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EXHIBIT 4.2
THIRD AMENDED AND RESTATED CO-SALE AND
BOARD REPRESENTATION AGREEMENT
This THIRD AMENDED AND RESTATED CO-SALE AND BOARD REPRESENTATION
AGREEMENT
("Agreement") dated as of January 22, 2003, by and among Capella
Education
Company (the "Company"), Stephen Shank ("Shank"), Cherry Tree
Ventures IV, a
Minnesota limited partnership ("Cherry Tree"), NCS Pearson, Inc.
as successor to
National Computer Systems, Inc. ("Pearson"), Forstmann Little
& Co. Equity
Partnership-VI, L.P. ("Equity-VI"), Forstmann Little & Co.
Equity
Partnership-VII, L.P. ("Equity-VII"), Forstmann Little & Co.
Subordinated Debt
and Equity Management Buyout Partnership-VIII, L.P. ("MBO-VIII"
and, together
with Equity-VI and Equity-VII, the "Forstmann Little Entities"),
SmartForce plc
("SmartForce"), Putnam OTC and Emerging Growth Fund ("Putnam
OTC"), TH LEE,
Putnam Investment Trust - TH LEE, Putnam Emerging Opportunities
Portfolio
("Putnam TH LEE" and, together with Putnam OTC, "Putnam"), DRW
Venture Partners
LP ("Dain"), ThinkEquity Investment Partners LLC ("Think
Equity"), the
Management Investors (the "Management Investors") listed on
Schedule 1 attached
hereto for the benefit of each of them, Maveron Equity Partners
2000, L.P.,
Maveron Equity Partners 2000-B, L.P. and MEP 2000 Associates LLC
(collectively
the "Maveron Entities"), Judy Shank ("Judy"), Susan Shank
("Susan"), Mary
Retzlaff ("Retzlaff"), (collectively, the "Shareholders") and
Joseph Gaylord
("Gaylord"), a resident of Minnesota, shall supersede and
replace that certain
Second Amended and Restated Co-Sale and Board Representation
Agreement dated
February 21, 2002 by and among Shank, Cherry Tree, Pearson, the
Forstmann Little
Entities, SmartForce, Putnam, Dain, Think Equity, the Management
Investors,
Gaylord and the Company (the "Prior Agreement") and be effective
as of the date
of this Agreement. The Prior Agreement is hereby cancelled and
terminated in its
entirety and shall be of no further force and effect.
WHEREAS, the Maveron Entities and David Smith ("Smith")
(collectively, the
"Purchasers") have executed the Maveron Class G Convertible
Preferred Stock
Purchase Agreement dated as of January 15, 2003 with the Company
(the "Purchase
Agreement"), pursuant to which the Purchasers will acquire
shares of Class G
Convertible Preferred Stock ("Class G Preferred Stock") which
will become part
of the outstanding shares of capital stock of the Company
("Capital Stock")
(hereinafter the term "Capital Stock" shall be deemed to include
any shares of
Capital Stock subsequently acquired by a Shareholder and any
rights by a
Shareholder to acquire any additional shares of Capital Stock
and shall exclude
any shares acquired from Harold Abel ("Abel") pursuant to
Shareholder Agreement
No. 2 (as defined in Section 2));
WHEREAS, Equity-VII, MBO-VIII, Putnam, Think Equity, Dain,
Gaylord and the
Management Investors (other than Smith) (collectively referred
to as the "Class
F Investors") have entered into an exchange agreement (the
"Exchange
Agreement"), pursuant to which the Class F Investors agree to
exchange (the
"Exchange") each of the outstanding shares of Class F
Convertible Preferred
Stock of the Company (the "Class F Preferred Stock") held by
such investor for
shares of Class G Preferred Stock;
WHEREAS, certain of the parties hereto own shares of Capital
Stock as set
forth in Schedule 2.4 to the Purchase Agreement;
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WHEREAS, the execution and delivery of this Agreement by each
Shareholder
is a condition to the purchase of the Class G Preferred Stock by
the Purchasers
and the exchange of the Class F Preferred Stock for Class G
Preferred Stock by
the Class F Investors; and
WHEREAS, the parties hereto desire that the Purchasers
consummate the
purchase of Class G Preferred Stock contemplated by the Purchase
Agreement and
are willing to enter into this Agreement as an inducement to the
Purchasers to
complete the purchase of the Class G Preferred Stock.
