Exhibit 10.2

 

TAX SHARING AND INDEMNIFICATION AGREEMENT

 

This Tax Sharing and Indemnification Agreement (this “Agreement”) is entered into as of the Distribution Date by and between Pharmacopeia, Inc., a Delaware corporation (“Pharmacopeia”), on behalf of itself and each Pharmacopeia Affiliate, and Pharmacopeia Drug Discovery, Inc., a Delaware corporation (“PDD”), and their respective successors.

 

RECITALS

 

WHEREAS, Pharmacopeia is the common parent of an affiliated group of corporations within the meaning of Section 1504(a) of the Code, which currently files consolidated income Tax Returns;

 

WHEREAS, PDD is a first-tier subsidiary of Pharmacopeia;

 

WHEREAS, PDD conducts the drug discovery business which integrates proprietary small molecule combinatorial and medicinal chemistry, high-throughput screening, in-vitro pharmacology, computational methods and informatics to discover and optimize lead compounds, as more fully described in its Form 10 filed with the Securities and Exchange Commission on December 22, 2003, and the amendment thereto filed on February 17, 2004 (the “Drug Discovery Business”);

 

WHEREAS, Pharmacopeia holds certain assets used in the Drug Discovery Business;

 

WHEREAS, Pharmacopeia has agreed to transfer and assign, or cause to be transferred and assigned, to PDD substantially all the remaining assets and properties of the Drug Discovery Business not already held by PDD (the “Contribution”);

 

WHEREAS, Pharmacopeia, its subsidiary Accelrys, Inc., and other Pharmacopeia Affiliates are engaged in the development and commercialization of molecular modeling and simulation software for the life sciences and materials research markets, cheminformatics and decision support systems, and bioinformatics tools including gene sequence analysis (the “Software Business”);

 

WHEREAS, the Board of Directors of Pharmacopeia has determined that it would be advisable and in the best interests of Pharmacopeia and its shareholders for Pharmacopeia to distribute on a pro-rata basis to the holders of record of Pharmacopeia common stock, par value $0.0001 per share (the “Pharmacopeia Common Stock”), without any consideration being paid by such holders, all of the outstanding shares of PDD common stock, par value $0.01 per share (the “PDD Common Stock”) owned directly by Pharmacopeia (the “Distribution”);

 

WHEREAS, Pharmacopeia and PDD intend that the Contribution and the Distribution qualify as free of Federal Tax to Pharmacopeia and its stockholders under Sections 355 and 368(a)(1)(D) of the Code;

 

 

WHEREAS, the parties hereto are entering into this agreement: to ensure the tax-free status of the Contribution and Distribution; to provide certain indemnities; and to provide for various administrative matters relating to Taxes, including (1) the preparation and filing of Tax Returns along with the payment of Taxes shown as due and payable thereon, (2) the retention and maintenance of relevant records necessary to prepare and file appropriate Tax Returns, as well as the provision for appropriate access to those records by the parties to this Agreement, (3) the conduct of audits, examinations, and proceedings by appropriate governmental entities which could result in a redetermination of Taxes, and (4) the cooperation of all parties with one another in order to fulfil their duties and responsibilities under this Agreement and under the Code and other applicable law; and

 

WHEREAS, the parties desire to set forth their respective responsibilities for Taxes, including any Taxes that could be incurred in connection with the Distribution.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth below, the parties agree as follows:

 

ARTICLE I
DEFINITIONS

 

Unless otherwise defined in this Agreement, capitalized terms shall have the meanings ascribed thereto in the Distribution Agreement.  As used in this Agreement, the following terms shall have the following meanings:

 

1.1.                               “ Adjustment ” means any proposed or final change in the taxable income or Tax Liability of a taxpayer.

 

1.2.                               “ Affiliate ” means, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such Person.

 

1.3.                               “ Associates ” has the meaning ascribed to such term in the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

1.4.                               “ Code ” means the Internal Revenue Code of 1986, as amended.

 

1.5.                               “ Combined State Tax ” means, with respect to each United States state or local taxing jurisdiction, any income, franchise or similar tax payable to such state or local taxing jurisdiction in which any PDD Affiliate files Returns with a Pharmacopeia Affiliate, on a consolidated, combined or unitary basis for purposes of such Tax.

 

1.6.                               “ Combined State Tax Return ” means any Return with respect to any Combined State Taxes that includes any Pre-Distribution Tax Period.

 

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1.7.                               “ Distribution ” has the meaning set forth in the recitals.

 

1.8.                               “ Distribution Agreement ” means the Master Separation and Distribution Agreement between Pharmacopeia, Accelrys Inc. and PDD dated April 30, 2004.

 

1.9.                               “ Distribution Date ” has the meaning set forth in the Distribution Agreement.

