REGULUS THERAPEUTICS INC. FOUNDING INVESTOR RIGHTS AGREEMENT

 

REGULUS THERAPEUTICS INC.

 

FOUNDING INVESTOR RIGHTS AGREEMENT

 

THIS FOUNDING INVESTOR RIGHTS AGREEMENT (the “Agreement”) is entered into as of the 1st day of January 2009, by and among Regulus Therapeutics Inc. , a Delaware corporation (the “Company” ) on the one hand, and Isis Pharmaceuticals, Inc. , a Delaware Corporation ( “Isis” ) and Alnylam Pharmaceuticals, Inc. , a Delaware corporation ( “Alnylam” ) who are each holders of the Company’s Series A Preferred Stock (the “Preferred Stock” ) on the other hand.  Isis and Alnylam may be referred to hereinafter collectively as the “Founding Investors” and each individually as a “Founding Investor” .  The Company, Isis and Alnylam may be referred to hereinafter collectively as the “Parties” and each individually as a “Party” .

 

RECITALS

 

WHEREAS, the Company was formerly a Delaware limited liability company with the Founding Investors as its only members;

 

WHEREAS , the Company converted to a Delaware corporation in January 2009;

 

WHEREAS, in connection with the Company’s conversion to a Delaware corporation, the Founding Investors received the Preferred Stock in exchange for their membership interests in the limited liability company; and

 

WHEREAS, in connection with the issuance of the Preferred Stock, the parties desire to enter into this Agreement in order to grant registration, information rights, buy-out rights and other rights to the Founding Investors as set forth below.

 

NOW, THEREFORE, in consideration of these premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

SECTION 1.         DEFINITIONS.

 

Capitalized terms used herein and not defined elsewhere herein have the meanings set forth in Exhibit A.

 

SECTION 2.          RESTRICTIONS ON TRANSFER.

 

No Founding Investor may directly or indirectly sell, assign, transfer, pledge, hypothecate, or otherwise deal with or encumber or dispose of in any way (each a “Transfer”) such Founding Investor’s Shares or Registrable Securities, whether in whole or in part, voluntarily or involuntarily, by operation of law or otherwise, except in accordance with the terms and conditions set forth in this Section 2.

 

2.1          Restrictions on Transfer Before Initial Offering.  Except as provided in this Section 2, before the Company’s Initial Offering, each Founding Investor agrees that it may not

 

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and will not Transfer its Shares or Registrable Securities without the prior written consent of the other Founding Investor.

 

2.2           Restrictions on Transfer After Initial Offering.  Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until:

 

(a)           there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

 

(b)           (i) The transferee has agreed in writing to be bound by the terms of this Agreement, (ii) such Holder will have notified the Company of the proposed disposition and will have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (iii) if reasonably requested by the Company, such Holder will have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act.  It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144, except in unusual circumstances.  After its Initial Offering, the Company will not require any transferee pursuant to Rule 144 to be bound by the terms of this Agreement if the shares so transferred do not remain Registrable Securities hereunder following such transfer.

 

2.3           Exempt Transfers.   Notwithstanding the provisions of Sections 2.1 and 2.2 above, no such restriction will apply to a transfer by a Founding Investor that is:

 

(a)           a Transfer by a Founding Investor to an Affiliate of such Founding Investor; provided, however , that (i) the Affiliate of such transferring Founding Investor must have the resources, assets, experience, qualifications, permits and other rights necessary to perform under this Agreement and each of the Ancillary Agreements and (ii) the transferee will agree in writing to be subject to the terms of this Agreement to the same extent as if it were an original Founding Investor hereunder.

 

(b)           Transfer pursuant to a Change in Control of such Founding Investor.  In the event of a Change in Control of a Founding Investor, the other Founding Investor may initiate a Buy-Out pursuant to Section 4.

 

2.4           Stock Legends.   Each certificate representing Shares or Registrable Securities will be stamped or otherwise imprinted with legends substantially similar to the following (in addition to any legend required under applicable state securities laws):

 

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ ACT ”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH

 

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REGISTRATION IS NOT REQUIRED.

