sub will be merged with and into Sotheby’s (the “merger”), with Sotheby’s continuing as the surviving corporation and a wholly owned subsidiary of Parent. At the special meeting you will be asked to consider and vote upon (i) a proposal to adopt the merger agreement and (ii) a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for Sotheby’s named executive officers in connection with the merger.

If the merger is completed, you will be entitled to receive $57.00 in cash, without interest, for each share of Sotheby’s common stock owned by you, which represents a premium of approximately 61% to the closing price of Sotheby’s common stock as of June 14, 2019, the last trading day prior to the public announcement of the execution of the merger agreement.

The Board has (i) determined that (a) the merger agreement, (b) the equity commitment letter, dated June 16, 2019, from Next Alt S.à r.l. to Parent, (c) the guaranty of Next Luxembourg S.C.Sp., dated June 16, 2019, and (d) the voting and support agreement, dated June 16, 2019, by and among Parent, Merger Sub and certain stockholders of Sotheby’s (we refer to (b), (c) and (d), collectively, as the “ancillary documents”), the merger and the other transactions contemplated by the merger agreement and the ancillary documents are advisable to, and in the best interests of, Sotheby’s and its stockholders; (ii) approved and declared advisable the merger agreement and the execution, delivery, and performance by Sotheby’s of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement; (iii) approved the ancillary documents and the execution, delivery and performance of the ancillary documents by their respective parties and the consummation of the transactions contemplated by the ancillary documents; (iv) directed that the merger agreement be submitted to Sotheby’s stockholders for adoption at the special meeting; and (v) recommended that Sotheby’s stockholders vote to adopt the merger agreement and to approve and/or adopt such other matters that are submitted to the stockholders at the special meeting in connection with the merger agreement. Our Board made its determination after consultation with its legal and financial advisors and consideration of a number of factors.

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the shares of Sotheby’s common stock outstanding as of the close of business on the record date for the special meeting. Our Board recommends that you vote “FOR” approval of the proposal to adopt the merger agreement.

The proposal to approve, by non-binding, advisory vote, certain compensation arrangements for Sotheby’s named executive officers in connection with the merger requires the affirmative vote of the holders of a majority of the shares of Sotheby’s common stock that are present in person or by proxy at the special meeting and entitled to vote on such proposal. Our Board recommends that you vote “FOR” the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for Sotheby’s named executive officers in connection with the merger.

Your vote is very important. The merger cannot be completed unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of Sotheby’s common stock entitled to vote on the proposal to adopt the merger agreement. Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or the Internet. If you attend the special meeting and vote in person, your vote by


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ballot will revoke any proxy previously submitted. The failure to return your proxy or vote at the special meeting in person will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

If your shares of common stock are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares of common stock without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares of common stock in accordance with the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares of common stock “FOR” approval of the proposal to adopt the merger agreement will have the same effect as voting “AGAINST” approval of the proposal to adopt the merger agreement.

The accompanying proxy statement provides you with detailed information about the special meeting and the merger agreement. A copy of the merger agreement is attached as Annex A to the proxy statement, and is incorporated by reference therein. We encourage you to read the entire proxy statement and its annexes, including the merger agreement, carefully. You may also obtain additional information about Sotheby’s from documents we have filed with the Securities and Exchange Commission.

Your vote is very important to us. Regardless of the number of shares you own and whether or not you attend the meeting, please vote. You may vote by toll-free telephone, via the Internet or, if you request that the proxy materials be mailed to you, by completing, dating and signing the proxy card and returning it in the envelope provided. No postage is required if the proxy card is mailed in the United States. If present at the meeting, you may revoke your proxy and vote in person.

Attendance at the meeting will be limited to stockholders as of August 6, 2019, the record date for the special meeting, or their authorized representatives, and our guests.

If you have any questions or need assistance voting your shares of Sotheby’s common stock, please contact Innisfree M&A Incorporated, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833. We look forward to seeing you at the meeting.

Cordially,

 

 

LOGO

Domenico De Sole

Chairman of the Board of Directors

 

 

LOGO

Thomas S. Smith, Jr.

President and Chief Executive Officer

The proxy statement is dated August 7, 2019, and is first being mailed on or about August 7, 2019 to our stockholders who owned shares of Sotheby’s common stock as of the close of business on August 6, 2019.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THE ACCOMPANYING PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


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LOGO

 

    

August 7, 2019

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held September 5, 2019

To the Stockholders of

Sotheby’s:

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Sotheby’s (the “Company” or “Sotheby’s”) will be held at the Company’s offices, 1334 York Avenue, New York, NY 10021, on Thursday, September 5, 2019, at 9:00 a.m., Eastern Daylight Saving Time, for the following purpose:

 

   

To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of June 16, 2019, as it may be amended from time to time (the “merger agreement”), by and among the Company, BidFair USA LLC, a Delaware limited liability company (“Parent” or “BidFair”), and BidFair MergeRight Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). A copy of the merger agreement is attached as Annex A to the accompanying proxy statement. Pursuant to the merger agreement, Merger Sub will be merged with and into the Company (the “merger”), with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent.

 

   

To consider and vote on a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

The merger agreement, the equity commitment letter, dated June 16, 2019, from Next Alt S.à r.l. to Parent (the “equity commitment letter”), the guaranty of Next Luxembourg S.C.Sp., dated June 16, 2019 (the “guaranty”), and the voting and support agreement, dated June 16, 2019, by and among Parent, Merger Sub and each of (i) certain stockholders affiliated with Third Point LLC, (ii) Domenico De Sole and (iii) Thomas S. Smith, Jr. (the “voting and support agreement” and, together with the equity commitment letter and the guaranty, the “ancillary documents”) and the transactions contemplated by such agreements are described more fully in the attached proxy statement, which we urge you to read carefully and in its entirety.

Our board of directors (the “Board”) has (i) determined that the merger agreement, the ancillary documents, the merger and the other transactions contemplated by the merger agreement and the ancillary documents are advisable to, and in the best interests of, the Company and the Company’s stockholders; (ii) approved and declared advisable the merger agreement and the execution, delivery, and performance by the Company of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement; (iii) approved the ancillary documents and the execution, delivery and performance of the ancillary documents by their respective parties and the consummation of the transactions contemplated by the ancillary documents; (iv) directed that the merger agreement be submitted to Company’s stockholders for adoption at the special meeting; and (v) recommended that the Company’s stockholders vote to adopt the merger agreement and to approve and/or adopt such other matters that are submitted to the stockholders at the special meeting in connection with the merger agreement. The Board made its determination after consultation with its legal and financial advisors and consideration of a number of factors.

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the shares of the Company’s common stock outstanding as of the close of business on the record date for the special meeting. The proposal to approve, by non-binding, advisory vote, certain compensation


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arrangements for the Company’s named executive officers in connection with the merger requires the affirmative vote of the holders of a majority of the shares of the Company’s common stock that are present in person or by proxy at the special meeting and entitled to vote on such proposal.

The Board recommends that you vote “FOR” approval of the proposal to adopt the merger agreement and “FOR” approval of the proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

Your vote is very important, regardless of the number of shares of our common stock you own. Because stockholders cannot take any action at the meeting unless a majority of our common stock issued and outstanding and entitled to vote thereat is represented, it is important that you attend the meeting in person or are represented by proxy at the meeting. The merger cannot be completed unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the shares of our outstanding common stock entitled to vote thereon. Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying postage-paid reply envelope, or submit your proxy by telephone or the Internet. If your shares of our common stock are held in “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares of our common stock without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares of our common stock in accordance with the procedures provided by your bank, brokerage firm or other nominee. If you fail to return your proxy card, submit your proxy by telephone or the Internet or vote in person, or if your shares are held in “street name” by your bank, brokerage firm or other nominee and you fail to instruct your bank, brokerage firm or other nominee to vote your shares of common stock, your shares of our common stock will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

Stockholders who do not vote in favor of the proposal to approve the merger agreement, and who object in writing to the merger prior to the special meeting and comply with all of the applicable requirements of Delaware law, which are summarized in the section entitled “Appraisal Rights” in the accompanying proxy statement and reproduced in its entirety as Annex D to this proxy statement, will be entitled to rights of appraisal to obtain the fair value of their shares of common stock of the Company.

You may revoke your proxy before the special meeting, by voting over the Internet or by telephone (only your latest Internet or telephone vote is counted) or by signing a new proxy and mailing it, in each case, in accordance with the instructions on the enclosed proxy card. In addition, you may revoke your proxy by attending the special meeting, requesting that your proxy be revoked and voting in person; however, attending the special meeting will not revoke your Internet vote, telephone vote or proxy, as the case may be, unless you specifically request it.

The Board has fixed the close of business on August 6, 2019 as the record date for determination of stockholders entitled to receive notice of, and to vote at, the special meeting and any adjournments or postponements thereof. Only stockholders of record as of the close of business on the record date are entitled to receive notice of, and to vote at (in person or by proxy), the special meeting and at any adjournment or postponement thereof. You will be entitled to one vote for each share of the Company’s common stock that you owned on the record date. A complete list of our stockholders of record entitled to vote at the special meeting will be available for inspection at our principal executive offices at 1334 York Avenue, New York 10021 at least ten (10) days prior to the date of the special meeting and continuing through the special meeting for any purpose germane to the meeting. The list will also be available at the meeting for inspection by any stockholder present at the meeting.


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Only stockholders of record (including “street name” stockholders who can show that they beneficially owned our common stock on the record date), their duly appointed proxy holders and our guests may attend the special meeting. If you hold your shares through a bank, brokerage firm or other nominee, you will not be admitted to the special meeting unless you bring a legal proxy or a copy of a statement (such as a brokerage statement) from your bank, brokerage firm or other nominee reflecting your stock ownership as of the record date. Additionally, in order to be admitted to the special meeting, you must bring a driver’s license, passport or other form of government-issued identification to verify your identity. If you are the representative of a corporate or institutional stockholder, you must present valid photo identification along with proof that you are the representative of such stockholder.

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE PAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU ATTEND THE SPECIAL MEETING AND VOTE IN PERSON, YOUR VOTE BY BALLOT WILL REVOKE ANY PROXY PREVIOUSLY SUBMITTED.

By Order of the Board of Directors

 

LOGO

David G. Schwartz

Senior Vice President, Chief Securities Counsel

and Corporate Secretary


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Introduction

     1  

SUMMARY

     2  

Parties to the Merger

     2  

The Special Meeting

     2  

Time, Place and Purpose of the Special Meeting

     2  

Record Date and Quorum

     2  

Vote Required

     3  

Proxies and Revocation

     3  

The Merger

     3  

The Merger Consideration

     4  

Reasons for the Merger; Recommendation of the Board

     4  

Opinion of Financial Advisor

     5  

Financing of the Merger

     5  

Interests of Certain Persons in the Merger

     5  

Material U.S. Federal Income Tax Consequences of the Merger

     7  

Regulatory Approvals

     7  

Litigation Related to the Merger

     7  

The Merger Agreement

     8  

Treatment of Common Stock, Stock-Based Awards and Performance Awards

     8  

No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes

     10  

Conditions to the Merger

     10  

Termination

     10  

Termination Fee

     12  

Parent Termination Fee

     13  

Remedies

     13  

Market Price of Common Stock

     13  

Appraisal Rights

     14  

Delisting and Deregistration of Common Stock

     14  

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     15  

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     23  

PARTIES TO THE MERGER

     24  

The Company

     24  

Parent

     24  

Merger Sub

     24  

THE SPECIAL MEETING

     25  

Date, Time and Place of the Special Meeting

     25  

Purpose of the Special Meeting

     25  

Record Date and Quorum

     25  

Attendance

     26  

Vote Required

     26  

Voting

     28  

Voting by the Company’s Directors and Executive Officers

     29  

Proxies and Revocation

     29  

 


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Anticipated Date of Completion of the Merger

     30  

Rights of Stockholders Who Seek Appraisal

     30  

Adjournments

     31  

Solicitation of Proxies; Payment of Solicitation Expenses

     31  

Questions and Additional Information

     31  

THE MERGER

     32  

Per Share Merger Consideration

     32  

Background of the Merger

     32  

Reasons for the Merger; Recommendation of the Company’s Board of Directors

     46  

Opinion of the Company’s Financial Advisor

     51  

Certain Company Forecasts

     61  

Financing of the Merger

     64  

Closing and Effective Time

     65  

Payment of the Per Share Merger Consideration and Surrender of Stock Certificates

     66  

Interests of Certain Persons in the Merger

     67  

Treatment of Outstanding Equity-Based and Performance Awards

     67  

Agreement with Thomas S. Smith, Jr.

     70  

Executive Severance Plan

     70  

Separation Agreement with David Goodman

     71  

2019 Annual Bonus

     72  

Indemnification and Insurance

     73  

Material U.S. Federal Income Tax Consequences of the Merger

     73  

Information Reporting and Backup Withholding

     75  

Regulatory Approvals

     75  

HSR Approval

     75  

CFIUS Clearance

     76  

Efforts to Obtain Regulatory Approvals

     77  

Litigation Related to the Merger

     77  

THE MERGER AGREEMENT

     78  

Explanatory Note Regarding the Merger Agreement

     78  

Effects of the Merger; Directors and Officers; Certificate of Incorporation; By-laws

     78  

Closing and Effective Time

     79  

Treatment of Common Stock and Stock-Based Awards

     79  

Surrender and Payment Procedures

     81  

Representations and Warranties

     82  

Representations and Warranties of the Company

     82  

Material Adverse Effect

     83  

Representations and Warranties of Parent

     85  

Conduct of Our Businesses Pending the Merger

     85  

No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes

     89  

No Solicitation

     89  

Non-Solicitation Exceptions

     91  

Notification to Parent

     91  

Change of Recommendation or Termination of Merger Agreement

     92  

The Special Meeting

     93  

 


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Filings; Other Actions; Notification

     94  

Financing

     96  

Treatment of Outstanding Debt

     97  

Employee Benefits Matters

     97  

Conditions to the Merger

     98  

Termination

     100  

Termination Fees

     101  

Fees and Expenses

     103  

Remedies

     103  

Indemnification; Directors’ and Officers’ Insurance

     104  

Amendment or Supplement

     105  

Governing Law; Jurisdiction

     105  

THE VOTING AND SUPPORT AGREEMENT

     106  

Explanatory Note Regarding the Voting and Support Agreement

     106  

Summary

     106  

NON-BINDING ADVISORY VOTE ON MERGER-RELATED COMPENSATION FOR THE COMPANY’S NAMED EXECUTIVE OFFICERS

     108  

Golden Parachute Compensation

     108  

The Compensation Proposal

     111  

MARKET PRICE OF COMMON STOCK

     112  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     113  

APPRAISAL RIGHTS

     116  

HOUSEHOLDING OF PROXY MATERIALS

     122  

DELISTING AND DEREGISTRATION OF OUR COMMON STOCK

     122  

OTHER MATTERS

     123  

SUBMISSION OF STOCKHOLDER PROPOSALS

     123  

WHERE YOU CAN FIND MORE INFORMATION

     125  
ANNEX A: AGREEMENT AND PLAN OF MERGER      A-1  
ANNEX B: VOTING AND SUPPORT AGREEMENT      B-1  
ANNEX C: OPINION OF LIONTREE ADVISORS LLC      C-1  
ANNEX D: SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW      D-1  

 


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LOGO

1334 York Avenue

New York, New York 10021

 

 

PROXY STATEMENT

 

 

Special Meeting of Stockholders

 

 

Introduction

This proxy statement is being furnished to the stockholders of Sotheby’s, a Delaware corporation (the “Company” or “Sotheby’s”) in connection with the solicitation of proxies by our board of directors (the “Board”), for use at a special meeting of stockholders and at any adjournments thereof (the “special meeting”). Stockholders will be asked:

 

   

to consider and vote on a proposal (the “merger proposal”) to adopt the Agreement and Plan of Merger, dated as of June 16, 2019 as it may be amended from time to time (the “merger agreement”), by and among the Company, BidFair USA LLC, a Delaware limited liability company (“Parent” or “BidFair”) and BidFair MergeRight Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”); and

 

   

to consider and vote on a proposal (the “compensation proposal”) to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

A copy of the merger agreement is attached as Annex A to the accompanying proxy statement. Pursuant to the merger agreement, Merger Sub will be merged with and into the Company (the “merger”), with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent.

 

 

LOGO

  

 

Special Meeting Proxy Statement  

 

 

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SUMMARY

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 125 of this proxy statement.

Parties to the Merger (Page 24)

Sotheby’s

The Company, a Delaware corporation, with headquarters in New York, New York, has been uniting collectors with world-class works of art since 1744. The Company presents auctions in ten different salesrooms, including New York, London, Hong Kong and Paris, and Sotheby’s BidNow program allows visitors to view all auctions live online and place bids from anywhere in the world.

The Company has a global network of 80 offices in 40 countries and is the oldest company listed on the New York Stock Exchange, under the symbol “BID.”

BidFair USA LLC

BidFair USA LLC, a Delaware limited liability company, is a special purpose vehicle formed for purposes of effectuating the merger.

BidFair MergeRight Inc.

BidFair MergeRight Inc., a Delaware corporation, is a special purpose vehicle formed for purposes of effectuating the merger. BidFair MergeRight Inc. is one hundred percent (100%) owned by BidFair USA LLC.

The Special Meeting (Page 25)

Time, Place and Purpose of the Special Meeting (Page 25)

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the Board for use at the special meeting to be held at the Company’s offices, 1334 York Avenue, New York, NY 10021, on Thursday, September 5, 2019, at 9:00 a.m., Eastern Daylight Saving Time.

At the special meeting, holders of our Common Stock, par value $0.01 per share (our “common stock,” and the holders of which, our “stockholders”), will be asked to approve the merger proposal and the compensation proposal.

Record Date and Quorum (Page 25)

You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of our common stock at the close of business on August 6, 2019, which the Board has set as the record date for the special meeting. As of the close of business on the record date, there were 46,613,735 shares of common stock outstanding. Each holder of our common stock is entitled to cast one vote per share. The

 

 

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  Special Meeting Proxy Statement

  

 

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Summary

 

 

presence at the special meeting, in person or represented by proxy, of the holders of a majority of the shares of the Company’s common stock outstanding as of the close of business on the record date constitutes a quorum. Abstentions (as described in the section entitled “The Special Meeting—Vote Required” starting on page 26) are counted as present for the purpose of determining whether a quorum is present.

Vote Required (Page 26)

Approval of the merger proposal requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding as of the close of business on the record date.

Approval of the compensation proposal requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy at the special meeting and entitled to vote on such proposal.

As of the record date, the current directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 7,179,122 shares of our common stock (not including any shares of our common stock deliverable upon exercise of or underlying any Company DSUs, Company PSUs or Company RSUs (as defined below)), representing approximately 15.40% of the outstanding voting power of our common stock.

Proxies and Revocation (Page 29)

Any stockholder of record entitled to vote at the special meeting may vote in person by appearing at the special meeting, or by submitting a proxy via the Internet, by telephone, or by mail using the enclosed postage-paid envelope. If you are a beneficial owner of our common stock and your shares are held in “street name,” you should instruct your bank, brokerage firm or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or you do not provide your bank, brokerage firm or other nominee with instructions, as applicable, your shares of our common stock will not be voted on the merger proposal, which will have the same effect as a vote “AGAINST” approval of the merger proposal.

You have the right to revoke a proxy. You may revoke your proxy before the special meeting, by voting over the Internet or by telephone (only your latest Internet or telephone vote is counted) or by signing a new proxy and mailing it, in each case, in accordance with the instructions on the enclosed proxy card. In addition, you may revoke your proxy by attending the special meeting, requesting that your proxy be revoked and voting in person; however, attending the special meeting will not revoke your Internet vote, telephone vote or proxy, as the case may be, unless you specifically request it.

The Merger (Page 32)

The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation following the merger. We refer to the time when the merger becomes effective as the effective time. As a result of the merger, the Company will cease to be a publicly traded company and will become a wholly owned subsidiary of Parent. You will not own any shares of the capital stock of the surviving corporation. Unless the merger is terminated in accordance with the merger agreement, the closing of the merger (the “closing”), will take place on the fifth (5th) business day after

 

 

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Special Meeting Proxy Statement  

 

 

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certain conditions set forth in the merger agreement have been satisfied or waived by the party entitled to the benefit of such condition (the “closing date”).

The Merger Consideration (Page 32)

In the merger, each outstanding share of our common stock will automatically be converted into the right to receive an amount of cash equal to $57.00 (the “per share merger consideration”), without interest, other than shares of our common stock that are (i) held in the treasury of the Company or owned by any subsidiary of the Company or owned by Parent, Merger Sub or any other subsidiary or affiliate of Parent (collectively, the “excluded shares”); and (ii) owned by stockholders who have neither voted in favor of the merger nor consented thereto in writing and properly exercised and perfected their statutory rights of appraisal in accordance with Section 262 of the DGCL (the “dissenting shares”).

Reasons for the Merger; Recommendation of the Board (Page 46)

After careful consideration of various factors as described in the section entitled “The Merger—Reasons for the Merger; Recommendation of the Company’s Board of Directors” beginning on page 46, the Board has determined that (i) the merger agreement, (ii) the equity commitment letter, dated June 16, 2019, from Next Alt S.à r.l. (“NEXT”) to Parent, (iii) the guaranty of Next Luxembourg S.C.Sp., dated June 16, 2019 (the “guaranty”), and (iv) the voting and support agreement, dated June 16, 2019, by and among Parent, Merger Sub and certain stockholders of Sotheby’s (we refer to (ii), (iii) and (iv) collectively as the “ancillary documents”), the merger and the other transactions contemplated by the merger agreement and the ancillary documents, are advisable to, and in the best interests of, the Company and the Company’s stockholders and approved and declared advisable the merger agreement and the execution, delivery and performance by the Company of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement. The Board approved the ancillary documents and the execution, delivery and performance of the ancillary documents by their respective parties and the consummation of the transactions contemplated by the ancillary documents. The Board has also resolved that the merger agreement be submitted for consideration by the stockholders of the Company at the special meeting and recommended that the stockholders of the Company vote to adopt the merger agreement and to approve and/or adopt such other matters that are submitted to the stockholders at the special meeting in connection with the merger agreement. Our Board made its determination after consultation with its legal and financial advisors and consideration of a number of factors.

In considering the recommendation of the Board with respect to the merger proposal, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, yours. The Board was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See “The Merger—Interests of Certain Persons in the Merger” beginning on page 67.

Our Board recommends that you vote “FOR” approval of the merger proposal and “FOR” approval of the compensation proposal.

 

 

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Opinion of Financial Advisor (Page 51)

On June 16, 2019, at a meeting of the Board, LionTree Advisors LLC (“LionTree”) rendered an oral opinion to the Board (which was subsequently confirmed in writing by delivery of LionTree’s written opinion dated June 16, 2019) as to the fairness, from a financial point of view, as of such date, of the per share merger consideration to the holders of Sotheby’s common stock, other than excluded shares and dissenting shares, based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken, and other matters considered by LionTree in preparing its opinion.

LionTree’s opinion was provided to, and for the benefit of, the Board in connection with its evaluation of the merger and only addressed the fairness, from a financial point of view, of the per share merger consideration to be received by the holders of Sotheby’s common stock (other than excluded shares and dissenting shares) in the merger pursuant to the merger agreement (without giving any effect to any impact of the merger and other transactions contemplated by the merger agreement on any particular stockholder of Sotheby’s other than in its capacity as a holder of Sotheby’s common stock). The summary of LionTree’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex C to this proxy statement and incorporated herein by reference, and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken, and other matters considered by LionTree in preparing its opinion. However, neither LionTree’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement constitutes a recommendation to any holder of Sotheby’s common stock as to how such stockholder should vote or act on any matter relating to the merger and other transactions contemplated by the merger agreement or any other matter.

Financing of the Merger (Page 64)

The merger agreement does not contain any condition to the obligations of Parent or Merger Sub relating to the receipt of financing. Parent and Merger Sub have secured committed financing, consisting of a combination of equity financing to be provided by NEXT and debt financing from BNP Paribas Securities Corp. and BNP Paribas, the aggregate proceeds of which, together with cash or cash equivalents held by Parent as of the effective time, Parent and Merger Sub have represented will be sufficient for Parent and Merger Sub to pay all amounts required to be paid by Parent and Merger Sub in cash in connection with the merger and the other transactions contemplated by the merger agreement, including the aggregate per share merger consideration and other fees and expenses under the merger agreement.

For further information with respect to the financing of the merger, see the section titled “The Merger—Financing of the Merger” beginning on page 64.

Interests of Certain Persons in the Merger (Page 67)

In considering the recommendation of the Board that you vote to adopt the merger agreement, you should be aware that aside from their interests as Company stockholders, the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, those of Company stockholders generally. These interests include, among others:

 

   

Under the merger agreement, in connection with the closing, deferred stock units issued by the Company (“Company DSUs”) and performance share units issued by the Company (“Company

 

 

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PSUs”) that are subject to performance conditions based on the price of the Company’s common stock (“Company Share Price PSUs”), will be cancelled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, based on the per share merger consideration.

 

   

Company equity awards other than Company DSUs and Company Share Price PSUs will, in connection with the closing, be cancelled, extinguished and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax based on the per share merger consideration that will (a) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions for performance cash units issued by the Company (“Company PCUs”) and Company PSUs) as were applicable immediately prior to the effective time, and (b) vest in full to the extent the holder of such Company equity award is subject to a qualifying termination.

 

   

Mr. Thomas S. Smith, Jr.’s existing employment agreement provides for “double-trigger” (i.e., benefits that require two conditions, which are the closing of the merger as well as a qualifying termination of employment) severance benefits in the event of a qualifying termination of employment.

 

   

The Company’s Executive Severance Benefits Plan (as amended and restated, the “executive severance plan”) covers each of the Company’s current executive officers other than Mr. Smith, and provides for “double-trigger” severance benefits in the event of certain qualifying terminations of employment in connection with or within the twenty-four (24) months following the merger.

 

   

The Separation Agreement and General Release entered into by the Company and Mr. Goodman, which treats Mr. Goodman’s termination of employment as a qualifying termination of employment in anticipation of the merger, generally entitling him to the “double-trigger” severance benefits under the executive severance plan.

 

   

In the event that the closing date occurs during the 2019 fiscal year, the merger agreement provides that the Company shall pay bonus eligible employees (including executive officers) an amount equal to 75% of the bonus payable in respect of the 2019 fiscal year assuming achievement at target, and following the completion of the 2019 fiscal year, shall determine the amount of such bonus payable in respect of the 2019 fiscal year based on performance actually achieved, with payment of the positive difference (if any) of such amounts at the time annual bonuses have historically been paid by the Company.

 

   

The Company’s directors and officers will be entitled to certain ongoing indemnification and coverage under directors’ and officers’ liability insurance policies pursuant to the merger agreement.

Members of the Board were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to the Company’s stockholders that the merger agreement be adopted. For more information, see the sections entitled “The Merger—Background of the Merger” beginning on page 32 and “The Merger—Reasons for the Merger; Recommendation of the Company’s Board of Directors” beginning on page 46. These interests are described in more detail below, and certain of them are quantified in the narrative and in

 

 

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the section entitled “Non-Binding, Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation” beginning on page 108.

Material U.S. Federal Income Tax Consequences of the Merger (Page 73)

If you are a U.S. holder (as defined under “The Merger—Material U.S. Federal Income Tax Consequences of the Merger”), the receipt of cash in exchange for shares of common stock pursuant to the merger will generally be a taxable transaction for U.S. federal income tax purposes. You should consult your own tax advisor regarding the particular tax consequences to you of the exchange of shares of common stock for cash pursuant to the merger in light of your particular circumstances (including the application and effect of any state, local or foreign income and other tax laws). You should read “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 73 for a more detailed discussion of the U.S. Federal income tax consequences of the merger. You should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

Regulatory Approvals (Page 75)

The Company, Parent and Merger Sub have agreed to cooperate with each other and use commercially reasonable efforts to promptly take all actions, and to do, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate, in the most expeditious manner practicable, the merger and the other transactions contemplated by the merger agreement, including preparing and filing all forms, registrations and notices required to be filed and taking such actions as are reasonably necessary to obtain any requisite approvals, consents, orders, exemptions or waivers by any governmental authority or other third party. These filings and actions include (i) those required pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (ii) the filing of a joint voluntary notice to the Committee on Foreign Investment in the United States (“CFIUS”), and (iii) filings required by certain other non-U.S. governmental authorities relating to antitrust and competition matters. You should read “The Merger—Regulatory Approvals” beginning on page 75 for a more detailed discussion of the parties’ obligations with respect to obtaining regulatory and other third-party approvals in connection with the merger.

On July 5, 2019, the Company and Parent submitted a draft joint voluntary notice with CFIUS. On July 22, 2019, the Company and Parent filed the final joint voluntary notice with CFIUS. On July 29, 2019, CFIUS accepted the final joint voluntary notice. In accordance with the letter of acceptance from CFIUS, the 45-day initial review period commenced on July 29, 2019 and will conclude no later than September 11, 2019.

On July 10, 2019, the Federal Trade Commission (the “FTC”) granted early termination of the waiting period under the HSR Act.

Litigation Related to the Merger (Page 77)

On July 17, July 19, July 23 and August 1, 2019, purported stockholders of the Company filed actions in the United States District Court for the Southern District of New York and in the United States District Court for the District of Delaware, captioned Stein v. Sotheby’s, et al., Case No. 1:19-cv-06669 (S.D.N.Y.),

 

 

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Goffmna v. Sotheby’s, et al., Case No. 1:19-cv-06733 (S.D.N.Y.), Kent v. Sotheby’s, et al., Case No. 1:19-cv-01374-UNA (D. Del.) and Stevens v. Sotheby’s, et al., Case No. 1:19-cv-7198 (S.D.N.Y), respectively, alleging that a preliminary version of this proxy statement was inaccurate or incomplete. The actions name the Company and the members of the Board as defendants. The Company believes the allegations in these actions are without merit.

For additional information regarding the pending litigation, please see the section entitled “The Merger—Litigation Related to the Merger” beginning on page 76.

The Merger Agreement (Page 78)

Treatment of Common Stock, Stock-Based Awards and Performance Awards (Page 79)

 

   

Common Stock. Each share of our common stock outstanding immediately prior to the effective time (other than excluded shares and dissenting shares) will be converted into the right to receive from Parent $57.00 in cash.

 

   

Deferred Stock Units. Each Company DSU that is outstanding immediately prior to the effective time shall be cancelled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (x) the total number of shares underlying such Company DSUs and (y) $57.00.

 

   

Share Price Performance Share Units. Each Company Share Price PSU that is outstanding immediately prior to the effective time shall be cancelled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (x) the total number of shares earned in accordance with the terms and conditions set forth in the award agreement as reasonably determined by the compensation committee of the Board (the “Compensation Committee”), and (y) $57.00.

 

   

Other Company Equity and Equity-Based Awards. Except as otherwise agreed by and between Parent and a holder of a Company equity award (other than a Company DSU, a Company Share Price PSU or a Company equity award that is subject to Section 409A of the Internal Revenue Code of 1986 (the “Code”)) prior to the effective time:

 

   

Performance Cash Units. As of the effective time, each Company PCU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company PCU, be canceled, extinguished and converted into an award (each of which, a “Converted PCU”), representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal in value to the product of (i) $57.00 multiplied by (ii) the number of shares represented by Company PCUs deemed earned as of immediately prior to the effective time (125% of target for Company PCUs with a performance period ending on December 31, 2019, 100% of target for Company PCUs with a performance period ending on December 31, 2020 and 100% of target for Company PCUs with a performance period ending on December 31, 2021). Each Converted PCU shall (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions) as were applicable to the corresponding Company PCU immediately prior to the effective time and (B) vest in full to

 

 

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the extent the holder of a Converted PCU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing.

 

   

Performance Share Units. As of the effective time, each Company PSU other than a Company Share Price PSU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company PSU, be canceled, extinguished and converted into an award (each of which, a “Converted PSU”) representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal in value to the product of (i) $57.00 multiplied by (ii) the number of Company PSUs deemed earned as of immediately prior to the effective time (125% of target for Company PSUs with a performance period ending on December 31, 2019, 100% of target for Company PSUs with a performance period ending on December 31, 2020 and 100% of target for Company PSUs with a performance period ending on December 31, 2021). Each Converted PSU shall (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions) as were applicable to the corresponding Company PSU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted PSU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing.

 

   

Restricted Cash Units. As of the effective time, each Company restricted cash unit (a “Company RCU”) that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company RCU, be canceled, extinguished and converted into an award (each of which, a “Converted RCU”), representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (i) $57.00 multiplied by (ii) the number of shares represented by outstanding Company RCUs as of immediately prior to the effective time. Each Converted RCU shall (A) vest and settle on terms (including acceleration events) as were applicable to the corresponding Company RCU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted RCU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing.

 

   

Restricted Stock Units. As of the effective time, each Company restricted stock unit (“Company RSU”) that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company RSU, be canceled, extinguished and converted into an award (each of which, a “Converted RSU”) representing the right to receive from the surviving corporation an amount in cash, without interest, and subject to any applicable withholding tax, equal to the product of (i) $57.00 multiplied by (ii) the total number of shares underlying such Company RSU as of immediately prior to the effective time. Each Converted RSU shall (A) vest and settle on terms (including acceleration events) as were applicable to the corresponding Company RSU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted RSU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing.