 

1.10.                         “ Federal Tax ” means any Tax imposed under the Code, including any interest, penalty or other additions to Tax imposed under Subtitle F of the Code.

 

1.11.                         “ Federal Tax Return ” means any Return with respect to any Federal Taxes that includes any Pre-Distribution Tax Period.

 

1.12.                         “ Final Determination ” means the final resolution of any Tax matter.  A final Determination shall result from the first to occur of:

 

(a)                                   the expiration of 30 days after the IRS’s acceptance of a Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment on Form 870 or 870-AD (or any successor comparable form) (the “ Waiver ”), except as to reserved matters specified therein, or the expiration of 30 days after acceptance by any other Taxing Authority of a comparable agreement or form under the laws of any other jurisdiction, including state, local, and foreign jurisdictions; unless, within such period, the taxpayer gives notice to the other party to this Agreement of the taxpayer’s intention to attempt to recover all or part of any amount paid pursuant to the Waiver by the filing of a timely claim for refund;

 

(b)                                  a decision, judgment, decree, or other order by a court of competent jurisdiction that is not subject to further judicial review (by appeal or otherwise) and has become final;

 

(c)                                   the execution of a closing agreement under Code section 7121, or the acceptance by the IRS of an offer in compromise under Code section 7122, or comparable agreements under the laws of any other jurisdiction, including state, local, and foreign jurisdictions; except as to reserved matters specified therein;

 

(d)                                  the expiration of the time for filing a claim for refund or for instituting suit in respect of a claim for refund that was disallowed in whole or part by the IRS or any other Taxing Authority;

 

(e)                                   the expiration of the applicable statute of limitations; or

 

(f)                                     an agreement by the parties hereto that a Final Determination has been made.

 

1.13.                         “ Indemnified Liability ” is defined at Section 7.2.

 

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1.14.                         “ Indemnified Parties ” is defined at Section 7.2.

 

1.15.                         “ Indemnifying Parties ” is defined at Section 7.2.

 

1.16.                         “ IRS ” means the U.S. Internal Revenue Service.

 

1.17.                         “ IRS Interest Rate ” means the rate of interest imposed from time to time on underpayments of income tax pursuant to Code section 6621(a)(2).

 

1.18.                         “ Opinion Documents ” means (i) the Spin-Off Opinion, (ii) the representation letters issued by Pharmacopeia and PDD to Dechert LLP in connection with the Spin-Off Opinion and (iii) all other documents provided by Pharmacopeia and PDD to Dechert LLP and on which Dechert LLP relied in issuing the Spin-Off Opinion

 

1.19.                         “ PDD Affiliate ” means PDD and any Affiliate of PDD after the Distribution Date.

 

1.20.                         “ PDD Change in Control Tax ” means any Tax imposed by reason of section 355(e) of the Code or any comparable provision of state or local law as a result of one or more persons acquiring, directly or indirectly, stock representing a 50% or greater interest in PDD.

 

1.21.                         “ PDD Separate Return ” means any state or local Tax Return of PDD, other than any Combined State Tax Return, that includes any Pre-Distribution Tax Period.

 

1.22.                         “ Pharmacopeia Affiliate ” means Pharmacopeia and any Affiliate of Pharmacopeia (other than PDD) before, on or after the Distribution Date, as applicable.

 

1.23.                         “ Pharmacopeia Consolidated Group ” means the group of companies filing a consolidated Federal Tax Return or Combined State Tax Return, as the case may be, that includes Pharmacopeia.

 

1.24.                         “ Pharmacopeia Consolidated Return ” means any consolidated Federal Tax Return or Combined State Tax Return of the Pharmacopeia Consolidated Group that includes any Pre-Distribution Tax Period.

 

1.25.                         “ Person ” means any natural person, corporation, business trust, joint venture, association, company, partnership, or government, or any agency or political subdivision thereof.

 

1.26.                         “ Post-Distribution Tax Period” means (i) any tax period ending after the Distribution Date, and (ii) with respect to a tax period that begins on or before the Distribution Date and ends after the Distribution Date, such portion of the tax period that begins on the day after the Distribution Date.

 

1.27.                         “ Pre-Distribution Tax Period ” means (i) any tax period beginning and ending before or on the Distribution Date, and (ii) with respect to a tax period that begins on or before and ends after the Distribution Date, such portion of the tax period that begins before the Distribution Date and ends at the close of the Distribution Date.

 

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1.28.                         “ Proceeding ” is defined at section 8.2(a).

 

1.29.                         “ Return ” means any return, declaration, report, claim for refund, or information or return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

 

1.30.                         “ Separation Tax ” means any Tax (other than any PDD Change in Control Tax) imposed on any Pharmacopeia Affiliate or PDD Affiliate in connection with the Contribution and Distribution that would not have occurred had the Contribution and Distribution not occurred.

