RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT

 

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[DRAFT - 01/11/2005

FOR DISCUSSION PURPOSES ONLY]

 

                                   EXHIBIT 4.5

 

                  RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT

 

            THIS RIGHT OF FIRST REFUSAL AND CO-SALE  AGREEMENT (the "Agreement")

is  made  as of the  28th  day of  January,  2005  by  and  among  PacificHealth

Laboratories,  Inc., a Delaware corporation (the "Company"), the stockholders of

the  Company  listed on  Schedule A hereto  (together  with any  transferee  who

becomes  subject  to the  provisions  hereof  pursuant  to  Section  4, the "Key

Holders")  and the  investors  listed on Schedule B hereto and each other person

who hereafter may become a party hereto pursuant to Sections 5(k) or 5(i) hereof

(each, an "Investor" and, collectively, the "Investors").

 

            WHEREAS,  the Key Holders are the beneficial owners of the number of

shares of Common Stock of the Company set forth opposite their  respective names

on Schedule A hereto;

 

            WHEREAS,  the Company and certain of the  Investors  (the  "Series A

Investors") are parties to the Series A Preferred Stock Purchase  Agreement,  of

even date herewith (the  "Purchase  Agreement"),  pursuant to which the Series A

Investors  have agreed to purchase  shares of the  Company's  Series A Preferred

Stock; and

 

            WHEREAS,  the Key Holders and the Company  desire to further  induce

the Series A Investors to purchase the Series A Preferred Stock;

 

            NOW,  THEREFORE,  in consideration of the mutual covenants set forth

herein,  and  for  other  good  and  valuable  consideration,  the  receipt  and

sufficiency  of which are  acknowledged,  the  Company,  the Key Holders and the

Investors agree as follows:

 

            1. Definitions.

 

                  (a) "Capital  Stock" means (i) shares of Common Stock (whether

now outstanding or hereafter issued in any context), (ii) shares of Common Stock

issued or issuable upon conversion of Preferred Stock and (iii) shares of Common

Stock issued or issuable upon exercise or conversion,  as  applicable,  of stock

options,  warrants or other convertible  securities of the Company, in each case

now owned or  subsequently  acquired by any Key Holder,  any Investor,  or their

respective successors or permitted transferees or assigns.

 

                  (b)  "Common  Stock"  means  shares  of  Common  Stock  of the

Company.

 

                  (c) "Company  Notice"  means  written  notice from the Company

notifying the selling Key Holders that it intends to exercise its Right of First

Refusal as to some or all of the Transfer Stock with respect to any Proposed Key

Holder Transfer.

 

                  (d) "Investor  Notice"  means written  notice from an Investor

notifying the Company and the selling Key Holder that such  Investor  intends to

exercise its Secondary  Refusal Right as to a portion of the Transfer Stock with

respect to any Proposed Key Holder Transfer.

 

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                  (e) "Investors"  means the persons named on Schedule B hereto,

each person to whom the rights of an Investor are  assigned  pursuant to Section

5(k) and each  person  who  hereafter  becomes  a  signatory  to this  Agreement

pursuant to Section 5(i) and  "Investor"  means any one of them,  as the context

requires.

 

                  (f) "Key  Holder  Stock"  means any Common  Stock now owned or

subsequently acquired by any Key Holder or his permitted transferees or assigns.

 

                  (g) "Key Holders" means the persons named on Schedule A hereto

and the  respective  transferees  of such persons' Key Holder Stock  pursuant to

Section 4(a) hereof.

 

                  (h) "Preferred  Stock" means shares of Preferred  Stock of the

Company.

 

                  (i)  "Proposed  Key  Holder   Transfer"   means  any  proposed

assignment, sale, offer to sell, pledge, mortgage,  hypothecation,  encumbrance,

disposition  of or any other like transfer or  encumbering  of any Capital Stock

(or any  interest  therein)  proposed by any of the Key Holders;  provided  that

Proposed Key Holder Transfer shall not include any merger, consolidation or like

transfer  effected  pursuant  to a vote of the  holders of Capital  Stock of the

Company.

 

                  (j) "Proposed Transfer Notice" means written notice from a Key

Holder setting forth the terms and conditions of a Proposed Key Holder Transfer.

 

                  (k)  "Prospective  Transferee"  means any person to whom a Key

Holder proposes to make a Proposed Key Holder Transfer.

 

                  (l) "Right of Co-Sale" means the right, but not an obligation,

of an Investor to participate in a Proposed Key Holder Transfer on the terms and

conditions specified in the Proposed Transfer Notice.