 

 

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No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes (Page 89)

The merger agreement provides that we are not permitted to solicit, initiate, propose or knowingly facilitate, induce or encourage any inquiries or the making of any proposal or offer that constitutes or would reasonably be expected to lead to an alternative transaction proposal (as defined in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes” beginning on page 89). The merger agreement also provides that we may not enter into, continue or otherwise participate or engage in any discussions or negotiations regarding, or furnish to any person any information with respect to, or cooperate in any way that would otherwise reasonably be expected to lead to, any alternative transaction proposal.

Notwithstanding these restrictions, under certain circumstances, we may, prior to the time the merger agreement is adopted by our stockholders, and subject to certain obligations to provide Parent with advance written notice, (x) make a Company adverse recommendation change (as defined in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes—Non-Solicitation Exceptions” beginning on page 91) (A)(1) in response to a superior proposal (as defined in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes” beginning on page 89) that is made and not withdrawn (and that continues to be a superior proposal) or (2) if an intervening event (as defined in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes—Non-Solicitation Exceptions” beginning on page 91) has occurred and (B) the Board determines in good faith (after consultation with its outside legal counsel and financial advisor) that failure to take such action in response to such superior proposal or intervening event, as applicable, would violate the directors’ fiduciary duties under applicable law, or (y) subject to certain obligations to negotiate with Parent in good faith prior to termination and the payment of the Company termination fee (as defined in the section entitled “Summary—The Merger Agreement—Termination” beginning on page 10), authorize the Company to terminate the merger agreement in order to enter into a definitive written agreement with respect to such superior proposal (a “superior proposal agreement”) if the Board determines in good faith (after consultation with its outside legal counsel and independent financial advisor) that, in light of such superior proposal, the failure to terminate the merger agreement and enter into a superior proposal agreement with respect to such superior proposal would violate the directors’ fiduciary duties under applicable law.

Conditions to the Merger (Page 98)

The respective obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain customary conditions, including the adoption of the merger agreement by our stockholders, receipt of certain regulatory approvals, the absence of any legal prohibitions to the consummation of the merger, the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the merger agreement. See “The Merger Agreement—Conditions to the Merger” beginning on page 98.

Termination (Page 100)

We and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time.

 

 

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The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time as follows:

 

   

By either Parent or the Company:

 

   

for a failure to consummate the merger by December 13, 2019 (as may be extended for ninety (90) days by either party by written notice under certain circumstances, the “outside date”), as described in the section entitled “The Merger Agreement—Termination” beginning on page 100;

 

   

for a failure to obtain the stockholder approval to adopt the merger agreement, as described in the section entitled “The Merger Agreement—Termination” beginning on page 100;

 

   

if any order permanently restraining, enjoining or other otherwise prohibiting the merger or any of the other transactions contemplated by the merger agreement is or has become final and non-appealable;

 

   

By the Company:

 

   

in order to enter into an agreement relating to a superior proposal if the Company has been in compliance with certain provisions relating to the non-solicitation of alternative transaction proposals and, prior to or concurrently with such termination, pays to Parent a $110,860,000 termination fee (the “Company termination fee”) and reimburses certain expenses incurred by Parent up to a maximum of $4,000,000 (the “Parent expense reimbursement”); or

 

   

if the Company is not then in breach in any material respect of any of its obligations under the merger agreement, if there is any continuing inaccuracy in the representations and warranties of Parent and Merger Sub set forth in the merger agreement, or if Parent or Merger Sub are then failing to perform any of their covenants or other agreements set forth in the merger agreement as described in the section entitled “The Merger Agreement—Termination” beginning on page 100, in either case, such that certain conditions to closing would not be satisfied as of the time of such termination, or such breach is not reasonably capable of being cured by the outside date or has not been cured within thirty (30) days after written notice of such breach was received by Parent; or

 

   

by Parent, if:

 

   

the Board has effected a Company adverse recommendation change (as defined in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes” beginning on page 89) or there has been any breach in any material respect on the part of the Company of certain provisions relating to the non-solicitation of alternative transaction proposals, the preparation of the proxy statement and the special meeting;

 

   

if Parent is not then in breach in any material respect of any of its obligations under the merger agreement, if there is any continuing inaccuracy in the representations and warranties of the Company set forth in the merger agreement, or the Company is then failing to perform any of its covenants or other agreements set forth in the merger

 

 

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agreement, in either case such that certain conditions to closing would not be satisfied as of the time of such termination, or such breach is not reasonably capable of being cured by the outside date or has not been cured within thirty (30) days after written notice of such breach was received by the Company; or

 

   

there has occurred any Company material adverse effect (as described in the section entitled “The Merger Agreement—Representations and Warranties” beginning on page 82) that is not reasonably capable of being cured by the outside date.

Termination Fee (Page 101)

The Company termination fee and the Parent expense reimbursement would be payable by us if:

 

   

the Company terminates the merger agreement to enter into a superior proposal agreement;

 

   

Parent terminates the merger agreement because the Board has effected a Company adverse recommendation change or there has been a material breach on the part of the Company or its subsidiaries or representatives of certain provisions under the merger agreement relating to non-solicitation of alternative transaction proposals or provisions under the merger agreement relating to the special meeting prior to obtaining the stockholder approval (as defined in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes” beginning on page 89); or

 

   

a combination of the following events occur:

 

   

the merger agreement is terminated by:

 

   

Parent or the Company by written consent, because the outside date has not occurred;

 

   

Parent or the Company because the stockholder approval is not obtained at the special meeting;

 

   

Parent because (x) there is a continuing inaccuracy in the representations and warranties of the Company or (y) the Company fails to perform any of its covenants or agreements under the merger agreement and such inaccuracy or failure causes any of the conditions to closing of the Parent not to be satisfied or such breach is not reasonably capable of being cured by the outside date or has not been cured by the Company within thirty (30) days of receipt of written notice of the breach; or

 

   

Parent because an event has a material adverse effect on the Company that is not reasonably capable of being cured by the outside date;

 

   

prior to such termination, a third party makes an alternative transaction proposal and such proposal is not terminated or withdrawn prior to the termination of the merger agreement; and

 

   

prior to the fifteen (15th) month anniversary of the termination of the merger agreement, the Company enters into an agreement with respect to, or recommends to the Company’s stockholders and subsequently consummates, any alternative transaction proposal (in

 

 

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which case the applicable percentages in the definition of alternative transaction as used in the definition of alternative transaction proposal will be eighty percent (80%) rather than ten percent (10%)).

Parent Termination Fee (Page 101)

Parent will be required to pay the Company a termination fee equal to $221,710,000 (the “Parent termination fee”), if:

 

   

the Company or Parent terminates the merger agreement because the merger is not consummated on or before the outside date; or

 

   

the Company terminates the merger agreement due to a continuing inaccuracy in the representations and warranties of Parent and Merger Sub set forth in the merger agreement, or Parent or Merger Sub failing to perform any of their covenants or other agreements set forth in the merger agreement, in either case such that certain conditions to closing would not be satisfied as of the time of such termination, or such breach is not reasonably capable of being cured by the outside date or has not been cured within thirty (30) days after written notice of such breach was received by Parent;

and in any such case, the sole reason Parent was unable to consummate the merger was due to its failure to obtain all or any portion of its debt financing (as described in the section entitled “The Merger—Financing of the Merger” beginning on page 64).

Remedies (Page 103)

No termination of the merger agreement will relieve or release any party to the merger agreement from any liabilities or damages arising out of its willful breach of any provision of the merger agreement.

The Company’s right to receive the Parent termination fee will be the sole and exclusive remedy of the Company for any loss suffered due to the failure of the closing to occur under circumstances that require the payment of the Parent termination fee.

Prior to termination of the merger agreement, each party is entitled to enforce specifically the terms and provisions of the merger agreement and to obtain an injunction to prevent breaches of the merger agreement.

Market Price of Common Stock (Page 112)

The closing price of our common stock on the New York Stock Exchange (the “NYSE”) on June 14, 2019, the last trading day prior to the public announcement of the execution of the merger agreement, was $35.39 per share of our common stock. If the merger is completed, you will be entitled to receive $57.00 in cash, without interest, for each share of our common stock owned by you (unless you have properly exercised, and not lost, your appraisal rights with respect to such shares), which represents a premium of 61% to Company’s closing price on June 14, 2019, and a 56.3% premium to the Company’s 30 trading-day volume weighted average share price on June 14, 2019.

 

 

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On August 6, 2019, the most recent practicable date before this proxy statement was mailed to our stockholders, the closing price for our common stock on the NYSE was $57.94 per share of common stock. You are encouraged to obtain current market quotations for our common stock in connection with voting your shares of common stock.

Appraisal Rights (Page 116)

If the merger is completed, the Company’s stockholders who do not vote in favor of the adoption of the merger agreement are entitled to appraisal rights under Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”), but only if they fully comply with all of the applicable legal requirements of Section 262 of the DGCL, which are summarized in this proxy statement in the section entitled “Appraisal Rights” beginning on page 116 and set forth in their entirety in Section 262 of the DGCL (attached to this proxy statement as Annex D). This means that you may be entitled to have the fair value of your shares of our common stock determined by the Delaware Court of Chancery and to receive payment based on that valuation in lieu of the per share merger consideration if you follow exactly the procedures set forth in Section 262 of the DGCL. The ultimate amount you may receive in an appraisal proceeding may be less than, equal to or more than the amount you would have received under the merger agreement.

To exercise your appraisal rights, you must, among other things, submit a written demand for appraisal to the Company before the vote is taken on the adoption of the merger agreement (and must not fail to perfect or effectively withdraw your demand or otherwise waive or lose your right to appraisal) and you must not vote (either in person or by proxy) in favor of the adoption of the merger agreement. If you fail to follow exactly the procedures set forth in Section 262 of the DGCL, you will lose your appraisal rights. The requirements for exercising appraisal rights are further described in the section entitled “Appraisal Rights” beginning on page 116 and the text of the DGCL appraisal rights statute reproduced in its entirety as Annex D to this proxy statement. We encourage you to read these provisions carefully and in their entirety. If you hold your shares of our common stock through a bank, brokerage firm or other nominee and you wish to exercise your appraisal rights, you should consult with your bank, brokerage firm or other nominee to determine the appropriate procedures for the making of a demand for appraisal by your bank, brokerage firm or other nominee. In view of the complexity of the DGCL relating to appraisal rights, stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors promptly. The discussion of appraisal rights in this proxy statement is not a full summary of the law pertaining to appraisal rights under the DGCL and is qualified in its entirety by the full text of Section 262 of the DGCL, a copy of which is attached to this proxy statement as Annex D.

Delisting and Deregistration of Common Stock (Page 122)

If the merger is completed, our common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder (the “Exchange Act”) and we will no longer file periodic reports with the Securities and Exchange Commission (the “SEC”) on account of our common stock.

 

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers are intended to briefly address some commonly asked questions regarding the merger, the merger agreement, and the special meeting. These questions and answers may not address all questions that may be important to you as a Company stockholder. Please refer to the “Summary” beginning on page 2 and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully and in their entirety.

 

Q.

What is the proposed merger transaction and what effects will it have on the Company?

 

A.

The proposed merger transaction is the acquisition of the Company by Parent pursuant to the terms and subject to the conditions of the merger agreement. If the proposal to adopt the merger agreement is approved by our stockholders and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub will merge with and into the Company, with the Company being the surviving corporation. As a result of the merger, the Company will become a wholly owned subsidiary of Parent and will no longer be a publicly held corporation, and you, as a holder of our common stock, will no longer have any interest in our future earnings or growth. In addition, following the merger, our common stock will be delisted from the NYSE and deregistered under the Exchange Act, and we will no longer file periodic reports with the SEC on account of our common stock.

 

Q.

What will I receive if the merger is completed?

 

A.

In connection with the merger, each outstanding share of our common stock (other than excluded shares and dissenting shares) will automatically be converted into the right to receive an amount in cash equal to $57.00, without interest.

 

Q.

How does the per share merger consideration compare to the market price of our common stock prior to announcement of the merger?

 

A.

The per share merger consideration of $57.00 per share of common stock represents a premium of approximately 61% to the closing price of our common stock as of June 14, 2019, the last trading day prior to the public announcement of the execution of the merger agreement, and a premium of approximately 56.3% to the 30 trading-day volume weighted average share price on June 14, 2019.

 

Q.

How does the Board recommend that I vote?

 

A.

The Board recommends that you vote “FOR” approval of the merger proposal and “FOR” approval of the compensation proposal.

 

Q.

When do you expect the merger to be completed?

 

A.

We are working towards completing the merger as soon as possible. Assuming timely receipt of required regulatory approvals and the satisfaction or waiver of other closing conditions, including approval by our stockholders of the merger proposal, we anticipate that the merger will be completed during the fourth quarter of 2019.

 

 

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Q.

What happens if the merger is not completed?

 

A.

If the merger proposal is not approved by the stockholders of the Company or if the merger is not completed for any other reason, the stockholders of the Company will not receive any payment for their shares in connection with the merger. Instead, the Company will remain an independent public company and our common stock will continue to be listed and traded on the NYSE.

Additionally, if the merger is not completed, the merger agreement will be terminated. Depending on the circumstances surrounding the termination, it is possible that the Company will be required to pay Parent a termination fee of $110,860,000. It is also possible, if Parent or the Company terminates the agreement under certain circumstances relating to Parent’s failure to obtain financing for the merger, that Parent would be required to pay the Company a fee of $221,710,000.

 

Q.

What conditions must be satisfied to complete the merger?

 

A.

There are several conditions which must be satisfied to complete the merger, including obtaining stockholder approval, obtaining regulatory approvals, no governmental entity having instituted any order or restraint to prohibit the consummation of the merger or any of the other transactions contemplated by the merger agreement, there having been no Company material adverse effect (as defined in the section “The Merger Agreement—Representations and Warranties” beginning on page 82) and the accuracy of certain representations and warranties and compliance with covenants contained in the merger agreement. You should read “The Merger Agreement—Conditions to the Merger” beginning on page 98 for a more detailed discussion of the conditions that must be satisfied to complete the merger.

 

Q.

Is the merger expected to be taxable to me?

 

A.

Yes. The exchange of shares of our common stock for the per share merger consideration pursuant to the merger will generally be a taxable transaction to U.S. holders (as defined under “The Merger—Material U.S. Federal Income Tax Consequences of the Merger”) for U.S. federal income tax purposes. If you are a U.S. holder and you exchange your shares of our common stock in the merger for cash, you will generally recognize gain or loss in an amount equal to the difference, if any, between the amount of cash received with respect to such shares and your adjusted tax basis in such shares. We encourage you to read “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” for a more detailed discussion of the U.S. federal income tax consequences of the merger. You should also consult your tax advisor regarding the particular tax consequences to you of the exchange of shares of common stock for cash pursuant to the merger in light of your particular circumstances (including the application and effect of any state, local or foreign income and other tax laws).

 

Q.

Why am I receiving this proxy statement and proxy card or voting instruction form?

 

A.

You are receiving this proxy statement and proxy card or voting instruction form because you own shares of the Company’s common stock. This proxy statement describes matters on which we urge you to vote and is intended to assist you in deciding how to vote your shares of our common stock with respect to such matters.

 

 

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Q.

When and where is the special meeting?

 

A.

The special meeting of the stockholders of the Company will be held at our offices located at 1334 York Avenue, New York 10021, on September 5, 2019 at 9:00 a.m., Eastern Daylight Saving Time.

 

Q.

What am I being asked to vote on at the special meeting?

 

A.

You are being asked to consider and vote on a proposal to adopt the merger agreement that provides for the acquisition of the Company by Parent and to vote on a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger.

 

Q.

Why am I being asked to consider and vote on a proposal to approve, by non-binding, advisory vote, certain compensation arrangements for the Company’s named executive officers in connection with the merger?

 

A.

Under SEC rules, we are required to seek a non-binding, advisory vote with respect to the compensation that may be paid or become payable to our named executive officers that is based on or otherwise relates to the merger, commonly referred to as “golden parachute” compensation.

 

Q.

What will happen if the Company’s stockholders do not approve the compensation proposal?

 

A.

Approval of the compensation that may be paid or become payable to the Company’s named executive officers that is based on or otherwise relates to the merger is not a condition to completion of the merger. The vote is an advisory vote and will not be binding on the Company or the surviving corporation in the merger. Because the merger-related compensation to be paid to the named executive officers in connection with the merger is based on contractual arrangements with the named executive officers, such compensation may be payable, regardless of the outcome of this advisory vote, if the merger agreement is adopted (subject only to the contractual obligations applicable thereto).

 

Q.

What vote is required for the Company’s stockholders to approve the merger proposal?

 

A.

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding as of the close of business on the record date.

Because the affirmative vote required to approve the merger proposal is based upon the total number of outstanding shares of our common stock, if you fail to submit a proxy or vote in person at the special meeting, or abstain, or you do not provide your bank, brokerage firm or other nominee with instructions, as applicable, this will have the same effect as a vote “AGAINST” approval of the merger proposal. If your shares of our common stock are held in “street name” by your bank, brokerage firm or other nominee and you do not instruct the nominee how to vote your shares, the failure to instruct your nominee will have the same effect as a vote “AGAINST” the merger proposal.

 

Q.

What vote of our stockholders is required to approve the compensation proposal?

 

A.

Approval of the compensation proposal requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy at the special meeting and

 

 

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  entitled to vote on such proposal. Accordingly, abstentions will have the same effect as a vote “AGAINST” approval of the compensation proposal, and broker non-votes will have no effect on the outcome of the vote.

 

Q.

What is the Voting and Support Agreement?

 

A.

Concurrently with the execution of the merger agreement, Parent and Merger Sub entered into the voting and support agreement, dated June 16, 2019, with (i) certain stockholders affiliated with Third Point LLC, (ii) Domenico De Sole and (iii) Thomas S. Smith, Jr. (the “voting and support agreement”). The voting and support agreement requires each of the Third Point affiliates, Mr. De Sole and Mr. Smith, who collectively hold approximately 14.82% of our outstanding voting power of our common stock as of the record date, to vote all of his or its shares of our common stock in favor of the adoption of the merger agreement.

 

Q.

Do any of the Company’s directors or officers have interests in the merger that may differ from or be in addition to my interests as a stockholder?

 

A.

In considering the recommendation of the Board with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers may have certain interests in the merger that may be different from, or in addition to, the interests of our stockholders generally. The Board was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See “The Merger—Interests of Certain Persons in the Merger” beginning on page 67 and “Non-Binding Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers” beginning on page 108.

 

Q.

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

A.

If your shares are registered directly in your name with our transfer agent, Computershare Investor Services (“Computershare”), you are considered the stockholder of record with respect to those shares. As the stockholder of record, you have the right to vote, grant your voting rights directly to the Company or to a third party or to vote in person at the special meeting.

If your shares of our common stock are held by a bank, broker, trustee or nominee, you are considered the beneficial owner of shares held in “street name,” and your bank, broker, trustee or nominee, or their intermediary, is considered the stockholder of record with respect to those shares. Your bank, broker, trustee or nominee should send you, as the beneficial owner, a package describing the procedure for voting your shares of our common stock. You should follow the instructions provided by them to vote your shares of our common stock. You are invited to attend the special meeting; however, you may not vote these shares of our common stock in person at the special meeting unless you obtain a “legal proxy” from your bank, broker, trustee or nominee that holds your shares of our common stock, giving you the right to vote the shares of our common stock at the special meeting.

 

 

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Q.

If my shares of common stock are held in “street name” by my bank, brokerage firm or other nominee, will my bank, brokerage firm or other nominee vote my shares of common stock for me?

 

A.

Your bank, brokerage firm or other nominee will only be permitted to vote your shares of our common stock if you instruct your bank, brokerage firm or other nominee how to vote. You should follow the procedures provided by your bank, brokerage firm or other nominee regarding the voting of your shares of our common stock. Banks, brokerage firms or other nominees who hold shares in street name for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms and other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters, such as the merger proposal and the compensation proposal, and, as a result, absent specific instructions from the beneficial owner of such shares of our common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of our common stock on non-routine matters. If you do not instruct your bank, brokerage firm or other nominee to vote your shares of our common stock, your shares of our common stock will not be voted (“broker non-votes”), and the effect will be the same as a vote “AGAINST” approval of the merger proposal, and your shares of our common stock will not be voted and will not have an effect on compensation proposal.

 

Q.

Who can vote at the special meeting?

 

A.

All of the holders of record of our common stock as of the close of business on August 6, 2019, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. Each holder of our common stock is entitled to cast one vote on each matter properly brought before the special meeting for each share of our common stock that such holder owned as of the record date.

 

Q.

How many votes do I have?

 

A.

You are entitled to one vote for each share of the common stock held of record by you as of the record date, August 6, 2019. As of the close of business on the record date, there were 46,613,735 outstanding shares of common stock.

 

Q.

What is a quorum?

 

A.

For purposes of the merger proposal and the compensation proposal, the holders of a majority of our common stock outstanding as of the close of business on the record date, present in person or represented by proxy, at the special meeting constitutes a quorum of the stockholders. Abstentions are counted as present for the purpose of determining whether a quorum is present.

 

Q.

How do I vote?

 

A.

Stockholder of Record. If you are a stockholder of record, you may have your shares of our common stock voted on matters presented at the special meeting in any of the following ways:

 

   

In Person. You may attend the special meeting and cast your vote there.

 

   

Via the Internet or by Telephone. You can vote via the Internet or by telephone by following the instructions in the proxy card. Votes submitted via the Internet or by telephone must be received by 11:59 p.m., Eastern Daylight Saving Time, on September 4, 2019; or

 

 

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By Mail. You can vote by mail if you received a printed proxy card by dating, signing and promptly returning your proxy card in the postage prepaid envelope provided with the materials. Votes submitted by mail must be received by the close of business on September 4, 2019.

Beneficial Owner. If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting. To attend the special meeting in person (regardless of whether you intend to vote your shares in person at the special meeting), you must bring with you to the special meeting a valid photo identification and proof of your beneficial ownership. For more information, see the instructions under “The Special Meeting—Attendance” beginning on page 26 of this proxy statement.

IT IS IMPORTANT THAT YOU PROMPTLY VOTE YOUR SHARES OF OUR COMMON STOCK. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

 

Q.

How can I change or revoke my vote?

 

A.

If you own shares in your own name, you may revoke any prior proxy or voting instructions, regardless of how your proxy or voting instructions were originally submitted, by:

 

   

sending a written statement to that effect to our Corporate Secretary, which must be received by us before the special meeting;

 

   

submitting a properly signed proxy card or voting instruction form dated a later date;

 

   

submitting a later-dated proxy or providing new voting instructions via the Internet or by telephone; or

 

   

attending the special meeting in person and voting your shares. Attendance alone at the meeting will not constitute revocation of a proxy.

If you hold shares in street name, you should contact the intermediary for instructions on how to change your vote.

 

Q.

What is a proxy?

 

A.

A proxy is your legal designation of another person, referred to as a “proxy,” to vote your shares of our common stock. The written document describing the matters to be considered and voted on at the special meeting is called a “proxy statement.” The document used to designate a proxy to vote your shares of our common stock is called a “proxy card.”

 

Q.

If a stockholder gives a proxy, how are the shares of common stock voted?

 

A.

Regardless of the method you choose to vote, the individuals named on the enclosed proxy card will vote your shares of our common stock in the way that you indicate. When completing the Internet or telephone processes on the proxy card, you may specify whether your shares of our common

 

 

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  stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you own shares that are registered in your own name and return a signed proxy card or grant a proxy via the Internet or by telephone, but do not indicate how you wish your shares to be voted, the shares represented by your properly signed proxy will be voted “FOR” approval of the merger proposal and “FOR” approval of the compensation proposal.

 

Q.

How are votes counted?

 

A.

For the merger proposal and the compensation proposal, you may vote “FOR,” “AGAINST” or “ABSTAIN.” Abstentions and broker non-votes will have the same effect as votes “AGAINST” approval of the merger proposal. Abstentions will have the same effect as a vote “AGAINST” approval of the compensation proposal, and broker non-votes will have no effect on the outcome of the vote on the compensation proposal.

 

Q.

What do I do if I receive more than one proxy or set of voting instructions?

 

A.

If you received more than one proxy card, your shares are likely registered in different names or with different addresses or are in more than one account. You must separately vote the shares shown on each proxy card that you receive in order for all of your shares to be voted at the special meeting.

 

Q.

What happens if I sell my shares of common stock before the special meeting?

 

A.

The record date for stockholders entitled to vote at the special meeting is earlier than both the date of the special meeting and the consummation of the merger. If you transfer your shares of our common stock after the record date but before the special meeting, unless special arrangements (such as provision of a proxy) are made between you and the person to whom you transfer your shares and each of you notifies the Company in writing of such special arrangements, you will retain your right to vote such shares at the special meeting but will transfer the right to receive the per share merger consideration to the person to whom you transfer your shares.

 

Q.

What happens if I sell my shares of common stock after the special meeting but before the effective time?

 

A.

If you transfer your shares after the special meeting but before the effective time, you will have transferred the right to receive the per share merger consideration to the person to whom you transfer your shares. In order to receive the per share merger consideration, you must hold your shares of common stock through completion of the merger.

 

Q.

Who will solicit and pay the cost of soliciting proxies?

 

A.

The Company has engaged Innisfree M&A Incorporated (“Innisfree”) to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Innisfree a fee of $25,000 and telephone charges. The Company has agreed to reimburse Innisfree for certain out-of-pocket fees and expenses and will also indemnify Innisfree, its subsidiaries and their respective directors,

 

 

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  officers, employees and agents against certain claims, liabilities, losses, damages and expenses. The Company may advance monies to Innisfree to pay on the Company’s behalf charges rendered by banks, brokers or their agents for their expenses in forwarding proxy materials to beneficial owners of our common stock. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

Q.

What do I need to do now?

 

A.

Even if you plan to attend the special meeting, after carefully reading and considering the information contained in this proxy statement, please vote promptly to ensure that your shares are represented at the special meeting. If you hold your shares of our common stock in your own name as the stockholder of record, you may submit a proxy to have your shares of our common stock voted at the special meeting in one of three ways: (i) using the Internet in accordance with the instructions set forth on the enclosed proxy card; (ii) calling the toll-free number specified on your proxy card; or (iii) completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope. If you decide to attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you are a beneficial owner, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

 

Q.

Should I send in my stock certificates now?

 

A.

No. If the merger proposal is approved, you will be sent a letter of transmittal promptly, and in any event within three (3) business days, after the completion of the merger, describing how you may exchange your shares of our common stock for the per share merger consideration. If your shares of our common stock are held in “street name” through a bank, brokerage firm or other nominee, you should contact your bank, brokerage firm or other nominee for instructions as to how to effect the surrender of your “street name” shares of our common stock in exchange for the per share merger consideration. Please do NOT return your stock certificate(s) with your proxy.

 

Q.

Am I entitled to exercise appraisal rights under the DGCL instead of receiving the per share merger consideration for my shares of our common stock?

 

A.

Stockholders who do not vote in favor of the adoption of the merger agreement are entitled to exercise appraisal rights under Section 262 of the DGCL in connection with the merger if they take certain actions and meet certain conditions. For additional information, see “Appraisal Rights” beginning on page 116. For the full text of Section 262 of the DGCL, please see Annex D of this proxy statement. Because of the complexity of the DGCL relating to appraisal rights, if you wish to exercise your appraisal rights, we encourage you to seek the advice of legal counsel.

 

Q.

Who can help answer any other questions I might have?

 

A.

If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of our common stock, or need additional copies of the proxy statement or the enclosed proxy card, please contact Innisfree, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

 

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this communication may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995, each as amended. Forward-looking statements provide current expectations of future events and include any statement that does not directly relate to any historical or current fact. Words such as “anticipates,” “believes,” “expects,” “intends,” “plans,” “projects,” or other similar expressions may identify such forward-looking statements.

Actual results may differ materially from those discussed in forward-looking statements as a result of factors, risks and uncertainties over which we have no control. These factors, risks and uncertainties include, but are not limited to, the following: (i) conditions to the completion of the proposed acquisition, including stockholder approval of the proposed acquisition, may not be satisfied or the regulatory approvals required for the proposed acquisition may not be obtained on the terms expected or on the anticipated schedule; (ii) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement between the parties to the proposed acquisition; (iii) the effect of the announcement or pendency of the proposed acquisition on the Company’s business relationships, operating results, and business generally; (iv) risks that the proposed acquisition disrupts the Company’s current plans and operations and potential difficulties in the Company’s employee retention as a result of the proposed acquisition; (v) risks related to diverting management’s attention from our ongoing business operations; (vi) potential litigation that may be instituted against the Company or its directors or officers related to the proposed acquisition or the merger agreement between the parties to the proposed acquisition; (vii) the amount of the costs, fees, expenses and other charges related to the proposed acquisition; and (ix) such other factors as are set forth in the Company’s periodic public filings with the SEC, including, but not limited to, those described under the headings “Risk Factors” and “Forward Looking Statements” in its Form 10-K for the fiscal year ended December 31, 2018 and in its other filings made with the SEC from time to time, which are available via the SEC’s website at www.sec.gov.

Forward-looking statements reflect the views and assumptions of management as of the date of this communication with respect to future events. The Company does not undertake, and hereby disclaims, any obligation, unless required to do so by applicable securities laws, to update any forward-looking statements as a result of new information, future events or other factors. The inclusion of any statement in this communication does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material.

 

 

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PARTIES TO THE MERGER

The Company

Sotheby’s

1334 York Avenue

New York, New York 10021

Telephone: (212) 894-1210

Sotheby’s, a Delaware corporation, with headquarters in New York, New York, has been uniting collectors with world-class works of art since 1744. Sotheby’s presents auctions in ten different salesrooms, including New York, London, Hong Kong and Paris, and Sotheby’s BidNow program allows visitors to view all auctions live online and place bids from anywhere in the world.

Sotheby’s has a global network of 80 offices in 40 countries and is the oldest company listed on the NYSE, under the symbol “BID.”

Parent

BidFair USA LLC

c/o Hughes Hubbard and Reed LLP,

One Battery Park Plaza, 12th floor

New York, New York 10004

BidFair USA LLC, a Delaware limited liability company, is a special purpose vehicle formed for purposes of effectuating the merger.

Merger Sub

BidFair MergeRight Inc.

c/o Hughes Hubbard and Reed LLP

One Battery Park Plaza, 12th floor

New York, New York 10004

BidFair MergeRight Inc., a Delaware corporation, is a special purpose vehicle formed for purposes of effectuating the merger. BidFair MergeRight Inc. is one hundred percent (100%) owned by BidFair USA LLC.

 

 

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THE SPECIAL MEETING

Date, Time and Place of the Special Meeting

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the Board for use at the special meeting to be held at our offices located at 1334 York Avenue, New York, New York 10021 on September 5, 2019 at 9:00 a.m., Eastern Daylight Saving Time, or at any adjournment or postponement thereof.

Purpose of the Special Meeting

At the special meeting, holders of our common stock will be asked to consider and vote on the following:

 

   

the merger proposal;

 

   

the compensation proposal.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” EACH OF THE ABOVE PROPOSALS.

The Company’s stockholders must approve the merger proposal in order for the merger to occur. If the Company’s stockholders fail to approve the merger proposal, the merger will not occur. A copy of the merger agreement is attached as Annex A to this proxy statement, which we encourage you to read carefully and in its entirety.

The vote on the compensation proposal is a vote separate and apart from the vote on the merger proposal. Accordingly, a stockholder may vote to approve the compensation proposal and vote not to adopt the merger proposal, and vice versa. Because the vote on the compensation proposal is advisory in nature only, it will not be binding on the Company, Parent or the surviving corporation in the merger. Accordingly, if the merger agreement is adopted by the Company’s stockholders and the merger is completed, the merger-related compensation may be paid to the Company’s named executive officers to the extent payable in accordance with the terms of their compensation agreements and arrangements even if the stockholders do not approve the compensation proposal.

Record Date and Quorum

The Board has fixed the close of business on August 6, 2019 as the record date for the determination of stockholders entitled to receive notice of, and to vote at, the special meeting, and any adjournments or postponements thereof. Only holders of record of our common stock as of the close of business on the record date are entitled to receive notice of, and to vote at (in person or by proxy), the special meeting and at any adjournment or postponement thereof.

As of the close of business on the record date, there were 46,613,735 shares of common stock outstanding. Each holder of our common stock is entitled to cast one vote per such share on each matter properly brought before the special meeting for each share of our common stock that such holder owned as of the record date.

The presence at the special meeting, in person or represented by proxy, of the holders of a majority of the shares of our common stock issued and outstanding as of the close of business on the record date

 

 

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constitutes a quorum for the transaction of business at the special meeting. Once a share is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting. Shares of our common stock represented at the special meeting but not voted, including shares of our common stock for which proxies have been received but for which stockholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. Because brokers do not have discretionary authority to vote on any of the proposals at the special meeting, broker non-votes are not counted for the purpose of determining the presence of a quorum. Your vote is very important, regardless of the number of shares of our common stock you own. Because stockholders cannot take any action at the meeting unless a majority of our common stock issued and outstanding and entitled to vote thereat is represented, it is important that you attend the meeting in person or are represented by proxy at the meeting.

