false000078516100007851612022-06-302022-06-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): June 30, 2022
Encompass Health Corporation
(Exact name of Registrant as specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
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| 001-10315 | 63-0860407 |
| (Commission File Number) | (IRS Employer Identification No.) |
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9001 Liberty Parkway, Birmingham, Alabama 35242
(Address of Principal Executive Offices, Including Zip Code)
(205) 967-7116
(Registrant’s Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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| ☐ | Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934. Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | EHC | New York Stock Exchange |
Item 1.01. Entry into a Material Definitive Agreement.
On July 1, 2022, Encompass Health Corporation (the “Company” or “Encompass Health”) completed the previously announced separation of its home health and hospice business through the distribution (the “Distribution”) of all of the outstanding shares of common stock, par value $0.01 per share, of Enhabit, Inc. (“Enhabit”) to the stockholders of record of Encompass as of the close of business on June 24, 2022 (the “Record Date”). The Distribution was effective at 12:01 a.m., Eastern Time, on July 1, 2022. As a result of the Distribution, Enhabit is now an independent public company and its common stock is listed under the symbol “EHAB” on the New York Stock Exchange.
In connection with the Distribution, on June 30, 2022, Encompass Health entered into several agreements with Enhabit that govern the relationship of the parties following the Distribution, including a Separation and Distribution Agreement, a Transition Services Agreement, a Tax Matters Agreement and an Employee Matters Agreement, which are included as Exhibits 2.1, 2.2, 2.3 and 2.4, respectively, to this Current Report on Form 8-K, each of which is incorporated by reference into this Item 1.01. A summary of the material terms of each of these agreements can be found in the section entitled “Certain Relationships and Related Party Transactions” in the Information Statement, dated June 21, 2022 included as Exhibit 99.1 to Encompass Health’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on June 21, 2022, which summaries are incorporated herein by reference.
ITEM 2.01. Completion of Acquisition or Disposition of Assets.
The Distribution was completed in accordance with the Separation and Distribution Agreement and structured as a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass Health common stock held of record as of the Record Date. No fractional shares have been or will be distributed. A cash payment will be made in lieu of any fractional shares. The description of the Distribution included under Item 1.01 and the Separation and Distribution Agreement attached as Exhibit 2.1 to this Current Report on From 8-K are incorporated herein by reference.
Forward-Looking Statements
The information contained in this Current Report on From 8-K includes certain estimates, projections, and other forward-looking statements, including those relating to the actions to be performed under the agreements described above, that involve known and unknown risks and relate to, among other things, future events, including the impact of the transactions governed by those agreements on the Company’s business model, outlook and guidance, financial plans, effective income tax rates, taxes payable, future financial performance, projected business results or model, ability to return value to its shareholders, projected capital expenditures, leverage ratio, acquisition opportunities, and the impact of future legislation or regulation. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “targets,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These estimates, projections, and other forward-looking statements are based on assumptions the Company believes, as of the date hereof, are reasonable. Inevitably, there will be differences between such estimates and actual results, and those differences may be material.
There can be no assurance that any estimates, projections, or forward-looking statements will be realized.
All such estimates, projections, and forward-looking statements speak only as of the date hereof. The Company undertakes no duty to publicly update or revise that information.
You are cautioned not to place undue reliance on the estimates, projections, and other forward-looking statements in this report and supplemental information as they are based on current expectations and general assumptions and are subject to various risks, uncertainties, and other factors, including those set forth in the Annual Report on Form 10‑K for the year ended December 31, 2021, Form 10‑Q for the three months ended March 31, 2022, Enhabit's Form 10 registration statement, and in other documents the Company previously filed with the SEC, many of which are beyond the Company’s control. These factors may cause actual results to differ materially from the views, beliefs, and estimates expressed herein.
ITEM 9.01. Financial Statements and Exhibits.
(b) Pro Forma financial information
Unaudited pro forma financial information of Encompass Health to give effect to the Distribution is included in Exhibit 99.1 filed herewith and incorporated by reference into this Item 9.01.
(d) Exhibits.
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| Exhibit Number | | Description |
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| 104 | | Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
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| ENCOMPASS HEALTH CORPORATION |
| By: | /S/ DOUGLAS E. COLTHARP |
| Name: | Douglas E. Coltharp |
| Title: | Executive Vice President and Chief Financial Officer |
Dated: July 7, 2022
SEPARATION AND DISTRIBUTION AGREEMENT
BY AND BETWEEN
ENCOMPASS HEALTH CORPORATION
AND
ENHABIT, INC.
_________________
Dated as of June 30, 2022
TABLE OF CONTENTS
Page
SCHEDULES
Schedule I Separation Step Plan
Schedule 1.1(a) Enhabit Business
Schedule 1.1(b) Excluded Business
Schedule 1.2(a) Enhabit Customer Contracts
Schedule 1.2(b) Enhabit Vendor Contracts
Schedule 1.2(d) Enhabit Intellectual Property Contracts
Schedule 1.2(m) Enhabit Right to Recovery Contracts
Schedule 1.3 Enhabit Information Technology
Schedule 1.4 Excluded Enhabit Information Technology
Schedule 1.5 Enhabit Marks
Schedule 1.6(a) Enhabit Real Property
Schedule 1.6(b) Enhabit Leases
Schedule 1.7 Enhabit Registered IP
Schedule 1.8 Enhabit Technology
Schedule 2.1(e)(i) Enhabit License to Certain Intellectual Property Rights
Schedule 2.2(a)(xv) Enhabit Tangible Personal Property
Schedule 2.2(a)(xvi) Other Enhabit Assets
Schedule 2.2(a)(xvii) Excluded Assets
Schedule 2.2(b)(xi) Other Encompass Assets
Schedule 2.3(a)(v) Other Enhabit Liabilities
Schedule 2.3(a)(viii) Enhabit Third-Party Claims
Schedule 2.3(a)(ix) Excluded Enhabit Liabilities
Schedule 2.3(b)(iv) Encompass Liabilities
Schedule 2.3(b)(v) Encompass Third-Party Claims
Schedule 2.7(b)(ii) Intercompany Agreements (Non-Termination)
Schedule 2.8 Shared Contracts
Schedule 2.12 Enhabit Financing Arrangements
Schedule 4.3(e) Encompass Information
Schedule 4.5(b) Shared Third-Party Claims
Schedule 5.1(b) Time Periods for Use of Names
Schedule 6.7(f) Litigation Cooperation
Schedule 6.8(b) Privileged Matters
Schedule 10.9 Expense Allocation
EXHIBITS
Exhibit A Amended and Restated Certificate of Incorporation of Enhabit
Exhibit B Amended and Restated Bylaws of Enhabit
SEPARATION AND DISTRIBUTION AGREEMENT
This SEPARATION AND DISTRIBUTION AGREEMENT, dated as of June 30, 2022 (this “Agreement”), is by and between Encompass Health Corporation, a Delaware corporation (“Encompass”), and Enhabit, Inc., a Delaware corporation and a direct wholly owned subsidiary of Encompass (“Enhabit”). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I.
