TAX SHARING AGREEMENT

 

TAX SHARING AGREEMENT

 

THIS TAX SHARING AGREEMENT (the “ Agreement ”) is dated as of June 1, 2006, by and between Agilent Technologies, Inc., a Delaware corporation (“ Agilent ”), and Verigy Ltd., a company organized under the laws of Singapore (together with its successors and assigns, “ Verigy ”) (each, a “ Party ” and, collectively, the “ Parties ”).

 

W I T N E S S E T H:

 

WHEREAS , Agilent has determined that it would be appropriate, desirable and in the best interests of Agilent and Agilent’s stockholders to separate the Business from Agilent (the “ Separation ”);

 

WHEREAS , Agilent and its Subsidiaries will convey to Verigy and its Subsidiaries substantially all of the business and assets of the Business owned by Agilent in accordance with the Master Separation and Distribution Agreement, dated as of May 31, 2006, between the Parties (the “ Master Separation Agreement ”), and Verigy will assume certain of the liabilities related to the Business in accordance with the General Assignment and Assumption Agreement, dated as of June 1, 2006, between the Parties (the “ General Assignment and Assumption Agreement ”);

 

WHEREAS , Verigy intends to offer and sell for its own account a limited number of Verigy Ordinary Shares pursuant to an initial public offering of such shares (the “ IPO ”);

 

WHEREAS , Agilent intends, after the IPO, to distribute to holders of shares of Agilent Common Stock the outstanding Verigy Ordinary Shares then owned by Agilent (the “ Distribution ”);

 

WHEREAS , Agilent and Verigy intend that the Distribution qualify as a transaction described in Section 355 of the Code;

 

WHEREAS , Agilent and Verigy wish to provide for and agree upon the allocation between the Agilent Tax Group and the Verigy Tax Group of all responsibilities, liabilities and benefits relating to or affecting Taxes paid or payable by either of them for all taxable periods; and

 

WHEREAS , the Parties intend in this Agreement and the Transaction Documents to set forth the principal arrangements between them regarding the Transfer, the IPO and the Distribution;

 

NOW, THEREFORE , in consideration of the foregoing and the mutual covenants and agreements set forth below, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Parties hereby agree as follows:

 

ARTICLE I

DEFINITIONS AND RULES OF CONSTRUCTION

 

1.1            Definitions .

 

(a)           As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined).

 

“ Actually Realized ” means, for purposes of determining the timing of any Taxes (or related Tax Benefit or Tax Detriment) relating to any payment, transaction, occurrence or event, the time at which the amount of Taxes (including estimated Taxes) payable by any person is increased above or reduced below, as the case may be, the amount of Taxes that such person would be required to pay but for the payment, transaction, occurrence or event.

 

“ Agilent ” has the meaning set forth in the Recitals to this Agreement.

 

“ Agilent Common Stock ” means the common stock of Agilent.

 

“ Agilent Tax Group ” means (i) Agilent, (ii) any corporation or other legal entity which Agilent directly or indirectly owns immediately following the Separation Date other than a Verigy Tax Group

 

 

Member, and (iii) any other corporation or other legal entity which Agilent directly or indirectly owned at any time on or prior to the Separation Date other than a Verigy Tax Group Member.

 

“ Agilent Tax Representation Letter ” means the letter delivered by Agilent to Baker & McKenzie LLP on the Distribution Date.

 

“ Agilent/Verigy Tax Group ” means any corporation or other legal entity which is an Agilent Tax Group Member or Verigy Tax Group Member but only with respect to Taxable Periods (or portions thereof) ending on or before or including the Separation Date.

 

“ Business ” has the meaning set forth in the Master Separation Agreement.

 

“ Code ” means the Internal Revenue Code of 1986, as amended, or any successor legislation.

 

“ Controlling Company ” has the meaning set forth in Section 4.2 .

 

“ Distribution ” has the meaning set forth in the Recitals to this Agreement.

 

“ Distribution Date ” means the date on which the Distribution occurs (or, if different, the date on which the Distribution is deemed to occur for U.S. federal Income Tax purposes). For purposes of this Agreement, the Distribution shall be deemed effective as of the end of the day on the Distribution Date.