 

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT BY AND BETWEEN THE STOCKHOLDER AND THE COMPANY.  COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.

 

(a)           The Company will be obligated to promptly reissue unlegended certificates at the request of any Holder thereof if the Company has completed its Initial Offering and the Holder has obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification and legend, provided that the second legend listed above will be removed only at such time as the Holder of such certificate is no longer subject to any restrictions hereunder.

 

(b)           Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities will be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal.

 

SECTION 3.          COVENANTS OF THE COMPANY.

 

3.1          Financial Information and Reporting.

 

(a)           The Company will cause to be maintained complete books and records accurately reflecting the accounts, business and transactions of the Company on a calendar-year basis and with sufficient detail and completeness customary and usual for businesses of the type engaged in by the Company.  The Company’s books and records and financial statements will be kept using the accrual method of accounting and in accordance with U.S. generally accepted accounting principles.  The Company will maintain a system of internal accounting controls which are sufficient to provide reasonable assurance that (w) transactions are executed in accordance with the Company’s signature authority policy; (x) transactions are recorded as necessary to permit preparation of the financial statements of the Company and to maintain accountability for the Company’s assets; (y) access to the Company’s assets is permitted only in accordance with management’s authorization; and (z) the reporting of the Company’s assets is compared with existing assets at regular intervals.  The Company’s financial statements will be audited annually by an independent nationally recognized public accounting firm approved by the Company’s Board of Directors.

 

(b)           During Consolidation Period .  For so long as (1) Isis’ independent auditors advise Isis that Isis should consolidate Regulus’ financial statements with Isis’ financial statements or (2) Regulus is using Isis’ financial systems (the “Consolidation Period” ) Regulus will do the following:

 

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(i)            Commencing with respect to the fiscal year ending December 31, 2008, and for each fiscal year during the term hereof, the Company will deliver or mail to each Founding Investor the audited annual financial statements of the Company at least [***] ([***]) [***] prior to the earliest date by which either Founding Investor is required to file its annual report on Form 10-K for such fiscal year (or such earlier time as may be required by either Founding Investor to satisfy its reporting obligations under law, including without limitation, the rules and regulations of the SEC), which financial statements will have been prepared in accordance with U.S. generally accepted accounting principles.

 

(ii)           For each fiscal quarter during the term hereof, the Company will deliver or mail to each Founding Investor an unaudited balance sheet of the Company as at the end of such quarter and unaudited statements of income and cash flows of the Company for such quarter and for the current fiscal year to the end of such fiscal quarter within [***] ([***]) days after the end of each fiscal quarter of the Company (or such earlier time as may be required by a Founding Investor to satisfy its reporting obligations under law, including without limitation, the rules and regulations of the SEC).

 

(iii)         Commencing with the month ending on January 31, 2009, the Company will deliver to each Founding Investor an unaudited balance sheet of the Company as at the end of such month and unaudited statements of income and of cash flows of the Company for such month and for the current fiscal year to the end of such month promptly following the Company’s completion of the review of its financial statements for such month (other than the last month of any fiscal quarter) (or such earlier time as may be required by a Founding Investor to satisfy its reporting obligations under law, including without limitation, the rules and regulations of the SEC).

 

(iv)          The income statements and balance sheets referred to in this Section 3.1 will be accompanied by the report thereon, if any, of any independent accountants engaged by the Company or by the certificate of the President that such financial statements were prepared without audit from the books and records of the Company.

 

(v)             The Company will use the same accounting firm as Isis uses to audit its financial statements.

 

(vi)          The Company’s principal executive officer and principal financial officer, or persons performing similar functions, will provide certifications to Isis corresponding to those required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and the Company will provide to Isis an attestation report of its auditors with respect to the Company’s internal controls, as may be requested by Isis’ external auditors.

 

(vii)         If after reasonable discussions in good faith, the Company’s audit committee and Isis’ audit committee cannot resolve any dispute with respect to accounting policies and practices for the Company’s financial reporting, the Parties agree that they will apply the accounting policy or practice proposed by Isis’ audit committee.