NOW, THEREFORE, for good and valuable consideration, the receipt
and
adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
1. RESTRICTION ON TRANSFER. (a) Each of Shank, Judy, Cherry
Tree, the
Forstmann Little Entities, Pearson, SmartForce, the Maveron
Entities and Putnam
(collectively, the "Co-Sale Shareholders") agrees, on behalf of
such Co-Sale
Shareholder and any transferee of any shares of Capital Stock
owned by such
Co-Sale Shareholder, not to sell, transfer or otherwise dispose
of (or enter
into a binding agreement to sell, transfer or otherwise dispose
of) all or any
of such Co-Sale Shareholder's shares of Capital Stock now or
hereafter owned by
such Co-Sale Shareholder, unless the right of co-sale set forth
in Section 2 of
this Agreement has been fully complied with to the extent
applicable.
(b) Each Shareholder agrees, on behalf of such Shareholder and
any
transferee of any shares of Capital Stock owned by such
Shareholder, not to
sell, transfer or otherwise dispose of (or enter into a binding
agreement to
sell, transfer or otherwise dispose of) all or any of such
Shareholder's shares
of Capital Stock now or hereafter owned by such Shareholder,
unless such
transferee shall become a signatory to this Agreement, and upon
execution and
delivery of this Agreement, such transferee shall be deemed a
Shareholder for
purposes of this Agreement. The obligations of this Section 1(b)
shall terminate
upon an IPO (as defined in Section 2).
2. RIGHT OF CO-SALE. Except as hereinafter provided, each
Co-Sale
Shareholder agrees that such Co-Sale Shareholder will not sell,
transfer or
otherwise dispose of any shares of Capital Stock (or any rights
to acquire
shares of Capital Stock) without permitting each of the other
Co-Sale
Shareholders (the "Benefiting Shareholders") to participate as a
seller in such
transaction on a pro rata basis according to common share
holdings (with
preferred shares of the Company being counted on an
as-if-converted basis) as of
the date of receipt of the notice described below in this
Section 2.
The following sale, transfer or other disposal of shares of
Capital Stock
shall not be covered by this right of co-sale:
(a) sale of shares of Capital Stock by any of the Co-Sale
Shareholders in a bona fide underwritten public offering
pursuant to a
registration statement filed by the Company pursuant to the
Securities Act
of 1933, as now or hereafter amended (the "1933 Act");
(b) sale of shares of Capital Stock in a market transaction in
a
bona fide public market, either pursuant to such a registration
statement
or Rule 144 (or any successor rule) promulgated under the 1933
Act;
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(c) transfer of shares of Capital Stock (i) during the lifetime
of a
Co-Sale Shareholder to the spouse of such Co-Sale Shareholder or
to the
children, spouses of children or grandchildren of such Co-Sale
Shareholder
or to a trust or trusts for benefit of any of the foregoing, or
(ii) by
gift or testamentary disposition to any person, so long as the
transferee,
donee or distributee assumes in writing the obligations of such
Co-Sale
Shareholder under this Agreement and agrees to be treated as
a
"Shareholder" and a "Co-Sale Shareholder" for all purposes of
this
Agreement; or
(d) transfers by Cherry Tree, Putnam, any Maveron Entity or
any
Forstmann Little Entity to any of their respective partners,
members,
investors, or other affiliates (including without limitation
affiliated
investment funds), so long as the transferee assumes in writing
the
obligations of such Shareholder under this Agreement and agrees
to be
treated as a "Shareholder" and a "Co-Sale Shareholder" for all
purposes of
this Agreement.
Any Co-Sale Shareholder that intends to sell, transfer or
otherwise
dispose of shares of Capital Stock in a transaction subject to
these rights of
co-sale (the "Selling Shareholder") shall give prompt written
notice of such
intent to each Benefiting Shareholders, and each Benefiting
Shareholder shall
notify the Selling Shareholder within 20 days of receipt of such
notice whether
such Benefiting Shareholder wishes to participate in such
transaction and bear a
pro rata portion of the expenses incident thereto. Failure of a
Benefiting
Shareholder to respond within such 20-day period shall be deemed
a declination
of any right to participate in such transaction provided that:
(i) such
transaction is fully closed and consummated within 90 days of
the expiration of
such 20-day period; (ii) the terms of the actual transaction
include no fewer or
greater number of shares of Capital Stock than those set forth
in the notice
hereunder; and (iii) no purchasers or ultimate legal or
beneficial holders of
such shares of Capital Stock are involved in the transaction in
addition to
those disclosed in any such notice. Failure to meet any of the
foregoing
conditions shall require a new notification and right of co-sale
with regard to
such transaction under this Section 2. Each Co-Sale Shareholder
acknowledges the
obligations of Shank and Cherry Tree under that certain
Shareholder Agreement
dated May 24, 1993 by and between Abel, Shank, and Cherry Tree
("Shareholder
Agreement No. 2") and agrees that any exercise of rights by a
Benefiting
Shareholder hereunder shall be conducted in a manner which
facilitates
compliance by the Selling Shareholder of such obligations.