R E C I T A L S
WHEREAS, Enhabit is a direct, wholly-owned Subsidiary of Encompass;
WHEREAS, the board of directors of Encompass (the “Encompass Board”) has determined that it is in the best interests of Encompass and its stockholders for Enhabit to operate the Enhabit Business as a separate, publicly traded company;
WHEREAS, the Encompass Board has determined that it is appropriate and desirable to separate the Enhabit Business from the other businesses conducted by Encompass (the “Separation”) and, following the Separation, make a distribution, on a pro rata basis, to holders of Encompass Shares on the Record Date of all of the outstanding Enhabit Shares (the “Distribution”);
WHEREAS, pursuant to the Separation Step Plan and the terms of this Agreement, among other things, following certain preparatory transactions described in the Separation Step Plan, (a) Encompass IP Holding Corp. (“IP NewCo”) contributed to Enhabit Holdings, LLC (“HHH NewCo”), a Delaware limited liability company (which at the time of such transfer was treated as disregarded from IP NewCo for Federal Income Tax purposes) all of the issued and outstanding membership interests in Advanced Homecare Management, LLC, a Delaware limited liability company, and HHH NewCo converted from a limited liability company to a corporation pursuant to Delaware law (together, the “Contribution”), (b) IP NewCo distributed to Advanced Homecare Holdings, Inc. (“AH Holdings”), a Delaware corporation, all of the issued and outstanding stock of HHH NewCo (the “First Internal Distribution”), (c) AH Holdings distributed to Enhabit all of the issued and outstanding stock of HHH NewCo (the “Second Internal Distribution”), (d) Enhabit distributed to Distributing all of the issued and outstanding stock of AH Holdings (the “Third Internal Distribution”), (e) Enhabit transferred the net proceeds of new revolving and term loan facilities of approximately $566.5 million to Encompass, and (f) Enhabit recapitalized its issued and outstanding stock through a forward stock split;
WHEREAS, for Federal Income Tax purposes, it is intended that (a) the First Internal Distribution (together with the Contribution), shall qualify as a transaction that is generally tax-free pursuant to Sections 355(a) and 368(a)(1)(D) of the Code and (b) the Second Internal Distribution, the Third Internal Distribution and the Distribution shall each qualify as a transaction that is generally tax-free pursuant to Section 355(a) of the Code;
WHEREAS, Enhabit and Encompass have prepared, and Enhabit has filed with the SEC, the Form 10, which includes the Information Statement, and which sets forth disclosures concerning Enhabit, the Separation and the Distribution;
WHEREAS, each of Encompass and Enhabit has determined that it is necessary and desirable, on or prior to the Effective Time (as defined herein), to allocate and transfer to the applicable Group (as defined below) certain Assets, and to allocate and assign to the applicable Group responsibility for certain Liabilities, in respect of the activities of the Enhabit Business (as defined herein) and the Encompass Businesses (as defined herein), in each case, solely to the extent such Assets are not already held by or are not already Liabilities of the relevant Group; and
WHEREAS, the Parties acknowledge that this Agreement and the Ancillary Agreements represent the integrated agreement of Encompass and Enhabit relating to the Separation and the Distribution, are being entered into together, and would not have been entered into independently.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement, the following terms shall have the following meanings:
“Accounts Payable” shall mean any and all trade and non-trade accounts payable of either Party or member of its Group.
“Accounts Receivable” shall mean any and all trade and non-trade accounts receivable of either Party or member of its Group.
“Action” shall mean any demand, action, claim, dispute, suit, countersuit, arbitration, inquiry, subpoena, proceeding or investigation of any nature (whether criminal, civil, legislative, administrative, regulatory, prosecutorial or otherwise) by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.
“Affiliate” shall mean, when used with respect to a specified Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified Person. For the purpose of this definition, “control” (including, with correlative meanings, “controlled by” and “under common control with”), when used with respect to any specified Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or other interests, by contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment, undertaking or otherwise. It is expressly agreed that, prior to, at and after the Effective Time, for purposes of this Agreement and the Ancillary Agreements, (a) no member of the Enhabit Group shall be deemed to be an Affiliate of any member of the Encompass Group and (b) no member of the Encompass Group shall be deemed to be an Affiliate of any member of the Enhabit Group.
“Agent” shall mean the trust company or bank to be duly appointed by Encompass to act as distribution agent, transfer agent and registrar for the Enhabit Shares in connection with the Distribution.
“Agreement” shall have the meaning set forth in the Preamble.
“AH Holdings” shall have the meaning set forth in the Recitals.