 

1.31.                         “ Spin-Off Opinion ” means the opinion received from Dechert LLP to the effect that the Distribution will qualify as free of Federal Tax to Pharmacopeia and its stockholders under sections 355 and 368(a)(1)(D) of the Code.

 

1.32.                         “ Spin-Off Period ” means the period commencing on the Distribution Date and ending on the seventh anniversary of the close of the taxable year of Pharmacopeia in which the Distribution occurs.

 

1.33.                         “ Subsidiary ” means with respect to Pharmacopeia or PDD, any Person of which Pharmacopeia or PDD, respectively, controls or owns, directly or indirectly, more than 50% of the stock or other equity interest entitled to vote on the election of members to the board of directors or similar governing body.

 

1.34.                         “ Tax Asset ” means any Tax Item that may have the effect of producing a Tax Benefit.

 

1.35.                         “ Tax Benefit ” means a reduction in the Tax Liability of a taxpayer (whether a Pharmacopeia Affiliate or a PDD Affiliate) for any taxable period.  Except as otherwise provided in this Agreement, a Tax Benefit shall be deemed to have been realized or received from a Tax Item in a taxable period only if and to the extent that the Tax Liability of the taxpayer for such period, after taking into account the effect of the Tax Item on the Tax Liability of such taxpayer in all prior periods, is less than it would have been if such Tax Liability were determined without regard to such Tax Item.

 

1.36.                         “ Taxes ” means all federal, state, local and foreign gross or net income, gross receipts, withholding, payroll, franchise, transfer, sales, use, value added, estimated or other taxes of any kind whatsoever or similar charges and assessments, including all interest, penalties and additions imposed with respect to such amounts which any Pharmacopeia Affiliate or any PDD Affiliate is required to pay, collect or withhold, together with any interest and any penalties, additions or additional amounts imposed with respect thereto, and “ Tax ” means any of the Taxes.

 

1.37.                         “ Taxing Authority ” means the IRS or any other governmental authority or any subdivision, agency, commission or authority thereof or any quasi-governmental or private body

 

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having jurisdiction pursuant to applicable law over the assessment, determination, collection or imposition of any Tax.

 

1.38.                         “ Tax Item ” means any item of income, gain, loss, deduction, credit, recapture of credit, or any other item (including basis) which may have the effect of increasing or decreasing Taxes paid or payable.

 

1.39.                         “ Tax Liability ” means the net amount of Taxes due and paid or payable for any taxable period, determined after applying all tax credits and all applicable carrybacks or carryovers for net operating losses, net capital losses, unused general business tax credits, or any other Tax Items arising from a prior or subsequent taxable period, and all other relevant adjustments.

 

1.40.                         “ Tax Returns ” means all reports, estimates, declarations of estimated tax, information statements and returns relating to, or required to be filed in connection with any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties.

 

1.41.                         “ Unqualified Tax Opinion ” means an unqualified “will” opinion of tax counsel to the effect that a transaction does not disqualify the Distribution from qualifying for tax-free treatment for Pharmacopeia or its shareholders under Code section 355 (including Code section 355(e))and any other applicable sections of the Code, assuming that the Distribution would have qualified for tax treatment if such transaction did not occur, which opinion is in form and substance reasonably satisfactory to Pharmacopeia.  An Unqualified Tax Opinion may rely upon, and may assume the accuracy of, any representations given in any Opinion Document, and any customary representations contained in an officer’s certificate delivered by an officer of Pharmacopeia or PDD to such counsel.

 

ARTICLE II
PREPARATION AND FILING OF TAX RETURNS.

 

2.1.                               Designation of Agent .  With regard to each Pharmacopeia Consolidated Return, each PDD Affiliate hereby irrevocably authorizes and designates Pharmacopeia as its agent, coordinator, and administrator, for the purpose of taking any and all actions (including the execution of waivers of applicable statutes of limitation) necessary or incidental to the filing of any such Tax Return or other Tax proceedings, and for the purpose of making payments to, or collecting refunds from, any Taxing Authority, provided that PDD may continue to participate in any such Tax proceedings as provided herein.

 

2.2.                               Pharmacopeia Consolidated Returns .  Pharmacopeia will prepare all Pharmacopeia Consolidated Returns.  Pharmacopeia shall have the exclusive right to (a) file, prosecute, compromise, or settle any claim for refund, and (b) determine whether any refunds to which the Pharmacopeia Consolidated Group may be entitled shall be received by way of refund or credit against the Tax liability of the Pharmacopeia Consolidated Group.

 

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2.3.                               Taxable Period Ends on Distribution Date .  Unless prohibited by applicable law, any taxable period of PDD that is included in a Pharmacopeia Consolidated Return that includes the Distribution Date shall end on the Distribution Date.