 

(c)           After the Consolidation Period .  After the Consolidation Period and until neither Isis nor Alnylam is required to record their respective share of Regulus’ profit/loss,

 

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Regulus will provide Isis and Alnylam the information as specified on EXHIBIT E attached hereto.

 

(d)           Once Isis and Alnylam are no longer required to record their respective share of Regulus’ income/losses, Regulus will not be required to provide the information to Isis and Alnylam outlined in Section 3.1(c) above. However, Regulus will provide to Isis and/or Alnylam any financial information reasonably requested by either company so that such company can determine if an impairment in Regulus exists, and Regulus will make its management available to Isis and/or Alnylam for reasonable inquiries regarding its financials.

 

3.2           Tax Matters.

 

(a)           The Company will prepare or cause to be prepared, at the Company’s expense, all tax returns and statements, if any, that must be filed on behalf of the Company with any taxing authority, and will make timely filing thereof, including filings pursuant to extensions permitted under applicable federal and state tax regulations.  With respect to the Company’s tax return for the fiscal year ended December 31, 2008, the Company will provide a draft of such tax return to each Founding Investor within a reasonable amount of time prior to filing such return to allow each Founding Investor an opportunity to review and comment on such return.  In addition, the Company will give due consideration to each Founding Investor’s comments regarding the tax return for the year ended December 31, 2008.

 

(b)           Each Founding Investor may request from the Company any information reasonably necessary for the Founding Investor to complete any of its tax returns or compute estimated tax payments and the Company will, within a reasonable period of time following the request, provide such information to the requesting Founding Investor.

 

3.3           Confidentiality of Records.  Each Founding Investor agrees to use the same degree of care as such Founding Investor uses to protect its own confidential information to keep confidential and not disclose to any party any information furnished to such Founding Investor pursuant to Section 3.1 and 3.2 hereof that the Company identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Founding Investor may disclose such proprietary or confidential information (i) to any partner, subsidiary or parent of such Founding Investor as long as such partner, subsidiary or parent is advised of and agrees or has agreed to be bound by the confidentiality provisions of this Section 3.3 or comparable restrictions; (ii) at such time as it enters the public domain through no fault of such Founding Investor; (iii) that is communicated to it free of any obligation of confidentiality; (iv) that is developed by Founding Investor or their respective agents independently of and without reference to any confidential information communicated by the Company; or (v) as required by applicable law.  Upon request by the Company, each Founding Investor agrees to enter into a separate confidentiality agreement with the Company.

 

3.4           Reservation of Common Stock.  The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Preferred Stock, all Common Stock issuable from time to time upon such conversion.

 

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3.5           Board of Directors.  The Board will consist of up to [***] ([***]) directors (each, a “Director” ).  Alnylam will have the right to designate [***] ([***]) Directors who need not be Independent Directors (the “Alnylam Directors” ).  Isis will have the right to designate [***] ([***]) Directors who need not be Independent Directors (the “Isis Directors” ).  The President of the Company will, at all times while in office, be a Director. The remaining two members will be independent industry representatives approved by the other Directors then serving on the Board.  Other than the President, each Director will serve at the pleasure of the Founding Investor designating such Director until such Director’s removal by the designating Founding Investor or such Director’s resignation.  If there is a vacancy on the Board, the vacancy will be filled by the Founding Investor, if any, who initially designated the Director, except if the vacancy is caused by the termination of the President, such vacancy will be filled when the then existing Board appoints the new President.  Any Founding Investor may remove, at any time and for any reason, any or all of the Directors designated by such Founding Investor and, subject to the Independent Director requirements, designate in lieu thereof any individual(s) to serve the remainder of the relevant term.

 

(a)           Observers .  The right to attend all or particular meetings of the Board ( “Observer Rights” ) may be granted to any Person designated by a Founding Investor upon the approval of the other Founding Investor (such approval not to be unreasonably withheld or delayed); provided, however, that any Person granted Observer Rights, and/or any representative of such Person attending meetings of the Board, will agree in writing to be subject to appropriate confidentiality obligations if requested by a Director; provided, further, that such holder of Observer Rights may be excluded from any meeting or any portion of a meeting for which any Director believes (i) such meeting or portion will involve a discussion of information that the Company or the Founding Investor designating such Director considers to be a trade secret or of a confidential or proprietary nature, (ii) exclusion of such holder of Observer Rights is desirable in order to preserve the attorney client-privilege or (iii) exclusion is otherwise merited.