“Ancillary Agreements” shall mean all agreements (other than this Agreement) entered into by the Parties or the members of their respective Groups (but as to which no Third Party is a party) in connection with the Separation, the Distribution or the other transactions contemplated by this Agreement, including the Transition Services Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Business Associate Agreement and the Transfer Documents.
“Approvals or Notifications” shall mean any consents, waivers, approvals, permits or authorizations to be obtained from, notices, registrations or reports to be submitted to, or other filings to be made with, any third Person, including any Governmental Authority.
“Arbitration Request” shall have the meaning set forth in Section 7.3(a).
“Assets” shall mean, with respect to any Person, the assets, properties, claims and rights (including goodwill) of such Person, wherever located (including in the possession of vendors or other third Persons or elsewhere), of every kind, character and description, whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of such Person, including rights and benefits pursuant to any contract, license, permit, indenture, note, bond, mortgage, agreement, concession, franchise, instrument, undertaking, commitment, understanding or other arrangement.
“Business Associate Agreement” shall mean the Business Associate Agreement to be entered into by and between Encompass and Enhabit or the members of their respective Groups in connection with, the Transition Services Agreement, the Separation, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
“Business Day” shall mean a day other than a Saturday, a Sunday or a day on which banking institutions located in Birmingham, Alabama; Dallas, Texas; or New York, New York are authorized or obligated by Law or executive order to close.
“Cash Transfer” shall have the meeting set forth in Section 2.12(a).
“CEO Negotiation Request” shall have the meaning set forth in Section 7.2.
“Change of Control” shall mean, with respect to a Party: (a) a transaction whereby any Person or group (within the meaning of Section 13(d)(3) of the Exchange Act) would acquire, directly or indirectly, voting securities representing more than fifty percent (50%) of the total voting power of such Party; (b) a merger, consolidation, recapitalization or reorganization of such Party, unless securities representing more than fifty percent (50%) of the total voting power of the legal successor to such Party as a result of such merger, consolidation, recapitalization or reorganization are immediately thereafter beneficially owned, directly or indirectly, by the Persons who beneficially owned such Party’s outstanding voting securities immediately prior to such transaction; or (c) the sale of all or substantially all of the consolidated assets of such Party’s Group. For the avoidance of doubt, no transaction contemplated by this Agreement shall be considered a Change of Control.
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Contribution” shall have the meaning set forth in the Recitals.
“Delayed Encompass Asset” shall have the meaning set forth in Section 2.4(h).
“Delayed Encompass Liability” shall have the meaning set forth in Section 2.4(h).
“Delayed Enhabit Asset” shall have the meaning set forth in Section 2.4(c).
“Delayed Enhabit Liability” shall have the meaning set forth in Section 2.4(c).
“Disclosure Document” shall mean any registration statement (including the Form 10) filed with the SEC by or on behalf of any Party or any member of its Group, and also includes any information statement (including the Information Statement), prospectus, offering memorandum, offering circular, periodic report or similar disclosure document, whether or not filed with the SEC or any other Governmental Authority, in each case that describes the Separation or the Distribution or the Enhabit Group or primarily relates to the transactions contemplated hereby.
“Dispute” shall have the meaning set forth in Section 7.1.
“Distribution” shall have the meaning set forth in the Recitals.
“Distribution Date” shall mean 12:01 a.m. Eastern Time on July 1, 2022, which is the date of the consummation of the Distribution, which shall be determined by the Encompass Board in its sole and absolute discretion.
“Distribution Ratio” shall mean a number equal to 0.50.
“Effective Time” shall mean 12:01 a.m., New York City time, on the Distribution Date.
“Employee Matters Agreement” shall mean the Employee Matters Agreement to be entered into by and between Encompass and Enhabit in connection with the Separation or the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
“Encompass” shall have the meaning set forth in the Preamble.
“Encompass Accounts” shall have the meaning set forth in Section 2.9(a).
“Encompass Assets” shall have the meaning set forth in Section 2.2(b).
“Encompass Board” shall have the meaning set forth in the Recitals.
“Encompass Business” shall mean all businesses, operations and activities conducted at any time prior to the Effective Time by either Party or any member of its Group, other than the Enhabit Business.
“Encompass Group” shall mean Encompass and each Person that is a Subsidiary of Encompass (other than Enhabit and any other member of the Enhabit Group).
“Encompass Indemnitees” shall have the meaning set forth in Section 4.2.
“Encompass Information Technology” shall mean all Information Technology, other than Enhabit Information Technology, owned by either Party or any member of its Group as of the Effective Time.
“Encompass Intellectual Property Rights” shall mean the Intellectual Property Rights set forth on Schedule 2.2(b)(iv) and all Intellectual Property Rights, other than Enhabit Intellectual Property Rights, owned by either Party or any member of its Group as of the Effective Time.
“Encompass Inventory” shall mean all Inventory, other than Enhabit Inventory, owned by either Party or any member of its Group as of the Effective Time.
“Encompass Liabilities” shall have the meaning set forth in Section 2.3(b).
“Encompass Marks” shall mean all Trademarks, other than the Enhabit Marks, owned by either Party or any member of its Group as of the Effective Time.
“Encompass Policies” shall have the meaning set forth in Section 5.2(b).
“Encompass Records” shall have the meaning set forth in Section 2.2(a)(viii).
“Encompass Shares” shall mean the shares of common stock, par value $0.01 per share, of Encompass.
“Enhabit” shall have the meaning set forth in the Preamble.
“Enhabit Accounts” shall have the meaning set forth in Section 2.9(a).
“Enhabit Accounts Payable” shall mean any and all trade and non-trade accounts payable of either Party or member of its Group outstanding as of the Effective Time, in each case, to the extent related to the Enhabit Business or arising out of any Enhabit Contract.
“Enhabit Accounts Receivable” shall mean any and all trade and non-trade accounts receivable of either Party or member of its Group outstanding as of the Effective Time, in each case, to the extent related to the Enhabit Business or arising out of any Enhabit Contract.