 

2.4.                               Allocation .  Unless Pharmacopeia and PDD agree otherwise, the taxable year of PDD shall be treated for all Tax purposes as ending on the Distribution Date, and no alternative method of allocating Tax Items of PDD to the period including the Distribution shall be used.

 

2.5.                               PDD Separate Returns .  PDD shall be solely responsible for the preparation and filing of all PDD Separate Returns.  PDD shall be responsible for paying to the applicable Tax Authorities all Taxes shown as due from any PDD Affiliate on the PDD Separate Returns.

 

2.6.                               Post-Distribution Conduct of PDD .  On or after the Distribution Date, PDD will not, nor will it permit any PDD Affiliate to, make or change any accounting method, change its taxable year, amend any Return or take any Tax position on any Return, take any other action, omit to take any action, or enter into any transaction that may reasonably be expected to result in or does result in any increased Tax liability or reduction of any Tax Asset of the Pharmacopeia Consolidated Group or any Pharmacopeia Affiliate.

 

ARTICLE III
TAX SHARING

 

3.1.                               Taxes Generally .  Except as provided in Section 3.2 and Section 3.3 of this Agreement, Pharmacopeia shall pay or cause to be paid and shall indemnify and hold each PDD Affiliate harmless against all Tax Liabilities that arise under each Pharmacopeia Consolidated Return.  PDD shall pay or cause to be paid and shall indemnify and hold each Pharmacopeia Affiliate harmless against all Tax Liabilities that arise under each PDD Separate Return.

 

3.2.                               Adjustments .  If any Tax Return is examined by a Taxing Authority and an Adjustment results from such examination, liability for Taxes arising from such Adjustment shall be borne by the responsible party as determined under Section 3.1, provided, however, that if the Adjustment which results in additional Tax Liability to one party also results in a Tax Benefit to the other party, the party receiving such Tax Benefit, to the extent it is equal to or less than the other party’s additional Tax Liability, shall pay such Tax Benefit to the other party within 30 days after such Tax Benefit is realized.  Promptly after receiving notice from the party having the Adjustment which results in additional Tax Liability, the other party shall make a claim for any Tax Benefit resulting from such Adjustment, on an amended Tax Return or in a formal or informal claim filed with the IRS, unless the amount of such Tax Benefit is immaterial or unless otherwise agreed by the parties.  If an Adjustment could be governed by both this Section 3.2 and Articles VII or VIII, those Articles will take precedence over this Section 3.2.

 

3.3.                               Separation Taxes .  Notwithstanding anything in this Agreement to the contrary, PDD shall indemnify and hold harmless each Pharmacopeia Affiliate against liability for (i) any PDD Change in Control Tax and (ii) any Separation Tax for which PDD or its Affiliates has an obligation to indemnify Pharmacopeia under any other provision of this Agreement.

 

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Pharmacopeia shall indemnify and hold harmless each PDD Affiliate against liability for all other Separation Taxes.

 

ARTICLE IV
COOPERATION AND EXCHANGE OF INFORMATION; AUDITS AND ADJUSTMENTS

 

4.1.                               Tax Return Information .

 

(a)                                   PDD shall, and shall cause each appropriate PDD Affiliate to, provide Pharmacopeia with all information and other assistance reasonably requested by Pharmacopeia to enable the Pharmacopeia Affiliates to prepare and file Pharmacopeia Consolidated Returns required to be filed by them pursuant to this Agreement.

 

(b)                                  Pharmacopeia shall, and shall cause each appropriate Pharmacopeia Affiliate to, provide PDD with all information and other assistance reasonably requested by PDD to enable the PDD Affiliates to prepare and file PDD Separate Returns required to be filed by them pursuant to this Agreement.

 

4.2.                               Audits and Adjustments .

 

(a)                                   Whenever a Pharmacopeia Affiliate or PDD Affiliate receives in writing from the IRS or any other Taxing Authority notice of an Adjustment that may give rise to a payment from the other party under this Agreement or otherwise affect the other party’s Taxes, Pharmacopeia or PDD, as the case may be, shall give written notice of the Adjustment to the other party in accordance with the terms of Article VIII.  The audit shall be controlled and settled pursuant to the terms of that article.

 

(b)                                  PDD agrees reasonably to cooperate with Pharmacopeia in the negotiation, settlement, or litigation of any liability for Taxes of any Pharmacopeia Affiliate.

 

(c)                                   Pharmacopeia agrees reasonably to cooperate, and to cause each Pharmacopeia Affiliate to cooperate, with PDD in the negotiation, settlement, or litigation of any liability for Taxes of any PDD Affiliate.

 

(d)                                  Pharmacopeia will reasonably promptly notify PDD in writing of any Adjustment involving a change in the tax basis of any asset of any PDD Affiliate, specifying the nature of the change so that such PDD Affiliate will be able to reflect the revised basis of its tax books and records fo