 

(b)           Other Attendees .  Any Director may invite a subject matter expert to attend any meeting of the Board; provided, however, that any Person granted attendance rights will agree in writing to be subject to appropriate confidentiality obligations if requested by a Director and provided further that no other Director objects to such expert’s presence.  Upon such objection, the expert will be excluded from any meeting or any portion of a meeting.

 

(c)           The Directors designated as of the Effective Date are set forth on EXHIBIT B hereto.

 

3.6           Directors’ Liability and Indemnification.   The Company’s Certificate of Incorporation and Bylaws will provide (a) for elimination of the liability of a Director to the maximum extent permitted by law and (b) for indemnification of Directors for acts on behalf of the Company to the maximum extent permitted by law.  In addition, the Company will enter into and use its best efforts to at all times maintain reasonable and customary indemnification agreements with each of its Directors to indemnify such directors to the maximum extent permissible under applicable law.

 

3.7           Operating Plan.   The Company will use commercially reasonable efforts to operate the Company in accordance with the Approved Operating Plan (as defined below). The

 

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initial Operating Plan, dated April 30, 2008 attached hereto as EXHIBIT C (the “Initial Operating Plan” ), will be deemed the “Approved Operating Plan” for the period beginning on September 6, 2007 and ending on December 31, 2009 (such period, the “Initial Commitment Period” ).

 

(a)           No later than September 30, 2009, and no later than September 30 in each fiscal year thereafter, Regulus’ management will prepare and submit to the Board a proposal for revising the Approved Operating Plan then in effect ( “Proposed Operating Plan” ), which will include a proposed Development Plan ( “Proposed Development Plan” ), proposed Operating Budget ( “Proposed Operating Budget” ).

 

(b)           Each Proposed Operating Plan that has been prepared and submitted by Regulus’ management in accordance with Section 3.7(a) will be considered at the first meeting of the Board following its submission and will be subject to the approval of the Board.  The Chairperson will call a special meeting of the Board for this purpose at the request of any Director if the next scheduled regular meeting is later than December 31 of the year in which submission is made.  Any such Proposed Operating Plan (or any amendment thereto) that is approved by the Board will be considered the “ Approved Operating Plan ” for all purposes of this Agreement until amended or replaced.

 

(c)           If, after the Initial Commitment Period, the Board is unable to approve a Proposed Operating Plan that has been prepared and submitted by Regulus’ management in accordance with Section 3.7(a) within three months following the date such Proposed Operating Plan is submitted for approval (a “Stalemate” ), either Founding Investor may initiate a Buy-Out in accordance with Section 4; provided, however, that in the event sufficient funding is available to the Company to continue to carry out the Development Plan after the Initial Commitment Period, a Stalemate will not be deemed to have occurred, and neither Founding Investor may initiate a Buy-Out, until a date [***] ([***]) days prior to the date on which all of the Company’s funds are expected to be depleted as determined based on the Approved Operating Plan then in effect.

 

3.8           Scientific Advisory Board.  The Company will maintain a Scientific Advisory Board ( “SAB” ) consisting of at least three (3) members.  The initial members and chairperson of the SAB will be as set forth on EXHIBIT B .  Any changes to the composition of the Scientific Advisory Board, including the removal or appointment of the chairperson, will be approved by the Board.  The SAB will meet at least at least three time a year until December 31, 2009 and will initially be responsible for (i) advising the Company as to research goals and plans, (ii) reviewing research data and advising the Company with respect to interpretation of such research data, as requested by the Board, President or Chief Scientific Officer; and (iii) advising the Company with respect to research and development decisions, as requested by the Board, President or Chief Scientific Officer.