“Enhabit Assets” shall have the meaning set forth in Section 2.2(a).
“Enhabit Balance Sheet” shall mean the pro forma combined balance sheet of the Enhabit Business, including any notes and subledgers thereto, as of March 31, 2022, as presented in the Information Statement.
“Enhabit Books and Records” shall mean all books and records used in or necessary, as of the Effective Time, for the general financial and administrative operation of the Enhabit Business, including financial, employee, and general business operating documents, instruments, papers, books, books of account, records and files and data related thereto; provided that Enhabit Books and Records shall not include (i) Enhabit Product and Customer Records, and (ii) material that Encompass is not permitted by applicable Law or agreement to disclose or transfer to Enhabit.
“Enhabit Business” shall mean the business, operations and activities of the Enhabit segment of Encompass conducted as of the Effective Time by either Party or any member of its Group, as described in the Information Statement. For the avoidance of doubt, the Enhabit Business shall include the business, operations and activities set forth on Schedule 1.1(a) and exclude the business, operations and activities set forth on Schedule 1.1(b).
“Enhabit Bylaws” shall mean the Amended and Restated Bylaws of Enhabit, substantially in the form of Exhibit B.
“Enhabit Certificate of Incorporation” shall mean the Amended and Restated Certificate of Incorporation of Enhabit, substantially in the form of Exhibit A.
“Enhabit Common Stock” shall mean the common stock, par value $0.01 per share, of Enhabit.
“Enhabit Contracts” shall mean the following contracts and agreements to which either Party or any member of its Group is a party or by which it or any member of its Group or any of their respective Assets is bound, whether or not in writing; provided that Enhabit Contracts shall not include any contract or agreement that shall be retained by Encompass or any member of the Encompass Group from and after the Effective Time pursuant to any provision of this Agreement or any Ancillary Agreement:
(a) (i) any customer contract, agreement with third party payor (including government health programs and private insurance companies) or agreement entered into prior to the Effective Time exclusively related to the Enhabit Business, including the contracts and agreements set forth on Schedule 1.2(a) and (ii) with respect to any customer contract, agreement with third party payor (including government health programs and private insurance companies) or agreement entered into prior to the Effective Time that relates to the Enhabit Business but is not exclusively related to the Enhabit Business, that portion of any such contract or agreement that primarily relates to the Enhabit Business;
(b) (i) any supply or vendor contract or agreement entered into prior to the Effective Time exclusively related to the Enhabit Business, including the contracts and agreements set forth on Schedule 1.2(b), and (ii) with respect to any supply or vendor contract or agreement entered into prior to the Effective Time that relates to the Enhabit Business but is not exclusively related to the Enhabit Business, that portion of any such contract or agreement that primarily relates to the Enhabit Business;
(c) any contract or agreement entered into prior to the Effective Time pursuant to which Enhabit or any member of the Enhabit Group participates in any United States federal, state or local health care or reimbursement program administered by a Governmental Authority, including any “Federal Health Care Program” as defined in 42 U.S.C. §1320a-7b(f), including Medicare, state Medicaid programs, state CHIP programs, TRICARE and similar or successor programs with or for the benefit of any Governmental Authority;
(d) any contract or agreement entered into prior to the Effective Time set forth on Schedule 1.2(d), which grants a Third Party rights or licenses to Intellectual Property Rights that are Enhabit Intellectual Property Rights;
(e) any joint venture or partnership contract or agreement that exclusively relates to the Enhabit Business as of the Effective Time;
(f) any guarantee, indemnity, representation, covenant, warranty or other liability of either Party or any member of its Group in respect of any other Enhabit Contract, any Enhabit Liability or the Enhabit Business;
(g) any proprietary information and inventions agreement or similar Intellectual Property Rights assignment or license agreement with any current or former Enhabit Group employee, Encompass Group employee, consultant of the Enhabit Group or consultant of the Encompass Group, in each case entered into prior to the Effective Time (i) that is exclusively related to the Enhabit Business or (ii) if not exclusively related to the Enhabit Business, that portion of any such assignment or agreement that primarily relates to the Enhabit Business;
(h) any contract or agreement that is expressly contemplated pursuant to this Agreement or any of the Ancillary Agreements to be assigned to, or to be a contract or agreement in the name of, Enhabit or any member of the Enhabit Group;
(i) any interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements exclusively related to the Enhabit Business;
(j) any contract or agreement entered into in the name of, or expressly on behalf of, any division, business unit or member of the Enhabit Group;
(k) any other contract or agreement exclusively related to the Enhabit Business or Enhabit Assets;
(l) Enhabit Leases; and
(m) any contracts, agreements or settlements set forth on Schedule 1.2(m), including the right to recover any amounts under such contracts, agreements, leases or settlements.
“Enhabit Debt” shall have the meeting set forth in Section 2.12(a).
“Enhabit Designees” shall mean any and all entities (including corporations, general or limited partnerships, trusts, joint ventures, unincorporated organizations, limited liability entities or other entities) designated by Encompass that will be members of the Enhabit Group as of the Effective Time.
“Enhabit Financing Arrangements” shall have the meaning set forth in Section 2.12(a).
“Enhabit Group” shall mean (a) Enhabit, (b) each Subsidiary of Enhabit as of the Effective Time, and (c) each other Person that is controlled directly or indirectly by Enhabit as of the Effective Time.
“Enhabit Indemnitees” shall have the meaning set forth in Section 4.3.
“Enhabit Information Technology” shall mean (a) all Information Technology owned by either Party or any member of its Group that is exclusively used or exclusively held for use in the Enhabit Business as of the Effective Time, and (b) the Information Technology set forth on Schedule 1.3; provided, however, that Enhabit Information Technology shall not include the Information Technology set forth on Schedule 1.4 or any Software licensed from a Third Party.