 

“ Distribution Taxes ” means any Tax liability resulting from or arising in connection with any failure to qualify the Distribution as a tax-free distribution to the Agilent Tax Group under the Code or corresponding provisions of other Tax Laws. For the avoidance of doubt, Distribution Taxes shall include any Tax resulting from or arising in connection with any failure to qualify the Distribution under Section 355 of the Code or the application of Section 355(d) or Section 355(e) of the Code to the Distribution; provided , however , that Distribution Taxes shall not include any Tax that results from or arises in connection with any act, failure to act or omission by Agilent that occurs prior to the Distribution Date, unless Verigy would otherwise be liable for Distribution Taxes pursuant to Section 2.2(c)(ii) of this Agreement.

 

“ Entity ” means a partnership (whether general or limited), a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or any other entity, without regard to whether it is treated as a disregarded entity for U.S. federal Tax purposes

 

“ Foreign Income Tax ” means any Income Tax other than a U.S. federal, state or local Income Tax.

 

“ Foreign Income Tax Return ” means any Income Tax Return which is not a U.S. federal, state or local Income Tax Return.

 

“ Group Member ” means any Agilent Tax Group Member or Verigy Tax Group Member, as the case may be.

 

“ Income Tax ” means (a) any Tax based upon, measured by, or calculated with respect to (i) net income or profits (including, but not limited to, any capital gains, minimum Tax and any Tax on items of Tax preference, but not including sales, use, real or personal property, gross or net receipts, transfer or similar Taxes) or (ii) multiple bases (including, but not limited to, corporate franchise, doing business or occupation Taxes) if one or more of the bases upon which such Tax may be based, measured by, or calculated with respect to, is described in clause (i) above, or (b) any U.S. state or local franchise Tax or similar foreign Tax; including in the case of each of (a) and (b) any related interest and any penalties, additions to such Tax or additional amounts imposed with respect thereto by any Tax Authority.

 

“ Income Tax Return ” means any Tax Return that relates to Income Taxes.

 

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“ Indemnification Expenses ” has the meaning set forth in Section 4.3 .

 

“ Indemnified Party ” means (i) Agilent, in cases where Verigy is obligated to indemnify Agilent for Losses under this Agreement, and (ii) Verigy, in cases where Agilent is obligated to indemnify Verigy for Losses under this Agreement.

 

“ Indemnifying Party ” means (i) Agilent, in cases where it is obligated to indemnify Verigy for Losses under this Agreement, and (ii) Verigy, in cases where it is obligated to indemnify Agilent for Losses under this Agreement.

 

“ Independent Firm ” means a nationally recognized law or accounting firm; provided , however , that such term shall not include any law or accounting firm that performs or has performed legal or audit services with respect to Agilent or Verigy.

 

“ IRS ” means the Internal Revenue Service.

 

“ Loss ” means any loss, cost, fine, penalty, fee, damage, obligation, liability, payment in settlement, Tax or other expense of any kind, including reasonable attorneys’ fees and costs, but excluding any consequential, special, punitive or exemplary damages.

 

“ Non-Income Tax ” means any Tax other than an Income Tax.

 

“ Person ” means any individual, partnership, joint venture, corporation, limited liability entity, trust, unincorporated organization or other entity (including a governmental entity).

 

“ Post-Separation Date Taxable Period ” means a Taxable Period beginning after the Separation Date.

 

“ Pre-Separation Date Taxable Period ” means a Taxable Period ending on or before the Separation Date.

 

“ Reimbursement Statement ” has the meaning set forth in Section 4.3 .

 

“ Representative ” means, with respect to any Person, any of such Person’s directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives.

 

“ Separation ” has the meaning set forth in the Recitals to this Agreement.

 

“ Separation Date ” has the meaning set forth in the General Assignment and Assumption Agreement.

 

“ Shareholder Costs ” means any and all Losses relating to or arising from claims or lawsuits by stockholders of Agilent resulting from the failure of the Distribution to qualify under Section 355 of the Code or corresponding provisions of other Tax Laws.

 

“ Straddle Period ” means a Taxable Period that includes but does not end on the Separation Date.