 

3.9           Termination of Covenants.  All covenants of the Company contained in Section 3 of this Agreement (other than the provisions of Section 3.1 and 3.3) will expire and terminate as to each Founding Investor upon the earlier of (i) the effective date of the registration statement pertaining to an Initial Offering or (ii) upon a Liquidation Event, Acquisition or Asset Transfer

 

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(in each case as defined in the Company’s Certificate of Incorporation as such may be amended from time to time).

 

SECTION 4.          BUY-OUT.

 

4.1          Right to Initiate Buy-Out.  Within (a) solely in the event of a Stalemate occurring after the end of the Initial Commitment Period (as further described in Section 3.7(c), the [***] ([***]) day period following such Stalemate, (b) at any time, whether before or after the end of the Initial Commitment Period, during the [***] ([***]) day period following notice from a Founding Investor that it has entered into a binding agreement providing for a Change of Control of such Founding Investor (such [***] ([***]) or [***] ([***]) day period, a “Buy-Out Notice Period” ), or (c) as provided for in the License Agreement, either Founding Investor (in the case of (a)), the Founding Investor receiving the notice of a Change in Control (in the case of (b)), or the Founding Investor or Founding Investors as specified in the License Agreement (in the case of (c) (in each case, the “Initiating Founding Investor” ) has the right, exercisable upon written notice to the Company and the other Founding Investor (the “Buy-Out Notice” ), to initiate the sale of the Company or the distribution the Company’s assets, including the Company Intellectual Property and Company’s rights in Licensed IP, in accordance with the terms set forth on EXHIBIT D (the “Buy-Out” ).

 

4.2          Voting Agreement; Cooperation.   If any Founding Investor initiates a Buy-Out under Section 4.1, each Founding Investor agrees to vote or act with respect to their Shares, Registrable Securities and designated members of the Board so as to authorize and approve the Buyout unless Exhibit D expressly allows a Founding Investor to withhold such vote or action.  Each Party further agrees to assist the other Parties in every proper way to consummate the Buy-Out, effect the Buy-Out, including but not limited to executing and delivering such documents and performing such other acts as a Party may reasonably request in connection with effecting the Buy-Out.

 

4.3          Preservation of Intent.   If any term, covenant or condition of this Section 4 or Exhibit D or the application thereof to any Party or circumstance, to any extent, is invalid or unenforceable, then (a) the remainder of this Section 4 and Exhibit D, or the application of such term, covenant or condition to Parties or circumstances other than those as to which it is invalid or unenforceable, will not be affected thereby and each term, covenant or condition of this Section 4 and Exhibit D will be valid and be enforced to the fullest extent permitted by law; and (b) the Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Section 4 and Exhibit D or the application thereof that is invalid or unenforceable, it being the intent of the Parties that the basic purposes of this Section 4 and Exhibit D are to be effectuated.

 

4.4          Termination of Buy-Out .  The provisions set forth in this Section 4 will expire and terminate upon the effective date of the registration statement pertaining to an Initial Offering.

 

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SECTION 5.          RIGHTS OF FIRST REFUSAL

 

5.1          Subsequent Offerings.  Subject to applicable securities laws, each Founding Investor will have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 5.6 hereof.  Each Founding Investor’s pro rata share is equal to the ratio of (a) the number of shares of the Company’s Common Stock (including all shares of Common Stock issuable or issued upon conversion of the Shares or upon the exercise of outstanding warrants or options) of which such Founding Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company’s outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Shares or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities.  The term “ Equity Securities ” will mean (i) any Common Stock, Preferred Stock or other security of the Company, (ii) any security convertible into or exercisable or exchangeable for, with or without consideration, any Common Stock, Preferred Stock, or other security (including any option to purchase such a convertible security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security or (iv) any such warrant or right.

 

5.2          Exercise of Rights.  If the Company proposes to issue any Equity Securities, it will give each Founding Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same.  Each Founding Investor will have [***] ([***]) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased.  Notwithstanding the foregoing, the Company will not be required to offer or sell such Equity Securities to any Founding Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale.