“Enhabit Intellectual Property Rights” shall mean (a) the Enhabit Registered IP, (b) the Enhabit Marks (to the extent not included in clause (a) above), and (c) all Intellectual Property Rights (other Patents, Trademarks and other Registered IP) of either Party or any of the members of its Group, in each case, that is embodied in the Enhabit Technology.
“Enhabit Inventory” shall have the meaning set forth in Section 2.2(a)(vii).
“Enhabit Leases” shall have the meaning set forth in the definition of Enhabit Real Property.
“Enhabit Liabilities” shall have the meaning set forth in Section 2.3(a).
“Enhabit Marks” shall mean the names, Trademarks, monograms, domain names and other source or business identifiers of either Party or any member of its Group that (a) use or contain “Enhabit” (including any stylized versions or design elements thereof), (b) are set forth on Schedule 1.5, or (c) otherwise identify Enhabit as a whole, either alone or in combination with other words or elements, and all names, Trademarks, monograms, domain names and other source or business identifiers confusingly similar to or embodying any of the foregoing, either alone or in combination with other words or elements; provided that Enhabit Marks shall not include the Encompass Marks.
“Enhabit Permits” shall mean all Permits owned or licensed by either Party or any member of its Group exclusively used or exclusively held for use in the Enhabit Business as of the Effective Time.
“Enhabit Product” shall mean products and services supplied, sold, provided or distributed, as the case may be, at any time, by Enhabit or members of its Group under an Enhabit Mark.
“Enhabit Product and Customer Records” shall mean all books and records related to or used by Enhabit or any member of its Group as of the Effective Time in connection with the sourcing, supply chain management, marketing, sale, distribution, maintenance and warranty of Enhabit Products, including vendor and supplier information and records, customer lists, sales records, customer registration and account information, billing information, marketing materials, customer contracts, terms of use and privacy policies, sales literature catalogs, brochures, sales, warranty and other product information and materials, and Web Site content.
“Enhabit Real Property” shall mean (a) all of the Real Property owned by either Party or any member of its Group as of the Effective Time listed or described on Schedule 1.6(a), (b) the Real Property Leases to which either Party or any member of its Group is party as of the Effective Time set forth on Schedule 1.6(b) (“Enhabit Leases”), and (c) all recorded Real Property notices, easements, and obligations with respect to the Real Property and/or Real Property Leases described in clauses (a) and (b) of this paragraph.
“Enhabit Records” shall have the meaning set forth in Section 2.2(a)(viii).
“Enhabit Registered IP” shall mean the Registered IP set forth on Schedule 1.7.
“Enhabit Shares” shall mean the shares of common stock, par value $0.01 per share, of Enhabit.
“Enhabit Tangible Personal Property” shall have the meaning set forth in Section 2.2(a)(xv).
“Enhabit Technology” shall mean any Technology with respect to which the Intellectual Property Rights therein are owned by either Party or any member of its Group to the extent that such Technology is used in or necessary to the operation of the Enhabit Business as of the Effective Time and capable of being copied (for example, Software), including Technology set forth on Schedule 1.8; provided that Enhabit Technology shall not include (i) any Information Technology, (ii) any Tangible Personal Property, (iii) any Enhabit Books and Records, and (iv) any Enhabit sales and customer Records.
“Environmental Law” shall mean any Law relating to pollution, protection or restoration of or prevention of harm to the environment or natural resources, including the use, handling, transportation, treatment, storage, disposal, Release or discharge of Hazardous Materials or the protection of or prevention of harm to human health and safety.
“Environmental Liabilities” shall mean all Liabilities relating to, arising out of or resulting from any Hazardous Materials, Environmental Law or contract or agreement relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, response costs, natural resources damages, property damages, personal injury damages, costs of compliance with any product take back requirements or with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses, interest, fines, penalties or other monetary sanctions in connection therewith.
“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.
“Federal Income Tax” shall have the meaning set forth in the Tax Matters Agreement.
“First Internal Distribution” shall have the meaning set forth in the Recitals.
“Force Majeure” shall mean, with respect to a Party, an event beyond the reasonable control of such Party (or any Person acting on its behalf), which event (a) does not arise or result from the fault or negligence of such Party (or any Person acting on its behalf) and (b) by its nature would not reasonably have been foreseen by such Party (or such Person), or, if it would reasonably have been foreseen, was unavoidable, and includes acts of God, acts of civil or military authority, embargoes, acts of terrorism, cyberattacks, epidemics, pandemics or diseases (including SARS-CoV-2 or Covid-19, and any evolutions or variants thereof or related or associated epidemics, pandemics or disease outbreaks) or other health crises or public health events, or any worsening of any of the foregoing, quarantine or government health alert that prohibits or restricts travel or prevents any individual from reporting to a work location, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts, or, in the case of computer systems, any significant and prolonged failure in electrical or air conditioning equipment. Notwithstanding the foregoing, the receipt by a Party of an unsolicited takeover offer or other acquisition proposal, even if unforeseen or unavoidable, and such Party’s response thereto shall not be deemed an event of Force Majeure.
“Form 10” shall mean the registration statement on Form 10 filed by Enhabit with the SEC to effect the registration of Enhabit Shares pursuant to the Exchange Act in connection with the Distribution, as such registration statement may be amended or supplemented from time to time prior to the Distribution.
“GAAP” means United States generally accepted accounting principles, consistently applied.
“Governmental Approvals” shall mean any Approvals or Notifications to be made to, or obtained from, any Governmental Authority.
“Governmental Authority” shall mean any nation or government, any state, municipality or other political subdivision thereof, and any entity, body, agency, commission, department, board, bureau, court, tribunal or other instrumentality, whether federal, state, local, domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory, administrative or other similar functions of, or pertaining to, a government and any executive official thereof.
“Group” shall mean either the Enhabit Group or the Encompass Group, as the context requires.