 

“ Tax ” and “ Taxes ” means all forms of taxation, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a federal, state, municipal, governmental, territorial, local, foreign or other body, and without limiting the generality of the foregoing, shall include net income, gross income, gross receipts, sales, use, value added, ad valorem, transfer, recording, franchise, profits, license, lease, service, service use, payroll, wage, withholding, employment, unemployment insurance, workers compensation, social security, excise, severance, stamp, business license, business organization, occupation, premium, property, environmental, windfall profits, customs, duties, alternative minimum, estimated or other taxes, fees, premiums, assessments or charges of any kind whatever imposed or collected by any governmental entity or political subdivision thereof, together with any related interest and any penalties, additions to such tax or additional amounts imposed with respect thereto by any Tax Authority.

 

“ Tax Advisor ” means Baker & McKenzie LLP.

 

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“ Tax Asset ” means any Tax item that has accrued for Tax purposes, but has not been used during a Taxable Period, and that could reduce a Tax in another Taxable Period, including a net operating loss, net capital loss, investment tax credit, foreign tax credit, research and experimentation credit, charitable deduction or credit related to alternative minimum tax or any other Tax credit.

 

“ Tax Authority ” means, with respect to any Tax, any governmental entity, quasi-governmental body or political subdivision thereof that imposes such Tax and the agency (if any) charged with the determination or collection of such Tax for such entity, body or subdivision.

 

“ Tax Benefit ” means any refund, credit or other reduction in otherwise required Tax payments (including any reduction in estimated Tax payments).

 

“ Tax Contest ” means an audit, review, examination or any other administrative or judicial proceeding with the purpose or effect of redetermining Taxes of any member of any Group (including any administrative or judicial review of any claim for refund) for any Tax Period.

 

“ Tax Detriment ” means an increase in the Tax liability of any Group Member for any Taxable Period or a decrease in a Tax Asset of any Group Member. Except as otherwise provided in this Agreement, a Tax Detriment shall be deemed to have been realized from a Tax item in a Taxable Period only if and to the extent that the Tax liability of the Group Member for such Tax Period, after taking into account the effect of the Tax item on the Tax liability of such Group Member in the current Tax Period and all prior Tax Periods, is more than it would have been if such Tax liability were determined without regard to such Tax item.

 

“ Tax Group ” means the Agilent Tax Group or the Verigy Tax Group, as the case may be.

 

“ Tax Indemnification Period ” means any Pre-Separation Date Taxable Period and that portion of any Straddle Period that ends on the Separation Date.

 

“ Tax Law ” means the law of any governmental entity or political subdivision thereof relating to any Tax, including the Code.

 

“ Taxable Period ” means, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law.

 

“ Tax Return ” means any return, filing, questionnaire, information return, election or other document required or permitted to be filed, including requests for extensions of time, filings made with respect to estimated tax payments, claims for refund and amended returns that may be filed, for any period with any Tax Authority (whether domestic or foreign) in connection with any Tax (whether or not a payment is required to be made with respect to such filing).

 

“ Transaction Documents ” has the meaning set forth in the Master Separation Agreement.

 

“ Transfer Taxes ” has the meaning set forth in Section 2.2(b)(iii) .

 

“ Verigy Ordinary Shares ” means the ordinary shares of Verigy.

 

“ Verigy Tax Group ” means (i) Verigy and (ii) any corporation or other legal entity which Verigy directly or indirectly owned or owns prior to, on or following the Separation Date.

 

“ Verigy Tax Representation Letter ” means the letter delivered by Verigy to Baker & McKenzie LLP on the Distribution Date.

 

1.2            Rules of Construction .

 

(a)           This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the Party drafting or causing any instrument to be drafted.

 

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(b)           The words “hereof, “herein” and “hereunder” and words of similar import when used in this Agreement will refer to this Agreement as a whole (including any annexes, exhibits and schedules to this Agreement) and not to any particular provision of this Agreement, and section and subsection references are to this Agreement unless otherwise specified. The words “include,” “including,” or “includes” when used herein shall be deemed in each case to be followed by the words “without limitation” or words having similar import. The headings and table of contents in this Agreement are included for convenience of reference only and will not limit or otherwise affect the meaning or interpretation of this Agreement. The meanings given to terms defined herein will be equally applicable to both the singular and plural forms of such terms.