In the event that a quorum is not present at the special meeting, we expect to adjourn or postpone the special meeting until we solicit enough proxies to obtain a quorum. The Company may also adjourn or postpone the special meeting (i) to the extent necessary to ensure that the stockholders are given sufficient time to evaluate any necessary supplement or amendment to the proxy statement in advance of the special meeting, and (ii) if required by applicable law, a governmental authority or a request from the SEC. The Company is required, upon Parent’s request, to adjourn or postpone the special meeting up to two (2) times for a period of up to twenty (20) calendar days each, if, in the reasonable judgment of Parent, there will be an insufficient number of votes of our common stock represented (either in person or by proxy) to achieve the stockholder approval and if such action would not be a violation of the directors’ fiduciary duties under applicable law.

Attendance

Only stockholders who owned shares as of the record date, or their duly appointed proxies, and our guests may attend the special meeting. If you hold your shares through a broker, bank or other record owner, you will not be admitted to the special meeting unless you bring a legal proxy or a copy of a statement (such as a brokerage statement) from your broker, bank or other record owner reflecting your stock ownership as of the record date. Additionally, in order to be admitted to the special meeting, you must bring a driver’s license, passport or other form of government-issued identification to verify your identity. If you are the representative of a corporate or institutional stockholder, you must present valid photo identification along with proof that you are the representative of such stockholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

Vote Required

Approval of the merger proposal requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding as of the close of business on the record date. For the merger proposal, you may vote “FOR,” “AGAINST” or “ABSTAIN.” Abstentions will not be counted as votes cast in favor of the merger proposal, but will count for the purpose of determining whether a quorum is present. Your vote is very important, regardless of the number of shares of our common stock you own. Because stockholders cannot take any action at the meeting unless a majority of our common stock issued and outstanding and entitled to vote thereat is represented, it is important that you attend the meeting in person or are represented by proxy at the meeting. If you fail to return your proxy card, submit your

 

 

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proxy by telephone or the Internet or vote in person, or if your shares are held in “street name” by your bank, brokerage firm or other nominee and you fail to instruct your bank, brokerage firm or other nominee to vote your shares of common stock, your shares will have the same effect as a vote “AGAINST” approval of the merger proposal.

If your shares of our common stock are registered directly in your name with our transfer agent, Computershare, you are considered, with respect to those shares of our common stock, the stockholder of record. This proxy statement and proxy card have been sent directly to you by the Company. As the stockholder of record, you have the right to vote in person at the meeting or to grant your voting rights directly to the Company or to a third party by a proxy duly executed or transmitted in a manner in accordance with applicable law.

If your shares of our common stock are held in “street name” through a bank, brokerage firm or other nominee, you are considered the beneficial owner of those shares. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of our common stock, the stockholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee how to vote your shares by following their instructions for voting. Your bank, brokerage firm or other nominee should send you, as the beneficial owner, a package describing the procedure for voting your shares.

Banks, brokerage firms or other nominees who hold shares in “street name” for customers generally have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms and other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters, such as the merger proposal and the compensation proposal, and, as a result, absent specific instructions from the beneficial owner of such shares of our common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of our common stock on non-routine matters.

For the purposes of the merger proposal, if you attend the special meeting and abstain on this proposal, or if you have given a proxy and have abstained on this proposal, this will have the same effect as if you voted “AGAINST” approval of the merger proposal. If you do not instruct your bank, brokerage firm or other nominee to vote your shares of our common stock, your shares of our common stock will not be voted, and as broker non-votes, the effect will be the same as a vote “AGAINST” approval of the merger proposal.

Approval of the compensation proposal requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy at the special meeting and entitled to vote on such proposal. For this proposal, you may vote “FOR,” “AGAINST” or “ABSTAIN.” For purposes of the compensation proposal, if you attend the special meeting and abstain on the compensation proposal, or if you have given a proxy and abstained on the compensation proposal, your shares will not be voted “FOR” or “AGAINST” such proposal, but will have the same effect as a vote “AGAINST” such proposal. If you fail to submit a proxy or vote in person at the special meeting or if your shares of our common stock are held through a bank, brokerage firm or other nominee and you do not instruct your bank, brokerage firm or other nominee to vote your shares of our common stock, your shares of our common stock will not be voted, but this will not have an effect on the proposal to approve the merger-related executive compensation proposal.

 

 

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Voting

If you are a stockholder of record and your shares are registered directly in your name, you may have your shares of our common stock voted on matters presented at the special meeting in any of the following ways:

 

   

In Person. You may attend the special meeting and cast your vote there. Even if you plan to attend the meeting, it is desirable that you vote in advance of the meeting.

 

   

By Proxy. Stockholders of record have a choice of voting by proxy:

 

   

Via the Internet or by Telephone. You can vote via the Internet or by telephone by following the instructions in the proxy card. Votes submitted via the Internet or by telephone must be received by 11:59 p.m., Eastern Daylight Saving Time, on September 4, 2019; or

 

   

By Mail: You can vote by mail if you received a printed proxy card by dating, signing and promptly returning your proxy card in the postage prepaid envelope provided with the materials by the close of business on September 4, 2019.

If you are a beneficial owner of our common stock and your shares are held in “street name,” you should receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of our common stock voted. Those instructions will identify which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a “legal proxy” from your bank, brokerage firm or other nominee that is the stockholder of record for your shares of our common stock giving you the right to vote the shares at the special meeting. A legal proxy is not the form of proxy enclosed with this proxy statement. You will not be able to vote shares you hold in “street name” through a bank, broker or other nominee in person at the special meeting unless you have a legal proxy from that bank, broker or other nominee issued in your name giving you the right to vote your shares.

If you vote by proxy, regardless of the method you choose to vote, the individuals named on the enclosed proxy card, and each of them, with full power of substitution, will vote your shares of our common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of our common stock should be voted “FOR” or “AGAINST” or to “ABSTAIN” from voting on all, some or none of the specific items of business to come before the special meeting.

If you are a holder of record and you properly sign your proxy card but do not mark the boxes showing how your shares of our common stock should be voted on a matter, the shares of our common stock represented by your properly signed proxy will be voted “FOR” approval of the merger proposal and “FOR” approval of the compensation proposal.

If you have any questions or need assistance voting your shares, please contact Innisfree M&A Incorporated, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES OF OUR COMMON STOCK YOU OWN. BECAUSE STOCKHOLDERS CANNOT TAKE ANY ACTION AT THE MEETING UNLESS A

 

 

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MAJORITY OF OUR COMMON STOCK ISSUED AND OUTSTANDING AND ENTITLED TO VOTE THEREAT IS REPRESENTED, IT IS IMPORTANT THAT YOU ATTEND THE MEETING IN PERSON OR ARE REPRESENTED BY PROXY AT THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE PAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU WILL ATTEND THE SPECIAL MEETING AND VOTE IN PERSON, YOUR VOTE BY BALLOT WILL REVOKE ANY PROXY PREVIOUSLY SUBMITTED.

Voting by the Company’s Directors and Executive Officers

As of the record date, the current directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 7,179,122 shares of our common stock (not including any shares of our common stock deliverable upon exercise of or underlying any Company DSUs, Company PSUs or Company RSUs), representing approximately 15.40% of the outstanding voting power of our common stock.

Proxies and Revocation

Any stockholder of record entitled to vote at the special meeting may submit a proxy via the Internet, by telephone or by returning the enclosed proxy card in the accompanying postage-paid reply envelope, or may vote in person by appearing at the special meeting. If your shares of our common stock are held in “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, brokerage firm or other nominee. If you are a beneficial owner and wish to vote in person at the special meeting, you must provide a “legal proxy” from the bank, brokerage firm or other nominee that is the stockholder of record for your shares of our common stock giving you the right to vote the shares at the special meeting. If you fail to vote in person at the special meeting or fail to return your proxy card or fail to submit your proxy via the Internet or by telephone, or if your shares are held in “street name” by your bank, brokerage firm or other nominee and you fail to instruct your bank, brokerage firm or other nominee to vote, your shares of our common stock will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote “AGAINST” approval of the merger proposal. If you fail to vote in person at the special meeting or fail to return your proxy card or fail to submit your proxy by telephone or the Internet, your shares of our common stock will not have an effect on the compensation proposal.

You have the right to revoke a proxy. If your shares are registered directly in your name, you may revoke your proxy or change your vote before the special meeting. To do so, you must do one of the following:

 

   

Send a written statement to that effect to our Corporate Secretary, which must be received by us before the special meeting;

 

   

Vote via the Internet or by telephone as instructed above. Only your latest Internet or telephone vote is counted. You may not change your vote over the Internet or by telephone after 11:59 p.m., Eastern Daylight Saving Time, on Wednesday, September 4, 2019.

 

   

Sign a new proxy and mail it as instructed above. Only your latest dated, valid proxy received not later than Wednesday, September 4, 2019 will be counted.

 

 

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Attend the special meeting, request that your proxy be revoked and vote in person as instructed above. Attending the special meeting will not revoke your Internet vote, telephone vote or proxy, as the case may be, unless you specifically request it.

If you hold shares in “street name” through a bank, brokerage firm or other nominee, you may submit a new, later-dated voting instruction form or contact your bank, broker or other nominee. You may also vote in person at the special meeting if you obtain a legal proxy.

Anticipated Date of Completion of the Merger

We are working towards completing the merger as soon as possible. Assuming timely receipt of required regulatory approvals and satisfaction of other closing conditions, including the approval by our stockholders of the merger proposal, we anticipate that the merger will be completed during the fourth quarter of 2019. If our stockholders vote to approve the merger proposal, the merger will become effective as promptly as practicable following the satisfaction or waiver of the other conditions to the merger, subject to the terms of the merger agreement. See “The Merger Agreement—Closing and Effective Time” beginning on page 79.

Rights of Stockholders Who Seek Appraisal

If the merger is completed, the Company’s stockholders who do not vote in favor of the adoption of the merger agreement are entitled to appraisal rights under Section 262 of the DGCL in connection with the merger, but only if they fully comply with all the applicable legal requirements for Section 262 of the DGCL, which are summarized in this proxy statement in the section entitled “Appraisal Rights” beginning on page 116 and set forth in their entirety in Section 262 of the DGCL (attached to this proxy statement as Annex D). This means you may be entitled to have the fair value of your shares of our common stock determined by the Delaware Court of Chancery and to receive payment based on that valuation in lieu of the per share merger consideration if you follow exactly the procedures set forth in Section 262 of the DGCL. The ultimate amount you may receive in an appraisal proceeding may be less than, equal to or more than the amount you would have received under the merger agreement.

To exercise your appraisal rights, you must, among other things, submit a written demand for appraisal to the Company before the vote is taken on the adoption of the merger agreement (and must not fail to perfect or effectively withdraw your demand or otherwise waive or lose your rights to appraisal) and you must not vote (either in person or by proxy) in favor of the merger proposal. If you fail to follow exactly the procedures set forth in Section 262 of the DGCL, you will lose your appraisal rights. The requirements for exercising appraisal rights are further described in the section entitled “Appraisal Rights” beginning on page 116 and the text of the DGCL appraisal rights statute reproduced in its entirety as Annex D to this proxy statement. We encourage you to read these provisions carefully and in their entirety. If you hold your shares of our common stock through a bank, brokerage firm or other nominee and you wish to exercise your appraisal rights, you should consult with your bank, brokerage firm or other nominee to determine the appropriate procedures for the making of a demand for appraisal by your bank, brokerage firm or other nominee. In view of the complexity of the DGCL, stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors promptly.

 

 

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Adjournments

Although it is not currently expected, the special meeting may be adjourned or postponed. The Company retains full authority to the extent set forth in its by-laws and/or permitted under Delaware law to adjourn the special meeting for any purpose, or to postpone the special meeting before it is convened, without the consent of any stockholder of the Company, provided that the merger agreement includes certain limitations on the Company’s ability to postpone or adjourn the meeting.

If the special meeting is adjourned, we are not required to give notice of the time and place of the adjourned meeting if announced at the meeting at which the adjournment is taken, unless the adjournment is for more than thirty (30) days or the Board fixes a new record date for the special meeting. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. All proxies will be voted in the same manner as they would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the time the proxy is voted at the reconvened meeting.

Solicitation of Proxies; Payment of Solicitation Expenses

We will bear the costs of solicitation of proxies for the special meeting. In addition to solicitation by mail, directors, officers and our regular employees may solicit proxies from stockholders by telephone, personal interview or otherwise. These directors, officers and employees will not receive additional compensation, but may be reimbursed for out-of-pocket expenses in connection with this solicitation. In addition to solicitation by our directors, officers and employees, we have engaged Innisfree to assist in the solicitation of proxies and provide related advice and informational support, for a fee of $25,000 and telephone charges. The Company has agreed to reimburse Innisfree for certain out-of-pocket fees and expenses and will also indemnify Innisfree, its subsidiaries and their respective directors, officers, employees and agents against certain claims, liabilities, losses, damages and expenses. The Company may advance monies to Innisfree to pay on the Company’s behalf charges rendered by banks, brokers or their agents for their expenses in forwarding proxy materials to beneficial owners of our common stock.

Questions and Additional Information

If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please contact Innisfree, our proxy solicitor, by calling toll-free at (888) 750-5834. Banks and brokers should call at (212) 750-5833.

 

 

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THE MERGER

This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A. You should read the entire merger agreement carefully and in its entirety as it is the legal document that governs the merger.

The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation following the merger. As a result of the merger, the Company will cease to be a publicly traded company and will become a wholly owned subsidiary of Parent. You will not own any shares of the capital stock of the surviving corporation.

Per Share Merger Consideration

In the merger, each outstanding share of our common stock will automatically be converted into the right to receive an amount of cash equal to $57.00, without interest, other than excluded shares and dissenting shares.

Background of the Merger

The Board has regularly reviewed and evaluated, with the Company’s senior management, the Company’s business strategies, opportunities and challenges as part of its consideration and evaluation of the Company’s prospects and stockholder value. As part of this process, the Board and management have considered and regularly reviewed the Company’s strategic direction and business objectives, including strategic opportunities that might be available to the Company, such as possible acquisitions, divestitures and business combination transactions. From time to time in the preceding four years, the Company’s senior management has had discussions with parties about the possibility of investing in the Company. Until May 2019, these discussions did not proceed to the point of entering into a confidentiality agreement (other than as discussed below with respect to one potential investor) or sharing non-public information with any such party.

Mr. Patrick Drahi is a client of the Company. From time to time, Mr. Drahi has met with employees of the Company regarding potential transactions in art in the ordinary course of the Company’s business.

In November 2018, a representative of a private equity fund (“Party A”) informed Mr. Michael Goss, the Chief Financial Officer of the Company, that Party A would be interested in investing in the Company alongside a private investment firm unaffiliated with any members of the Board (“Party B”). Mr. Goss offered to arrange a meeting for Party A and Party B (the “Party AB Group”) to discuss the potential investment with Mr. Tad Smith, Chief Executive Officer of the Company, and Mr. Goss. Mr. Goss informed Mr. Smith, of this conversation, and Mr. Smith then promptly informed Mr. Domenico De Sole, Chairman of the Board of the Company and Chair of the Nominating and Corporate Governance Committee of the Board.

On December 13, 2018, a representative of LionTree Advisors LLC (“LionTree”) informed Mr. Smith that Mr. Drahi, together with two other investors (“Party C” and “Party D”), none of whom was represented by LionTree, had an interest in acquiring the Company. Mr. Smith promptly informed Mr. De Sole of this conversation.

 

 

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Following the discussion with Mr. Goss in November 2018, the representative of Party A did not pursue a meeting with Mr. Smith and Mr. Goss, but called Mr. De Sole on December 16, 2018 and informed him that the Party AB Group had an interest in jointly acquiring the Company. The representative of Party A requested a meeting with Mr. De Sole to discuss a potential transaction. Following discussions with certain other members of the Board in the following days, Mr. De Sole informed Party A that, although the Company was not actively pursuing a sale of the Company at that time, if there was a proposal that the Party AB Group would like to make to the Company, Mr. De Sole would be willing to arrange a meeting to discuss.

In mid-December 2018, a representative of Mr. Drahi, contacted Mr. Smith to arrange a meeting with Mr. Drahi. Mr. Smith, Mr. Drahi and Mr. Drahi’s representative met on December 18, 2018 at the Company’s New York headquarters and discussed the global art market in general and general, publicly available information about the Company’s business, and also toured the Company’s New York headquarters. This meeting was the first time Mr. Smith had ever met or spoken with Mr. Drahi. Mr. Drahi, Mr. Drahi’s representative, and Mr. Smith did not discuss Mr. Drahi’s potential interest in acquiring the Company at this meeting, but Mr. Smith promptly informed Mr. De Sole of the meeting.

In January 2019, representatives of the Party AB Group called Mr. De Sole to request a meeting, which Mr. De Sole subsequently scheduled for February 5, 2019, to follow up on their discussions from December.

On February 5, 2019, Mr. De Sole and Mr. Harry Wilson, a director of the Company and the chair of the Board’s Business Strategy Committee, met with representatives of the Party AB Group, who made a presentation regarding their background research on the Company based on publicly available information and interviews with former and current employees of the Company (which interviews had not been authorized by the Company, Mr. Smith or any other member of the Board). The representatives of the Party AB Group stated that their preliminary financial analysis resulted in a valuation for the Company of approximately $50 per share of common stock, which they noted remained subject to upward or downward adjustment following due diligence. The closing market price of the Company’s common stock on that date was $40.57 per share. Mr. De Sole and Mr. Wilson thanked the representatives of the Party AB Group for their interest and stated they would then discuss the matter with the Board and respond to the Party AB Group following those discussions with the Board. Following this meeting, Mr. De Sole informed the other members of the Board (including Mr. Smith) of the Party AB Group’s proposal and provided them with a copy of the Party AB Group’s written presentation.

At a regularly scheduled in-person meeting of the Board on February 27, 2019, a portion of which was attended by representatives from the Company’s outside legal counsel, Sullivan & Cromwell LLP (“Sullivan & Cromwell”), Mr. Goss presented to the Board, at the Board’s request, a projection of the Company’s 2023 EBITDA reflecting potential growth in the core business and the projected results of the Company’s investments in its digital initiatives and other key initiatives. Following Mr. Goss’s presentation, the Board and management discussed the materials and particularly the meaningful execution risk to be considered in connection with the growth assumptions in the projections. The Board then instructed Mr. Goss to work with the Company’s senior management team to develop a full set of five-year financial projections for the Company for presentation to the Business Strategy Committee of the Board on April 3, 2019 (see the section entitled “The Merger—Certain Company Forecasts” beginning

 

 

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on page 61). In addition, the Board discussed the Party AB Group’s proposal, Mr. Drahi’s previous expression of interest and other strategic alternatives available to the Company, including the possibility of facilitating transactions that would result in a holder of a significant number of shares of the Company’s common stock transferring its stake to a potential investor. Mr. Daniel Loeb, a director of the Company and the founder of Third Point LLC, affiliates of which hold approximately 14.3% of the Company’s outstanding common stock, provided the directors with a financial analysis of a hypothetical private equity buyout of the Company that his firm had prepared following the receipt of the Party AB Group’s proposal. Mr. Loeb made clear that neither he nor Third Point LLC was interested in proposing such a potential buyout and that the analysis was intended to be illustrative only. During this discussion, Mr. Smith informed the other directors that, in his capacity as a stockholder of the Company and based on his knowledge of the Company as its Chief Executive Officer, he would be willing to vote in favor of a sale of the Company at a price between $55 and $60 per share. The closing market price of the Company’s common stock on that date was $40.85 per share. There was consensus among the directors, based upon their familiarity with the Company’s financial position, market valuation and available strategic alternatives, that the Party AB Group’s proposal was inadequate but that the Company was open to having further discussions with the Party AB Group about a potential proposal at a higher valuation. The Board authorized Mr. De Sole and Mr. Wilson to reject the Party AB Group’s proposal and to take the lead in evaluating the Company’s strategies when responding to the Party AB Group’s proposal. The Board also discussed potential financial advisors that could provide the Company with strategic advisory services and instructed Mr. Smith, in consultation with Mr. De Sole, to explore the engagement of LionTree as a financial advisor to provide the Company with strategic advisory services and LionTree’s perspective on valuation of the Company in light of the Company’s business plans. LionTree was selected due to its substantial experience in and reputation for providing such services, and its familiarity with representatives of several of the parties that had expressed, or the Board considered could express, interest in a transaction with the Company (including representatives of the Party AB Group and Mr. Drahi, none of whom had a contractual relationship with LionTree or would otherwise present a conflict in LionTree’s representation of the Company), as well as the fact that both Mr. Smith and Mr. Goss and certain members of the Board were familiar with representatives of LionTree from their prior work experiences at other companies.

On February 28, 2019, the Company entered into a non-disclosure agreement with LionTree pursuant to which LionTree agreed to keep confidential certain non-public information about the Company.

Also at the end of February 2019, Mr. De Sole and Mr. Wilson called representatives of the Party AB Group to inform them that the Board had reviewed the Party AB Group’s preliminary proposal and did not believe that further discussions at the Party AB Group’s valuation for the Company of approximately $50 per share of common stock would be in the best interests of the Company and its stockholders because the Board saw upside potential in the Company’s businesses. Mr. De Sole and Mr. Wilson noted that the Company was open to having further discussions with the Party AB Group about a potential proposal at a higher valuation, and invited the Party AB Group to meet with management to obtain additional due diligence information that might assist them to raise their bid. The representatives of the Party AB Group accepted the invitation to meet with Mr. Smith and Mr. Goss, which Mr. De Sole subsequently discussed with other members of the Board and agreed to arrange. The Party AB Group’s meeting with Mr. Smith and Mr. Goss was subsequently scheduled for April 10, 2019.

 

 

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In early March 2019, Mr. Smith attended an event sponsored by LionTree. At this event, Mr. Smith spoke privately with Party C, who was also in attendance, regarding Party C’s potential interest in acquiring the Company with Party D and Mr. Drahi. Party C informed Mr. Smith that Party D was no longer interested due to the potential that an acquisition of the Company would result in conflicts of interest with respect to Party D’s other activities. Mr. Smith promptly informed Mr. De Sole about this conversation. Mr. Loeb, who was also in attendance at this event, separately discussed his perspectives on an acquisition of the Company with a representative of LionTree.

On March 22, 2019, Mr. Goss and Mr. Jonathan Olsoff, the General Counsel of the Company, met in-person with representatives of the Party AB Group (in advance of the Party AB Group’s upcoming April 10 meeting with Mr. Smith and Mr. Goss) and discussed general, publicly available information about the Company’s business. Prior to this meeting, Mr. Smith sent the representatives of the Party AB Group an e-mail with suggested discussion topics for their upcoming April 10 meeting based on general, publicly available information about the Company’s business and the Party AB Group’s written presentation from February regarding their background research on the Company. Mr. Goss and Mr. Olsoff promptly updated Mr. Smith regarding their meeting with the Party AB Group, and Mr. Smith subsequently sent an additional e-mail to the representatives of the Party AB Group to follow-up on certain discussions they had with Mr. Goss and Mr. Olsoff at their meeting. Mr. Smith promptly informed Mr. De Sole about the meeting and the related communications.

In late March, Mr. Drahi’s representative approached Mr. Smith to arrange another meeting in the first week of April 2019. Mr. Smith promptly informed Mr. De Sole of a request by Mr. Drahi’s representative for a meeting, and Mr. De Sole confirmed that Mr. Smith should proceed with such meeting. At the meeting, on April 3, 2019, Mr. Drahi’s representative stated to Mr. Smith that Mr. Drahi was very serious about a potential acquisition of the Company. Mr. Smith promptly updated Mr. De Sole regarding the meeting.

In early April 2019, Mr. Drahi’s representative called Mr. Smith and requested permission to speak with the Company’s two largest stockholders, Third Point and Taikang Life Insurance Co. Ltd. (“Taikang”). Mr. Smith promptly informed Mr. De Sole of the request by Mr. Drahi’s representative for permission to speak with Third Point and Taikang, which Mr. De Sole agreed to provide and which Mr. Smith communicated back to Mr. Drahi’s representative.

On April 3, 2019, the Business Strategy Committee held a telephonic meeting, which was attended by all of the Company’s directors, LionTree, Mr. Goss and Mr. Olsoff. In that meeting, Mr. Goss presented a set of five-year financial projections for the Company (see the section entitled “The Merger—Certain Company Forecasts” beginning on page 61), prepared for the Business Strategy Committee at the instruction of the Board, and noted among other things that such projections could be overly optimistic as they entailed significant execution risk. After discussion, the Business Strategy Committee instructed Mr. Goss to work with the Company’s senior management to supplement the set of five-year financial projections to take into account various economic and commercial scenarios for the upcoming Board meeting on May 8 and May 9, 2019. In addition, LionTree reviewed with the Business Strategy Committee historical trends and current dynamics in the global art marketplace, the Company’s positioning within the global art marketplace, the Company’s five-year financial projections and an analysis of their sensitivity to key drivers of performance, and a comparison of the Company’s status quo opportunities to

 

 

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an inorganic expansion plan or sale of the Company. At this meeting, Mr. Smith discussed with the members of the Business Strategy Committee his discussions with Mr. Drahi and his representative, and he reminded the Board that a U.S. private equity fund (“Party E”), which had previously executed a confidentiality agreement (which did not include a standstill) with the Company in November 2017 while considering a potential investment in the Company’s digital businesses, had previously expressed an interest in considering a transaction involving the whole Company in the future. The Business Strategy Committee authorized Mr. Smith to engage in preliminary discussions with Party E to gauge its interest in an acquisition of the Company. LionTree also reviewed with the Business Strategy Committee, in a meeting attended by all members of the Board, a list of potential counterparties that could have an interest in acquiring the Company, including private equity sponsors, sovereign wealth funds, family offices of high net worth individuals, and strategic counterparties. The Business Strategy Committee discussed the likelihood that any such potential counterparties would be interested in acquiring the Company at an attractive price, their ability to pay and potential regulatory impediments to acquisitions by certain of them. The Business Strategy Committee also considered the pros and cons of soliciting indications of interest from potentially interested parties or engaging in a public auction process, including the risk that a leak about the Company’s solicitation efforts could disrupt the Company’s relationships with its employees and damage its business activities with its clients. As the Company’s business is highly reliant on a steady and rolling process of securing substantial consignments with multi-month time horizons, the Board considered that many clients would be reluctant to consign to the Company in the presence of substantial uncertainty around its ownership, management and key employees. Based on these considerations, the Board determined it would not initiate a broad solicitation of indications of interest at such time.

On April 8, 2019, the Company executed an engagement letter with LionTree pursuant to which LionTree agreed to assist the Company in conducting a review of the Company and an evaluation of different strategic alternatives. The engagement letter had an initial term of six months and required the Company to consider in good faith engaging LionTree as its financial advisor if the Company should pursue a buy-side or other strategic transaction prior to April 8, 2020.

On April 10, 2019, Mr. Smith and Mr. Goss met in-person with representatives of the Party AB Group, with Mr. De Sole attending the meeting via telephone, and discussed general, publicly available information about the Company’s business. After this meeting, Mr. De Sole determined that in order for further discussions to take place with the Party AB Group, the Party AB Group would need to provide a specific proposal to the Company in writing. Mr. De Sole called a representative of Party A shortly thereafter to relay this message.

In mid-April 2019, Mr. Smith contacted a representative of Party E to discuss Party E’s potential interest in an acquisition of the Company. Also in mid-April 2019, Mr. Smith was approached by the founder of a non-U.S. private equity fund (“Party F”), who indicated that his fund may have an interest in a potential acquisition of the Company. The founder of Party F informed Mr. Smith that he believed Party F would be able to pay a price of approximately $49 or $50 per share in cash to acquire the Company. During this time period, the market price of the Company’s common stock was between $40 to $45 per share. Mr. Smith requested that Party F submit a proposal in writing to the Company and promptly updated Mr. De Sole regarding this discussion.

 

 

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On May 6, 2019, the Party AB Group sent Mr. De Sole a letter outlining the terms of a preliminary, non-binding proposal to acquire the Company in a take-private transaction at a value of $52.50 per share of common stock, in cash. The closing market price of the Company’s common stock on that date was $40.30 per share. The letter indicated that the Party AB Group would require third party debt financing and outlined the key areas of due diligence on the Company that the Party AB Group would require, including a review of the Company’s historical and forecast revenue and profitability trends, including its business segment and geographic performance; a review of the Company’s organizational structure, both at the departmental and geographic level, including personnel and other allocated resources; a review of the current functionality, feature set, and technical capabilities of the Company’s existing platforms, as well as the Company’s forward-looking technology roadmap; and customary accounting and tax, legal, environmental and functional reviews. The letter also indicated that the Party AB Group’s offer would require final approval from Party A’s investment committee and Party B’s investment officers following completion of diligence.

Also in early May 2019, Mr. Drahi’s representative informed Mr. Smith that Mr. Drahi continued to have an interest in acquiring the Company, and that Mr. Drahi planned to submit a formal proposal to the Company after he secured his financing arrangements for the acquisition. In the course of the discussion, Mr. Drahi’s representative remarked that Mr. Drahi would have an interest in Mr. Smith remaining as Chief Executive Officer of the Company under Mr. Drahi’s ownership. Mr. Smith advised Mr. Drahi’s representative that if Mr. Drahi wanted to make a proposal, he should direct it to the Board in writing and that Mr. Smith would not discuss potential employment arrangements in relation to any such proposal unless and until authorized to do so by the Board. Mr. Drahi’s representative agreed that this was appropriate. Mr. Smith promptly informed Mr. De Sole and Mr. Wilson of this discussion. Mr. Smith has informed the Company that as of the date of filing of this definitive proxy statement, Mr. Smith had neither sought nor received any offer of employment from Mr. Drahi or his representatives nor made any determination concerning whether he would accept any such offer.

On May 8 and 9, 2019, at a regularly scheduled meeting of the Board, Mr. Goss presented the Company’s five-year financial projections that were prepared at the instruction of the Business Strategy Committee to show a “high case,” “middle case” and “low case” with respect to the Company’s financial projections for the upcoming five-year period assuming the Company remains a public company (the “draft five-year projections”) (see the section entitled “The Merger—Certain Company Forecasts” beginning on page 61). The cases were sensitized to include adjustments for the risks associated with macroeconomic conditions and the global art marketplace’s acceptance of the Company’s new initiatives. The directors (including Mr. Michael Wolf, who joined the Board on May 9, 2019 as a director of the Company designated by Third Point) discussed the draft five-year projections, including the fact that they entailed significant execution risks. Also at this meeting, representatives of LionTree reviewed with the Board certain preliminary financial analyses of the Company. The Board discussed the Party AB Group’s preliminary non-binding proposal (including the contingencies contained therein), as well as Mr. Smith’s conversation with Mr. Drahi’s representative. The Board also discussed the individual directors’ views on an appropriate price for an acquisition of the Company (with respect to which the Board did not come to a consensus but which included, in the case of Mr. Linus Cheung, an independent director of the Company designated by Taikang, independent of Taikang and approved by the Board, a price close to $100 per share, which was a price significantly higher than any price discussed by any other director), and strategies for testing the prices that each of the Party AB Group and Mr. Drahi might be willing to offer to

 

 

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acquire the Company, and authorized the Company’s senior management and LionTree to consult with Mr. De Sole and Mr. Wilson to refine those strategies as discussions with each of the Party AB Group and Mr. Drahi unfolded. The Board also discussed the merits and downsides of conducting a public auction process (which downsides included the risk that a public auction process could disrupt the Company’s relationships with its employees and damage its business activities with its clients (including the Company’s ability to secure new consignments from its clients)), the types of other potential counterparties that could have an interest in acquiring the Company, including private equity sponsors, sovereign wealth funds, family offices of high net worth individuals, and strategic counterparties, and the likelihood any such potential counterparties would be interested in acquiring, and their ability to acquire, the Company at an attractive price. Following this discussion, the Board authorized the Company’s senior management and LionTree to offer each of the Party AB Group and Mr. Drahi the opportunity to participate in a meeting with Mr. De Sole, Mr. Smith and Mr. Goss at which Mr. Goss would present the Company’s draft five-year projections, subject to entering into appropriate confidentiality agreements.

On May 9, 2019, representatives of LionTree contacted representatives of the Party AB Group to invite them to participate in a meeting to receive a presentation regarding the Company’s draft five-year projections. Representatives of the Party AB Group thereafter sent the Company a written list of due diligence requests, but, at the direction of the Board, representatives of LionTree informed representatives of the Party AB Group that a price of $52.50 per share of common stock was unacceptable for the Company to proceed with the Party AB Group’s due diligence requests, but that the Company was willing to provide a presentation regarding the Company’s draft five-year projections, subject to execution of a mutually acceptable confidentiality agreement, which might assist the Party AB Group with raising their bid. Representatives of the Party AB Group then accepted the proposed meeting to receive a presentation regarding the Company’s draft five-year projections.