 

5.3          Issuance of Equity Securities to Other Persons .  The Company will have [***] ([***]) days thereafter to sell the Equity Securities in respect of which the Founding Investor’s rights were not exercised, at a price not lower and upon general terms and conditions not materially more favorable to the purchasers thereof than specified in the Company’s notice to the Founding Investors pursuant to Section 5.2 hereof.  If the Company has not sold such Equity Securities within [***] ([***]) days of the notice provided pursuant to Section 5.2, the Company will not thereafter issue or sell any Equity Securities, without first offering such securities to the Founding Investors in the manner provided above.

 

5.4          Termination and Waiver of Rights of First Refusal.  The rights of first refusal established by this Section 5 will not apply to, and will terminate upon the earlier of (i) the effective date of the registration statement pertaining to the Company’s Initial Offering or (ii) an Acquisition.  Notwithstanding Section 7.5 hereof, the rights of first refusal established by this Section 5 may be amended, or any provision waived with and only with the written consent of the Company and the Founding Investors holding a majority of the Registrable Securities held by all Founding Investors.

 

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5.5           Assignment of Rights of First Refusal.  The rights of first refusal of each Founding Investor under this Section 5 may be assigned to the same parties, subject to the same restrictions as any transfer of registration rights pursuant to Section 6.7.

 

5.6           Excluded Securities.  The rights of first refusal established by this Section 5 will have no application to any of the following Equity Securities:

 

(a)           shares of Common Stock and/or options, warrants or other Common Stock purchase rights and the Common Stock issued pursuant to such options, warrants or other rights issued to employees, officers or directors of, or consultants or advisors to, the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors;

 

(b)           stock issued or issuable pursuant to any rights or agreements, options, warrants or convertible securities outstanding as of the date of this Agreement; and stock issued pursuant to any such rights or agreements granted after the date of this Agreement, so long as the rights of first refusal established by this Section 5 were complied with, waived, or were inapplicable pursuant to any provision of this Section 5.6 with respect to the initial sale or grant by the Company of such rights or agreements;

 

(c)           any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board of Directors;

 

(d)           any Equity Securities issued in connection with any stock split, stock dividend or recapitalization by the Company;

 

(e)           any Equity Securities issued pursuant to any equipment loan or leasing arrangement, real property leasing arrangement, or debt financing from a bank or similar financial or lending institution approved by the Board of Directors;

 

(f)            any Equity Securities that are issued by the Company pursuant to a registration statement filed under the Securities Act;

 

(g)           any Equity Securities that are issued by the Company in connection with any underwritten public offering;

 

(h)           any Equity Securities issued in connection with strategic transactions involving the Company and other entities, including, without limitation (i) joint ventures, manufacturing, marketing or distribution arrangements or (ii) technology transfer or development arrangements; provided that the issuance of shares therein has been approved by the Company’s Board of Directors; and

 

(i)            Any Equity Securities issued to third-party service providers in exchange for or as partial consideration for services rendered to the Company.

 

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SECTION 6.                             REGISTRATION RIGHTS; MARKET STAND-OFF.

 

6.1           Piggyback Registrations.  The Company will notify all Holders of Registrable Securities in writing at least fifteen (15) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding Special Registration Statements) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder.  Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it will, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing.  Such notice will state the intended method of disposition of the Registrable Securities by such Holder.  If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder will nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.

 

(a)           Underwriting.  If the registration statement of which the Company gives notice under this Section 6.3 is for an underwritten offering, the Company will so advise the Holders of Registrable Securities.  In such event, the right of any such Holder to include Registrable Securities in a registration pursuant to this Section 6.3 will be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein.  All Holders proposing to distribute their Registrable Securities through such underwriting will enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company.  Notwithstanding any other provision of this Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting will be allocated, first, to the Company; and second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; provided, however, that such reduction will not be permitted unless such registration does not include shares of any other selling stockholders.  If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement.  Any Registrable Securities excluded or withdrawn from such underwriting will be excluded and withdrawn from the registration.  For any Holder which is a partnership, limited liability company or corporation, the partners, retired partners, members, retired members and stockholders of such Holder, or the estates and family members of any such partners, retired partners, members and retired members and any trusts for the benefit of any of the foregoing persons will be deemed to be a single “Holder,” and any pro rata reduction with respect to such “Holder” will be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such “Holder,” as defined in this sentence.