 

(c)           References to a “ Schedule ” are, unless otherwise specified, to a Schedule attached to this Agreement; references to “ Section ” or “ Article ” are, unless otherwise specified, to one of the Sections or Articles of this Agreement; references to “sub-section” are, unless the context otherwise requires, references to the section in which the reference appears; and references to this Agreement include the Schedules.

 

ARTICLE II

FILING OF TAX RETURNS; PAYMENT OF TAXES; REFUNDS

 

2.1           Preparation of Tax Returns.

 

(a)            Income Tax Returns .

 

(i)            Agilent shall prepare and file or cause to be prepared and filed all U.S. federal Income Tax Returns, U.S. state Income Tax Returns, and Foreign Income Tax Returns (including amendments thereto) which are required to be filed in respect of the Agilent Tax Group for any Taxable Period.

 

(ii)           Verigy shall prepare and file or cause to be prepared and filed all U.S. federal Income Tax Returns, U.S. state Income Tax Returns, and Foreign Income Tax Returns (including amendments thereto) which are required to be filed in respect of a Verigy Tax Group Member for any Taxable Period.

 

(iii)          For the avoidance of doubt, Verigy shall prepare all IRS Forms 5471 (and any similar state and local forms) for the Verigy Tax Group that are required to be filed with the Income Tax Returns of the Agilent Tax Group. Verigy shall provide Agilent with a true, correct and complete IRS Form 5471 with respect to each Verigy Tax Group Member (and such additional information regarding such form as may reasonably be requested by Agilent) at least sixty (60) calendar days prior to the due date for the Income Tax Returns of the Agilent Tax Group (including extensions).

 

(b)            Non-Income Tax Returns .

 

(i)            Agilent shall prepare and file or cause to be prepared and filed all Non-Income Tax Returns which are required to be filed in respect of (A) a member of the Agilent/Verigy Tax Group for any Pre-Separation Date Taxable Period or Straddle Period or (B) an Agilent Tax Group Member for any Post-Separation Date Taxable Period. Verigy hereby irrevocably designates, and agrees to cause each Verigy Tax Group Member to designate, Agilent as its agent to take any and all actions necessary or incidental to the preparation and filing of such Non-Income Tax Returns.

 

(ii)           Verigy shall prepare and file or cause to be prepared and filed all Non-Income Tax Returns with respect to the Verigy Tax Group which are required to be filed in respect of a Verigy Tax Group Member for any Post-Separation Date Taxable Period.

 

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(c)            Manner of Preparation .  Unless Agilent and Verigy otherwise agree in writing:

 

(i)            In the absence of a controlling change in law or circumstances, all Tax Returns filed after the date of this Agreement for any Pre-Separation Date Taxable Period or Straddle Period shall be prepared on a basis consistent with the elections, accounting methods, conventions and principles of taxation used for the most recent Taxable Periods for which Tax Returns involving similar matters have been filed.

 

(ii)           In the absence of a controlling change in law or circumstances, Verigy will not, and will not permit any Verigy Tax Group Member to, change any accounting method, change its taxable year, amend any Tax Return or take any position on a Tax Return, take any other action, or enter into any transaction that may reasonably be expected to result in any increased Tax liability or reduction of any Tax Asset of any Agilent Tax Group Member.

 

(iii)          Agilent will make the allocations to the Verigy Tax Group required under Section 41(f)(3) of the Code. Verigy agrees that the Verigy Tax Group will not deviate from the amount of any qualified research expenditures allocated to it by Agilent.

 

(iv)          Whenever permitted to do so by applicable law, Verigy shall elect to relinquish any carryback period which would relate to any Pre-Separation Date Taxable Period.

 

(v)           Agilent and Verigy agree to treat stock-based compensation as follows:

 

(1)                                   the Agilent Tax Group shall prepare and file Tax Returns claiming (i) any deduction with respect to the exercise of a vested option to purchase Agilent Common Stock that is exercised by an employee of the Verigy Tax Group after the Separation Date and (ii) any other similar compensated-related Tax deductions. Agilent shall pay the related Tax liability under the Federal Insurance Contributions Act, the Federal Unemployment Tax Act or any state, local or foreign employment Tax law;

 

(2)                                   the Verigy Tax Group shall prepare and file Tax Returns claiming (i) any deduction with respect to the exercise of a vested option to purchase Verigy Ordinary Shares that is exercised by an employee of the Verigy Tax Group after the Separation Date (including any option that is issued by Verigy on the Distribution Date to replace an unvested option to acquire Agilent Common Stock), and (ii) any other similar compensation-related Tax deductions. Verigy shall pay the related Tax liability under the Federal Insurance Contributions Act, the Federal Unemployment Tax Act or any state, local or foreign employment Tax law.