 

                  (m)  "Right  of First  Refusal"  means the  right,  but not an

obligation, of the Company, or its permitted transferees or assigns, to purchase

some  or all of the  Transfer  Stock  with  respect  to a  Proposed  Key  Holder

Transfer, on the terms and conditions specified in the Proposed Transfer Notice.

 

                  (n)  "Secondary  Notice" means written notice from the Company

notifying  the Investors and the Key Holders that the Company does not intend to

exercise  its Right of First  Refusal  as to all shares of  Transfer  Stock with

respect to any Proposed Key Holder Transfer.

 

                  (o)  "Secondary  Refusal  Right"  means the right,  but not an

obligation,  of each Investor to purchase up to its pro rata portion (based upon

the total number of shares of Capital  Stock then held by all  Investors) of any

Transfer  Stock not  purchased  pursuant to the Right of First  Refusal,  on the

terms and conditions specified in the Proposed Transfer Notice.

 

                  (p) "Transfer  Stock" means shares of Capital Stock subject to

a Proposed Key Holder Transfer.

 

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                  (q)  "Undersubscription  Notice" means written  notice from an

Investor  notifying  the Company  and the selling Key Holder that such  Investor

intends to exercise its option to purchase a portion of the  Transfer  Stock not

purchased pursuant to the Right of First Refusal or the Secondary Refusal Right.

 

            2. Agreement Among the Company, the Investors and the Key Holders.

 

                  (a) Right of First Refusal.

 

                        (1) Grant.  Each Key Holder hereby  unconditionally  and

irrevocably  grants to the Company a Right of First  Refusal to purchase  all or

any portion of Transfer  Stock that such Key Holder may propose to transfer in a

Proposed  Key  Holder  Transfer,  at the same  price  and on the same  terms and

conditions as those offered to the Prospective Transferee.

 

                        (2) Notice. Each Key Holder proposing to make a Proposed

Key Holder  Transfer must deliver a Proposed  Transfer Notice to the Company and

each Investor not later than fifteen (15) days prior to the consummation of such

Proposed Key Holder  Transfer.  Such Proposed  Transfer Notice shall contain the

material  terms and  conditions  of the  Proposed  Key Holder  Transfer  and the

identity of the Prospective  Transferee.  The Company must exercise its Right of

First Refusal under this Section 2 by giving a Company Notice to the selling Key

Holder within fifteen (15) days after delivery of the Proposed  Transfer Notice.

In the event of a conflict  between this Agreement and any other  agreement that

may have been  entered  into by a Key Holder  with the Company  that  contains a

preexisting  right of first refusal,  the terms of this Agreement  shall control

and the  preexisting  right  of  first  refusal  shall be  deemed  satisfied  by

compliance with this Section 2(a)(1) and (2).  Notwithstanding the foregoing, in

the event of a  contemplated  private  sale  which  would be within  the  volume

limitations of Rule 144(e) if it were a public sale, the fifteen (15) day period

shall be  reduced  to two (2)  business  days  and the  name of the  Prospective

Transferee need not be provided.

 

                        (3) Grant of Secondary Refusal Right to Investors.  Each

Key Holder  hereby  unconditionally  and  irrevocably  grants to the Investors a

Secondary Refusal Right to purchase all or any portion of the Transfer Stock not

purchased by the Company pursuant to the Right of First Refusal,  as provided in

this  subparagraph  (3). If the Company does not intend to exercise its Right of

Refusal  with  respect to all  Transfer  Stock  subject to a Proposed Key Holder

Transfer,  the Company must deliver a Secondary  Notice to each Investor to that

effect no later than fifteen (15) days after the selling Key Holder delivers the

Proposed  Transfer  Notice to the  Company.  To exercise its  Secondary  Refusal

Right, an Investor must deliver an Investor Notice to the selling Key Holder and

the  Company  within  ten (10)  days  after the  deadline  for  delivery  of the

Secondary Notice.  Notwithstanding the foregoing, in the event of a contemplated

private sale which would be within the volume  limitations  of Rule 144(e) if it

were a public  sale,  the  fifteen  (15) day period  shall be reduced to two (2)

business days and the name of the Prospective Transferee need not be provided.

 

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                        (4) Forfeiture of Rights. Notwithstanding the foregoing,

if the total  number  of  shares of  Transfer  Stock  that the  Company  and the

Investors  indicate an interest in  purchasing in the Company  Notice,  Investor

Notices and Undersubscription Notices is less than the total number of shares of

Transfer  Stock,  then the  Company  and the  Investors  shall be deemed to have

forfeited any right to purchase the Transfer  Stock,  and the selling Key Holder

shall be free to sell all, but not less than all, of the  Transfer  Stock to the

Prospective  Transferee  (subject  to the other terms and  restrictions  of this

Agreement,  including  without  limitation  the  provisions  of  Section  2(b)),

provided,  that such sale shall be  consummated  within 45 days after receipt of

the Proposed Transfer Notice by the Company.