Also on May 9, 2019, after consultation with Mr. De Sole, Mr. Smith (with Mr. Dennis Weibling, a director of the Company and the chair of both the Board’s Audit and Finance Committees, listening in on the discussion) contacted Mr. Drahi’s representative to invite Mr. Drahi’s advisors to participate in a meeting to receive the same presentation regarding the Company’s draft five-year projections as was offered to the Party AB Group, subject to execution of a mutually acceptable confidentiality agreement. Mr. Drahi’s representative informed Mr. Smith that such a meeting was not necessary at that time, as Mr. Drahi was nearly finished with securing his financing arrangements for the potential acquisition of the Company.

On May 15, 2019, representatives of LionTree scheduled a meeting between Mr. De Sole, Mr. Smith and Mr. Goss, on the one hand, and representatives of the Party AB Group, on the other hand, to take place on June 6, 2019.

On May 17, 2019, representatives of the Party AB Group contacted representatives of LionTree to request approval to add two new private investment funds to the Party AB Group (“Party G” and “Party H”). After discussing the Party AB Group’s request with representatives of LionTree, Mr. De Sole and members of the Company’s senior management concluded that neither of Party G nor Party H was likely to be interested in acquiring the Company by itself and that their inclusion in the Party AB group could potentially strengthen the Party AB group’s bid, so they agreed to allow Party G and Party H to join the Party AB Group.

 

 

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Between May 17, 2019 and June 3, 2019, the Company, together with representatives of Sullivan & Cromwell, negotiated and executed confidentiality agreements with each member of the Party AB Group. Each of the confidentiality agreements included a standstill provision and a customary “don’t ask, don’t waive” provision that terminated upon the announcement by the Company of a change of control transaction with a third party.

On May 23, 2019, Mr. Smith met with a representative of a party (“Party I”) that expressed an interest in pursuing the formation of a fund with the Company to invest jointly in art, jewelry and other collectibles. Also on that day, Mr. Smith was contacted by a representative of Party E who informed Mr. Smith that Party E did not consider an acquisition of the Company to be a transaction that Party E wished to undertake.

On May 28, 2019, Mr. Smith and Mr. Goss were contacted by a representative of Party F with a request to discuss a list of diligence questions compiled by Party F based on its review of the Company’s public filings. The Party F representative noted that Party F was interested in leading a consortium that would include a strategic non-U.S. entity and another private investor potentially to acquire the Company. Mr. Smith consulted with Mr. De Sole regarding the appropriate response to Party F and subsequently informed a representative of Party F that the Company would not provide Party F with due diligence access prior to receiving a proposed price from Party F. However, Mr. Smith agreed to arrange a meeting with Party F for mid-June 2019 to discuss general, publicly available information about the Company’s business, which meeting was cancelled promptly after the execution of the merger agreement.

On May 28, 2019, after discussions with Mr. De Sole and Mr. Wilson, representatives of LionTree contacted Mr. Drahi’s representative to inquire about the status of Mr. Drahi’s interest in acquiring the Company and informed Mr. Drahi’s representative that the Board would be open to negotiating a transaction for a sale of the Company, noting that certain directors supported a price of $65 per share of common stock. Mr. Drahi’s representative stated that Mr. Drahi would not be amenable to a transaction at that price.

On May 30, 2019, after further discussions with Mr. De Sole and Mr. Wilson, representatives of LionTree contacted Mr. Drahi’s representative to let him know that he should make his best proposal and get as close as he could to a price per share of common stock in the $60s. Mr. Drahi’s representative stated that Mr. Drahi would revert to LionTree with an indicative proposal in the next few days.

On June 2, 2019, Mr. Smith was contacted by another representative of Party I regarding Party I’s interest in having exploratory discussions with the Company regarding a potential minority investment in the Company, coupled with a right to designate a director to the Board. Thereafter on June 2, 2019, Mr. Smith consulted with Mr. De Sole regarding the communication and Mr. Smith subsequently communicated to Party I that the Company was open to having further discussions regarding Party I’s interest in making an investment in the Company.

On June 3, 2019, a letter outlining the terms of an offer was sent to the Company by BidFair Ltd. (together with its subsidiaries, “BidFair”), an entity indirectly wholly-owned by Mr. Drahi, to acquire the Company at a price of $52.25 per share of common stock in cash. The closing market price of the Company’s common stock on that date was $32.38 per share. The letter stated that BidFair would not require any due diligence with respect to the Company, that BidFair was already in possession of a debt

 

 

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commitment letter from BNP to provide debt financing with respect to the transaction and that BidFair would be able to negotiate definitive transaction documents within one week.

Around June 4, 2019, Mr. Drahi’s representative informed a representative of LionTree that he had contacted a representative of Taikang to ask about whether Taikang would be likely to support a potential sale of the Company to Mr. Drahi. Mr. Drahi’s representative indicated that the representative of Taikang did not state a clear position but noted that Sotheby’s was a strategic investment for Taikang. The representative of LionTree promptly informed Mr. De Sole and Mr. Smith of this conversation. Mr. Smith informed the representative of LionTree that Mr. Loeb had previously authorized Mr. Smith to tell Mr. Drahi’s representative that Third Point would be open to a sale of the Company at the right price and would not seek to roll over its shares in connection with an acquisition of the Company.

On June 5, 2019, Mr. De Sole, together with the other chairs of the committees of the Board (Mr. Wilson, Mr. Weibling, and Ms. Jessica Bibliowicz, the chair of the Board’s Compensation Committee), as well as Mr. Smith and Mr. Loeb, met telephonically with representatives of LionTree and Sullivan & Cromwell to discuss BidFair’s June 3 proposal and potential strategies for getting BidFair to increase its proposed offer price. The directors present at this meeting also discussed the advisability of contacting Taikang to inquire about its interest in making an offer to acquire the Company, but determined not to do so after concluding that the several weeks it would take to explore the possibility of a deal with Taikang would put the no-diligence, fully-financed deal currently proposed by Mr. Drahi at-risk. At the conclusion of the discussions regarding strategies, there was consensus among the directors in attendance to recommend to the Board that the Company revert to Mr. Drahi’s representative to propose a price of $57.50 per share of common stock in cash. The directors in attendance also discussed strategies with respect to the Party AB Group as well as whether the Company should reach out to any other potentially interested parties at that time. At the direction of such directors following the telephonic meeting, representatives of LionTree subsequently contacted Mr. Drahi’s representative to inform him that BidFair’s proposed price of $52.25 per share of common stock was too low but that a price of $57.50 per share of common stock was at a level that the subset of the directors who had the opportunity to consider BidFair’s proposal to date believed would form the basis for a transaction that could be recommended to the Board. The closing market price of the Company’s common stock on that date was $33.67 per share. Shortly after that discussion, Mr. Drahi’s representative contacted representatives of LionTree to inform them that BidFair would be willing to raise its proposed price to $57.00 per share of common stock in cash, but nothing higher, and believed that it could complete a definitive transaction agreement in approximately seven to ten calendar days without any due diligence apart from a meeting with Company management to address a few discrete topics. However, Mr. Drahi’s representative stated that BidFair’s offer was subject to the definitive transaction agreement including a termination fee of five percent because BidFair was offering a greater than 60% premium to the Company’s market price and believed that it should be compensated for helping to deliver such a high premium to the Company’s stockholders in the event a third party ultimately made a superior proposal.

On June 6, 2019, BidFair sent Mr. De Sole a letter confirming its offer to acquire the Company for $57.00 per share of common stock in cash. Subsequently on June 6, 2019, Mr. De Sole, Mr. Smith and other members of the Company’s senior management team discussed BidFair’s revised proposal with representatives of LionTree and Sullivan & Cromwell.

 

 

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Also on June 6, 2019, Mr. De Sole, members of the Company’s senior management and representatives of LionTree met with representatives of the Party AB Group and presented the Company’s draft five-year projections to them.

On the evening of June 6, 2019, and the morning of June 7, 2019, Mr. De Sole contacted each member of the Board individually to apprise them of the contents of the letter from BidFair and to confirm their availability to join a telephonic Board meeting on June 7, 2019.

On June 7, 2019, LionTree provided a letter to the Board stating that as of June 7, 2019, LionTree had reviewed its internal records regarding investment banking engagements with Altice USA, Inc. a telecommunications and media company controlled by Mr. Drahi (“Altice”) and Mr. Drahi in the preceding two years, and reported that LionTree had not performed any investment banking services for which it had received compensation from Altice or Mr. Drahi during such time.

On June 7, 2019, Mr. De Sole met with Mr. Drahi’s representative to discuss the status of the potential transaction and Mr. Drahi’s vision for the future of the Company.

Also on June 7, 2019, at a special telephonic meeting of the Board attended by representatives of LionTree and Sullivan & Cromwell, the Board discussed BidFair’s proposal to acquire the Company for $57.00 per share of common stock. Representatives of Sullivan & Cromwell discussed BidFair’s request for a five percent termination fee and the range of potential deal protections that BidFair might seek to include in a definitive agreement with respect to the transaction. Mr. Goss made a presentation to the Board regarding the Company’s senior management’s ongoing work to derive a single base case set of five-year projections for the Company from the “high case,” “middle case” and “low case” projections set forth in the draft five-year projections that would reflect management’s best estimate of the most likely outcome over the next five years assuming the Company remains a public company and factoring in the substantial execution risks going forward. Representatives of LionTree reviewed with the Board certain preliminary financial analyses related to BidFair’s proposal. Mr. Cheung stated that he believed BidFair’s proposal was inadequate and that the Company’s value was close to $100 per share of common stock. Mr. Cheung indicated he might abstain from any vote to approve a transaction at the price proposed by BidFair. Mr. Cheung also stated his belief that Taikang might have an interest in acquiring the Company and there followed a discussion concerning the fiduciary obligations of the directors and the options potentially available to the Company if it received a superior proposal after having executed a merger agreement with a bidder. After discussion, the Board authorized the Company’s senior management, LionTree and Sullivan & Cromwell to engage in negotiations with BidFair concerning its proposal. The Board also discussed strategies with respect to the Party AB Group, and whether there were any other potential bidders whom the Company should contact at that time, taking into consideration the antitrust and competition law and foreign investment regulatory considerations (including CFIUS) associated with such other potential bidders (including as compared to BidFair and the Party AB Group) and the need to take measures to try to avoid a leak about the potential transaction, which could disrupt the Company’s relationships with its employees and damage its business activities with clients. The Board also discussed the advisability of contacting Taikang to inquire about its interest in making an offer to acquire the Company, but determined not to do so after considering the potential regulatory considerations in connection with such a transaction and the Board’s belief that the several weeks it would take to explore the possibility of a deal with Taikang would put the no-diligence, fully-financed deal proposed by BidFair at-risk. After excusing LionTree from the meeting, the Board also discussed engaging LionTree as the

 

 

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Company’s financial advisor with respect to a potential change in control transaction. The Board approved the engagement of LionTree and authorized Mr. Goss and Mr. De Sole to determine the financial and other terms of LionTree’s engagement.

On June 8 and 9, 2019, the Company, together with representatives of Sullivan & Cromwell, negotiated with BidFair and representatives of BidFair’s outside counsel, Hughes, Hubbard & Reed LLP (“Hughes Hubbard”) and executed a confidentiality agreement between the Company and BidFair Limited. Mr. Drahi’s representative had previously communicated that he would not be willing to sign a standstill agreement, and the confidentiality agreement did not include a standstill.

On June 10, 2019, members of the Company’s senior management, Mr. De Sole and representatives of LionTree and Sullivan & Cromwell met with Mr. Drahi and other representatives of BidFair, including representatives of Morgan Stanley Securities LLC and BNP, BidFair’s financial advisors for the transaction, and Hughes Hubbard. Certain of the attendees joined the meeting telephonically or by video conference. At the meeting, the representatives of the Company provided Mr. Drahi and his representatives with a presentation concerning the Company’s businesses, including certain historical financial information and a discussion of the Company’s digital business initiatives. Mr. Drahi, BidFair and their representatives did not request, and the Company did not provide, the Company’s draft five-year projections.

Also on June 10, 2019, a representative of the Party AB Group contacted a representative of LionTree and stated that the Party AB Group would follow up in the next day or two with respect to the Party AB Group’s interest in acquiring the Company.

Also on June 10, 2019, representatives of Hughes Hubbard sent representatives of Sullivan & Cromwell a draft merger agreement with respect to the transaction which proposed, among other things, that the Company would pay a termination fee equal to five percent of the Company’s equity value should the Board change its recommendation of the transaction to accept a superior proposal. Hughes Hubbard also provided a draft voting and support agreement that BidFair requested be signed by Third Point, Taikang, each of the Company’s directors and such number of members of the Company’s executive management team that would bring the number of executed voting and support agreements to ten, equal to approximately 32% of the shares then eligible to vote on any such transaction.

From June 10, 2019 until the execution of the merger agreement by the Company and BidFair on June 16, 2019, representatives of BidFair, Hughes Hubbard, Ropes & Gray International LLP (“Ropes & Gray”), who represented BidFair with respect to certain financing-related matters, members of the Company’s senior management (in consultation with Mr. De Sole), Sullivan & Cromwell and LionTree met telephonically and in person multiple times and exchanged multiple drafts of the merger agreement, equity commitment letter and guaranty. During this period, Third Point also negotiated the terms of the voting and support agreement with Hughes Hubbard and from time to time representatives of Sullivan & Cromwell consulted with a representative of Third Point regarding the terms and conditions of the merger agreement and strategies with respect to the negotiations. The Company refused BidFair’s request to ask Taikang to sign a voting and support agreement. The parties discussed Mr. Drahi’s request for a five percent termination fee on multiple occasions, and on numerous occasions the Company and its advisors sought to reduce the size of the proposed termination fee in connection with a potential go-shop period, by having a lower termination fee applicable to Taikang or other specified parties, or by having a lower overall termination fee. In addition to the termination fee and other deal protections, key subjects

 

 

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of the negotiations of the merger agreement and related transaction documentation included, among other things, the potential inclusion of a reverse termination fee associated with a potential failure of BidFair’s debt financing to be available when the transaction was otherwise ready to be consummated, the inclusion of a guaranty of BidFair’s obligations from a creditworthy entity and the treatment of employee equity awards and other employee benefits. At the Company’s request, BidFair provided the Company with certain financial information concerning the entities that BidFair proposed would be providing an equity commitment and a guaranty with respect to the transaction, together with copies of and information concerning BidFair’s debt commitment arrangements. BidFair also provided information concerning Mr. Drahi’s investments to assist the Company with evaluating the need for and risks associated with securing regulatory approvals for a transaction between the Company and BidFair.

On June 11, 2019, a representative of Party I contacted Mr. Smith to inquire whether Mr. Smith had any updates in response to Party I’s expression of interest in a potential minority investment in the Company. Mr. Smith told Party I that he would be in touch in the following week, and Mr. Smith promptly informed Mr. De Sole of this communication.

In addition, on June 11, 2019, a representative of the Party AB Group contacted Mr. Loeb and observed that the Company’s market price had declined since the Party AB Group submitted its written proposal to acquire the Company at a price of $52.50 per share in case. The closing market price of the Company’s common stock on that date was $35.46 per share. The representative of the Party AB Group subsequently spoke with a representative of LionTree and communicated a similar message regarding the decline in the Company’s market price, and stated that the Party AB Group would submit a revised proposal to acquire the Company that took into account the management presentation previously provided by the Company to the Party AB Group. During that conversation, the representative of the Party AB Group indicated that the Party AB Group’s proposed price of $52.50 per share was unchanged but that it could change upward or downward after the Party AB Group was provided with additional due diligence, which the Party AB Group would be prepared to undertake only if the Company granted the Party AB Group exclusivity. Later in the day on June 11, 2019, the Party AB Group submitted a non-binding offer letter to the Company reaffirming the Party AB Group’s interest in pursuing an acquisition of the Company at the same price of $52.50 per share it had previously offered (subject to final investment committee and officer approvals following completion of due diligence), restating the need to obtain third party debt financing, and requesting that the parties negotiate exclusively (noting that the Party AB Group would be open to having a go-shop period following the signing of a deal) and three weeks of due diligence.

On June 12, 2019, Mr. De Sole met with Mr. Drahi to discuss the status of the potential transaction and Mr. Drahi’s vision for the future of the Company.

On June 13, 2019, the Company and LionTree entered into an engagement letter pursuant to which LionTree would act as the Company’s financial advisor in connection with a potential change of control transaction.

On June 14, 2019, the Board met telephonically with certain members of the Company’s senior management and representatives of LionTree and Sullivan & Cromwell to discuss the status of the Company’s negotiations with BidFair and to discuss next steps. At the request of the Board, Mr. Goss presented a base case set of five-year financial projections for the Company (the “base case projections”),

 

 

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which was derived from the “high case,” “middle case” and “low case” projections set forth in the draft five-year projections to reflect management’s best estimate of the most likely outcome over the next five years assuming the Company remains a public company, taking execution risks into account (see the section entitled “The Merger—Certain Company Forecasts” beginning on page 61). After discussion, the directors voted unanimously to approve the base case projections for use by LionTree in connection with its financial analysis of the BidFair proposal, and LionTree subsequently reviewed with the Board certain preliminary financial analyses related to the BidFair proposal at that meeting. Representatives of Sullivan & Cromwell provided an overview of the key terms of the merger agreement and the voting and support agreement, including the material issues that the parties were still negotiating, such as the size of the Company’s termination fee, the inclusion and size of any reverse termination fee, the marketing period for BidFair’s debt financing, the treatment of equity interests held by employees, the continuation of the Company’s existing employee benefit arrangements and certain obligations with respect to antitrust, competition and other regulatory filings and approvals. Representatives of LionTree also provided, in advance of the meeting and orally at the meeting, disclosure concerning an estimated $625,000 non-voting and non-controlling investment held by LionTree and certain of its members in a third party investor in Altice USA. The Board considered this disclosure and concluded that the investment was immaterial, that such investment would not impair the ability of LionTree to render impartial advice to the Board, and that the Board remained satisfied with LionTree’s independence. At the conclusion of the meeting, the Board met in executive session without Mr. Smith or any other members of management present and discussed certain considerations related to the treatment of equity interests held by employees in the proposed transaction and the extent to which the Company’s existing employee benefit arrangements would continue after the consummation of the proposed transaction.

On June 16, 2019, Mr. De Sole, Mr. Smith and other members of the Company’s senior management, along with representatives of LionTree and Sullivan & Cromwell, participated in multiple telephonic meetings among themselves and with Mr. Drahi’s representative and representatives of Hughes Hubbard and Ropes & Gray to resolve the remaining outstanding issues in the merger agreement, including the size of the Company’s termination fee. Mr. De Sole reviewed and approved the material positions taken by senior management during these negotiations. Mr. Drahi’s representative communicated to representatives of LionTree that Mr. Drahi’s position was that he would agree to a reverse termination fee that would be double the Company’s termination fee, but that he would do so only with respect to a termination fee of four percent and a reverse termination fee of eight percent, or a termination fee of up to five percent and a reverse termination fee correspondingly double the Company termination fee, of up to ten percent. After further discussion and consultation with the Company’s financial and legal advisors as well as Mr. De Sole and Mr. Smith, representatives of LionTree communicated to Mr. Drahi’s representative that Mr. De Sole and management would recommend that the Board accept Mr. Drahi’s proposal for a four percent termination fee and an eight percent reverse termination fee.

Later in the day on June 16, 2019, the Board met telephonically with certain members of the Company’s senior management and representatives of LionTree and Sullivan & Cromwell. Representatives of Sullivan & Cromwell and LionTree reviewed the latest developments in negotiations and discussions with BidFair. A representative of Sullivan & Cromwell reviewed the key terms of the merger agreement, the current version of which was distributed in advance of the meeting, and the

 

 

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proposed resolutions that the Board would be adopting if it determined that the transaction was in the best interests of the Company and the Company’s stockholders and to enter into the transaction. The Board asked questions of management and the representatives of LionTree and Sullivan & Cromwell. Representatives of LionTree reviewed certain financial analyses that they had performed with respect to the final proposal from BidFair as set forth in a presentation distributed in advance of the meeting. At the Board’s request, representatives of LionTree rendered LionTree’s oral opinion, which was subsequently confirmed in writing by delivery of LionTree’s written opinion dated June 16, 2019, that, as of the date of such opinion and based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken as set forth in its written opinion, the per share merger consideration to be received by the holders of the Company’s common stock (other than the excluded shares and dissenting shares) pursuant to the merger agreement is fair, from a financial point of view, to such holders. For a detailed discussion of LionTree’s opinion, see the section entitled “The Merger—Opinion of the Company’s Financial Advisor” beginning on page 51. Sullivan & Cromwell then led a discussion of the support agreement, dated November 4, 2016, entered into between Taikang Insurance Group and the Company (the “Taikang support agreement”) in connection with its investment in the Company. The Board discussed that, while the Taikang support agreement would permit Taikang to make a superior proposal to acquire the Company following the announcement of a transaction with BidFair, it was desirable to ensure that there would be no technical obstacles under the standstill provisions of the Taikang support agreement to Taikang making such a proposal. The Board unanimously adopted a resolution effectively removing any such obstacles to such a proposal under the Taikang support agreement. Following further discussion, the Board thereafter (i) determined that the merger agreement, the voting and support agreement, the equity commitment letter and the guaranty and the merger and the other transactions contemplated by the merger agreement and such other transaction documents, are advisable to, and in the best interests of, the Company and its stockholders, (ii) approved and declared advisable the merger agreement and the execution, delivery and performance by the Company of the merger agreement and the consummation of merger and the other transactions contemplated by the merger agreement, (iii) approved the other transaction documents, including the voting and support agreement, and the execution, delivery and performance of such documents by their respective parties and the consummation of the transactions contemplated by such documents; (iv) directed that the merger agreement be submitted to the Company’s stockholders for adoption at a special meeting of the Company’s stockholders; and (v) resolved to recommend that the Company’s stockholders vote in favor of adoption of the merger agreement and such other matters submitted for the stockholders’ approval and/or adoption in connection with the merger agreement. The Board also amended and restated the Executive Severance Plan to cover each of the Company’s current executive officers (other than Mr. Smith) and provide for “good reason” severance protection (as described further in the section entitled “The Merger—Interests of Certain Persons in the Merger” beginning on page 67). All of the Company’s directors voted in favor of these resolutions with the exception of Mr. Cheung, who abstained after restating his belief that the value of the Company exceeded the proposed purchase price but who indicated his willingness to allow the Company’s stockholders to vote on the transaction nonetheless.

On the evening of June 16, 2019, the Company, Parent and Merger Sub executed the merger agreement.

On July 23, 2019, representatives of Taikang sent a letter to Mr. De Sole requesting that the Company provide either a copy of the board resolutions adopted at the board meeting on July 16, 2019

 

 

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related to the Taikang support agreement or an explanation of how the Board removed obstacles to Taikang’s ability to engage in corporate takeover actions under the Taikang support agreement.

On July 24, 2019, at the direction of the Company, Sullivan & Cromwell sent a letter to Taikang’s representatives providing the pertinent text of the board resolutions, dated July 16, 2019, relating to the Taikang support agreement, which provide in relevant part as follows: “[T]he Board determines that the submission of an unsolicited proposal that would be an Alternative Transaction Proposal (as defined in the Merger Agreement) by or on behalf of a party to the Taikang Support Agreement and the consummation of a transaction with any such party that is a Superior Proposal (as defined in the Merger Agreement) shall not be deemed to be restricted for purposes of the Taikang Support Agreement.”

Reasons for the Merger; Recommendation of the Company’s Board of Directors

The Board (i) determined that the merger agreement, the voting and support agreement, the equity commitment letter and the guaranty, the merger and the other transactions contemplated by the merger agreement and such other transaction documents are advisable to, and in the best interests of, the Company and the stockholders; (ii) approved and declared advisable the merger agreement and the execution, delivery, and performance by the Company of the merger agreement and the consummation of the merger and the other transactions contemplated by the merger agreement; (iii) approved the ancillary documents and the execution, delivery and performance of the ancillary documents by their respective parties and the consummation of the transactions contemplated by the ancillary documents; (iv) directed that the merger agreement be submitted to the stockholders for adoption at the special meeting; and (v) recommended that the stockholders vote to adopt the merger agreement and to approve and/or adopt such other matters that are submitted to the stockholders at the special meeting in connection with the merger agreement. Approval of the proposal to adopt the merger agreement requires the affirmative vote of holders of a majority of the shares of common stock outstanding as of the close of business on the record date.

Our Board recommends that you vote “FOR” approval of the merger proposal and “FOR” approval of the compensation proposal.

In the course of reaching its determination and recommendation, the Board consulted with and received the advice and assistance of its legal and financial advisors. In recommending that stockholders vote in favor of adoption of the merger agreement, the Board considered a number of factors, including the following (which factors are not necessarily presented in order of relative importance):

 

   

Attractive Value; Best Alternative for Maximizing Stockholder Value. The Board considered that the per share merger consideration of $57.00 provides stockholders with an attractive value for their shares of common stock and was more favorable to the stockholders than the potential value that would reasonably be expected to result from other alternatives reasonably available to the Company, including the continued standalone operation of the Company as an independent public company, taking into account its strategic alternatives and financing plans on an ongoing basis, in light of a number of factors, including:

 

   

the current and historical trading prices of the common stock, including that the per share cash merger consideration constituted a premium of approximately 61% to the closing

 

 

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price of the common stock on June 14, 2019, the last trading day prior to the meeting of the Board to consider the merger, and 56.3% to the 30 trading-day volume weighted average closing price during the thirty (30) days ended June 14, 2019;

 

   

the macroeconomic factors affecting the current environment in the global art market, including the potential impact on the Company’s businesses of United States trade relations with China and certain risk factors detailed in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as well as broader economic and commercial trends affecting the Company’s business and financial results;

 

   

the Board’s assessment of the Company’s business, assets and prospects, its competitive position and historical and projected financial performance and the nature of the industries in which the Company operates;

 

   

the strategic alternatives reasonably available to the Company, on both a standalone basis and with a third party, and the risks and uncertainties associated with those alternatives, including with respect to the execution risks associated with the Company’s long-term business plans;

 

   

the risks and uncertainties associated with the impact of the global economy, the financial markets and global political conditions on the Company’s business and clients and the supply of and demand for works of art and the resulting cyclicality in the Company’s performance;

 

   

the risks and uncertainties with the Company’s efforts to invest in new businesses and technologies, including the impact of those new technologies on its existing business;

 

   

the anticipated future trading prices of the Company common stock on a standalone basis, based on management estimates and adjusted for different scenarios, and the risks and uncertainties of continuing on a standalone basis as an independent public company;

 

   

the risks and uncertainties relating to the intense competition in the global art market;

 

   

the challenges faced by the Company operating as the only public company in its industry, including with respect to the very limited equity research analyst coverage of the Company and the competing needs for improved or stable stockholder returns on a quarter to quarter basis, on the one hand, and for increased spending to advance the implementation of the Company’s digital initiatives, on the other hand;

 

   

the fact that the Company has, over time, received multiple inbound inquiries relating to potential acquisitions of the Company, none of which proposed a value in excess of $57.00 per share;

 

   

the Board’s belief, following consultation with LionTree, that Parent would be the potential transaction partner most likely to offer the best combination of value and closing certainty to stockholders; and

 

   

the Board’s belief that the terms of the merger agreement, taken as a whole, are reasonable.

 

   

Greater Certainty of Value. The Board considered that the all-cash per share merger consideration provides the stockholders with certainty of value and liquidity for their shares

 

 

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upon the closing of the merger at a price significantly above the price of the common stock prior to the public announcement of the merger, especially when viewed against the potential rewards, risks and uncertainties inherent in the Company’s business, including risks associated with management’s standalone plan and the intense competitive dynamics of the industry.

 

   

Receipt of Fairness Opinion from LionTree. The Board considered the financial analyses presented to the Board by LionTree, as well as the opinion LionTree rendered to the Board to the effect that, as of June 16, 2019, and based upon and subject to the various assumptions, qualifications, limitations and other matters set forth in such opinion, the per share merger consideration of $57.00 in cash to be received pursuant to, and in accordance with, the terms of the merger agreement by the holders of shares of common stock (other than excluded shares and dissenting shares), was fair, from a financial point of view, to such holders, as more fully described below in the section captioned “The Merger—Opinion of the Company’s Financial Advisor” (beginning on page 51) and which written opinion is attached in its entirety as Annex C hereto.

 

   

Ability to Receive Higher Offers. The Board considered the Company’s rights under the merger agreement, subject to certain conditions, to respond to and negotiate with respect to certain unsolicited acquisition proposals made prior to the time the Company’s stockholders approve the merger proposal and to terminate the merger agreement to enter into an agreement with respect to a Superior Proposal, subject to Parent’s right to receive payment of the Company termination fee of $110,860,000, which amount the Board believed to be reasonable under the circumstances, taking into account the size of the transaction and the range of similar termination fees in comparable transactions. The Board also considered the fact that it took steps to ensure that Taikang would not be restricted from submitting a Superior Proposal by the terms of the standstill under its support agreement with the Company, and the fact that the voting and support agreement executed by Third Point, Mr. De Sole and Mr. Smith terminates in connection with the termination of the merger agreement in accordance with its terms (including in connection with the Company’s entry into an agreement relating to a Superior Proposal).

 

   

Likelihood of Completion; Certainty of Payment. The Board considered its belief that, absent a Superior Proposal, the merger represented a transaction that would likely be consummated based on, among other factors:

 

   

the reputation and financial condition of Parent and its affiliates;

 

   

the absence of any financing condition to consummation of the merger;

 

   

the fact that Parent and Merger Sub had already obtained committed debt and equity financing for the transaction, the reputation and stature of the debt and equity financing sources, the limited number and the nature of the conditions to the debt and equity financing, the obligation of Parent and Merger Sub to use commercially reasonable efforts to consummate the debt and equity financing and the guaranty provided by an affiliate of Parent in favor of the Company with respect to, among other things, the payment obligations of Parent’s affiliate under the equity commitment letter;

 

   

the requirement in the merger agreement that if Parent and Merger Sub fail to effect the closing under certain circumstances relating to the failure of Parent’s debt financing to be

 

 

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available when the transaction is otherwise ready to be consummated, Parent must pay to the Company the Parent termination fee of $221,710,000;

 

   

the fact that the guaranty provided by an affiliate of Parent in favor of the Company guarantees, among other things, (i) the payment of the Parent termination fee by Parent and (ii) in circumstances where the Parent termination fee is not payable, the payment of up to $1,924,000,000 in money damages awarded in connection with a breach by Parent, the equity financing source or Merger Sub of their respective obligations under the merger agreement or equity commitment letter;

 

   

the Company’s ability, under certain circumstances described in “The Merger Agreement—Remedies,” to seek specific enforcement of Parent’s obligations to cause, and, pursuant to the equity commitment letter, to seek specific performance to directly cause, the equity financing sources to fund their contributions as contemplated by the merger agreement and the equity commitment letter and the consummation of the merger;

 

   

the lack of competitive overlaps between the businesses of the Company and Parent’s affiliates; and

 

   

the fact that the conditions to the closing of the merger are specific and limited in scope.

 

   

Other Terms of the Merger Agreement. The Board considered other terms and conditions of the merger agreement and related transaction documents, including:

 

   

the provision allowing the Board to change its recommendation prior to obtaining the stockholder approval in specified circumstances relating to a Superior Proposal or intervening event, subject to Parent’s right to terminate the merger agreement and receive payment of the Company termination fee;

 

   

the provisions requiring Parent to use commercially reasonable efforts to take all actions necessary, proper or advisable to consummate the merger in the most expeditious manner practicable, including with respect to taking all actions customarily and reasonably undertaken to obtain CFIUS approval, subject to certain exceptions as further described under the heading “The Merger Agreement—Filings; Other Actions; Notification” beginning on page 94 and “The Merger—Regulatory Approvals” beginning on page 75; and

 

   

the outside date of the merger agreement on which either party, subject to certain exceptions, can terminate the merger agreement, and the Board’s view that the outside date, and the provisions of the merger agreement providing for extensions of the outside date under certain circumstances, allow for sufficient time to consummate the merger.

 

   

Opportunity for the Company’s Stockholders to Vote. The Board considered the fact that the merger would be subject to the approval of the stockholders, and the stockholders would be free to evaluate the merger and vote for or against the adoption of the merger agreement at the special meeting.

 

   

Appraisal Rights. The Board considered the availability of statutory appraisal rights under Delaware law in connection with the merger to stockholders who timely and properly exercise such rights.