The provisions of Section 1(a) and this Section 2 shall
terminate at such
time as the Company consummates a sale of shares of Capital
Stock pursuant to an
effective registration statement under the 1933 Act in which the
aggregate gross
proceeds to the Company and/or selling shareholders, if any,
equal or exceed
$20,000,000 at an average price per share of at least $5.40 (an
"IPO") (subject
to adjustment for stock splits, stock dividends, combinations,
recapitalizations
and the like) or, if earlier, as to any Co-Sale Shareholder at
such time as such
Co-Sale Shareholder is the beneficial owner of fewer than
140,000 shares of
Capital Stock (subject to adjustment for stock splits, stock
dividends,
combinations, recapitalizations and the like).
3. REPRESENTATION ON BOARD OF DIRECTORS.
(a) From and after the Closing, the Company shall take all
necessary
or desirable action within its control to, and the Shareholders
shall take
all necessary or
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desirable action within its control (including, without
limitation, voting
its shares) to, cause the following persons to be elected as
directors in
connection with each annual or special meeting held for the
election of
directors of the Company following the date hereof:
(i) Pearson shall have the right to designate one person for
appointment as a director (the "Pearson Director"), who
shall
initially be Jeff Taylor;
(ii) Cherry Tree shall have the right to designate one person
for
appointment as a director (the "Cherry Tree Director"), who
shall initially be Tony Christianson;
(iii) Equity-VI shall have the right to designate one person
for
appointment as a director (the "Equity-VI Director"), who
shall initially be Gordon Holmes;
(iv) So long as Shank (i) is chief executive officer of the
Company or (ii) owns not less than the Minimum Equity Amount
(as defined below), Shank shall have the right to designate
one person (which may be Shank) for appointment as a
director
(the "Shank Director"), who shall initially be Stephen
Shank;
(v) The holders of 66 2/3% of the then outstanding shares of
Class G Preferred Stock shall have the right to designate
one
person for appointment as a director, who shall initially be
Russell Gullotti (the "Class G Director");
(vi) The Forstmann Little Entities holding shares of Capital
Stock
of the Company and Shank (or if Shank is not the chief
executive officer of the Company, the chief executive
officer
of the Company) shall have the right to jointly designate
one
person for appointment as a director (the "Forstmann-Shank
Director"), provided however, that Shank hereby agrees that
he shall approve the appointment of Thomas H. Lister or T.
Geoffrey McKay if the Forstmann Little Entities desire to
appoint either Mr. Lister or Mr. McKay to such directorship;
(vii) The directors designated pursuant to (i) - (v) above
(by
majority vote) shall have the right to jointly designate one
person for appointment as a director (the "Preferred
Director"; together with the Pearson Director, the Cherry
Tree Director, the Equity-VI Director, the Shank Director,
the Forstmann-Shank Director and the Class G Director, the
"Designated Directors"), who shall initially by Joshua
Lewis;
and
(viii) The Board of Directors shall include two independent
directors, who shall initially be James Mitchell and David
Smith;
"Independent" director shall mean a person who is not an
affiliate (as
defined in the 1933 Act) of the Company or any Shareholder.
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(b) In connection with any annual or special meeting of
shareholders
at which the term of any Designated Director is to expire, the
Company
shall (to the extent within its control), and the Shareholders
shall, take
all necessary action to cause a Designated Director to be
nominated. At
any time at which the Shareholders have the right to, or will
vote for, or
consent to, electing the members of the Board of Directors,
the
Shareholders shall vote all shares of Capital Stock then owned
by them
(including shares of Capital Stock hereafter acquired by them)
in favor of
the election of the Designated Directors to the Board of
Directors.
(c) As soon as practicable following Closing, the Company shall
(to
the extent within its control), and the Shareholders shall (to
the extent
within their control), cause the appointment of (i) a person
designated by
the Forstmann Little Entities holding shares of Capital Stock of
the
Company to serve on the Audit Committee of the Board of
Directors (which
shall consist of no more than five persons or such greater
number as the
Board of Directors shall unanimously approve) and (ii) a person
designated
by the Forstmann Little Entities holding shares of Capital Stock
of the
Company to serve on the Compensation Committee of the Board of
Directors
(which shall consist of no more than six persons or such greater
number as
the Board of Directors shall unanimously approve).
(d) If at any time a Shareholder (or Shareholders, in the case
of a
director designated by more than one Shareholder) desires to
remove, with
or without cause, a designee which such Shareholder (or
Shareholders) has
the right to designate (whether directly or through their
Designated
Director), upon notice of such determination, each Shareholder
shall vote
all of its shares of Capital Stock to remove such designee or
designees.
In the event of any vacancy arising by reason of the
resignation, death,
removal or inability to serve of any Designated Director, each
Shareholder
shall vote all of its shares of Capital Stock for the election
of the
successor selected by the Shareholder (or Shareholders, in
the
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