“Hazardous Materials” shall mean any chemical, material, substance, waste, pollutant, emission, discharge, release or contaminant that could result in Liability under, or that is prohibited, limited or regulated by or pursuant to, any Environmental Law, and any natural or artificial substance (whether solid, liquid or gas, noise, ion, vapor or electromagnetic) that could cause harm to human health or the environment, including petroleum, petroleum products and byproducts, asbestos and asbestos-containing materials, urea formaldehyde foam insulation, electronic, medical or infectious wastes, polychlorinated biphenyls, radon gas, radioactive substances, chlorofluorocarbons and all other ozone-depleting substances.
“HHH Newco” shall have the meaning set forth in the Recitals.
“Indemnifying Party” shall have the meaning set forth in Section 4.4(a).
“Indemnitee” shall have the meaning set forth in Section 4.4(a).
“Indemnity Payment” shall have the meaning set forth in Section 4.4(a).
“Information Statement” shall mean the information statement to be made available to the holders of Encompass Shares in connection with the Distribution, as such information statement may be amended or supplemented from time to time prior to the Distribution.
“Information Technology” shall mean all computer systems (including hardware, computers, servers, workstations, routers, hubs, switches and data communication lines), network and telecommunications equipment, Internet-related information technology infrastructure, and other information technology equipment and all associated documentation.
“Insurance Proceeds” shall mean those monies:
(a) received by an insured from an insurance carrier; or
(b) paid by an insurance carrier on behalf of the insured;
in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses incurred in the collection thereof.
“Intellectual Property Rights” shall mean any and all common law and statutory rights anywhere in the world arising under or associated with the following: (a) patents, patent applications, utility models, statutory invention registrations, certificates of invention, registered designs and similar or equivalent rights in inventions and designs, and all rights therein provided by international treaties or conventions (“Patents”), (b) trademarks, service marks, trade names, service names, trade dress, logos and other designations of origin, including any registrations and applications for registration of any of the foregoing (“Trademarks”), (c) rights associated with Internet domain names, uniform resource locators, Internet Protocol addresses, social media accounts or “handles” with Facebook, LinkedIn, Twitter and similar social media platforms, handles and other names, identifiers and locators associated with Internet addresses, sites and services (“Internet Properties”), (d) copyrights and any other equivalent rights in works of authorship (including rights in software or databases as a work of authorship) and any other related rights of authors, and all registrations and applications for registration of any of the foregoing (“Copyrights”), (e) trade secrets and industrial secret rights and rights in know-how, inventions, data, and any other confidential or proprietary business or technical information, that derive independent economic value, whether actual or potential, from not being known to other
persons, and (f) all other similar or equivalent intellectual property or proprietary rights anywhere in the world.
“Inventory” shall have the meaning set forth in Section 2.2(a)(vii).
“IP Newco” shall have the meaning set forth in the Recitals.
“JAMS Rules” shall have the meaning set forth in Section 7.3(a).
“Law” shall mean any national, supranational, federal, state, provincial, local or similar law (including common law), statute, code, order, ordinance, rule, regulation, treaty (including any Tax treaty), license, permit, authorization, approval, consent, decree, injunction, binding judicial or administrative interpretation or other requirement, in each case, enacted, promulgated, issued or entered by a Governmental Authority.
“Liabilities” shall mean any and all debts, guarantees, assurances, commitments, liabilities, responsibilities, Losses, remediation, deficiencies, damages, fines, penalties, settlements, sanctions, costs, expenses, interest and obligations of any nature or kind, whether accrued or fixed, absolute or contingent, matured or unmatured, accrued or not accrued, asserted or unasserted, liquidated or unliquidated, foreseen or unforeseen, known or unknown, reserved or unreserved, or determined or determinable, including those arising under any Law, claim (including any Third-Party Claim), demand, Action, or order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority or arbitration tribunal, and those arising under any contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment or undertaking, or any fines, damages or equitable relief that is imposed, in each case, including all costs and expenses relating thereto.
“Linked” shall have the meaning set forth in Section 2.9(a).
“Losses” shall mean actual losses (including any diminution in value), costs, damages, penalties and expenses (including legal and accounting fees and expenses and costs of investigation and litigation), whether or not involving a Third-Party Claim.
“NYSE” shall mean the New York Stock Exchange.
“Officer Negotiation Request” shall have the meaning set forth in Section 7.1.
“Parties” shall mean the parties to this Agreement.
“Permits” shall mean permits, approvals, authorizations, consents, licenses or certificates issued by any Governmental Authority.
“Person” shall mean an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority.
“Policies” shall mean insurance policies and insurance contracts of any kind, including but not limited to global property, excess and umbrella liability, commercial general liability, directors and officers liability, fiduciary liability, cyber, media and technology errors and omissions liability, employment practices liability, workers’ compensation and employers’ liability, employee dishonesty/crime/fidelity, bonds and self-insurance, together with the rights, benefits, privileges and obligations thereunder.
“Prime Rate” shall mean the rate that Bloomberg displays as “Prime Rate by Country United States” or “Prime Rate By Country US-BB Comp” at http://www.bloomberg.com/quote/PRIME:IND or on a Bloomberg terminal at PRIMBB Index.
“Privileged Information” shall mean any information, in written, oral, electronic or other tangible or intangible forms, including any communications by or to attorneys (including attorney-client privileged communications), memoranda and other materials prepared by attorneys or under their direction (including attorney work product), as to which a Party or any member of its Group would be entitled to assert or has asserted a privilege or other protection, including the attorney-client and work product privileges.
“Real Property” shall mean land together with all easements, rights and interests arising out of the ownership thereof or appurtenant thereto and all buildings, structures, improvements and fixtures located thereon.
“Real Property Leases” shall mean all leases to Real Property and, to the extent covered by such leases, any and all buildings, structures, improvements and fixtures located thereon.
“Record Date” shall mean the close of business on June 24, 2022, which is the date determined by the Encompass Board in its sole and absolute discretion as the record date for determining holders of Encompass Shares entitled to receive Enhabit Shares pursuant to the Distribution.