 

 

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In the course of reaching its recommendation, the Board also considered a variety of risks and potentially negative factors concerning the merger and the merger agreement, including the following:

 

   

that the stockholders will have no ongoing equity participation in the Company following the merger and the stockholders will cease to participate in the Company’s future earnings or growth, if any, and will not benefit from increases, if any, in the value of the Company following the merger;

 

   

the risk that the merger will be delayed or will not be completed, including the failure to obtain certain regulatory approvals to the completion of the merger, as well as the potential loss of value to the stockholders and the potential negative impact on the operations and prospects of the Company if the merger agreement is terminated or the merger is not completed for any reason;

 

   

the risk, if the merger is not consummated, that the pendency of the merger could affect adversely the relationship of the Company and its subsidiaries with their respective employees (including making it more difficult to attract and retain key personnel and the possible loss of key specialists), customers, agents and others with whom they have business dealings;

 

   

the restrictions imposed by the terms of the merger agreement on the conduct of the Company’s business prior to completion of the merger, which may delay or prevent the Company from undertaking business opportunities that may arise pending completion of the merger, and the resultant risk if the merger is not consummated;

 

   

the significant effort and cost involved in connection with negotiating the merger agreement and completing the merger (including certain costs and expenses if the merger is not consummated), the substantial management time and effort required to effectuate the merger and the related disruption to the Company’s day-to-day operations during the pendency of the merger;

 

   

the possibility that the debt financing contemplated by the debt commitment letters and the equity financing contemplated by the equity commitment letter will not be obtained, resulting in Parent not having sufficient funds to complete the merger;

 

   

the fact that the Company is entering into a merger agreement with newly formed entities without any material assets and, accordingly, that the Company’s monetary remedy in connection with a breach of the merger agreement by Parent or Merger Sub is limited to (i) the payment of the $221,710,000 Parent termination fee under certain circumstances related to a failure of Parent’s debt financing to be available when the transaction is otherwise ready to be consummated or (ii) outside of the circumstances resulting in payment of the Parent termination fee under the merger agreement, $1,924,000,000 (the amount of the equity commitment under the equity commitment letter), which may not be sufficient to compensate the Company for losses suffered as a result of a breach of the merger agreement by Parent or Merger Sub;

 

   

the requirement that the Company pay Parent a termination fee of $110,860,000 under certain circumstances following termination of the merger agreement, including if the Board changes its recommendation in light of an intervening event or terminates the merger agreement to accept a Superior Proposal;

 

 

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the fact that the Company did not conduct a broad auction process for a sale of the Company, solicit an acquisition proposal from Taikang or provide the Party AB Group or other potentially interested bidders with an explicit opportunity to match or exceed Parent’s offer price prior to signing the merger agreement in order to secure Parent’s offer for a high-premium, high-certainty transaction;

 

   

the restrictions imposed by the merger agreement on soliciting competing acquisition proposals from third parties (see the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes” beginning on page 89);

 

   

the effect that the right afforded to Parent under the merger agreement to match acquisition proposals from third parties may have to discourage other parties that might otherwise have an interest in a business combination with, or an acquisition of, the Company, as described in the section entitled “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes” beginning on page 89;

 

   

as the transaction has a potential outside date as late as March 12, 2020, the possibility that the stockholders could be asked to vote on adoption of the merger agreement well in advance of completion of the transaction, depending on when the transaction actually closes;

 

   

the fact that the receipt of cash in exchange for the common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes for many of the stockholders; and

 

   

the fact that the Company’s officers and directors may have interests in the merger that are different from, or in addition to, the interests of the stockholders, including the conversion of equity awards held by officers and directors, the payment of severance to officers if a termination of employment were to occur in connection with the merger, and the interests of the Company’s directors and officers in being entitled to continued indemnification, advancement of expenses and insurance coverage from the surviving corporation.

The above discussion of the information and factors considered by the Board is not intended to be exhaustive, but indicates the material matters considered. In reaching its determination and recommendation, the Board did not quantify, rank or assign any relative or specific weight to any of the foregoing factors, and individual members of the Board may have considered various factors differently. The Board did not undertake to make any specific determination as to whether any specific factor, or any particular aspect of any factor, supported or did not support its ultimate recommendation. Moreover, in considering the information and factors described above, individual members of the Board each applied his or her own personal business judgment to the process and may have given differing weights to differing factors. The Board based its recommendation on the totality of the information presented. The explanation of the factors and reasoning set forth above contain forward-looking statements that should be read in conjunction with the section of this proxy statement entitled “Cautionary Statements Regarding Forward-Looking Information.”

Opinion of the Company’s Financial Advisor

On June 16, 2019, at a meeting of the Board, LionTree rendered an oral opinion to the Board (which was subsequently confirmed in writing by delivery of LionTree’s written opinion dated June 16, 2019) to the effect that, as of such date, the per share merger consideration to be received by the holders of

 

 

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Sotheby’s common stock (other than excluded shares and dissenting shares) in the merger pursuant to the merger agreement was fair from a financial point of view, based upon and subject to the procedures followed, assumptions made, qualifications and limitations on the review undertaken, and other matters considered by LionTree in preparing its opinion.

LionTree’s opinion was provided to, and for the benefit of, the Board in connection with its evaluation of the merger and only addressed the fairness, from a financial point of view, of the per share merger consideration to be received by the holders of Sotheby’s common stock (other than excluded shares and dissenting shares) in the merger pursuant to the merger agreement (without giving any effect to any impact of the merger and other transactions contemplated by the merger agreement on any particular stockholder of Sotheby’s other than in its capacity as a holder of Sotheby’s common stock). The summary of LionTree’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Annex C to this proxy statement and incorporated herein by reference, and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken, and other matters considered by LionTree in preparing its opinion. However, neither LionTree’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement constitutes a recommendation to any holder of Sotheby’s common stock as to how such stockholder should vote or act on any matter relating to the merger and other transactions contemplated by the merger agreement or any other matter.

In arriving at its opinion, LionTree, among other things:

 

   

reviewed a draft, dated June 15, 2019, of the merger agreement;

 

   

reviewed certain publicly available business and financial information relating to Sotheby’s;

 

   

reviewed certain historical financial information and other data relating to Sotheby’s that were provided to LionTree by the management of Sotheby’s, approved for LionTree’s use by Sotheby’s, and not publicly available;

 

   

reviewed certain internal financial forecasts, estimates, and other data relating to the business and financial prospects of Sotheby’s that were provided to LionTree by the management of Sotheby’s, approved for LionTree’s use by Sotheby’s, and not publicly available, including financial forecasts and estimates for the fiscal years ending December 31, 2019 through December 31, 2023, prepared by the management of Sotheby’s;

 

   

conducted discussions with members of the senior management of Sotheby’s concerning the business, operations, historical financial results, and financial prospects of Sotheby’s and the merger and other transactions contemplated by the merger agreement;

 

   

reviewed current and historical market prices of Sotheby’s common stock;

 

   

reviewed certain financial performance and stock market data of Sotheby’s and compared that data with similar data for certain other companies;

 

   

reviewed and compared data regarding the premiums paid in certain other transactions;

 

   

reviewed and compared certain financial terms of the merger and the other transactions contemplated by the merger agreement with the financial terms of certain other transactions; and

 

 

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conducted such other financial studies, analyses and investigations, and considered such other information, as LionTree deemed necessary or appropriate.

In connection with LionTree’s review, with Sotheby’s consent, LionTree assumed and relied upon, without independent verification, the accuracy and completeness of the information provided to, discussed with, or reviewed by LionTree for the purpose of its opinion. In addition, with Sotheby’s consent, LionTree did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Sotheby’s, or any of its subsidiaries, nor was LionTree furnished with any such evaluation or appraisal. With respect to the financial forecasts and estimates referred to above (which forecasts and estimates are summarized in the section entitled “The Merger—Certain Company Forecasts” and which we refer to collectively as the “forecasts”). LionTree assumed, with Sotheby’s consent (and based on advice of the management of Sotheby’s), that the forecasts have been reasonably prepared in good faith on a basis reflecting the best currently available estimates and judgments of the management of Sotheby’s as to the future financial performance of Sotheby’s and its subsidiaries. LionTree expressed no opinion with respect to such forecasts. LionTree’s opinion did not address any legal, regulatory, taxation, or accounting matters, as to which LionTree understood that Sotheby’s had obtained such advice as it deemed necessary from qualified professionals, and LionTree assumed the accuracy and veracity of all assessments made by such advisors with respect to such matters. LionTree’s opinion is necessarily based on economic, monetary, market, and other conditions as in effect on, and the information available to LionTree as of, the date of its opinion and LionTree’s opinion speaks only as of the date thereof.

LionTree’s opinion did not address Sotheby’s underlying business decision to engage in the merger and other transactions contemplated by the merger agreement or any related transaction, the relative merits of the merger and other transactions contemplated by the merger agreement or any related transaction as compared to other business strategies or transactions that might be available to Sotheby’s, or whether the consideration to be received by the stockholders of Sotheby’s pursuant to the merger agreement represented the best price obtainable. Other than responding to certain inbound inquiries received by Sotheby’s, in connection with its engagement, LionTree was not requested to, and did not, solicit interest from other parties prior to the date of its opinion with respect to an acquisition of, or other business combination with, Sotheby’s or any other alternative transaction. LionTree also expressed no view as to, and its opinion did not address, the solvency of Sotheby’s or any other entity under any state, federal, or other laws relating to bankruptcy, insolvency, or similar matters. LionTree’s opinion addressed only the fairness, from a financial point of view, to the holders of Sotheby’s common stock (other than excluded shares and dissenting shares), as of the date of its opinion, of the per share merger consideration to be received by such stockholders pursuant to the merger agreement. LionTree was not asked to, nor did it, offer any opinion as to the terms, other than the per share merger consideration to the extent expressly specified in its opinion, of the merger agreement or any related documents or the form of the merger and other transactions contemplated by the merger agreement or any related transaction (including any agreement or transaction between Sotheby’s, on the one hand, and Parent, Merger Sub or any other subsidiary or affiliate of Parent, on the other, or between Parent and any of its subsidiaries or other affiliates), including the fairness of the merger and other transactions contemplated under the merger agreement to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of Sotheby’s, Parent, or any of their respective affiliates. In addition, LionTree expressed no opinion as to the fairness of the amount or nature of any compensation to

 

 

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be received by any officers, directors, or employees of any parties to the merger and other transactions contemplated by the merger agreement, any of Parent, Merger Sub or any other subsidiary or affiliate of Parent, or any class of such persons, whether relative to the per share merger consideration or otherwise. LionTree’s opinion should not be construed as creating any fiduciary duty on the part of LionTree (or any of its affiliates) to any party. LionTree expressed no opinion as to the prices at which Sotheby’s common stock will trade at any time. In rendering its opinion, LionTree assumed, with Sotheby’s consent, that except as would not be in any way meaningful to its analysis: (i) the final executed form of the merger agreement would not differ from the draft that LionTree reviewed, (ii) the representations and warranties of the parties to the merger agreement, and the related transaction documents, were true and correct, (iii) the parties to the merger agreement, and the related transaction documents, would comply with and perform all covenants and agreements required to be complied with or performed by such parties under the merger agreement and the related transaction documents, and (iv) the merger and the other transactions contemplated by the merger agreement would be consummated in accordance with the terms of the merger agreement and related transaction documents, without any waiver or amendment of any term or condition thereof. LionTree also assumed, with Sotheby’s consent, that all governmental, regulatory, or other third-party consents and approvals necessary for the consummation of the merger or the other transactions contemplated by the merger agreement would be obtained without any adverse effect on Sotheby’s or on the expected benefits of the merger and other transactions contemplated by the merger agreement in any way meaningful to its analysis.

LionTree’s opinion was provided for the benefit of the Board (in its capacity as such) in connection with, and for the purpose of, its evaluation of the merger and the other transactions contemplated by the merger agreement, and does not constitute a recommendation to any holder of Sotheby’s common stock as to how such stockholder should vote or act with respect to the merger or the other transactions contemplated by the merger agreement or any other matter.

In rendering its opinion to the Board, LionTree performed a variety of analyses, including those described below. The summary of LionTree’s analyses is not a complete description of the analyses underlying LionTree’s opinion. The preparation of a fairness opinion involves various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. Consequently, neither a fairness opinion nor its underlying analyses is readily susceptible to summary description. LionTree arrived at its opinion based on the results of all analyses undertaken by it, assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. Accordingly, LionTree believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors or focusing on information presented in tabular format, without considering all analyses, methodologies and factors or the narrative description of the analyses, could create a misleading or incomplete view of the process underlying LionTree’s analyses and opinion. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques.

In performing its analyses, LionTree considered general business, economic, industry, regulatory and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. LionTree’s analyses involved judgments and assumptions with regard to

 

 

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general business, economic, industry, regulatory and market conditions, financial and otherwise, and other matters, many of which are beyond the control of the parties to the merger agreement, such as the impact of competition on the business of the parties and on the industry generally, industry growth and the absence of any material change in the financial condition and prospects of Sotheby’s or the proposed merger or other transactions contemplated by the merger agreement, and an evaluation of the results of those analyses is not entirely mathematical. LionTree believes that mathematical derivations (such as determining mean and median) of financial data are not by themselves meaningful and should be considered together with qualities, judgments, and informed assumptions. The estimates contained in the forecasts and the implied reference range values indicated by LionTree’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. Additionally, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of the parties. Much of the information used in, and accordingly the results of, LionTree’s analyses are inherently subject to substantial uncertainty.

LionTree’s opinion was provided to the Board in connection with its evaluation of the merger and the other transactions contemplated by the merger agreement and was only one of many factors considered by the Board in evaluating the merger and the other transactions contemplated by the merger agreement. The consideration payable in the merger and the other transactions contemplated by the merger agreement was determined through negotiation between Sotheby’s and Parent and the decision to enter into the merger agreement was solely that of the Board. LionTree did not recommend any specific type or amount of consideration to Sotheby’s or the Board, nor did it recommend that any specific type or amount of consideration constituted the only appropriate consideration for the merger and the other transactions contemplated by the merger agreement.

The following is a summary of the material analyses performed by LionTree in connection with LionTree’s presentation to the Board and opinion rendered on June 16, 2019. The order of the analyses does not represent relative importance or weight given to those analyses by LionTree. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of LionTree’s analyses.

For purposes of its analyses, LionTree reviewed a number of financial and operating metrics, including:

 

   

equity value, calculated as the value of the relevant company’s outstanding equity securities (taking into account its shares of outstanding common stock, outstanding Company DSUs, outstanding Company PCUs, outstanding Company PSUs, outstanding Company RSUs and outstanding Company RCUs, based on the treasury stock method), based on the relevant company’s closing stock price;

 

   

enterprise value (“EV”), calculated as the relevant company’s equity value plus net debt (calculated as outstanding indebtedness, out-of-the-money convertible securities, preferred

 

 

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stock, and capital lease obligations minus the amount of cash and cash equivalents on its balance sheet) plus the value of interests of others in majority (but not wholly owned) subsidiaries, or minority interests, minus the value of interests in entities for which the relevant company owns less than 50% of the equity, as of a specified date (except that, in the case of Sotheby’s, no adjustment was made for equity investments because the equity income from these investments is reflected in the forecasts); and

 

   

EBITDA, calculated as the relevant company’s earnings before interest, taxes, depreciation and amortization, adjusted to exclude stock-based compensation expense (unless otherwise indicated).

Unless the context indicates otherwise, EVs and equity values derived from the selected companies analyses described below were calculated using the closing price of Sotheby’s common stock and the common equity of the selected publicly traded companies listed below as of market close on June 14, 2019. Accordingly, this information may not reflect current or future market conditions.

In addition, unless the context indicates otherwise, per share amounts for Sotheby’s common stock were calculated on a fully diluted basis using the treasury stock method, assuming the conversion of all outstanding Company DSUs, outstanding Company PCUs, outstanding Company PSUs, outstanding Company RSUs and outstanding Company RCUs.

Financial Analyses

Selected Publicly Traded Companies Analysis. Using publicly available information, LionTree compared selected financial data of Sotheby’s to corresponding financial data for the following publicly traded companies in the luxury retail industry:

 

   

Tapestry, Inc.

 

   

Tiffany & Co.

 

   

LVMH Moet Hennessy—Louis Vuitton, Societe Europeenne

 

   

Kering SA

 

   

Burberry Group plc

 

   

Ralph Lauren Corporation

 

   

Movado Group, Inc.

 

   

Compagnie Financiere Richemont SA

 

   

Prada S.p.A.

 

   

Moncler S.p.A.

 

   

Hermes S.A.

 

   

Canada Goose Holdings Inc.

 

   

Capri Holdings Limited

 

   

Brunello Cucinelli S.p.A.

 

   

Salvatore Ferragamo S.p.A.

 

 

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Although none of the selected companies is directly comparable to Sotheby’s, the companies included were chosen because they are publicly traded companies with operations that for purposes of this analysis were considered by LionTree in its judgment to be similar, in certain respects, to certain operations of Sotheby’s. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies differently than they would affect Sotheby’s.

Using publicly available information, for each of the selected companies, LionTree calculated valuation multiples, including (a) EV as a multiple of estimated EBITDA for calendar year (CY) 2019 (based on consensus equity research analyst estimates), and (b) share price as a multiple of estimated 2019 earnings per share (“EPS”) (based on consensus equity research analyst estimates).

The multiples of the selected companies were compared to the corresponding multiples of Sotheby’s derived from the Sotheby’s forecasts.

The multiples for each selected company, the low, mean, median and high multiples for the selected companies, and the multiples for Sotheby’s (at its closing price as of June 14, 2019) are set forth below:

 

  Company CY 2019E
EV/EBITDA

 

CY 2019E   
P/E

 

  Tapestry, Inc.

 

 

 

 

 

6.9x

 

 

 

 

 

 

 

10.9x

 

 

 

 

  Tiffany & Co.

 

 

 

11.0x

 

 

 

 

 

 

18.6x

 

 

 

 

  LVMH Moet Hennessy

 

 

 

 

 

13.5x

 

 

 

 

 

 

 

24.2x

 

 

 

 

  Kering SA

 

 

 

 

 

12.0x

 

 

 

 

 

 

 

18.2x

 

 

 

 

  Burberry Group plc

 

 

 

 

 

11.4x

 

 

 

 

 

 

 

20.9x

 

 

 

 

  Ralph Lauren Corporation

 

 

 

 

 

7.4x

 

 

 

 

 

 

 

14.8x

 

 

 

 

  Movado Group, Inc.

 

 

 

 

 

n.m.

 

 

 

 

 

 

 

9.5x

 

 

 

 

  Compagnie Financiere Richemont SA

 

 

 

 

 

12.2x

 

 

 

 

 

 

 

23.9x

 

 

 

 

  Prada S.p.A.

 

 

 

 

 

11.7x

 

 

 

 

 

 

 

25.4x

 

 

 

 

  Moncler S.p.A.

 

 

 

 

 

14.7x

 

 

 

 

 

 

 

24.2x

 

 

 

 

  Hermes S.A.

 

 

 

 

 

24.1x

 

 

 

 

 

 

 

42.6x

 

 

 

 

  Canada Goose Holdings Inc.

 

 

 

 

 

20.2x

 

 

 

 

 

 

 

30.6x

 

 

 

 

  Capri Holdings Limited

 

 

 

 

 

6.4x

 

 

 

 

 

 

 

6.8x

 

 

 

 

  Brunello Cucinelli S.p.A.

 

 

 

 

 

19.1x

 

 

 

 

 

 

 

36.4x

 

 

 

 

  Salvatore Ferragamo S.p.A.

 

 

 

 

 

17.3x

 

 

 

 

 

 

 

31.6x

 

 

 

 

  Low

 

 

 

 

 

6.4x

 

 

 

 

 

 

 

6.8x

 

 

 

 

  Mean

 

 

 

 

 

13.4x

 

 

 

 

 

 

 

22.6x

 

 

 

 

  Median

 

 

 

 

 

12.1x

 

 

 

 

 

 

 

23.9x

 

 

 

 

  High

 

 

 

 

 

24.1x

 

 

 

 

 

 

 

42.6x

 

 

 

 

  Sotheby’s

 

 

 

 

 

11.0x

 

 

 

 

 

 

 

14.6x

 

 

 

 

 

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Based on the multiples calculated as described above, LionTree’s analyses of the various selected publicly traded companies and on professional judgments made by LionTree, LionTree applied a range of multiples of 11.0x to 13.0x to Sotheby’s management’s estimate of CY 2019 EBITDA of Sotheby’s based upon the forecasts to derive a range of estimated implied values of approximately $35.31 to $45.34 per share of Sotheby’s common stock. Further, LionTree applied a range of multiples of 15.0x to 23.0x to Sotheby’s management’s estimate of CY 2019 EPS of Sotheby’s based upon the forecasts to derive a range of estimated implied values of approximately $36.38 to $55.78. LionTree compared the foregoing implied value ranges to the per share merger consideration of $57.00 to be received pursuant to the proposed merger and the other transactions contemplated by the merger agreement.

Selected Transactions Analysis. LionTree reviewed and analyzed the financial terms of selected transactions in the luxury retail industry it deemed relevant. Although none of the selected transactions is directly comparable to the merger and the other transactions contemplated by the merger agreement, the selected transactions were chosen because, in LionTree’s judgment, they are merger and acquisition transactions that for purposes of this analysis may, in certain respects, be considered similar to the merger and the other transactions contemplated by the merger agreement. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the transactions and companies involved and other factors that may differ from the merger and the other transactions contemplated by the merger agreement.

Using publicly available information, LionTree calculated, for each selected transaction, the implied enterprise value in the transaction as a multiple of EBITDA over the last twelve months (LTM) publicly reported prior to the announcement of the transaction. The following table summarizes the results of this analysis:

 

  Date Announced   Target   Acquirer    EV/LTM
EBITDA

 

  September 2018

 

 

 

Gianni Versace S.p.A.

 

 

 

Michael Kors (USA) Inc.

 

  

 

46.0x

 

 

  July 2017

 

 

 

Jimmy Choo Group Limited

 

 

 

Michael Kors (USA) Inc.

 

  

 

16.4x

 

 

  May 2017

 

 

 

Kate Spade & Company

 

 

 

Tapestry, Inc.

 

  

 

9.4x

 

 

  April 2017

 

 

 

Christian Dior Couture SA

 

 

 

LMVH Moet Hennessy

 

  

 

15.6x

 

 

  March 2016

 

 

 

Tumi Holdings, Inc.

 

 

 

Samsonite International SA

 

  

 

13.6x

 

 

  January 2015

 

 

 

Stuart Weitzman Inc.

 

 

 

Tapestry, Inc.

 

  

 

11.2x

 

       

 

Incl. Versace

 

  

 

Excl. Versace

 

 

  Low

 

     

 

9.4x

 

  

 

9.4x

 

 

  Mean

 

     

 

18.7x

 

  

 

13.2x

 

 

  Median

 

     

 

14.6x

 

  

 

13.6x

 

 

  High

 

   

 

46.0x

 

  

 

16.4x

 

Although LionTree included the Versace/Michael Kors transaction in its analysis because it is a recent acquisition of a publicly traded luxury retail company, LionTree considered that the EV/LTM EBITDA multiple paid in that transaction was an outlier that fell outside the normal range of EV/LTM EBITDA

 

 

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multiples for acquisitions of publicly traded luxury retail companies. Consequently, LionTree presented data for the precedent transactions both including and excluding the Versace/Michael Kors transaction.

Based on the results of this analysis and its professional judgment and experience, LionTree selected and applied a multiple range of 10.0x to 16.0x to Sotheby’s LTM EBITDA, as of March 31, 2019. From this analysis, LionTree derived an implied value per share range for Sotheby’s common stock of approximately $25.54 to $52.76 per share. LionTree compared the foregoing implied value range to the per share merger consideration of $57.00 to be received pursuant to the proposed merger and the other transactions contemplated by the merger agreement.

Discounted Cash Flow Analysis. LionTree performed a discounted cash flow (“DCF”) analysis of Sotheby’s by calculating the estimated net present value of the unlevered, after-tax free cash flows that Sotheby’s was forecasted to generate for the last nine months of 2019 and the four (4) calendar years ending December 31, 2023 (“CY 2023”) based upon the forecasts.

For the DCF analysis, LionTree calculated terminal values for Sotheby’s by applying a range of terminal value multiples of 11.0x to 13.0x to Sotheby’s estimated EBITDA for CY 2023 based upon the forecasts. These terminal value multiple estimates were derived by LionTree utilizing its professional judgment and experience, taking into account, among other things, estimated operational metrics for Sotheby’s and the operational metrics and EBITDA multiples for selected publicly traded companies. The present values of the cash flows and terminal values were then calculated using discount rates ranging from 9.0% to 10.0%, reflecting estimates of Sotheby’s weighted average cost of capital. LionTree derived these discount rates by application of the capital asset pricing model, which requires certain company-specific inputs, including the company’s target capital structure weightings, the cost of long-term debt, future applicable marginal cash tax rate and a beta for the company, as well as certain financial metrics for the United States financial markets generally. LionTree then subtracted from the range of implied enterprise values Sotheby’s net debt of approximately $964 million to derive a range of implied equity values for Sotheby’s as of March 31, 2019. The resulting range of implied equity values was then brought forward to June 14, 2019 using a rate of 13.0%, reflecting LionTree’s estimate of Sotheby’s cost of equity. LionTree divided the range of implied equity values it derived by the number of fully diluted outstanding shares of Sotheby’s common stock as of June 14, 2019, or approximately 48.6 million shares. The DCF analysis indicated an implied per share equity value reference range of $39.11 to $50.43 for the Sotheby’s common stock. LionTree compared the foregoing implied value range to the per share merger consideration of $57.00 to be received pursuant to the proposed merger and the other transactions contemplated by the merger agreement.

Analyst Price Target Analysis. For reference purposes only, LionTree reviewed one year forward share price targets for shares of Sotheby’s common stock prepared and published by 4 equity research analysts and known to LionTree as of June 14, 2019. The equity research analysts and their respective one year forward share price targets for Sotheby’s common stock were as follows: Berenberg Capital Markets - $39.00; Cowen & Company - $44.00; Consumer Edge Research - $49.00; and Sidoti & Company LLC - $50.00. The average one year forward share price target for Sotheby’s common stock was $45.50 per share compared to the closing price per share of Sotheby’s common stock of $35.39 on June 14, 2019. LionTree performed a present value analysis of the equity research analyst share price targets by discounting these share price targets to present value at June 14, 2019 using a discount rate of 13.0%,

 

 

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reflecting LionTree’s estimate of Sotheby’s cost of equity. This analysis indicated an implied per share equity value reference range of $34.86 to $44.87 for the Sotheby’s common stock. LionTree compared the foregoing implied value range to the per share merger consideration of $57.00 to be received pursuant to the proposed merger and the other transactions contemplated by the merger agreement.

Premiums Paid Analysis. For reference purposes only, using publicly available data, LionTree reviewed the premiums paid in selected all cash acquisitions of North American publicly traded companies with transaction values between $1.0 billion and $10.0 billion for the ten (10)-year period ended June 14, 2019 (excluding transactions involving real estate investment trusts, investment trusts/mutual funds and major banks), or a total of 465 transactions. This analysis indicated that the median premium in the selected transactions relative to the closing price of the acquired company on the trading day prior to the announcement of the transaction was 22.6% and the median premium in the selected transactions relative to the closing price of the acquired company thirty (30) trading days prior to the announcement of the transaction was 33.4%. LionTree applied these median premiums to the closing price of Sotheby’s common stock on June 14, 2019 and to the closing price of Sotheby’s common stock on the thirtieth trading day prior to and including June 14, 2019. This analysis indicated an implied per share equity value reference range of $43.37 to $54.27 for the Sotheby’s common stock. LionTree compared the foregoing implied value range to the per share merger consideration of $57.00 to be received pursuant to the proposed merger and the other transactions contemplated by the merger agreement.

Other Matters

The Board selected LionTree as its financial advisor because LionTree is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger and the other transactions contemplated by the merger agreement, and because of its significant prior experience with the industries in which Sotheby’s operates. Pursuant to its engagement letter, Sotheby’s will pay LionTree a fee for its services which is estimated to be between approximately $41 million and $42 million and which, subject to the following sentence, is contingent upon the consummation of the merger and the other transactions contemplated by the merger agreement. Sotheby’s paid LionTree $4.2 million in connection with LionTree’s delivery of its fairness opinion, which will be credited against the fee described in the preceding sentence if and when the merger and the other transactions contemplated by the merger agreement are consummated. Sotheby’s has also agreed to reimburse LionTree for certain expenses and to indemnify LionTree, its affiliates, and certain related parties against certain liabilities and expenses.

In the past two years, LionTree and its affiliates have provided investment banking services to Sotheby’s, for which LionTree and its affiliates received compensation of $500,000 that will be credited against the fee payable in connection with the consummation of the merger and the other transactions contemplated by the merger agreement. In the past two years, LionTree and its affiliates have not provided investment banking services to Parent or its affiliates. LionTree and its affiliates may seek in the future to provide investment banking services and capital markets services to Sotheby’s, Parent, their respective affiliates and their related entities or entities in which they have a significant direct or indirect interest, and expect to receive fees for the rendering of these services. As a result of the acquisition of equity interests in Suddenlink Communications by Altice SA in 2015, LionTree and certain of its partners hold an indirect interest in a vehicle that owns equity securities of Altice USA, an affiliate of Parent, as

 

 

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described in the section entitled “The Merger—Background of the Merger” beginning on page 32. In the ordinary course of business, certain of LionTree’s employees and affiliates may hold or trade, for their own accounts and the accounts of their investors, securities of Sotheby’s and affiliates of Parent and, accordingly, may at any time hold a long or short position in such securities.

Certain Company Forecasts

The Company does not, as a matter of course, publicly disclose long-term projections as to future revenues, earnings or other results due to, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates. However, in the Spring of 2019, at the request of the Board, the Company prepared certain financial forecasts (the “Company projections”) to assist the Board with forming a view about the stand-alone valuation of the Company. The Company subsequently provided these forecasts to the Board and LionTree. These forecasts were not prepared for public disclosure.

A summary of certain of the Company projections is not being included in this document to influence the decision of our stockholders whether to vote for or against the merger proposal, but is being included because the Company projections were made available to the Board and LionTree. The inclusion of this information should not be regarded as an indication that the Board, its advisors or any other person considered, or now considers, the Company projections to be material or to be a reliable prediction of actual future results, and the Company projections should not be relied upon as such. The Company projections are subjective in many respects. There can be no assurance that the Company projections will be realized or that actual results will not be significantly higher or lower than forecasted. Certain of the Company projections cover multiple years and/or relate to the year 2023 and such information by its nature becomes subject to greater uncertainty with each successive year. As a result, the inclusion of the Company projections in this proxy statement should not be relied on as necessarily predictive of actual future events.

In addition, the Company projections were not prepared with a view toward public disclosure or toward complying with generally accepted accounting principles (“GAAP”), the published guidelines of the SEC regarding projections and the use of non-GAAP measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither the Company’s independent registered public accounting firm nor any other independent accountants have compiled, examined or performed any procedures with respect to the Company projections contained in this proxy statement, nor have they expressed any opinion or any other form of assurance on such information or its achievability. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies. The non-GAAP financial measures used in the forecasts were relied upon by LionTree for purposes of its financial analyses and opinion and by the Board in connection with its consideration of the merger. Financial measures provided to a financial advisor are excluded from the definition of non-GAAP financial measures and, therefore, are not subject to SEC rules regarding disclosures of non-GAAP financial measures, which would otherwise require a reconciliation of a non-GAAP financial measure to a GAAP financial measure.

Additionally, although the Company projections presented below are presented with numerical specificity, they are not facts. The Company projections were based on numerous variables and

 

 

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assumptions that were deemed to be reasonable as of the respective dates when such Company projections were finalized. Such assumptions are inherently uncertain and may be beyond the control of the Company. Important factors that may affect actual results and cause the Company projections not to be achieved include, but are not limited to, risks and uncertainties relating to the Company’s business (including its ability to achieve strategic goals, objectives and targets and its ability to retain customers and key employees), industry performance, the legal and regulatory environment, global political conditions, the financial markets, the art market, general business and economic conditions and other factors described or referenced under “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 23. In addition, the Company projections reflect assumptions that are subject to change and do not reflect revised prospects for the Company’s business, changes in general business or economic conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated as the Company projections were prepared. The Company has not prepared revised forecasts to take into account other variables that have changed since the dates on which the Company projections were finalized. There can be no assurance that the Company projections will be realized or that the Company’s future financial results will not materially vary from the Company projections.

Projected 2023 EBITDA (1)

In February 2019, the Company prepared and presented to the Board a projection of the Company’s 2023 EBITDA reflecting the projected results of the Company’s investments in its digital initiatives.

 

  (in millions)    2018A      2023E  

Adjusted EBITDA (excluding inventory activity)

   $ 229.9      $ 430.4  

 

(1)

Not adjusted to take account of the execution risk of the Company’s underlying business plan.

Initial Five-Year Projections (1)(2)

At the instruction of the Board, the Company developed a full set of five-year financial projections for the Company (the “initial five-year projections”) for presentation to the Business Strategy Committee of the Board in April 2019.

 

  (in millions)   2018A     2019E     2020E     2021E     2022E     2023E  

Adjusted EBITDA

  $ 234     $ 241     $ 197     $ 283     $ 345     $ 389  

 

(1)

Not adjusted to take account of the execution risk of the Company’s underlying business plan.

 

(2)

Assumes that a contraction of the global art market will occur in 2020 similar to, but more modest than, the contraction experienced in 2016.

Draft Five-Year Projections

At the instruction of the Business Strategy Committee, the Company supplemented, for presentation to the Board in May 2019, the initial five-year projections to take into account various economic and commercial scenarios and prepared the draft five-year projections. The “high case,” “middle case” and “low case” projections in the draft five-year projections were sensitized to address risks associated with macroeconomic conditions and the global art marketplace’s acceptance of the Company’s new initiatives.