 

(d)            Responsibility for Filing.   Notwithstanding any other provision of this Agreement to the contrary, Agilent and Verigy have agreed that the other Party will prepare and file the Tax Returns listed in Schedule 2.1(d) . Agilent and Verigy may agree in writing from time to time to additions to or deletions from Schedule 2.1(d) .

 

2.2            Liability for and Payment of Taxes.

 

(a)            Income Taxes.   Except as otherwise provided in this Agreement:

 

(i)            Agilent shall be liable for and shall pay or cause to be paid on a timely basis, and pursuant to Article III shall indemnify, defend and hold harmless Verigy from and against, all Taxes due with respect to the U.S. federal Income Tax, U.S. state and local Income Tax, and Foreign Income Tax liability for all Agilent Tax Group Members for any Taxable Period; provided , however , that Agilent shall not be liable for or pay, and shall not indemnify or hold harmless Verigy from and against any Distribution Taxes described in Section 2.2(c)(ii) of this Agreement.

 

(ii)           Verigy shall be liable for and shall pay or cause to be paid on a timely basis, and pursuant to Article III shall indemnify, defend and hold harmless Agilent from and against, all

 

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Taxes due with respect to the U.S. federal Income Tax, U.S. state and local Income Tax, and Foreign Income Tax liability for any Verigy Tax Group Member for any Taxable Period.

 

(b)            Non-Income Taxes.   Except as otherwise provided in this Agreement:

 

(i)            Agilent shall be liable for and shall pay or cause to be paid on a timely basis, and pursuant to Article III shall indemnify, defend and hold harmless Verigy from and against, (A) all Non-Income Taxes due with respect to any members of the Agilent/Verigy Tax Group for any Pre-Separation Date Taxable Period or Straddle Period and (B) all Non-Income Taxes due with respect to any Agilent Tax Group Member for any Post-Separation Date Taxable Period; provided , however , that Agilent shall not be liable for or pay, and shall not indemnify or hold harmless Verigy from and against any Transfer Taxes; provided , further , that Verigy, on behalf of the Verigy Tax Group, hereby assumes and agrees to pay directly to or at the direction of Agilent, at least five (5) calendar days prior to the date of payment (including estimated payment) thereof is due, the Non-Income Taxes for any Post-Separation Date Taxable Period (determined pursuant to Section 2.4 ) which relates to a Verigy Tax Group Member or its business, assets or activities.

 

(ii)           Verigy shall be liable for and shall pay or cause to be paid on a timely basis, and pursuant to Article III shall indemnify, defend and hold harmless Agilent from and against, (A) all Taxes due with respect to the Non-Income Tax liability for any Verigy Tax Group Member for any Post-Separation Date Taxable Period and (B) all Transfer Taxes.

 

(iii)          Verigy shall be liable for and shall pay on a timely basis, and pursuant to Article III shall indemnify, defend and hold harmless Agilent from and against, all transfer, documentary, sales, use, registration and such other Taxes (excluding any Taxes based on or attributable to income or gains) and related fees (including any penalties, interest, and addition to Tax) arising out of or incurred in connection with the Separation (“ Transfer Taxes ”).

 

(c)            Distribution Taxes.   Notwithstanding any other provision of this Agreement to the contrary:

 

(i)            Agilent shall be responsible for one hundred percent (100%) of any Distribution Taxes or Shareholder Costs that are not the responsibility of Verigy pursuant to Section 2.2(c)(ii).

 

(ii)           Verigy shall be responsible for one hundred percent (100%) of any Distribution Taxes or Shareholder Costs that result from one or more of the following:

 

(1)                                   any breach of its covenants under Section 5.2(b) hereof;

 

(2)                                   any act, failure to act or omission of or by any Verigy Tax Group Member after the Distribution Date, including a cessation, transfer to Affiliates or disposition of the Business, or an issuance of stock, stock buyback or payment of a