“Record Holders” shall mean the holders of record of Encompass Shares as of the Record Date.
“Registered IP” shall mean any United States, international or foreign (a) Patents and Patent applications; (b) registered Trademarks and applications to register Trademarks; (c) registered Copyrights and applications for Copyright registration; and (d) registered Internet Properties.
“Release” shall mean any release, spill, emission, discharge, leaking, pumping, pouring, dumping, injection, deposit, disposal, dispersal, leaching or migration of Hazardous Materials into the environment (including ambient air, surface water, groundwater and surface or subsurface strata).
“Representatives” shall mean, with respect to any Person, any of such Person’s directors, officers, employees, agents, consultants, advisors, accountants, attorneys or other representatives.
“SEC” shall mean the U.S. Securities and Exchange Commission.
“Second Internal Distribution” shall have the meaning set forth in the Recitals.
“Section 1542” shall have the meaning set forth in Section 4.1(c).
“Security Interest” shall mean any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer or other encumbrance of any nature whatsoever.
“Separation” shall have the meaning set forth in the Recitals.
“Separation Step Plan” shall be the plan set forth on Schedule I hereto.
“Shared Contract” shall have the meaning set forth in Section 2.8(a).
“Shared Third-Party Claim” shall have the meaning set forth in Section 4.5(b).
“Software” shall mean any and all (a) computer programs, including any and all software implementation of algorithms, models and methodologies, whether in source code, object code, human readable form or other form, (b) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (c) descriptions, flow charts and other work products used to design, plan, organize and develop any of the foregoing, (d) screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons and icons, and (e) documentation, including user manuals and other training documentation, relating to any of the foregoing.
“Specified Ancillary Agreement” shall have the meeting set forth in Section 10.19(a).
“Straddle Period” shall have the meeting set forth in Section 2.12(a).
“Subsidiary” shall mean, with respect to any Person, any corporation, limited liability company, joint venture or partnership of which such Person (a) beneficially owns, either directly or indirectly, more than fifty percent (50%) of (i) the total combined voting power of all classes of voting securities, (ii) the total combined equity interests or (iii) the capital or profit interests, in the case of a partnership, or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body.
“Tangible Information” shall mean information that is contained in written, electronic or other tangible forms.
“Tangible Personal Property” shall mean equipment, hardware, furniture, fixtures, motor vehicles and other transportation equipment, and other tangible personal property, it being understood that Tangible Personal Property shall not include (i) any Information Technology and (ii) any Technology.
“Tax” shall have the meaning set forth in the Tax Matters Agreement.
“Tax Matters Agreement” shall mean the Tax Matters Agreement to be entered into by and between Encompass and Enhabit in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement, as it may be amended from time to time.
“Tax Return” shall have the meaning set forth in the Tax Matters Agreement.
“Technology” shall mean embodiments, regardless of form, of Intellectual Property Rights, including, as the context requires, blueprints, designs, design protocols, documentation, specifications for materials, specifications for parts and devices, and design tools, materials, manuals, data, databases, Software and know-how or knowledge of employees, relating to, embodying, or describing products, articles, apparatus, devices, processes, methods, formulae, recipes or other technical information; provided that Technology specifically excludes (i) any and all Intellectual Property Rights, (ii) Tangible Personal Property, (iii) books and records, (iv) sales and customer records, and (v) customer data.
“Third Internal Distribution” shall have the meaning set forth in the Recitals.
“Third Party” shall mean any Person other than the Parties or any members of their respective Groups.
“Third-Party Claim” shall have the meaning set forth in Section 4.5(a).
“Transfer Documents” shall have the meaning set forth in Section 2.1(b).
“Transition Services Agreement” shall mean the Transition Services Agreement to be entered into by and between Encompass and Enhabit or any members of their respective Groups in connection with the Separation, the Distribution or the other transactions contemplated by this Agreement, as it may be amended from time to time.
“Unreleased Encompass Liability” shall have the meaning set forth in Section 2.5(b)(ii).
“Unreleased Enhabit Liability” shall have the meaning set forth in Section 2.5(a)(ii).
ARTICLE II
THE SEPARATION
2.1 Transfer of Assets and Assumption of Liabilities.
(a) On or prior to the Effective Time, but in any case prior to the Distribution, solely with respect to (x) any Enhabit Assets not already owned by members of the Enhabit Group or Enhabit Liabilities that are not already liabilities of members of the Enhabit Group and (y) any Encompass Assets not already owned by members of the Encompass Group or Encompass Liabilities that are not already liabilities of members of the Encompass Group, including in connection with the Separation Step Plan:
(i) Transfer and Assignment of Enhabit Assets. Encompass shall, and shall cause the applicable members of its Group to, contribute, assign, transfer, convey and deliver to Enhabit, or the applicable Enhabit Designees, and Enhabit or such Enhabit Designees shall accept from Encompass and the applicable members of the Encompass Group, all of Encompass’s and such Encompass Group member’s respective direct or indirect right, title and interest in and to all of the Enhabit Assets;
(ii) Acceptance and Assumption of Enhabit Liabilities. Enhabit and the applicable Enhabit Designees shall accept, assume and agree faithfully to perform, discharge and fulfill all the Enhabit Liabilities in accordance with their respective terms. Enhabit and such Enhabit Designees shall be responsible for all Enhabit Liabilities, regardless of when or where such Enhabit Liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the Effective Time, regardless of where or against whom such Enhabit Liabilities are asserted or determined (including any Enhabit Liabilities arising out of claims made by Encompass’s or Enhabit’s respective directors, officers, employees, agents, Subsidiaries or Affiliates against any member of the Encompass Group or the Enhabit Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the Encompass Group or the Enhabit Group, or any of their respective directors, officers, employees, agents, Subsidiaries or Affiliates;
(iii) Transfer and Assignment of Encompass Assets. Encompass and Enhabit shall cause Enhabit and the Enhabit Designees to contribute, assign, transfer, convey and deliver to Encompass or certain members of the Encompass Group designated by Encompass, and Encompass or such other members of the Encompass Group shall accept from Enhabit and the Enhabit Designees, all of Enhabit’s and such Enhabit Designees’ respective direct or indirect right, title and interest in and to all Encompass Assets held by Enhabit or an Enhabit Designee; and
(iv) Acceptance and Assumption of Encompass Liabilities. Encompass and certain members of the Encompass Group designated by Encompass shall accept and assume and agree faithfully to perform, discharge and fulfill all of the Encompass Liabilities held by Enhabit or any Enhabit Designee and Encompass and the applicable members of the Encompass Group shall be responsible for all Encompass Liabilities in accordance with their respective terms, regardless of when or where such Encompass Liabilities arose or arise, whether the facts on which they are based occurred prior to or subsequent to the Effective Time, where or against whom such Encompass Liabilities are asserted or determined (including any such Encompass Liabilities arising out of claims made by Encompass’s or Enhabit’s respective directors, officers, employees, agents, Subsidiaries or Affiliates against any member of the Encompass Group or the Enhabit Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the Encompass Group or the Enhabit Group, or any of their respective directors, officers, employees, agents, Subsidiaries or Affiliates.