 

 

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Low Case (1)(2)

 

  (in millions)   2018A     2019E     2020E     2021E     2022E     2023E  

 

Base Business EBITDA

 

 

$

 

223

 

 

 

 

$

 

215

 

 

 

 

$

 

70

 

 

 

 

$

 

159

 

 

 

 

$

 

206

 

 

 

 

$

 

228

 

 

 

Incremental EBITDA from New Initiatives

 

 

$

 

12

 

 

 

 

$

 

29

 

 

 

 

$

 

40

 

 

 

 

$

 

41

 

 

 

 

$

 

45

 

 

 

 

$

 

44

 

 

 

Combined EBITDA

 

 

$

 

235

 

 

 

 

$

 

244

 

 

 

 

$

 

110

 

 

 

 

$

 

200

 

 

 

 

$

 

251

 

 

 

 

$

 

273

 

 

 

Net Auction Sales (excluding New Initiatives)

 

 

$

 

4,300

 

 

 

 

$

 

3,900

 

 

 

 

$

 

2,800

 

 

 

 

$

 

3,600

 

 

 

 

$

 

3,900

 

 

 

 

$

 

4,100

 

 

 

Net Debt at End of Year

 

 

$

 

937

 

 

 

 

$

 

1,010

 

 

 

 

$

 

760

 

 

 

 

$

 

772

 

 

 

 

$

 

694

 

 

 

 

$

 

561

 

 

 

(1)

Not adjusted to take account of the execution risk of the Company’s underlying business plan.

 

(2)

Assumes that a contraction of the global art market will occur in 2020 similar to the contraction experienced in 2016.

Middle Case (1)(2)

 

  (in millions)   2018A     2019E     2020E     2021E     2022E     2023E  

Base Business EBITDA

  $ 223     $ 215     $ 186     $ 237     $ 315     $ 340  

Incremental EBITDA from New Initiatives

  $ 12     $ 29     $ 43     $ 56     $ 80     $ 99  

Combined EBITDA

  $ 235     $ 244     $ 230     $ 293     $ 395     $ 440  

Net Auction Sales (excluding New Initiatives)

  $ 4,300     $ 3,900     $ 3,500     $ 4,300     $ 4,800     $ 5,000  

Net Debt at End of Year

  $ 937     $ 1,010     $ 762     $ 647     $ 466     $ 206  

 

(1)

Not adjusted to take account of the execution risk of the Company’s underlying business plan.

 

(2)

Assumes that a less severe contraction of the global art market than that assumed in the Low Case will occur in 2020.

High Case (1)(2)

 

  (in millions)   2018A     2019E     2020E     2021E     2022E     2023E  

Base Business EBITDA

  $ 223     $ 215     $ 183     $ 243     $ 319     $ 346  

Incremental EBITDA from New Initiatives

  $ 12     $ 34     $ 62     $ 95     $ 119     $ 147  

Combined EBITDA

  $ 235     $ 249     $ 245     $ 339     $ 439     $ 493  

Net Auction Sales (excluding New Initiatives)

  $ 4,300     $ 3,900     $ 3,700     $ 4,300     $ 4,800     $ 5,100  

Net Debt at End of Year

  $ 937     $ 1,010     $ 752     $ 606     $ 393     $ 94  

 

(1)

Not adjusted to take account of the execution risk of the Company’s underlying business plan.

 

(2)

Assumes that a less severe contraction of the global art market than that assumed in the Middle Case will occur in 2020.

Base Case Projections

At the instruction of the Board, in June 2019, the Company derived the base case projections—a single base case set of five-year financial projections for the Company—from the “high case,” “middle

 

 

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case” and “low case” projections set forth in the draft five-year projections to reflect management’s best estimate of the most likely outcome over the five year period from 2019 through 2023 assuming the Company remains a public company, taking into account the execution risk of the Company’s underlying business plan. The base case projections were also provided to representatives of LionTree and approved by the Board for use in connection with LionTree’s financial analysis and fairness opinion rendered to Board (summarized in the section entitled “—Opinion of Financial Advisor” beginning on page 51).

Base Case (1)

 

  (in millions)   2018A     2019E     2020E     2021E     2022E     2023E  

Base Business EBITDA

  $ 223     $ 215     $ 167     $ 179     $ 204     $ 225  

Incremental EBITDA from New Initiatives

  $ 12     $ 29     $ 44     $ 56     $ 78     $ 97  

Combined EBITDA

  $ 235     $ 244     $ 211     $ 235     $ 282     $ 322  

Net Auction Sales (excluding New Initiatives)

  $ 4,300     $ 3,900     $ 3,500     $ 3,900     $ 4,100     $ 4,300  

Net Debt at End of Year

  $ 937     $ 1,010     $ 774     $ 697     $ 594     $ 421  

 

(1)

Assumes that a contraction of the global art market similar to that assumed in the Middle Case of the draft five-year projections will occur in 2020, but with a more modest recovery.

Unlevered Free Cash Flows

The discounted cash flow analysis prepared by LionTree described above under “The Merger—Opinion of the Company’s Financial Advisor” utilized unlevered free cash flow data. Such data was not prepared by the Company, or included in the Company projections provided to LionTree for the purposes of its financial analyses, but was arithmetically derived using the base case projections furnished by Company management and the Company’s public filings and approved by Company management for use by LionTree. Nevertheless, unlevered free cash flow data is being presented in the tables relating to the Company projections above in order to provide a more complete understanding of the data utilized by LionTree in conducting its financial analyses. The following table presents the estimated unlevered free cash flows that the Company was projected to generate for the last nine months (“L9M”) of 2019 and the four (4) calendar years ending December 31, 2023:

 

  (in millions)   L9M 2019E     2020E     2021E     2022E     2023E  

Unlevered Free Cash Flow (1)

  $     127     $     239     $     72     $     96     $     160  

 

(1)

For purposes hereof, unlevered free cash flow is defined as earnings before interest and taxes, less taxes, capital expenditures, changes in net working capital, changes in other cash flows, plus depreciation and amortization.

Financing of the Merger

The merger agreement does not contain any condition to the obligations of Parent or Merger Sub relating to the receipt of financing. Parent and Merger Sub have secured committed financing, consisting of a combination of equity financing to be provided by NEXT and debt financing from BNP Paribas

 

 

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Securities Corp. and BNP Paribas, the aggregate proceeds of which Parent and Merger Sub have represented will be sufficient for Parent and Merger Sub to pay the aggregate per share merger consideration and other fees and expenses under the merger agreement.

Pursuant to an equity commitment letter from NEXT dated as of June 16, 2019, NEXT has agreed to make capital contributions of up to $1,924 million. In addition, an affiliate of Parent has provided the Company with a guaranty in favor of the Company, which guarantees the payment obligations of NEXT under the equity commitment letter and certain payment obligations of Parent and Merger Sub under the merger agreement.

BNP Paribas Securities Corp. and BNP Paribas (collectively, the “lenders”) have committed to provide debt financing, consisting of senior secured credit facilities in an aggregate principal amount of up to $1,550 million, comprised of (i) a $300 million revolving credit facility, (ii) an $800 million senior secured term loan facility (provided that an amount up to $404 million of such facility may be re-allocated, at Merger Sub’s election, to a separate facility of term loans available on a delayed draw basis), and (iii) a $450 million senior secured asset sale bridge term loan facility, in each case pursuant to a debt commitment letter from the lenders dated as of June 16, 2019. Additionally, Merger Sub intends to issue $400 million of high yield senior securities (the “senior notes”) pursuant to a Rule 144A and/or Regulation S under the U.S. Securities Act or other private placement (in each case, without registration rights). In the event some or all of the senior notes are unable to be issued on or prior to the time the transactions contemplated by the merger agreement are consummated, the lenders have committed to provide senior bridge loans under a senior bridge facility in an aggregate principal amount of $400 million, less the gross proceeds from the sale of senior notes issued on or prior to the closing date.

The obligations of the lenders to provide the debt commitment amount under the debt commitment letter are subject to a limited number of conditions, which include the receipt of loan documentation executed by the borrower thereof, accuracy of certain representations and warranties, the absence of a Company material adverse effect, completion of the designated marketing period and other customary closing conditions for financings of these types. The proceeds of the debt financing will be used (i) to finance, in part, the payment of the amounts payable under the merger agreement, including to repay or refinance existing indebtedness and for the payment of related fees and expenses and (ii) to provide ongoing working capital and for capital expenditures and other general corporate purposes.

The lenders may invite other banks, financial institutions and institutional lenders and investors to participate in the debt financing contemplated by the debt commitment letter and to undertake a portion of the commitments to provide such debt financing.

Closing and Effective Time

Assuming receipt of required regulatory approvals and timely satisfaction of other closing conditions, including the approval by our stockholders of the merger proposal, we currently expect the closing of the merger to occur during the fourth quarter of 2019. See the section entitled “The Merger Agreement—Closing and Effective Time” beginning on page 79.

The effective time will occur upon a certificate of merger, in such appropriate form as is determined by the parties and in accordance with the DGCL (the “certificate of merger”), having been duly filed with

 

 

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and accepted by the Secretary of State of the State of Delaware (or at such later time as the Company and Parent may agree in writing and specified in the certificate of merger).

Payment of the Per Share Merger Consideration and Surrender of Stock Certificates

At or prior to the effective time, Parent will deposit, or will cause to be deposited, with the paying agent, for the benefit of the holders of shares of our common stock, a cash amount in immediately available funds necessary to pay the aggregate per share merger consideration payable to our stockholders.

Promptly after the effective time, and in any event within three (3) business days thereafter, each of our stockholders of record as of immediately prior to the effective time (other than holders of excluded shares and dissenting shares) will be mailed (i) transmittal materials, including a letter of transmittal in customary form, and (ii) instructions advising each such holder how to surrender his, her or its certificated and/or book-entry shares of our common stock in exchange for the per share merger consideration. The paying agent will pay each holder of record the per share merger consideration to which such holder is entitled after delivery or transfer of such shares. Interest will not be paid or accrue in respect of the per share merger consideration. From the effective time until the surrender or transfer of certificates or book-entry shares, as the case may be, each such certificate or book-entry share will represent only the right to receive in exchange therefor a cash amount (after giving effect to any required tax withholdings) equal to the per share merger consideration.

In the event of a transfer of ownership of shares that has not been registered in the transfer records of the Company, or if a holder of shares would like payment of the applicable per share merger consideration to be made to a person other than the person in whose name the surrendered certificate or book-entry share is registered, a check for any cash to be exchanged upon due surrender of the certificate or book-entry share may be issued to such transferee or other person if the certificates or book-entry share formerly representing such shares are presented to the paying agent, accompanied by all documents reasonably required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

You should not return any stock certificates you hold with the enclosed proxy card, and you should not forward any stock certificates to the paying agent without a letter of transmittal.

From and after the effective time, there will be no further transfers of shares of our common stock that were outstanding immediately prior to the effective time.

If any cash deposited with the paying agent remains unclaimed for one hundred and eighty (180) days following the effective time, such cash will be delivered to the surviving corporation or its designee(s). Thereafter, holders of our common stock (other than holders of excluded shares) who have not received payment due to non-compliance with the exchange procedures will be entitled to look only to the surviving corporation with respect to payment of the per share merger consideration (after giving effect to any required tax withholdings), without any interest thereon.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will be required to provide an affidavit of the loss, theft or destruction, and, if required by Parent, post a bond in a reasonable amount and upon reasonable terms as may be required by Parent as indemnity against any claim that may be made against Parent or the surviving

 

 

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corporation with respect to such certificate. These procedures will be described in the letter of transmittal and related instructions that you will receive, which you should read carefully and in their entirety.

Parent, the surviving corporation and the paying agent will be entitled to deduct and withhold from the per share merger consideration such amounts as are required to be deducted and withheld with respect to the making of such payment under any tax law. Any sum that is withheld will be remitted to the appropriate taxing authority, and will be treated for all purposes of the merger agreement as having been paid to the holder of shares with regard to whom it is deducted and withheld.

The per share merger consideration paid upon the surrender of certificates or transfer of book-entry shares in accordance with the exchange procedures will be deemed to have been paid in full satisfaction of all rights pertaining to the certificated or book-entry shares so surrendered or transferred.

Interests of Certain Persons in the Merger

In considering the recommendation of the Board that you vote to adopt the merger agreement, you should be aware that aside from their interests as Company stockholders, the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, those of Company stockholders generally. Members of the Board were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending to Company stockholders that the merger agreement be adopted. For more information, see the sections entitled “The Merger—Background of the Merger” beginning on page 32 and “The Merger—Reasons for the Merger; Recommendation of the Company’s Board of Directors” beginning on page 46. These interests are described in more detail below, and certain of them are quantified in the narrative and in the section entitled “Non-Binding Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation” beginning on page 108.

Treatment of Outstanding Equity-Based and Performance Awards

The Company DSUs, Company PSUs, Company PCUs, Company RCUs, and Company RSUs (collectively, the “Company equity awards”) held by the Company’s directors and executive officers immediately prior to the effective time will generally be treated in the same manner as those Company equity awards held by other employees of the Company. As described further in the section titled “The Merger Agreement—Treatment of Common Stock and Stock-Based Awards” beginning on page 79, Company equity awards will be subject to the following treatment:

 

   

Company DSUs: Each Company DSU that is outstanding immediately prior to the effective time shall be cancelled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (x) the total number of shares underlying such Company DSUs and (y) $57.00, the product of which we refer to as the “Company DSU Consideration,” which shall be payable to each holder of a Company DSU within ten (10) business days following the effective time.

 

   

Company Share Price PSUs: Each Company Share Price PSU that is outstanding immediately prior to the effective time shall be cancelled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (x) the total number of shares earned in accordance with the terms and conditions set forth in

 

 

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the award agreement as reasonably determined by the Compensation Committee, and (y) $57.00, the product of which we refer to as the “Company Share Price PSU Consideration,” which shall be payable to the holder of the Company Share Price PSU within ten (10) business days following the effective time.

 

   

Other Company Equity and Equity-Based Awards: Except as otherwise agreed by and between Parent and a holder of a Company equity award (other than a Company DSU, a Company Share Price PSU or a Company equity award that is subject to Section 409A of the Code) prior to the effective time:

 

   

Company PCUs: As of the effective time, each Company PCU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company PCU, be canceled, extinguished and converted into a Converted PCU, representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal in value to the product of (i) $57.00 multiplied by (ii) the number of shares represented by Company PCUs deemed earned as of immediately prior to the effective time. Each Converted PCU (125% of target for Company PCUs with a performance period ending on December 31, 2019, 100% of target for Company PCUs with a performance period ending on December 31, 2020 and 100% of target for Company PCUs with a performance period ending on December 31, 2021) shall (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions) as were applicable to the corresponding Company PCU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted PCU is terminated without cause or resigns for good reason, in each case within the twenty-four (24)-month period following the closing date, each of which is referred to as a qualifying termination, with such Converted PCU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

 

   

Company PSUs: As of the effective time, each Company PSU other than a Company Share Price PSU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company PSU, be canceled, extinguished and converted into a Converted PSU representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal in value to the product of (i) $57.00 multiplied by (ii) the number of Company PSUs deemed earned as of immediately prior to the effective time (125% of target for Company PSUs with a performance period ending on December 31, 2019, 100% of target for Company PSUs with a performance period ending on December 31, 2020 and 100% of target for Company PSUs with a performance period ending on December 31, 2021). Each Converted PSU shall (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions) as were applicable to the corresponding Company PSU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted PSU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted PSU settled in cash as soon as practicable, but in no event later than

 

 

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ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

 

   

Company RCUs: As of the effective time, each Company RCU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company RCU, be canceled, extinguished and converted into a Converted RCU, representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (i) $57.00 multiplied by (ii) the number of shares represented by outstanding Company RCUs as of immediately prior to the effective time. Each Converted RCU shall (A) vest and settle on terms (including acceleration events) as were applicable to the corresponding Company RCU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted RCU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted RCU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

 

   

Company RSUs: As of the effective time, each Company RSU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company RSU, be canceled, extinguished and converted into a Converted RSU, representing the right to receive from the surviving corporation an amount in cash, without interest, and subject to any applicable withholding tax, equal to the product of (i) $57.00 multiplied by (ii) the total number of shares underlying such Company RSU as of immediately prior to the effective time. Each Converted RSU shall (A) vest and settle on terms (including acceleration events) as were applicable to the corresponding Company RSU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted RSU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted RSU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

For an estimate of the amounts that would be payable to each of the Company’s named executive officers on settlement of their unvested Company equity awards, see the section entitled “Non-Binding Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation” beginning on page 108. The estimated aggregate amount that would be payable to the Company’s six (6) executive officers who are not named executive officers in settlement of their unvested Company equity awards that are outstanding as of the date of this proxy statement if the merger were to be completed and they were to experience a qualifying termination on September 30, 2019 is $5,085,000. The estimated aggregate amount that would be payable to the Company’s ten (10) non-employee directors in settlement of their unvested Company DSUs that are outstanding as of the date of this proxy statement if the effective time occurred on September 30, 2019 is $11,923,300.

 

 

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Agreement with Thomas S. Smith, Jr.

Prior to the execution of the merger agreement, the Company was party to an employment agreement, effective March 31, 2015, with Mr. Smith, the Company’s President and Chief Executive Officer and a director of the Company. The term of Mr. Smith’s employment agreement runs from March 31, 2015 through March 31, 2020.

Under the terms of Mr. Smith’s employment agreement, Mr. Smith is entitled to certain benefits in the event that his employment is terminated during the term of the employment agreement by the Company without cause or by Mr. Smith for good reason (as such terms are defined in his employment agreement). Upon such a qualifying termination, subject to his execution, delivery and non-revocation (within any applicable revocation period) of a release of claims in favor of the Company within sixty (60) days of his termination date, Mr. Smith would be entitled to receive:

 

   

cash severance benefits equal to two times the sum of his then current annual base salary and his target annual incentive opportunity (with sixty (60) percent of such amount payable on the six (6)-month anniversary of his termination and the remaining forty (40) percent of such amount payable on the twelve (12)-month anniversary of his termination);

 

   

a pro-rated bonus for the year of his termination, payable at the same time as bonuses are paid to other executives and using the same measure of the Company’s performance as applied to such other executives (but without any adjustment for individual performance);

 

   

the cash cost of maintaining the Company’s health benefits for a period equal to the greater of the remaining term of his employment agreement and two (2) years;

 

   

any unpaid bonus for any previously completed fiscal year (which would be determined in accordance with the otherwise applicable provisions of the annual incentive plan); and

 

   

full vesting of his outstanding unvested equity awards in accordance with the terms of such awards.

Executive Severance Plan

The Company’s executive severance plan covers, among others, the Company’s current executive officers other than Mr. Smith. The executive severance plan provides that, in the event the executive’s employment is terminated without “cause” and during a change in control protection period (which includes the six (6) month period prior to the closing date and the twenty-four (24)-month period following the closing date), the Company would be required to pay the executive:

 

   

an amount equal to two (2) times his or her base salary;

 

   

an amount equal to two (2) times the amount of his or her target bonus;

 

   

a lump sum payment equal to his or her pro rata target bonus for the year of termination based on the number of days worked in the year of termination;

 

   

a lump sum payment equal to the executive’s actual cost of COBRA coverage for eighteen (18) months; and

 

   

full vesting of his or her outstanding unvested equity awards in accordance with the terms of such awards.

 

 

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In connection with approving the merger agreement, the Board amended the executive severance plan to provide “good reason” severance protection such that participants thereunder would become eligible for the aforementioned benefits upon a resignation during the change in control protection period if, without the participant’s consent there occurs (i) a material diminution in the participant’s base salary, (ii) a material diminution in the participant’s title, authority, duties or responsibilities, (iii) a relocation of the participant’s location of employment by more than 35 miles or (iv) the Company’s breach of any material provision of the executive severance plan (including a failure by a successor to the Company to assume and honor the Company’s obligations thereunder).

To the extent an executive would be subject to any excise taxes under Section 280G of the Code, the executive severance plan provides that amounts he or she would be entitled to receive would be “capped” to avoid any excise tax unless the total payments to be received by him or her without regard to a cap would result in a higher after-tax benefit. The executive would be responsible to pay any required excise tax.

As a condition of participation in the executive severance plan, the executive must agree to be bound by certain restrictive covenants, including confidentiality, non-disparagement, non-compete, and customer, supplier, employee non-solicitation provisions. Additionally, payment of the severance benefits under the executive severance plan is in all cases contingent on the executive’s execution and non-revocation of a release of claims against the Company.

For an estimate of the value of the payments and benefits described above that would be payable to the Company’s named executive officers under the executive severance plan upon a qualifying termination in connection with the merger, see the section entitled “Non-Binding Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation” beginning on page 108 of this proxy statement. The estimated aggregate cash severance amount (two (2) times the sum of base salary and target bonus (or for one (1) executive officer, fifty-two (52) weeks of base salary)) and COBRA continuation payment that would be payable to the six (6) Company executive officers who are not named executive officers under the executive severance plan if the merger were to be completed and they were to experience a qualifying termination on September  30, 2019 is $10,223,776, based on base salary and target bonus amounts in effect as of the date of this proxy statement.

Separation Agreement with David Goodman

On July 1, 2019, the Company announced that Mr. Goodman left his position as Executive Vice President, Digital Development and Marketing. Mr. Goodman terminated his employment with the Company on July 15, 2019. Upon his termination, Mr. Goodman became entitled to the following:

 

   

cash severance payments under the executive severance plan consisting of an amount equal to the sum of (i) one and one-half (1.5) times his annual base salary and (ii) one and one-half (1.5) times his target bonus, payable in equal installments pursuant to the Company’s standard payroll practices, commencing within sixty (60) days of his separation from service and continuing for eighteen (18) months after commencement;

 

   

payment of 75% of his annual cash target bonus award for 2019, payable in a lump sum at the effective time; provided, that in the event the merger is completed after December 31, 2019, such

 

 

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payment will be made when 2019 bonuses are paid Company-wide to active employees generally (but in no event later than March 15, 2020);

 

   

his Company RSUs and Company PSUs will remain outstanding and be treated as though he experienced a qualifying termination upon the effective time; provided, that in the event the merger agreement is terminated without the occurrence of the merger, his unvested Company RSUs and Company PSUs will immediately be canceled and converted into a right to receive an amount in cash (without interest), equal in value to the product of (i) the number of shares of Company common stock underlying such award (with performance deemed achieved at 125% for any Company PSUs granted in 2017 and at 100% for any Company PSUs granted in 2018 and 2019) and (ii) $57.00 which will vest and settle on terms as were applicable to the Company RSUs and Company PSUs as of the date of this proxy statement. If the merger agreement is terminated without the occurrence of the merger because the Company receives, and consummates a transaction pursuant to, a superior proposal, the cash awards will become payable at such time outstanding equity awards held by active employees of the Company are settled pursuant to the terms of the superior proposal agreement; provided, further, that in no event will Mr. Goodman’s cash awards be settled for an amount in excess of the $57.00 per share conversion formula set forth above (including where the per share merger consideration exceeds $57.00 as a result of an increased price offered by Parent in response to a superior proposal); and

 

   

payment of an amount equal to monthly COBRA charge in effect as of his termination date beginning within sixty (60) days following the termination date and payable semi-monthly for eighteen (18) months.

Nineteen (19) months following his termination date, Mr. Goodman will also become entitled to the incremental portion of his cash severance so that, in the aggregate, he would receive an amount equal to the sum of (i) two (2) times his annual base salary and (ii) two (2) times his target bonus, consistent with the terms of the executive severance plan.

Pursuant to the separation agreement, Mr. Goodman acknowledged and reaffirmed his obligations pursuant to the restrictive covenants set forth in the executive severance plan, and agreed to a release of claims in favor of the Company.

2019 Annual Bonus

The merger agreement provides that in the event that the closing date occurs during the 2019 fiscal year, the Company shall be permitted to finally and conclusively determine the annual bonus amounts payable in respect of the 2019 fiscal year assuming achievement at target, and shall pay 75% of such amounts to bonus eligible employees (including the executive officers) as soon as administratively practicable following the closing date. Following completion of the 2019 fiscal year, the surviving corporation shall finally and conclusively determine the amounts payable in respect of the full 2019 fiscal year performance actually achieved and at the time annual bonuses have historically been paid by the Company, shall pay to each continuing employee an amount equal to the positive difference (if any) of the full year bonus less the pre-closing bonus (the “top-up bonus”). In the event that, prior to payment of the top-up bonus, a continuing employee experiences a termination of employment in a manner

 

 

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qualifying such employee to severance, such employee shall be paid his or her top-up bonus (if any) at the same time annual bonuses have historically been paid by the Company.

The Company will administer payment of the 2019 annual bonus under the merger agreement in a manner that avoids duplication of benefits with respect to any overlapping right to a pro-rated bonus under other Company plans and agreements (such as Mr. Smith’s employment agreement and the executive severance plan). In the event that the closing date occurs after the end of the 2019 fiscal year, then the amounts payable under the Company’s 2016 Annual Bonus Plan and the Annual Bonus Plan for Non-U.S. Employees (the “Company bonus plans”), in respect of the 2019 fiscal year will be determined based upon actual achievement in the ordinary course and at the time annual bonuses have historically been paid by the Company.

For an estimate of the value of the 2019 annual bonus awards that would be payable to the Company’s named executive officers in connection with the merger, see the section entitled “Non-Binding Advisory Vote on Merger-Related Compensation for the Company’s Named Executive Officers—Golden Parachute Compensation” beginning on page 108 of this proxy statement. The estimated aggregate 2019 annual bonus amount that would be payable to the six (6) Company executive officers who are not named executive officers if the merger were to be completed on September 30, 2019 is $2,260,000, with 75% of such amount paid as soon as administratively practicable following the closing date and the remainder paid when such amounts have historically paid by the Company, assuming in each case, achievement of full 2019 fiscal year performance at target and target bonus amounts in effect as of the date of this proxy statement.

Indemnification and Insurance

Pursuant to the terms of the merger agreement, the Company’s directors and officers will be entitled to certain ongoing indemnification and coverage under directors’ and officers’ liability insurance policies. See the section entitled “The Merger Agreement—Indemnification; Directors’ and Officers’ Insurance” beginning on page 104 for a description of such ongoing indemnification and coverage obligations.

Material U.S. Federal Income Tax Consequences of the Merger

The following is a general discussion of the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) of common stock whose shares are exchanged for cash pursuant to the merger. This discussion does not address U.S. federal income tax consequences with respect to holders other than U.S. holders. This discussion is based on the provisions of the Code, applicable U.S. Treasury Regulations promulgated thereunder, judicial opinions and administrative rulings and published positions of the Internal Revenue Service (the “IRS”), each as of the date hereof. These authorities are subject to change or differing interpretations, possibly on a retroactive basis, and any such change or interpretation could affect the accuracy of the statements and conclusions set forth in this discussion. This discussion is for general information purposes only and does not purport to be a complete analysis of all potential tax consequences. This discussion does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor does it address any tax consequences arising under state, local or foreign tax laws or U.S. federal tax laws other than those pertaining to the U.S. federal income tax. This discussion is not binding on the IRS or the courts and, therefore, could be subject to challenge, which could be sustained. No ruling is intended to be sought from the IRS with respect to the merger.

 

 

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For purposes of this discussion, the term “U.S. holder” means a beneficial owner of common stock that is for U.S. federal income tax purposes:

 

   

a citizen or individual resident of the United States;

 

   

a corporation, or other entity classified as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

 

   

a trust if (1) a court within the United States is able to exercise primary supervision over the trust’s administration, and one or more U.S. persons are authorized to control all substantial decisions of the trust or (2) such trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person; or

 

   

an estate the income of which is subject to U.S. federal income tax regardless of its source.

This discussion applies only to U.S. holders of shares of common stock who hold such shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). Further, this discussion does not purport to consider all aspects of U.S. federal income taxation that may be relevant to a U.S. holder in light of its particular circumstances, or that may apply to U.S. holders subject to special treatment under U.S. federal income tax laws (including, for example, insurance companies, dealers or brokers in securities or foreign currencies, traders in securities who elect the mark-to-market method of accounting, holders subject to the alternative minimum tax, U.S. holders that have a functional currency other than the U.S. dollar, tax-exempt organizations, governmental agencies or instrumentalities, tax-qualified retirement plans, banks and other financial institutions, mutual funds, certain former citizens or former long-term residents of the United States, partnerships (or other entities or arrangements treated as partnerships for U.S. federal income tax purposes), S corporations, or other pass-through entities or investors in such partnerships, S corporations or other pass-through entities, real estate investment trusts, regulated investment companies, U.S. holders who hold shares of common stock as part of a hedge, straddle, constructive sale, conversion or other integrated transaction, U.S. holders who will hold (actually or constructively) an equity interest in Parent immediately after the merger, and U.S. holders who acquired their shares of common stock through the exercise of employee stock options or other compensation arrangements). This discussion also does not address the U.S. federal income tax consequences to holders of shares of common stock who exercise appraisal rights in connection with the merger under the DGCL.

If a partnership (including for this purpose any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of common stock, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. If you are, for U.S. federal income tax purposes, a partner in a partnership holding shares of common stock, you should consult your tax advisor.

This summary of material U.S. federal income tax consequences is for general information purposes only and is not tax advice. Holders of common stock are urged to consult their own tax advisors to determine the particular tax consequences to them of the merger, including the applicability and effect of the alternative minimum tax, the unearned income Medicare contribution tax and any other U.S. federal, or state, local, foreign or other tax laws.

 

 

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The receipt of cash by U.S. holders in exchange for shares of common stock pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, for U.S. federal income tax purposes, a U.S. holder who receives cash in exchange for shares of common stock pursuant to the merger will recognize gain or loss in an amount equal to the difference, if any, between (1) the amount of cash received and (2) the U.S. holder’s adjusted tax basis in its shares of common stock.

Any such gain or loss will be long-term capital gain or loss if a U.S. holder’s holding period in the shares of common stock surrendered in the merger is greater than one year as of the date of the merger. Long-term capital gains of certain non-corporate holders, including individuals, are generally subject to U.S. federal income tax at preferential rates. The deductibility of capital losses is subject to limitations. If a U.S. holder acquired different blocks of common stock at different times or different prices, such U.S. holder must determine its adjusted tax basis and holding period separately with respect to each block of common stock.

Information Reporting and Backup Withholding

Payments made in exchange for shares of common stock pursuant to the merger may be subject, under certain circumstances, to information reporting and backup withholding at the statutory rate. To avoid backup withholding, a non-corporate U.S. holder that does not otherwise establish an exemption should complete and return to the applicable withholding agent a properly completed and executed IRS Form W-9, certifying under penalties of perjury that such U.S. holder is a “United States person” (within the meaning of the Code), that the taxpayer identification number provided is correct and that such U.S. holder is not subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against a holder’s U.S. federal income tax liability, if any, provided that such holder furnishes the required information to the IRS in a timely manner. U.S. holders are urged to consult their tax advisors as to the qualifications for exemption from backup withholding and the procedure for obtaining the exemption.

Regulatory Approvals

The Company, Parent and Merger Sub have agreed to cooperate with each other and use their respective commercially reasonable efforts to promptly take, and to assist and cooperate with the other parties in doing, all actions necessary, proper or advisable to consummate the merger in the most expeditious manner practicable, including taking such actions reasonably necessary to obtain any consents, waivers, approvals, exemptions or orders advisable or required to be obtained from any governmental authority in respect of the transactions contemplated by the merger agreement (including filings pursuant to the HSR Act, the filing of a joint voluntary notice to CFIUS, and filings required by certain other governmental authorities relating to antitrust, competition, trade, pre-merger notification or other regulatory matters).

HSR Approval

The completion of the merger is subject to antitrust review in the United States. Under the HSR Act and the rules promulgated thereunder, the merger cannot be completed until the parties to the merger agreement have given notification and furnished information to the FTC and the Department of Justice (the “DOJ”), and until the applicable waiting period has expired or has been terminated.

 

 

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On July 10, 2019, the FTC granted early termination of the waiting period under the HSR Act.

At any time before or after consummation of the merger, notwithstanding the termination of the waiting period under the HSR Act, the FTC or the DOJ, or any state, could take such action under antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the merger or seeking divestiture of substantial assets of the Company or Parent or their respective subsidiaries. Private parties may also seek to take legal action under antitrust laws under certain circumstances.

CFIUS Clearance

Under Section 721 of Title VII of the Defense Production Act of 1950, as amended (codified at 50 U.S.C. § 4565) (the “DPA”), the President of the United States, acting on his own or through CFIUS, an inter-agency committee chaired by the Secretary of the Treasury and composed of officials from the Departments of Commerce, Defense, Energy, Homeland Security, Justice, State, Treasury and other Executive Branch offices, is authorized to review transactions involving foreign persons that could result in control of a U.S. business engaged in interstate commerce in the United States (or, for certain U.S. businesses, investments by foreign persons that do not result in control of the U.S. business) if the President determines that there is credible evidence that the transaction threatens to impair the national security of the United States, and if other provisions of existing law do not provide adequate and appropriate authority to protect national security. CFIUS may clear a proposed transaction unconditionally or impose mitigation requirements as a condition of such clearance. CFIUS may also recommend that the President issue an executive order prohibiting a transaction or requiring a divestiture.