 

(b)           Right to Terminate Registration.  The Company will have the right to terminate or withdraw any registration initiated by it under this Section 6.1 whether or not any

 

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Holder has elected to include securities in such registration.  The Registration Expenses of such withdrawn registration will be borne by the Company in accordance with Section 6.3 hereof.

 

6.2          Form S-3 Registration.  In case the Company receives from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will:

 

(a)           promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and

 

(b)           as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder’s or Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however , that the Company will not be obligated to effect any such registration, qualification or compliance pursuant to this Section 6.2:

 

(i)             if Form S-3 is not available for such offering by the Holders;

 

(ii)            if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than fifteen million dollars ($15,000,000);

 

(iii)          if within thirty (30) days of receipt of a written request from any Holder or Holders pursuant to this Section 6.2, the Company gives notice to such Holder or Holders of the Company’s intention to make a public offering within ninety (90) days, other than pursuant to a Special Registration Statement;

 

(iv)           if the Company will furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company will have the right to defer the filing of the Form S-3 registration statement for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 6.2; provided , that such right to delay a request will be exercised by the Company not more than twice in any twelve (12) month period;

 

(v)             if the Company has, within the twelve (12) month period preceding the date of such request, already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 6.2, or

 

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(vi)           in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.

 

(c)            Subject to the foregoing, the Company will file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the requests of the Holders.

 

6.3           Expenses of Registration.  Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 6.1 or 6.2 herein will be borne by the Company.  All Selling Expenses incurred in connection with any registrations hereunder, will be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered.  The Company will not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 6.2, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to deem such registration to have been effected as of the date of such withdrawal for purposes of determining whether the Company will be obligated pursuant to Section 6.2(b)(v), as applicable, to undertake any subsequent registration, in which event such right will be forfeited by all Holders).  If the Holders are required to pay the Registration Expenses, such expenses will be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested.  If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then such registration will not be deemed to have been effected for purposes of determining whether the Company will be obligated pursuant to Section 6.2(b)(v) to undertake any subsequent registration.

 

6.4           Obligations of the Company.  Whenever required to effect the registration of any Registrable Securities, the Company will, as expeditiously as reasonably possible:

 

(a)            prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to thirty (30) days or, if earlier, until the Holders have completed the distribution related thereto; provided, however, that at any time, upon written notice to the participating Holders and for a period not to exceed sixty (60) days thereafter (the “Suspension Period”), the Company may delay the filing or effectiveness of any registration statement or suspend the use of any registration statement (and the Initiating Holders hereby agree not to offer or sell any Registrable Securities pursuant to such registration statement during the Suspension Period) if the Company reasonably believes that there is or may be in existence material nonpublic information or events involving the Company, the failure of which to be disclosed in the prospectus included in the registration statement could result in a Violation (as defined below).  In the event that the Company will exercise its right to delay the filing or effectiveness or suspend the use of a registration hereunder, the applicable time period during which the

 

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registration statement is to remain effective will be extended by a period of time equal to the duration of the Suspension Period.  The Company may extend the Suspension Period for an additional consecutive sixty (60) days with the consent of the Holders of a majority of the Registrable Securities registered under the applicable registration statement, which consent will not be unreasonably withheld.   If so directed by the Company, all Holders registering shares under such registration statement will (i) not offer to sell any Registrable Securities pursuant to the registration statement during the period in which the delay or suspension is in effect after receiving notice of such delay or suspension; and (ii) use their commercially reasonable efforts to deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holders’ possession, of the prospectus relating to such Registrable Securities current at the time of receipt of such notice.  Notwithstanding the foregoing, the Company will not be required to file, cause to become effective or maintain the effectiveness of any registration statement other than a registration statement on Form S-3 that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act.

 

(b)            Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in subsection (a) above.

 

(c)            Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

 

(d)            Use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will be reasonably requested by the Holders; provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to