 

                        (5)   Consideration;   Closing.   If  the  consideration

proposed to be paid for the  Transfer  Stock is in  property,  services or other

non-cash  consideration,  the fair market  value of the  consideration  shall be

determined in good faith by the Company's Board of Directors.  If the Company or

any Investor  cannot for any reason pay for the Transfer  Stock in the same form

of non-cash  consideration,  the Company or such Investor may pay the cash value

equivalent thereof, as determined by the Board of Directors.  The closing of the

purchase of Transfer  Stock by the Company and the  Investors  shall take place,

and all payments from the Company and the Investors shall have been delivered to

the selling Key Holder,  by the later of (i) the date  specified in the Proposed

Transfer  Notice as the intended  date of the  Proposed Key Holder  Transfer and

(ii) forty-five (45) days after delivery of the Proposed Transfer Notice.

 

                  (b) Right of Co-Sale.

 

                        (1) If any  Transfer  Stock  subject to a  Proposed  Key

Holder  Transfer is not purchased  pursuant to Section 2(a) above and thereafter

is to be sold to a Prospective Transferee, each respective Investor may elect to

exercise  its  Right of  Co-Sale  and  participate  on a  pro-rata  basis in the

Proposed Key Holder  Transfer on the same terms and conditions  specified in the

Proposed  Transfer  Notice.  Each  Investor who desires to exercise its Right of

Co-Sale must give the selling Key Holder  written  notice to that effect  within

five (5) days after the deadline for delivery of the Investor  Notice  described

above,  and upon  giving  such  notice  such  Investor  shall be  deemed to have

effectively exercised the Right of Co-Sale.

 

                        (2) Each Investor who timely  exercises  his, her or its

Right of Co-Sale by delivering the written notice  provided for above in Section

2(b)(1) may include in the Proposed Key Holder  Transfer all or any part of his,

her or its Capital Stock equal to the product  obtained by  multiplying  (i) the

aggregate  number of shares of Key  Holder  Stock  subject to the  Proposed  Key

Holder  Transfer  (excluding  shares  purchased by the Company or the  Investors

pursuant to the Right of First Refusal or the Secondary Refusal Right) by (ii) a

fraction,  the numerator of which is the number of shares of Capital Stock owned

by such  Investor  immediately  before  consummation  of the Proposed Key Holder

Transfer  (including any shares purchased by such time pursuant to the Secondary

Refusal  Right) and the  denominator  of which is the total  number of shares of

Capital Stock owned, in the aggregate, by all Investors immediately prior to the

consummation of the Proposed Key Holder Transfer (including any shares purchased

by such time pursuant to the Secondary  Refusal Right) plus the number of shares

of Capital  Stock held by the selling  Key Holder.  To the extent one or more of

the Investors  exercise such right of participation in accordance with the terms

and conditions set

 

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forth herein,  the number of shares of Capital Stock that the selling Key Holder

may sell in the Proposed Key Holder Transfer shall be correspondingly reduced.

 

                        (3) Each Investor shall effect its  participation in the

Proposed Key Holder Transfer by delivering to the  transferring  Key Holder,  no

later than  fifteen  (15) days after such  Investor's  exercise  of the Right of

Co-Sale,  one or more stock certificates,  properly endorsed for transfer to the

Prospective Transferee, representing:

 

                              (i) the number of shares of Common Stock that such

      Investor elects to include in the Proposed Key Holder Transfer; or

 

                              (ii) the number of shares of Preferred  Stock that

      is at such time convertible into the number of shares of Common Stock that

      such  Investor  elects to include  in the  Proposed  Key Holder  Transfer;

      provided,  however,  that if the  Prospective  Transferee  objects  to the

      delivery of  convertible  Preferred  Stock in lieu of Common  Stock,  such

      Investor  shall first  convert the  Preferred  Stock into Common Stock and

      deliver  Common Stock as provided  above.  The Company  agrees to make any

      such conversion concurrent with and contingent upon the actual transfer of

      such shares to the Prospective Transferee.

 

                        (4) The terms and  conditions  of any sale  pursuant  to

this Section 2(b) will be memorialized  in, and governed by, a written  purchase

and sale agreement with customary terms and provisions for such a transaction.

 

                        (5) Each stock  certificate an Investor  delivers to the

selling Key Holder pursuant to subparagraph (3) above will be transferred to the

Prospective  Transferee  against payment therefor in consummation of the sale of

the  Transfer  Stock  pursuant  to the terms  and  conditions  specified  in the

Proposed  Transfer Notice and the purchase and sale  agreement,  and the selling

Key Holder shall  concurrently