Pursuant to the DPA, a party or parties to a proposed transaction may voluntarily submit a notification of such transaction to CFIUS. The President or CFIUS may also initiate a review of a transaction on their own initiative, without any submission by the parties.

The merger agreement provides for the Company and Parent to file a draft and a final joint voluntary notice with CFIUS pursuant to the DPA, as amended. Under the terms of the merger agreement, consummation of the merger is subject to the satisfaction or waiver by each party of the condition that prior to the closing, CFIUS will have provided a written notice that it has determined that it has concluded action and there are no unresolved national security concerns with respect to the transactions contemplated by the merger agreement, or if CFIUS has sent a report to the President of the United States requesting the President’s decision with respect to the transactions contemplated by the merger agreement, then (A) the President will have announced a decision not to take any action to suspend or prohibit the transactions contemplated by the merger agreement or (B) having received a report from CFIUS requesting the President’s decision, the President will not have taken any action after fifteen (15) days from the date the President received such report from CFIUS.

On July 5, 2019, the Company and Parent submitted a draft joint voluntary notice with CFIUS. On July 22, 2019, the Company and Parent filed the final joint voluntary notice with CFIUS. On July 29, 2019, CFIUS accepted the final joint voluntary notice. In accordance with the letter of acceptance from CFIUS, the 45-day initial review period commenced on July 29, 2019 and will conclude no later than September 11, 2019. At the end of the 45-day review period, CFIUS may inform the parties that it has concluded all action, at which point the review process is complete. Alternatively, CFIUS may determine to undertake an

 

 

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investigation, which must be completed within 45 calendar days of its initiation (in extraordinary circumstances, the CFIUS Staff Chairperson may extend the investigation for one 15-day period).

Efforts to Obtain Regulatory Approvals

Under the terms of the merger agreement, the Company and Parent generally must, and must cause their respective affiliates to, use their respective commercially reasonable efforts to take all actions reasonably necessary, proper or advisable to consummate the merger as expeditiously as practicable. Parent and the Company must take all reasonable actions necessary (subject to certain exceptions) to resolve any objections or actions instituted or threatened by any applicable antitrust, competition or trade practices-related governmental authority challenging the merger. With respect to CFIUS approval, Parent and its affiliates (other than certain affiliates) must take all actions customarily and reasonably undertaken to obtain CFIUS approval (subject to certain exceptions) so as to enable the closing to occur.

There can be no certainty that the regulatory approvals required to consummate the merger will be obtained within the period of time contemplated by the merger agreement or that any such approvals would not be conditioned upon actions that are not required to be taken by the Company or Parent under the merger agreement, or that a regulatory challenge to the merger will not be made. For a more detailed description of the parties’ obligations with respect to regulatory approvals related to the merger, see “The Merger Agreement—Filings; Other Actions; Notification” beginning on page 93 of this proxy statement.

Litigation Related to the Merger

On July 17, July 19, July 23 and August 1, 2019, four substantially similar litigations were filed against the Company and the members of the Board in the United States District Court for the Southern District of New York and in the United States District Court for the District of Delaware by purported stockholders of the Company, captioned Stein v. Sotheby’s, et al., Case No. 1:19-cv-06669 (S.D.N.Y.), Goffmna v. Sotheby’s, et al., Case No. 1:19-cv-06733 (S.D.N.Y.), Kent v. Sotheby’s, et al., Case No. 1:19-cv-01374-UNA (D. Del.) and Stevens v. Sotheby’s, et al., Case No. 1:19-cv-7198 (S.D.N.Y), respectively. The complaints allege that a preliminary version of this proxy statement filed with the SEC on July 12, 2019 was materially inaccurate or incomplete in certain respects, thereby allegedly violating Section 14(a) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78n(a), 78t(a), and SEC Rule 14a-9, 17 C.F.R. 240.14a-9 and 17 C.F.R. § 244.100 promulgated thereunder. The complaints purport to seek injunctive relief and money damages. The Company believes the allegations in these actions are without merit.

 

 

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THE MERGER AGREEMENT

This section describes the material terms of the merger agreement. The description of the merger agreement in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the merger agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement carefully and in its entirety.

Explanatory Note Regarding the Merger Agreement

The merger agreement and this summary are included in this proxy statement to provide you with information regarding its material terms. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the merger agreement. The representations, warranties and covenants made in the merger agreement by the Company, Parent and Merger Sub were made solely to the parties to, and solely for the purposes of, the merger agreement and as of specific dates and were qualified by and subject to important limitations agreed to by the Company, Parent and Merger Sub in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to consummate the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by matters set forth in the disclosure letter delivered to Parent in connection with the merger agreement (the “disclosure letter”), which disclosures are not reflected in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts of the Company, Parent, Merger Sub or any of their respective subsidiaries or affiliates.

Effects of the Merger; Directors and Officers; Certificate of Incorporation; By-laws

The merger agreement provides that Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation. Following the merger, the Company will cease to be a publicly traded company and, as a result of the merger, will become a wholly owned subsidiary of Parent.

Immediately prior to the effective time, the Company will deliver to Parent the resignation of each member of the Board. The directors of Merger Sub and the officers of the Company immediately prior to the effective time will, from and after the effective time, be the directors and officers, respectively, of the surviving corporation, in each case, until their respective successors have been duly elected or appointed and qualified or until the earlier of their death, resignation or removal in accordance with the organizational documents of the Company.

 

 

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At the effective time, the certificate of incorporation of the Company will be amended and restated to read as set forth in Exhibit A to the merger agreement, and will be the certificate of incorporation of the surviving corporation. The by-laws of the Company will be amended and restated to read as set forth in Exhibit B to the merger agreement, and will be the by-laws of the surviving corporation.

Following the completion of the merger, the common stock of the Company will be delisted from the NYSE, will be deregistered under the Exchange Act and will cease to be publicly traded.

Closing and Effective Time

The closing of the merger will take place at 10:00 a.m., New York City Time, as promptly as practicable, and in any event no later than the fifth (5th) business day following the date on which the last of the conditions to closing (described in the section entitled “The Merger Agreement—Conditions to the Merger” beginning on page 98) has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing of the merger, but subject to the satisfaction or waiver of those conditions in accordance with the merger agreement). If, however, the marketing period relating to Parent’s debt financing has not ended at the time of satisfaction or waiver of all of the applicable conditions to closing, then the closing will occur on the earlier to occur of (a) a date during the marketing period specified by Parent on no less than three (3) business days’ notice to the Company and (b) the third (3rd) business day immediately following the final day of the marketing period.

Assuming receipt of required regulatory approvals and timely satisfaction of other closing conditions, including the approval by our stockholders of the merger proposal, we currently expect the closing of the merger to occur during the fourth quarter of 2019.

The merger will become effective upon the filing and acceptance of a certificate of merger with the Secretary of State of the State of Delaware (or at such later time as the Company and Parent may agree in writing and specified in the certificate of merger).

Treatment of Common Stock and Stock-Based Awards

Each share of common stock issued and outstanding immediately prior to the effective time (other than shares of common stock that are held in treasury of the Company, owned by any subsidiary of the Company or owned by Parent, Merger Sub or any other subsidiary or affiliate of Parent, and (ii) shares of common stock owned by Company stockholders who have neither voted in favor of the merger nor consented thereto in writing and properly exercised and perfected appraisal rights under Delaware law) will be converted into the right to receive $57.00 in cash, without interest.

Each Company DSU that is outstanding immediately prior to the effective time shall be canceled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, equal to the Company DSU Consideration, which shall be payable to each holder of a Company DSU within ten (10) business days following the effective time.

Each Company Share Price PSU that is outstanding immediately prior to the effective time shall be cancelled and converted into the right to receive an amount in cash, without interest and subject to any applicable withholding tax, equal to the Company Share Price PSU Consideration, which shall be payable to each holder of a Company Share Price PSU within ten (10) business days following the effective time.

 

 

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Except as otherwise agreed by and between Parent and a holder of a Company equity award (other than a Company DSU, a Company Share Price PSU or a Company equity award that is subject to Section 409A of the Code) prior to the effective time:

 

   

As of the effective time, each Company PCU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company PCU, be canceled, extinguished and converted into a Converted PCU, representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal in value to the product of (i) $57.00 multiplied by (ii) the number of shares represented by Company PCUs deemed earned as of immediately prior to the effective time (125% of target for Company PCUs with a performance period ending on December 31, 2019, 100% of target for Company PCUs with a performance period ending on December 31, 2020 and 100% of target for Company PCUs with a performance period ending on December 31, 2021). Each Converted PCU shall (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions) as were applicable to the corresponding Company PCU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted PCU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted PCU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

 

   

As of the effective time, each Company PSU other than a Company Share Price PSU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company PSU, be canceled, extinguished and converted into a Converted PSU, representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal in value to the product of (i) $57.00 multiplied by (ii) the number of Company PSUs deemed earned as of immediately prior to the effective time (125% of target for Company PSUs with a performance period ending on December 31, 2019, 100% of target for Company PSUs with a performance period ending on December 31, 2020 and 100% of target for Company PSUs with a performance period ending on December 31, 2021). Each Converted PSU shall (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions) as were applicable to the corresponding Company PSU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted PSU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted PSU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

 

   

As of the effective time, each Company RCU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company RCU, be canceled, extinguished and converted into a Converted RCU, representing the right to receive from the surviving corporation an amount in cash, without interest and subject to any applicable withholding tax, equal to the product of (i) $57.00 multiplied by (ii) the number of shares represented by outstanding Company RCUs as

 

 

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of immediately prior to the effective time. Each Converted RCU shall (A) vest and settle on terms (including acceleration events) as were applicable to the corresponding Company RCU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted RCU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted RCU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

 

   

As of the effective time, each Company RSU that is outstanding immediately prior to the effective time shall, by virtue of the merger and without any action by Parent, Merger Sub, the Company or the holder of such Company RSU, be canceled, extinguished and converted into a Converted RSU, representing the right to receive from the surviving corporation an amount in cash, without interest, and subject to any applicable withholding tax, equal to the product of (i) $57.00 multiplied by (ii) the total number of shares underlying such Company RSU as of immediately prior to the effective time. Each Converted RSU shall (A) vest and settle on terms (including acceleration events) as were applicable to the corresponding Company RSU immediately prior to the effective time and (B) vest in full to the extent the holder of a Converted RSU is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such Converted RSU settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Code.

Surrender and Payment Procedures

Prior to the effective time, Parent will appoint an institution, reasonably acceptable to the Company, to serve as paying agent in connection with the merger. Parent will deposit, or cause to be deposited, with the paying agent a cash amount in immediately available funds sufficient to provide all funds necessary for the paying agent to pay the aggregate per share merger consideration, other than in respect of excluded shares as discussed below, payable to our stockholders.

Promptly after the effective time, and in any event within three (3) business days thereafter, Parent will cause the paying agent to mail to each holder of record of common stock a letter of transmittal and instructions describing how such holder of record may surrender his, her or its shares of common stock in exchange for the aggregate per share merger consideration to which such holder is entitled.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

Holders of book-entry shares will not be required to deliver a certificate or an executed letter of transmittal to the paying agent to receive the per share merger consideration that such holder is entitled to receive as a result of the merger. With respect to any book-entry shares of common stock not held through The Depository Trust Company (the “DTC”), promptly after the effective time, the surviving corporation will cause the paying agent to deliver to each holder of record of such shares (i) a notice advising such holder of the effectiveness of the merger and (ii) upon surrender of such shares, a cash amount in immediately available funds of the applicable per share merger consideration payable to such holder (less any tax withholdings). With respect to any book-entry shares held through DTC, Parent and the Company will cooperate with the paying agent and DTC to establish procedures to ensure that upon

 

 

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surrender of shares held of record by DTC or its nominees in accordance with DTC’s customary surrender procedures, the paying agent will transmit to DTC or its nominees the per share merger consideration for each such book-entry share.

From and after the effective time, there will be no further transfers of shares of our common stock that were outstanding immediately prior to the effective time. If, after the effective time, any certificate is presented to the surviving corporation, Parent or the paying agent for transfer, it will be canceled and exchanged for the aggregate per share merger consideration to which the holder of the certificate is entitled pursuant to the merger agreement.

If any cash deposited with the paying agent remains unclaimed for one-hundred eighty (180) days following the effective time, such cash will be delivered to the surviving corporation or its designee(s). Thereafter, holders of our common stock (other than holders of excluded shares) who have not exchanged their shares of our common stock for the per share merger consideration will be entitled to look only to the surviving corporation for payment of the aggregate per share merger consideration to which such holders are entitled pursuant to the merger agreement.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will be required to provide an affidavit of the loss, theft or destruction, reasonably acceptable to Parent, and, if required by Parent or the surviving corporation, post a bond in a reasonable amount as an indemnity against any claim that may be made against Parent or the surviving corporation with respect to such certificate. These procedures will be described in the letter of transmittal and related instructions that you will receive, which you should read carefully and in their entirety.

Representations and Warranties

Representations and Warranties of the Company

We made customary representations and warranties in the merger agreement with respect to the Company and its subsidiaries that are subject, in many cases, to specified exceptions and qualifications contained in the merger agreement, in the disclosure letter that the Company delivered in connection with the merger agreement or in certain reports filed with the SEC. These representations and warranties relate to, among other things:

 

   

our and our subsidiaries’ due organization, existence, good standing and corporate power and authority to carry on our and their businesses;

 

   

the capitalization of the Company and its subsidiaries;

 

   

our corporate power and authority to execute the merger agreement, including as it relates to the performance of our obligations to consummate the merger and the other transactions contemplated by the merger agreement;

 

   

required filings and authorizations, consents or approvals of governmental authorities and other third parties in connection with our execution, delivery and performance under the merger agreement or the consummation of the merger and the other transactions contemplated by the merger agreement;

 

 

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our SEC filings since January 1, 2017 and the financial statements included therein, and our disclosure controls and procedures and internal controls over financial reporting;

 

   

the absence of undisclosed liabilities that would reasonably be expected to have a material adverse effect on the Company (as described in the section entitled “The Merger Agreement—Representations and Warranties” beginning on page 82);

 

   

our conduct of business in the ordinary course from March 31, 2019 through the date of the merger agreement, and the absence since March 31, 2019 of certain changes, including any event, occurrence, fact, condition, change, development, circumstance, matter, state of facts, series of events, circumstance or effect that has had or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the Company;

 

   

the absence of certain legal proceedings, investigations and governmental orders against the Company or any of its subsidiaries;

 

   

the Company’s and its subsidiaries’ compliance with applicable laws, and the possession by the Company and its subsidiaries of all licenses or other authorizations or approvals of a governmental authority necessary for the lawful conduct of the business of the Company and its subsidiaries;

 

   

the compliance of the Company and its subsidiaries with the provisions of the U.S. Foreign Corrupt Practices Act of 1977, as amended (15 U.S.C. §§ 78dd1, et seq.);

 

   

the owned real property and leased real property of the Company and its subsidiaries;

 

   

environmental matters relating to the Company and its subsidiaries;

 

   

tax matters relating to the Company and its subsidiaries;

 

   

intellectual property matters relating to the Company and its subsidiaries;

 

   

matters relating to employee benefit plans of the Company and its subsidiaries;

 

   

labor matters relating to the Company and its subsidiaries;

 

   

matters relating to material contracts of the Company and its subsidiaries;

 

   

matters relating to the insurance policies of the Company and its subsidiaries;

 

   

the inapplicability of anti-takeover laws enacted under U.S. state or federal law to the merger agreement or the transactions contemplated thereby;

 

   

the absence of transactions between the Company or any of its subsidiaries, on the one hand, and related parties, on the other hand;

 

   

the fairness opinion of LionTree received in connection with the merger; and

 

   

the absence of any undisclosed broker’s or finder’s fees.

Material Adverse Effect

Many of our representations and warranties are qualified by, among other things, exceptions relating to the absence of a “material adverse effect,” which means any event, occurrence, fact, condition, change, development, circumstance, matter, state of facts, series of events, circumstance or

 

 

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effect that, individually or in the aggregate, is, or is reasonably expected to, (a) be materially adverse to the business, assets, properties, liabilities, results of operations or condition (financial or otherwise) of the Company and its subsidiaries, taken as a whole, or (b) materially impair or materially delay the ability of the Company to perform its obligations under the merger agreement or to consummate the merger and the other transactions contemplated by the merger agreement; provided, however, that, solely with respect to clause (a) above, none of the following will be deemed in and of themselves, either alone or in combination, to constitute, nor will any of the following be taken into account in determining whether there has been, or would reasonably be expected to be, a material adverse effect:

 

  1.

effects generally affecting economic conditions attributable to the U.S. economy or financial or credit markets, or changes therein occurring after the date of the merger agreement;

 

  2.

any legal, regulatory, legislative, administrative or political conditions or changes therein occurring after the date of the merger agreement;

 

  3.

any changes or proposed changes in laws, or their interpretation, application or enforcement, occurring after the date of the merger agreement;

 

  4.

financial or security market fluctuations or conditions;

 

  5.

any change in the market price, trading volume or credit rating of any of the Company’s securities; provided, that this exception does not prevent or otherwise affect a determination that any effect underlying such change has resulted in or contributed to a material adverse effect;

 

  6.

changes in, or events affecting, the global art market (including ordinary course seasonal fluctuations) and the other industries in which the Company and its subsidiaries operate;

 

  7.

any failure by the Company or its subsidiaries to meet any internal or publicly available projections, forecasts, estimates or predictions; provided, that this exception does not prevent or otherwise affect a determination that any change, effect or development underlying such change has resulted in or contributed to a material adverse effect;

 

  8.

any effect arising out of a change in GAAP or applicable law after the date of the merger agreement;

 

  9.

any action commenced by the Company’s stockholders arising from the transactions contemplated by the merger agreement; provided, that this exception does not prevent or otherwise affect a determination that any effect underlying such action has resulted in or contributed to a material adverse effect;

 

  10.

the public announcement or pendency of the merger agreement, the transactions contemplated by the merger agreement or the identity of Parent or any of its affiliates, including the effect thereof on the relationships of the Company or any of its affiliates with employees, contractors, customers, suppliers, partners and other third parties; or

 

  11.

any effect arising out of an act or omission of the Company or its subsidiaries taken (or not taken) with the express written consent of Parent, and any effect arising from Parent unreasonably withholding its consent to a specific action prohibited by provisions under the merger agreement relating to the conduct of our businesses pending the merger.

 

 

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With respect to clauses 1-4, 6 and 8 above, any such effect will be taken into account in determining whether a material adverse effect has occurred if it disproportionately affects the Company and its subsidiaries relative to other participants in the industries in which the Company or its subsidiaries operate.

Representations and Warranties of Parent

The merger agreement also contains customary representations and warranties made by Parent and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement. The representations and warranties of Parent and Merger Sub relate to, among other things:

 

   

their due organization, existence, good standing and authority to carry on their businesses;

 

   

their corporate power and authority related to the merger agreement, including their power to consummate the merger agreement, perform their obligations under the merger agreement and consummate the transactions contemplated by the merger agreement, and the enforceability of the merger agreement against them;

 

   

required filings and authorizations and consents and approvals of governmental authorities or other third parties in connection with the execution, delivery and performance by (i) NEXT of the equity commitment letter, (ii) Next Luxembourg S.C.Sp. of the guaranty, and (iii) Parent and Merger Sub of the merger agreement and the consummation by NEXT of the transactions contemplated by the equity commitment letter, Next Luxembourg S.C.Sp. of the transactions contemplated by the guaranty and Parent and Merger Sub of the merger and other transactions contemplated by the merger agreement;

 

   

that in the past three (3) years, neither Parent nor Merger Sub was or has taken, or authorized or permitted any of their respective representatives to take, any action to be deemed an “interested stockholder” as defined in Section 203 of the DGCL;

 

   

the absence of any undisclosed broker’s or finder’s fees;

 

   

the debt and equity financing commitments and the guaranty;

 

   

the solvency of Parent, Merger Sub and NEXT as of the effective time; and

 

   

the formation and business conduct of Parent and Merger Sub.

The representations and warranties in the merger agreement of each of the Company, Parent and Merger Sub will not survive the consummation of the merger or the termination of the merger agreement pursuant to its terms.

Conduct of Our Businesses Pending the Merger

Under the merger agreement, until the effective time, except as (i) expressly required or permitted by the merger agreement, (ii) set forth in the disclosure letter, (iii) required by applicable law or (iv) consented to in writing by Parent, the Company has agreed that it will, and that it will cause its subsidiaries to, conduct its business in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its business organization and goodwill and

 

 

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satisfactory relations with governmental authorities, material customers, suppliers, licensors, licensees, distributors, agents, appraisers, historians, landlords, lessors and other third parties and to keep available the services of its current officers and key employees.

We have further agreed that, until the effective time, except as expressly (i) required or contemplated by the merger agreement (including exceptions set forth in the disclosure letter) or (ii) consented to in writing by Parent, the Company will not, and will cause its subsidiaries not to:

 

   

adopt or propose changes in their respective organizational documents;

 

   

authorize for issuance, issue, deliver, sell, pledge, dispose of, grant, encumber or transfer any shares of capital stock of or other equity interest in the Company or any of its subsidiaries or securities convertible into or exchangeable or exercisable for, or any options, warrants, stock appreciation rights, “phantom stock” or other rights of any kind to acquire any shares of (or any securities convertible into or exchangeable or exercisable for) any capital stock or other securities of the Company or any of its subsidiaries, other than the issuance of common stock issuable pursuant to Company equity awards issued under the Company Incentive Plan, the Company Stock Compensation Plan for Non-Employee Directors and the Company Long-Term Cash Unit Program (the “incentive plans”) and outstanding as of the date of the merger agreement;

 

   

sell, pledge, dispose of, transfer, lease, license, abandon, or create or incur any encumbrance (other than a permitted encumbrance) upon any property or assets of the Company or any of its subsidiaries which have a net book value in the aggregate in excess of $3,000,000 to any person other than to the Company or a wholly owned subsidiary of the Company, except:

 

   

for property or assets which are no longer used in the operation of the business of the Company or its subsidiaries, or

 

   

sales of inventory, art and other property in the ordinary course consistent with past practice;

 

   

acquire or agree to acquire, by merger, consolidation or otherwise, or otherwise purchase an equity interest in or assets of, any corporation, partnership, association or other business organization or division having assets or businesses with an aggregate fair market value in excess of $3,000,000, except for purchases of inventory in the ordinary course consistent with past practice;

 

   

adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of or relating to the Company or any of its subsidiaries (other than the merger);

 

   

declare, set aside, make or pay any dividend or any other distribution with respect to any capital stock of the Company (other than a dividend or distribution by a subsidiary of the Company to the Company or to a wholly owned subsidiary of the Company);

 

   

reclassify, combine, split or subdivide any capital stock of the Company or issue or authorize the issuance of any other securities in respect of, in lieu of, or in substitution for, shares of its capital stock, or redeem, purchase or otherwise acquire, directly or indirectly, any capital stock or other equity interests of the Company or any of its subsidiaries (other than in connection

 

 

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with the exercise, settlement or vesting of any Company equity awards issued under the incentive plans and outstanding as of the date of the merger agreement);

 

   

make any loans, advances or capital contributions to or investments, other than to the Company or a wholly owned subsidiary of the Company;

 

   

incur, assume or become liable for or modify any indebtedness, except for borrowings under the Company’s existing credit agreement, or assume, guarantee or otherwise become liable for the indebtedness or liabilities of a third party;

 

   

enter into, renew or extend certain contracts that are material to the Company;

 

   

amend, cancel or terminate, or waive, release, assign or create or incur any encumbrance (other than a permitted encumbrance) upon any rights under, certain contracts that are material to the Company, including in a manner that would affect any rights of exclusivity granted to a third party or effect a “change of control” or similar provision that would be triggered by the merger or any of the other transactions contemplated by the merger agreement;

 

   

increase the compensation or benefits of, or make any loans to, any director, officer, employee, consultant or other service provider or increase the compensation expense of the Company and its subsidiaries taken as a whole, except for annual merit-based base pay increases to employees of the Company and its subsidiaries who are non-executive officers in the ordinary course of business consistent with past practice and that do not exceed three percent in the aggregate;

 

   

grant, provide or increase any bonus, severance, change of control or retention payments or benefits to any director, officer, employee, consultant or other service provider, or grant, issue, or modify any equity or equity-based awards that may be settled in any capital stock or other equity interests or securities of the Company or any of its subsidiaries;

 

   

establish, adopt or enter into any new collective bargaining, bonus, pension, other retirement, deferred compensation, equity compensation, change in control, severance, employment, retention or other benefit agreement, plan or arrangement for the benefit of any current or former director, officer, employee, consultant or other service provider;

 

   

amend any company plan or amend any incentive plan, except as may be required to comply with applicable laws;

 

   

accelerate the payment of compensation or benefits to any director, officer, employee, consultant or other service provider;

 

   

hire any employee or executive officer with an annual base salary in excess of $150,000 (unless such new hire is to replace an employee or executive officer who has terminated or will terminate employment and the new hire’s total direct target compensation does not exceed that of the departed employee or executive officer as of immediately prior to his or her termination of employment), or terminate any executive officer of the Company or any of its subsidiaries other than for “cause” (as determined in the ordinary course of business consistent with past practice);

 

   

without prior consultation with Parent, renew or enter into any modifications of agreement or labor contract entered into with a union, which is referred to as a bargaining agreement, or

 

 

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other labor agreement or implement or announce any material reduction in labor force or mass lay-offs;

 

   

change its method of accounting, except as required by changes in GAAP or applicable law;

 

   

change its or any subsidiary’s fiscal year;

 

   

except as required by applicable law, and except as set forth in the disclosure letter, make, revoke or change any material tax election; file any material amended tax return; settle or compromise any material tax liability with any tax authority; surrender any right to claim a refund of taxes; other than in the ordinary course of business, consent to any extension or waiver of the limitation period applicable to any tax claim or assessment relating to the Company or any of its subsidiaries; enter into any “closing agreement” relating to taxes within the meaning of Section 7121 of the Code (or, with respect to a material amount of taxes, any similar provision of state, local or non-U.S. law); change any annual tax accounting period; change any method of tax accounting; or request any tax ruling;

 

   

other than with respect to purchases, sales and consignments of art and other property in the ordinary course consistent with past practice, authorize, or enter into any commitment for, any capital expenditures with respect to tangible property or real property other than those budgeted by the Company’s program of capital expenditures;

 

   

establish any new subsidiary or joint venture;

 

   

settle, release, waive, compromise or fail to defend any action brought (or threatened to be brought) by any governmental authority, any action brought (or threatened to be brought) by any current, former or purported holder of any capital stock of the Company concerning the merger agreement, the merger or any of the other transactions contemplated by the merger agreement, or any other action brought (or threatened to be brought) against the Company or any of its subsidiaries, other than settlements or compromises pursuant to which the amounts paid or payable (or other liabilities incurred) by the Company or any of its subsidiaries in settlement or compromise do not exceed $10,000,000 in the aggregate, that do not create liabilities that would impose any restrictions on the business of the Company or any of its subsidiaries and that do not involve the admission of wrongdoing by the Company or any of its subsidiaries; or

 

   

amend the engagement letter with LionTree or, unless LionTree is conflicted, engage any other investment bankers, finders or brokers in connection with the transactions contemplated by the merger agreement.

 

 

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No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes

No Solicitation

Under the terms of the merger agreement, the Company has agreed that we will, and will cause our subsidiaries and our respective directors, officers and employees, and will instruct and use our reasonable best efforts to cause our financial advisors, legal counsel, financing sources, accountants and other advisors, agents or representatives to:

 

   

immediately cease and cause all existing activities, discussion or negotiations with a third party to be terminated with respect to a proposal that is or that would reasonably be expected to lead to an alternative transaction proposal; and

 

   

enforce, and not waive or amend, any provisions of any anti-takeover law, confidentiality, standstill or similar agreement to which the Company or any of our subsidiaries is a party relating to any proposal that is or that would be reasonably expected to lead to an alternative transaction proposal.

In addition to the foregoing, the Company has agreed that we will not, and will cause its subsidiaries, and each of our respective directors, officers and employees not to, and will instruct and use reasonable best efforts to cause the other representatives of the Company and its subsidiaries not to, directly or indirectly:

 

   

solicit, initiate, propose or knowingly facilitate, induce or encourage any proposal that would reasonably be expected to lead to an alternative transaction proposal;

 

   

enter into, continue or otherwise participate or engage in any discussions or negotiations regarding, or furnish to a third party any information with respect to, or cooperate in any way that would otherwise reasonably be expected to lead to, any alternative transaction proposal;

 

   

otherwise knowingly facilitate any effort or attempt to make an alternative transaction proposal; or

 

   

take any action, directly or indirectly, that would constitute a Company adverse recommendation change, as described below.

“Alternative transaction proposal” means any written or oral (whether binding or non-binding) offer, inquiry, proposal or indication of interest relating to any of the following:

 

   

any merger, consolidation, share exchange, tender offer (including a self-tender offer), business combination, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving the Company or any of its subsidiaries, in a single transaction or a series of related transactions, which would result in any person or group (as defined in Section 13(d) of the Exchange Act), together with such person’s or group’s affiliates, beneficially owning, directly or indirectly, voting securities constituting ten percent (10%) or more of the aggregate outstanding voting power of the Company or any of its subsidiaries or a surviving entity, as applicable;

 

   

any direct or indirect acquisition, license or purchase, by any person or group (as defined in Section 13(d) of the Exchange Act), together with all affiliates thereof, in a single transaction or a series of related transactions, including by means of a joint venture, partnership or the

 

 

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acquisition of capital stock or assets of any subsidiary of the Company, of assets or properties that constitute ten percent (10%) or more of the fair market value of the assets and properties of the Company and its subsidiaries, taken as a whole or to which ten percent (10%) or more of the revenue or net income of the Company and its subsidiaries on a consolidated basis are attributable;

 

   

any direct or indirect acquisition or purchase, in a single transaction or series of related transactions, which would result in any person, together with its affiliates, beneficially owning voting securities constituting ten percent (10%) or more of the aggregate outstanding voting power of the Company or any of its subsidiaries; or

 

   

any other transaction or series of related transactions resulting in any person or group (as defined in Section 13(d) of the Exchange Act) obtaining the power to direct or cause the direction of the management or policies of the Company or any of its subsidiaries (whether by acquisition of voting rights, contract or otherwise).

A “Company adverse recommendation change” occurs if the Board, or any committee thereof, directly or indirectly takes any of the following actions:

 

   

fails to make, withdraws or qualifies (or changes, amends or modifies in a manner adverse to Parent), or publicly proposes or resolves to withdraw or qualify (or change, amend or modify in a manner adverse to Parent), the Board’s recommendation that the Company’s stockholders vote in favor of the adoption of the merger agreement at the special meeting (the “Board recommendation”), or the Board’s adoption or declaration of advisability of the merger agreement, the merger or any of the other transactions contemplated by the merger agreement;

 

   

fails to include the Board recommendation in the proxy statement that is mailed to our stockholders;

 

   

recommends, adopts or approves, or proposes publicly to recommend, adopt or approve, any alternative transaction proposal;

 

   

other than with respect to a tender offer or exchange offer, fails to publicly reaffirm its recommendation of the merger agreement within ten (10) business days after Parent so requests in writing if an alternative transaction proposal or any modification thereto shall have been made public or sent or given to our stockholders (or any person or group has publicly announced an intention, whether or not conditional, to make an alternative transaction proposal);

 

   

fails to recommend, in a solicitation/recommendation statement on Schedule 14D-9, against any alternative transaction proposal subject to Regulation 14D under the Exchange Act within ten (10) business days after the commencement of such alternative transaction proposal;

 

   

makes any public statement inconsistent with the Board recommendation;

 

   

approves, recommends, or publicly proposes to approve or recommend, or causes or allows the Company or any of its affiliates to execute or enter into any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar agreement,

 

 

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arrangement or understanding (i) constituting, or relating to, or that is intended to or would reasonably be expected to lead to any alternative transaction proposal or (ii) requiring it, or that would require it, to abandon, terminate or fail to consummate the merger agreement, the merger or the other transactions contemplated by the merger agreement; or

 

   

resolves, agrees or announces its intention to resolve or agree, to take any of the actions listed above.

Non-Solicitation Exceptions

If, prior to obtaining the stockholder approval, the Company receives an unsolicited alternative transaction proposal from a third party that is not in breach of the provisions of the merger agreement relating to the non-solicitation of alternative transaction proposals, and the Board determines that such proposal is reasonably expected to lead to a superior proposal, the Company may take the following actions:

 

   

furnish non-public information with respect to the Company and its subsidiaries to such third party and its representatives making such alternative transaction proposal; and

 

   

engage in discussions or negotiations with such third party (and its representatives) with respect to such alternative transaction proposal;

so long as prior to taking the foregoing actions, the Company (i) notifies Parent of its receipt of the alternative transaction proposal and (ii) enters into a confidentiality agreement with the third party on terms at least as restrictive as the terms in the confidentiality agreement between Parent and the Company.

“Stockholder approval” means the adoption of the merger agreement by the holders of a majority of the outstanding shares of common stock entitled to vote thereon voting together as a single class.

“Superior proposal” means a bona fide written alternative transaction proposal which the Board determines in good faith (after consultation with its outside legal counsel and independent financial advisor), taking into account all legal, financial, regulatory (including the likelihood of timely receipt of CFIUS approval), financing (including funding logistics), conditionality (including any due diligence or consent-related condition), timing and other aspects of such alternative transaction proposal (including all details relating to the person or group of persons making the proposal) and the merger agreement (including any revisions of the terms of the merger agreement proposed by Parent in response to such alternative transaction proposal or otherwise), is reasonably likely to be consummated on the terms proposed and, if consummated, would result in a transaction more favorable to the Company’s stockholders than the merger; provided, however, that for purposes of this definition of superior proposal, the applicable percentages in the definition of alternative transaction as used in the definition of alternative transaction proposal will be eighty percent (80%) rather than ten percent (10%).

Notification to Parent

The Company must promptly (and in any event within twenty-four (24) hours) notify Parent in writing of (i) the receipt of any alternative transaction proposal, (ii) any inquiry or request for information from, or for the initiation of discussions or negotiations with, the Company or its representatives

 

 

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concerning, or that could reasonably be expected to lead to, an alternative transaction proposal, or (iii) any request for non-public information relating to the Company or any of its subsidiaries or for access to the business, properties, assets, books or records of the Company or any of its subsidiaries by any third party who has made or communicated to the Company that it intends to make an alternative transaction proposal. The Company must also keep Parent reasonably informed on a current basis of any changes to the status and material terms of any such alternative transaction proposal.

Change of Recommendation or Termination of Merger Agreement

Neither the Board nor any committee thereof may make a Company adverse recommendation change, other than, prior to obtaining the stockholder approval, (i) in response to a superior proposal that is made and not withdrawn (and that continues to be a superior proposal) or (ii) if an intervening event has occurred and the Board determines in good faith (after consultation with its outside legal counsel and financial advisor) that failure to take such action in response to such superior proposal or intervening event, as applicable, would violate the directors’ fiduciary duties under applicable law. At any time prior to obtaining shareholder approval, the Board may authorize the Company to terminate the merger agreement in order to enter into a definitive written agreement with respect to such superior proposal if the Board determines in good faith that the failure to terminate the merger agreement and enter into an agreement with respect to such superior proposal would violate the directors’ fiduciary duties under applicable law.

Prior to making a Company adverse recommendation change or terminating the merger agreement as described above, the Company must comply with the following obligations:

 

   

the Company must give Parent written notice of the action(s) proposed to be taken by the Board, including the identity of the third party and the material terms relating to a superior proposal or a description of the intervening event;

 

   

during the five (5) business day period following receipt of such notice, Parent may make a written offer to the Company in response to the action(s) proposed to be taken by the Board. The Company will, and will cause each of its subsidiaries and their respective directors, officers and employees to, and will instruct and use reasonable best efforts to cause the other representatives of the Company and its subsidiaries to, negotiate with Parent and its representatives in good faith any adjustments to the merger agreement proposed by Parent so that the merger may be effected;

 

   

if Parent makes such an offer within the five (5) business day period, the Board must consider the offer in good faith and, if the Board determines in good faith that the acceptance of the offer received from Parent would render the failure by the Board to make a Company adverse recommendation change no longer a violation of its fiduciary duties under applicable law or would render a superior proposal no longer a superior proposal, the Company must agree in writing to all adjustments in the terms and conditions of the merger agreement necessary to reflect the offer received from Parent. The Company’s notice of the proposed Company adverse recommendation change or the termination of the merger agreement will be deemed to be rescinded and of no further force and effect;

 

   

the Company has an ongoing obligation to deliver a new written notice to Parent within one (1) business day of its receipt of any revisions to a superior proposal, and Parent has an ongoing

 

 

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right to respond with a new or revised offer with respect to each new or revised superior proposal; provided, however, that the period for Parent to make such an offer is reduced to four (4) business days;

 

   

the Company must have complied with the non-solicitation provisions in the merger agreement with respect to alternative transaction proposals in all material respects; and

 

   

prior to or concurrently with any termination of the merger agreement, the Company must pay the Company termination fee to Parent.

“Intervening event” means any material event, fact, circumstance, development or occurrence that was not known nor reasonably foreseeable to the Board prior to execution of the merger agreement (or, if known, the implications of which were not known to, or reasonably foreseeable by, the Board prior to execution of the merger agreement) that first becomes known to the Board after execution of the merger agreement and prior to the stockholder approval; provided none of the following will be taken into account in determining whether an intervening event has occurred:

 

   

the receipt, existence or terms of an alternative transaction proposal or a superior proposal or any inquiry, indication of interest, proposal, offer or communication relating thereto (or that could reasonably be expected to lead to an alternative transaction proposal or a superior proposal), or any matter relating thereto or consequence thereof;

 

   

any changes in the market price or trading volume of any of the Company’s securities, or the fact that the Company meets, exceeds or fails to meet internal or published projections, forecasts or revenue or earnings predictions for any period constitute an intervening event, except that the underlying cause or causes of such change or fact may be taken into account for purposes of determining whether an intervening event has occurred;

 

   

(i) the public announcement or pendency of the merger agreement or the transactions contemplated by the merger agreement, (ii) any actions required to be taken or to be refrained from being taken pursuant to the merger agreement, or (iii) any material breach of the merger agreement by the Company; or

 

   

any event, fact, circumstance, development or occurrence that has had or would reasonably be expected to have an adverse effect on the business or financial condition of Parent or Merger Sub.

The Special Meeting

The Company is required to take all action necessary to convene and hold a special meeting of the Company stockholders as promptly as reasonably practicable for the purpose of obtaining the stockholder approval. The Company may adjourn or postpone the special meeting only under the following circumstances:

 

   

to the extent necessary to ensure that the Company stockholders are given sufficient time to evaluate any necessary supplement or amendment to the proxy statement (as determined by the Company in good faith) in advance of the special meeting;

 

   

if there are insufficient shares of common stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business at the time of the originally scheduled special meeting;

 

 

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if the Company is required to postpone or adjourn the special meeting by applicable law, order of a governmental authority or a request from the SEC or its staff; or

 

   

upon Parent’s request, up to two (2) times for a period not in excess of twenty (20) calendar days in each instance, if in the reasonable judgment of Parent there will be an insufficient number of votes of common stock represented (either in person or by proxy) to achieve the stockholder approval and if such action would not be a violation of the directors’ fiduciary duties under applicable law.

The Company has agreed that the Board will recommend adoption of the merger agreement to the Company’s stockholders, subject to the Board’s rights to effect a Company adverse recommendation change as discussed above under “The Merger Agreement—No Solicitation of Alternative Transaction Proposals; Board Recommendation Changes—No Solicitation” beginning on page 89. Any Company adverse recommendation change by the Board does not affect the Company’s obligation under the merger agreement to hold the special meeting and submit the merger agreement to the Company’s stockholders for adoption.

Filings; Other Actions; Notification

The Company, Parent and Merger Sub have agreed to use commercially reasonable efforts to promptly take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make the merger and the other transactions contemplated by the merger agreement effective, including:

 

   

preparing and filing, as soon as practicable, all documentation required to be filed to consummate the merger and the other transactions contemplated by the merger agreement;

 

   

taking such actions as are reasonably necessary to obtain any requisite approvals, consents, orders, exemptions or waivers by any governmental authority or other third party, including filings pursuant to the HSR Act or a joint voluntary notice to CFIUS, and filings required relating to antitrust, competition, trade, pre-merger notification or other regulatory matters;

 

   

obtaining all necessary third-party consents, approvals or waivers from third parties; however, the Company, Parent and Merger Sub are not required to make any payments or incur any liabilities to obtain such approvals, and the Company and its subsidiaries may not amend any contracts or incur any liabilities to obtain such approvals without Parent’s prior written consent;

 

   

defending any actions challenging the merger agreement or the consummation of the merger, including seeking to have vacated or reversed any order that would restrain, prevent or delay the closing;

 

   

responding, as promptly as practicable, to any inquiries or requests for documentation or information from any governmental authority in connection with antitrust, competition, trade, pre-merger notification or other regulatory matters; and

 

   

executing and delivering any additional instruments required by applicable law necessary to consummate the merger and the other transactions contemplated by the merger agreement.

The Company and Parent have agreed to keep each other reasonably apprised of the status of governmental and third-party approval matters relating to the completion of the merger and the other

 

 

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transactions contemplated by the merger agreement. Unless prohibited by law, the Company and Parent have agreed to:

 

   

promptly notify the other of, and, if in writing, furnish the other with copies of (or, in the case of material oral communications, advise the other orally of), any material communications from or with any governmental authority or other third party with respect to the merger or any of the other transactions contemplated by the merger agreement;

 

   

permit the other to review and discuss in advance, and consider in good faith the views of the other and its counsel in connection with, any proposed written (or any material proposed oral) communication with any such governmental authority or other third party with respect to the merger or any of the other transactions contemplated by the merger agreement;

 

   

to the extent reasonably practical, or unless requested to do so by a governmental authority, not participate in any meeting with (A) any governmental authority with respect to the merger or any of the other transactions contemplated by the merger agreement or (B) any third party (excluding governmental authorities) with respect to any material consent, approval or waiver in connection with the merger or any of the other transactions contemplated by the merger agreement, in each case, unless it consults with the other in advance and, to the extent permitted by such governmental authority or other third party, as applicable, gives the other the opportunity to attend and participate; and

 

   

furnish the other with such necessary information and reasonable assistance as the Company or Parent, as applicable, may reasonably request in connection with its preparation of necessary filings or submissions of information to any such governmental authority or other third party.

The Company and Parent have agreed to take all reasonable actions to resolve any objections under U.S. and non-U.S. antitrust and competition laws or actions (or threatened actions) by the FTC, DOJ or other antitrust, competition or trade practices-related governmental authorities challenging the merger or the other transactions contemplated by the merger agreement to permit the consummation of the merger and the other transactions contemplated by the merger agreement as soon as reasonably practicable; however, neither the Company nor Parent are required to become subject to, consent to or agree to, or cause or permit any of their respective affiliates or any other person to become subject to, consent to or agree to, any requirement, condition, understanding, agreement or order to sell, to hold separate, divest itself or otherwise dispose of, or to conduct, restrict, operate, invest or otherwise change any of its, its affiliates’ or any other person’s respective capital stock, assets or business or the exercise of any voting rights regarding its, its affiliates’ or any other person’s capital stock, in any manner, or otherwise take steps to avoid or eliminate any impediment that may be asserted under any law governing competition, monopolies or restrictive trade practices. Further, Parent is not required to take action to defend any actions challenging the merger agreement or the consummation of the merger.

CFIUS Clearance

Parent and certain affiliates must take, or cause to be taken, all actions that are customarily and reasonably undertaken to obtain CFIUS approval, including providing all customary and reasonably necessary assurances to address national security, law enforcement and public safety interests in relation

 

 

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to any services offered by the Company or its subsidiaries or facilities owned or leased by the Company or its subsidiaries. So long as such actions:

 

   

do not require Parent or any of its affiliates to act or refrain from acting in a manner that would reasonably be expected to have a material adverse effect on Parent’s ownership, management or control of the Company or any of its subsidiaries or result in any personal civil or criminal liability for the individual who is the ultimate beneficial owner of a controlling interest in Parent;

 

   

do not relate to the assets or businesses of Parent or any of its affiliates that are held apart from the Company, unless such assets or businesses of Parent or any of its affiliates are held apart from the Company and have contracts or understandings to use or hold assets (including information) or businesses of the Company or any of its subsidiaries; and

 

   

do not relate to the assets or business of the Company or its subsidiaries or Parent or any of its affiliates to the extent those assets and businesses do not involve interstate commerce in the United States.

Financing

Parent and Merger Sub must use their respective commercially reasonable efforts to take, or cause to be taken, as promptly as possible, all actions and do, or cause to be done, all things necessary, proper or advisable to obtain the debt financing and equity financing on the terms and conditions as set forth in the debt commitment letter and the equity commitment letter, respectively.

Parent must pay all fees required to be paid under (and comply with all terms of) the equity commitment letter, execute and deliver all agreements and other documentation necessary for the full equity commitment to be funded, enter into all documentation contemplated by the debt commitment letter and facilitate the completion of any required due diligence by the sources of the debt financing. Parent and Merger Sub may not permit any amendment or modification to, or any waiver of any provision or remedy pursuant to, the equity commitment letter or debt commitment letter if such action would or could reasonably be expected to (i) impair, delay or prevent the consummation of the merger and the transactions contemplated by the merger agreement; (ii) reduce the aggregate amount of or the net proceeds of the financing; (iii) impose new or additional conditions precedent to the receipt of the financing; or (iv) otherwise adversely impact the ability of Parent or Merger Sub to enforce its rights against the other parties to the equity commitment letter or debt commitment letter or the definitive agreements with respect thereto.

In the event any portion of the financing becomes unavailable on the terms and conditions set forth in the equity commitment letter or the debt commitment letter, Parent must use its commercially reasonable efforts to obtain, or cause to be obtained, alternative financing on terms and conditions that are not more onerous than those set forth in the applicable commitment letter. Prior to the closing, the Company will use its commercially reasonable efforts to provide to Parent and Merger Sub, and will cause each of its subsidiaries to use their reasonable best efforts to provide, and will use commercially reasonable efforts to cause its representatives to provide, reasonable and customary cooperation and information as reasonably requested by Parent in connection with the arrangement of the debt financing. Parent has agreed to indemnify the Company, its subsidiaries and their respective directors, officers,

 

 

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employees and other representatives from and against all losses suffered or incurred by them, in connection with their cooperation in the arrangement of the financing. If the merger agreement is terminated by the Company due to inaccuracies in the representations and warranties of Parent or Merger Sub or their failure to perform their covenants or other agreements, and such failure prevents certain conditions to the closing from being satisfied, Parent must promptly reimburse the Company, upon request by the Company, for all reasonable and documented costs and expenses incurred in connection with its cooperation with respect to the financing. Obtaining any financing is not a condition to the closing.

Treatment of Outstanding Debt

The Company has agreed to assist Parent and Merger Sub in obtaining customary payoff letters, lien terminations and instruments of discharge to be delivered at closing to allow for the payoff, discharge and termination in full on the closing date of any indebtedness for borrowed money, bonds, debenture notes or other similar instruments of the Company or its subsidiaries that Parent desires (upon reasonable prior notice to the Company) to payoff, discharge and terminate at closing or that is otherwise subject to mandatory prepayment as a result of the consummation of the merger. The Company is not required to deliver any notice of prepayment or redemption or similar notice or document that is not conditioned on the consummation of the transactions contemplated by the merger agreement and if there is no liability to the Company if such transactions are not consummated.

Employee Benefits Matters

The parties have agreed that during the period commencing at the effective time and ending one (1) year after the effective time, which is referred to as the benefit protection period, the surviving corporation will provide, or will cause to be provided, to employees of the Company and its subsidiaries who are employed as of immediately prior to the effective time, which are referred to collectively as the continuing employees, other than employees covered by a bargaining agreement:

 

   

base salary or base wage that is no less favorable than the base salary or base wage provided by the Company and its subsidiaries to each such continuing employee immediately prior to the effective time;

 

   

welfare benefits and perquisites that are substantially comparable in the aggregate to those provided by the Company and its subsidiaries immediately prior to the effective time pursuant to the company plans set forth in the disclosure letter (excluding any retirement benefits, non-qualified deferred compensation benefits, defined benefit pension benefits and post-retirement health, medical or life insurance benefits); and

 

   

severance benefits that are no less favorable than the severance benefits provided by the Company and its subsidiaries to each such continuing employee immediately prior to the effective time as set forth in the disclosure letter.

Additionally, Parent has agreed, to the extent permissible and practicable under employee benefit plans of Parent that are adopted or established during the benefit protection period, which are referred to as the Parent plans, that it will:

 

   

with respect to any Parent plans that are group health plans in which the continuing employees participate following the effective time and during the benefit protection period, use its

 

 

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commercially reasonable efforts to (i) cause any pre-existing conditions or limitations and eligibility waiting periods to be waived with respect to the continuing employees and their eligible dependents and (ii) give each continuing employee credit for the plan year in which the effective time occurs towards applicable deductibles and annual out-of-pocket limits for medical expenses incurred prior to the effective time for which payment has been made; and

 

   

give each continuing employee service credit for such continuing employee’s employment with the Company and its subsidiaries for purposes of vesting, benefit accrual and eligibility to participate under each applicable Parent plan in which the continuing employees participate following the effective time and during the benefit protection period, as if such service had been performed with Parent, except for benefit accrual under defined benefit pension plans, for purposes of qualifying for subsidized early retirement benefits or to the extent it would result in a duplication of benefits.

The merger agreement provides that in the event that the closing date occurs during the 2019 fiscal year, the Company shall be permitted to finally and conclusively determine the annual bonus amounts payable in respect of the 2019 fiscal year based on achievement at target, and shall pay 75% of such amounts to bonus eligible employees as soon as administratively practicable following the closing date. Following completion of the 2019 fiscal year, the surviving corporation shall finally and conclusively determine the amounts payable in respect of the full 2019 fiscal year performance actually achieved and at the time annual bonuses have historically been paid by the Company, shall pay to each continuing employee a “top-up” amount equal to the positive difference (if any) of the full year bonus less the pre-closing bonus. In the event that, prior to payment of the top-up bonus, a continuing employee experiences a termination of employment in a manner qualifying such employee to severance, such employee shall be paid his or her top-up bonus (if any) at the same time annual bonuses have historically been paid by the Company.

The Company will administer payment of the 2019 annual bonus under the merger agreement in a manner that avoids duplication of benefits with respect to any overlapping right to a pro-rated bonus under other Company plans and agreements (such as Mr. Smith’s employment agreement and the executive severance plan). In the event that the closing date occurs after the end of the 2019 fiscal year, then the amounts payable under the Company bonus plans in respect of the 2019 fiscal year will be determined based upon actual achievement in the ordinary course and at the time annual bonuses have historically been paid by the Company.

Parent has acknowledged that the transactions contemplated by the merger agreement constitute a “change in control” (or similar phrase) under the terms of the company plans. From and after the effective time, the surviving corporation will honor all obligations and rights under the company plans in accordance with their terms.

Conditions to the Merger

The obligations of each of the Company, Parent and Merger Sub to effect the merger are subject to the satisfaction or waiver at or prior to the effective time of the following conditions:

 

   

receipt of the stockholder approval;

 

 

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the expiration or early termination of the certain antitrust waiting periods (and any extensions) applicable to the consummation of the merger (including under the HSR Act);

 

   

the absence of any legal restraint or prohibition which prohibits, renders illegal or enjoins the consummation of the merger or any of the other transactions contemplated by the merger agreement; and

 

   

receipt of a written determination from CFIUS that there are no unresolved national security concerns with respect to the transactions contemplated by the merger agreement.

The Company’s obligation to effect the merger is also subject to the satisfaction or waiver by the Company at or prior to the effective time of the following conditions:

 

   

Parent and Merger Sub’s representations and warranties regarding certain aspects of their respective organization, Parent’s ownership of Merger Sub, corporate authority and approval, Parent and Merger Sub’s ownership interests in the Company and disclosure of broker’s and finder’s fees must be true and correct in all respects both as of the date of the merger agreement and as of the closing date as though made on the closing date (except to the extent such representation or warranty expressly speaks as of an earlier date, in which case such representation or warranty must be true and correct in all respects as of such earlier date);

 

   

Parent and Merger Sub’s representations and warranties, other than those noted above, must be true and correct in all respects both as of the date of the merger agreement and as of the closing date as though made on and as of such date (except to the extent such representations and warranties speak as of an earlier date, in which case such representations and warranties must be true and correct in all respects as of such earlier date), and interpreted without giving effect to any materiality qualifications, except where all failures of such representations and warranties to be true and correct, individually or in the aggregate, have not and would not reasonably be expected to materially impair or delay the ability of Parent or Merger Sub to perform its respective obligations under the merger agreement or to consummate the merger or any of the other transactions contemplated by the merger agreement;

 

   

each of Parent and Merger Sub must have performed or complied, in all material respects, with each of its covenants and agreements required to be performed or complied with by it under the merger agreement at or prior to the closing date; and

 

   

the Company must have received a certificate of an executive officer of Parent certifying that all of the above conditions have been satisfied.

The obligations of Parent and Merger Sub to effect the merger are also subject to the satisfaction or waiver by Parent at or prior to the effective time of the following additional conditions:

 

   

the representations and warranties of the Company relating to certain aspects of its organization, capitalization (except for certain inaccuracies that represent $100,000 or less in total value), corporate authority and approval, the absence of an effect which, individually or in the aggregate, has had, or would reasonably be expected to have, a material adverse effect on the Company, the inapplicability of certain takeover statutes, the opinion of the Company’s financial advisor and the absence of undisclosed broker’s or finder’s fees must be true and correct in all respects both as of the date of the merger agreement and as of the closing date as

 

 

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though made on and as of such date (except to the extent that any such representation and warranty expressly speaks as of an earlier date, in which case such representation and warranty must be true and correct in all respects as of such earlier date);

 

   

the representations and warranties of the Company, other than those noted above, must be true and correct in all respects both as of the date of the merger agreement and as of the closing date as though made on and as of such date (except to the extent such representations and warranties speak as of an earlier date, in which case such representations and warranties must be true and correct in all respects as of such earlier date), and, in the case of this paragraph, interpreted without giving effect to any material adverse effect or materiality qualifications (other than the representations and warranties made relating to certain current liabilities incurred since the date of the Company’s balance sheet), except where all failures of such representations and warranties referred to in this paragraph to be true and correct, individually or in the aggregate, have not had, and would not reasonably be expected to have, a material adverse effect on the Company;

 

   

the Company must have performed or complied, in all material respects, with each of its covenants and agreements required to be performed or complied with by it under the merger agreement at or prior to the closing date;

 

   

no occurrence of any effect that, individually or in the aggregate, has had a material adverse effect on the Company; and

 

   

Parent and Merger Sub must have received a certificate of an executive officer of the Company certifying that all of the above conditions have been satisfied.

Termination

The Company and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time, whether or not the stockholder approval is obtained.

The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time as follows:

 

   

by either Parent or the Company if:

 

   

the merger is not consummated on or before December 13, 2019 (the “outside date”); provided, that the outside date may be extended for up to ninety (90) days by either party (so long as such party has not breached the merger agreement in a manner that has materially contributed to the failure of the effective time to occur) if the merger has not been consummated as a result of the conditions to closing relating to antitrust and competition waiting periods or approvals and CFIUS approval having not been satisfied, but each of the other conditions to the consummation of the merger has been satisfied or waived or remains reasonably capable of satisfaction as of the original outside date;

 

   

the stockholder approval has not been obtained at the special meeting (which was convened and at which the polls were closed after a vote of the stockholders); or

 

 

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any governmental authority having issued or granted an order or taken any other action prohibiting the merger (or any of the other transactions contemplated by the merger agreement) and such order or other action is, or has become, final and non-appealable;

 

   

by the Company if:

 

   

at any time prior to the receipt of the stockholder approval, the Board authorizes the Company to enter into an agreement relating to a superior proposal. Such termination will only be effective if the Company has complied with the provisions of the merger agreement relating to non-solicitation of alternative transaction proposals in all material respects, has paid the Company termination fee (and if required to be paid concurrently with the Company termination fee, the Parent expense reimbursement) and enters into an agreement relating to the Superior proposal concurrently with such termination; or

 

   

if the Company is not then in breach in any material respect of any of its obligations under the merger agreement, if there is any continuing inaccuracy in the representations and warranties of Parent and Merger Sub set forth in the merger agreement, or if Parent or Merger Sub is then failing to perform any of its covenants or other agreements set forth in the merger agreement as described in the section entitled “The Merger Agreement—Termination” beginning on page 100, in either case, such that certain conditions to closing would not be satisfied as of the time of such termination, and such breach is not reasonably capable of being cured by the outside date or has not been cured within thirty (30) days after written notice of such breach was received by Parent;

 

   

by Parent if

 

   

the Board has effected a Company adverse recommendation change or there has been any breach in any material respect on the part of the Company or any of its subsidiaries or representatives of the provisions of the merger agreement relating to the non-solicitation of alternative transaction proposals, the proxy statement or the provisions relating to the special meeting prior to obtaining the stockholder approval;

 

   

Parent is not in breach in any material respect of any of its obligations under the merger agreement, and (A) there is any continuing inaccuracy in the representations and warranties of the Company set forth in the merger agreement, or (B) the Company is then failing to perform any of its covenants or other agreements set forth in the merger agreement, in either case ((A) or (B)), (x) such that the conditions to Parent’s and Merger Sub’s obligations to consummate the merger and the other transactions contemplated by the merger agreement, as applicable, would not be satisfied as of the time of such termination and (y) such breach is not reasonably capable of being cured by the outside date or will not have been cured within thirty (30) days after written notice thereof will have been received by the Company; or

 

   

since the date of the merger agreement, an event has had a material adverse effect on the Company, which is not reasonably capable of being cured by the outside date.

Termination Fees

If the merger agreement is terminated under certain circumstances, the Company will be required to pay to Parent the $110,860,000 Company termination fee.

 

 

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The Company termination fee would be payable if:

 

   

the Company terminates the merger agreement to enter into a superior proposal agreement;

 

   

Parent terminates the merger agreement because the Board has effected a Company adverse recommendation change or there has been a material breach on the part of the Company or its subsidiaries or representatives of certain provisions under the merger agreement relating to non-solicitation of alternative transaction proposals or provisions under the merger agreement relating to the special meeting prior to obtaining the stockholder approval; or

 

   

the following events occur:

 

   

the merger agreement is terminated by:

 

   

Parent or the Company because the merger has not been consummated on or before the outside date;

 

   

Parent or the Company because the stockholder approval is not obtained at the special meeting;

 

   

Parent because (x) there is a continuing inaccuracy in the representations and warranties of the Company or (y) the Company fails to perform any of its covenants or agreements under the merger agreement and such inaccuracy or failure causes any of the conditions to closing of the Parent not to be satisfied and such breach is not reasonably capable of being cured by the outside date or has not been cured by the Company within thirty (30) days of receipt of written notice of the breach; or

 

   

Parent because an event has a material adverse effect on the Company that is not reasonably capable of being cured by the outside date;

 

   

prior to such termination, a third party makes an alternative transaction proposal and such proposal is not terminated or withdrawn prior to the termination of the merger agreement; and

 

   

prior to the fifteen (15th) month anniversary of the termination of the merger agreement, the Company enters into an agreement with respect to, or recommends to the Company’s stockholders and subsequently consummates, any alternative transaction proposal (in which case the applicable percentages in the definition of alternative transaction as used in the definition of alternative transaction proposal will be eighty percent (80%) rather than ten percent (10%)).

Parent will be required to pay the Company the Parent termination fee in the event that:

 

   

the Company or Parent terminates the merger agreement because the merger is not consummated at or prior to the outside date; or

 

   

the Company terminates the merger agreement because Parent breached its covenants and agreements to obtain the debt financing and such breach was not reasonably capable of being cured by the outside date or has not been cured by Parent within thirty (30) days of receipt of written notice of the breach,

and in either case, the sole reason Parent was unable to consummate the merger was its failure to obtain the debt financing.

 

 

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Fees and Expenses

All costs and expenses incurred in connection with the merger agreement will be paid by the party incurring such cost or expense; however, the Company must pay Parent the Parent expense reimbursement of up to $4,000,000 in reasonable and documented out-of-pocket expenses incurred by Parent and its subsidiaries in connection with the merger and the other transactions contemplated by the merger agreement if one of the following termination events occurs:

 

   

Parent or the Company terminates the merger agreement because the merger has not been consummated on or before the outside date;

 

   

Parent or the Company terminates the merger agreement because the stockholder approval is not obtained at the special meeting;

 

   

the Company validly terminates the merger agreement to accept a superior proposal;

 

   

Parent terminates the merger agreement because the Board makes a Company adverse recommendation change or the Company, its subsidiaries or representatives are in material breach of the provisions in the merger agreement relating to the non-solicitation of alternative transaction proposals or provisions under the merger agreement relating to the special meeting prior to obtaining the stockholder approval;

 

   

Parent terminates the merger agreement because (i) there is a continuing inaccuracy in the representations and warranties of the Company or (ii) the Company fails to perform any of its covenants or agreements under the merger agreement and such inaccuracy or failure causes any of the conditions to closing of the Parent not to be satisfied and such breach is not reasonably capable of being cured by the outside date or has not been cured by the Company within thirty (30) days of receipt of written notice of the breach; or

 

   

Parent terminates the merger agreement because an event has had a material adverse effect on the Company that is not reasonably capable of being cured by the outside date.

Remedies

If the merger agreement is terminated under circumstances that require the payment of the Parent termination fee as described above and the Parent termination fee is paid to us, the Parent termination fee will be our sole and exclusive remedy against Parent or Merger Sub pursuant to the merger agreement.

Subject to the foregoing paragraph, the parties are entitled to injunctions to prevent breaches of the merger agreement and to enforce specific performance of obligations under the terms of the merger agreement in addition to any other remedy to which they are entitled at law or in equity. The Company is a third-party beneficiary to Parent’s equity commitment letter, which entitles us to cause the equity commitments to be funded pursuant to the terms and conditions of the equity commitment letter. In addition, a certain affiliate of Parent has provided the Company with a guarantee in favor of the Company, which guarantees the payment of NEXT’s payment obligations under the equity commitment letter, Parent’s and Merger Sub’s payment obligations, at or prior to the effective time, pursuant to the merger agreement, and the payment of any money damages owed to the Company by Parent and the Parent termination fee, if and when any such amounts become payable.

 

 

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Indemnification; Directors’ and Officers’ Insurance

Following the consummation of the merger, the surviving corporation and its subsidiaries will honor and fulfill in all respects the obligations of the Company and its subsidiaries with respect to the indemnification and advancement of expenses under the organizational documents of the Company (or the comparable organizational documents of the Company’s subsidiaries) or the indemnification agreements executed by the directors of the Company, in each case, in effect as of the date of the merger agreement for the benefit of any of its current or former directors and officers in connection with such director’s or officer’s service as a director or officer of the Company or its subsidiaries (or acts or omissions performed at the Company’s or its subsidiaries’ request) at or prior to the effective time, whether asserted or claimed prior to, at or after the effective time, including, in connection with (i) the merger and the other transactions contemplated by the merger agreement and (ii) actions to enforce this provision or any other indemnification or advancement right of any indemnified party (but for the avoidance of doubt, subject to the terms of the indemnification and advancement of expenses rights set forth in such certificate of incorporation, by-laws, subsidiary organizational documents or indemnification agreements, respectively). In addition, from and after the effective time, the certificate of incorporation, certificate of formation and by-laws and operating agreement, as applicable (and other similar organizational documents), of the surviving corporation and its subsidiaries must at all times contain provisions with respect to elimination of liability of directors, indemnification of directors, officers and employees and advancement of expenses that are at least as favorable to the intended beneficiaries as the corresponding provisions contained in the certificate of incorporation and by-laws (or other comparable organizational documents) of the Company and its subsidiaries as of the date of the merger agreement.

For six (6) years after the effective time (and until such later date as of which any action commenced during such six (6) year period will have been finally disposed of), the surviving corporation will maintain the current policies maintained by the Company (whether through purchase of a “tail end” policy, prepaid policy or otherwise) of directors’ and officers’ and fiduciary liability insurance (“D&O insurance”) in respect of acts or omissions occurring at or prior to the effective time. All such policies must have terms, conditions, coverage and amounts that are no less favorable in the aggregate to the insured directors and officers than the policies maintained by the Company as of the signing of the merger agreement. If the aggregate annual premium of the policies exceeds 300% of the per annum premium rate (the “maximum premium”) paid by the Company and its subsidiaries as of the date of the merger agreement for such policies, the surviving corporation will only be required to provide as much coverage as will then be available at the maximum premium. Alternatively, at or prior the effective time, the Company may obtain, at its election, prepaid policies which provide directors and officers with coverage for an aggregate period of at least six (6) years with respect to claims arising from facts or events that occurred on or before the effective time, including in connection with the adoption and approval of the merger agreement, the merger and the other transactions contemplated by the merger agreement (“tail coverage”). The Company may not spend more than $2,500,000 in the aggregate to obtain such tail coverage. The parties have agreed that it is their strong preference for the Company to obtain tail coverage, and the Company will use commercially reasonable efforts to obtain the tail coverage as soon as practicable.

 

 

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The present and former directors and officers of the Company are third-party beneficiaries of the indemnification provisions of the merger agreement, and have the right to enforce such provisions after the consummation of the merger.

Amendment or Supplement

Prior to the effective time, and subject to certain provisions of the merger agreement relating to indemnification, insurance and the debt financing sources, the parties to the merger agreement may amend or supplement the merger agreement through a written agreement of the parties.

Governing Law; Jurisdiction

The merger agreement is governed by the laws of the State of Delaware. All disputes, claims or controversies arising out of or relating to the merger agreement, or the negotiation, validity or performance of the merger agreement or the transactions contemplated by the merger agreement, will be governed by and construed in accordance with the laws of the State of Delaware without regard to its rules of conflict of laws.

 

 

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