(b) Transfer Documents. In furtherance of any contribution, assignment, transfer, conveyance and delivery of the Assets and the assumption of the Liabilities in accordance with Section 2.1(a), (i) each Party shall execute and deliver, and shall cause the applicable members of its Group to execute and deliver, to the other Party, such bills of sale, quitclaim deeds, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence any transfer, conveyance and assignment of all of such Party’s and the applicable members of its Group’s right, title and interest in and to such Assets to the other Party and the applicable members of its Group in accordance with Section 2.1(a), and (ii) each Party shall execute and deliver, and shall cause the applicable members of its Group to execute and deliver, to the other Party, such assumptions of contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the Liabilities by such Party and the applicable members of its Group in accordance with Section 2.1(a). All of the foregoing documents contemplated by this Section 2.1(b) shall be referred to collectively herein as the “Transfer Documents.” The Transfer Documents shall effect certain of the transactions contemplated by this Agreement and, notwithstanding anything in this Agreement to the contrary, shall not expand or limit any of the obligations, covenants or agreements in this Agreement. It is expressly agreed that in the event of any conflict between the terms of the Transfer Documents and the terms of this Agreement or the Tax Matters Agreement, the terms of this Agreement or the Tax Matters Agreement, as applicable, shall control.
(c) Misallocations. In the event that at any time or from time to time (whether prior to, at or after the Effective Time), one Party (or any member of such Party’s Group) shall receive or otherwise possess any Asset that is allocated to the other Party (or any member of such Party’s Group) pursuant to this Agreement or any Ancillary Agreement, such Party shall promptly transfer, or cause to be transferred, such Asset to the Party so entitled thereto (or to any member of such Party’s Group), and such Party (or member of such Party’s Group) so entitled thereto shall accept such Asset; provided that cash and cash equivalents received prior to the Effective Time shall not be subject to the requirements of this sentence. Prior to any such transfer, the Person receiving or possessing such Asset shall hold such Asset in trust for such other Person. In the event that at any time or from time to time (whether prior to, at or after the Effective Time), one Party hereto (or any member of such Party’s Group) shall receive or otherwise assume or be liable for any Liability that is allocated to the other Party (or any member of such Party’s Group) pursuant to this Agreement or any Ancillary Agreement, such other Party shall promptly assume, or cause to be assumed, such Liability and agree to faithfully perform or discharge such Liability in accordance with this Agreement.
(d) Waiver of Bulk-Sale and Bulk-Transfer Laws. Enhabit hereby waives compliance by each and every member of the Encompass Group with the requirements and provisions of any “bulk-sale” or “bulk-transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any or all of the Enhabit Assets to any member of the Enhabit Group. Encompass hereby waives compliance by each and every member of the Enhabit Group with the requirements and provisions of any “bulk-sale” or “bulk-transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer or sale of any or all of the Encompass Assets to any member of the Encompass Group.
(e) Intellectual Property Rights.
(i) If and to the extent that, as a matter of Law in any jurisdiction, Encompass or the applicable members of its Group cannot assign, transfer or convey any of Encompass’s or such Encompass Group members’ respective direct or indirect right, title and interest in and to any Technology or Intellectual Property Rights included in the Enhabit Assets, then, to the extent possible, Encompass shall, and shall cause the applicable members of its Group to, irrevocably grant to Enhabit, or the applicable Enhabit Designees, an exclusive, irrevocable, assignable, transferable, sublicenseable, worldwide, perpetual, royalty-free license to use, exploit and commercialize in any manner now known or in the future discovered and for whatever purpose, any such right, title or interest.
(ii) If and to the extent that, as a matter of Law in any jurisdiction, Enhabit or the applicable members of its Group cannot assign, transfer or convey any of Enhabit’s or such Enhabit Group members’ respective direct or indirect right, title and interest in and to any Technology or Intellectual Property Rights included in the Encompass Assets, then, to the extent possible, Enhabit shall, and shall cause the applicable members of its Group to, irrevocably grant to Encompass, or its designee, an exclusive, irrevocable, assignable, transferable, sublicenseable, worldwide, perpetual, royalty-free license to use, exploit and commercialize in any manner now known or in the future discovered and for whatever purpose, any such right, title or interest.
(f) Electronic Transfer. All transferred Enhabit Assets and Encompass Assets, including transferred Technology, that can be delivered by electronic transmission will be so delivered or made available to Enhabit, Encompass or their respective designees (as applicable), at a designated FTP site or in another electronic form to be reasonably determined by the Parties.
2.2 Enhabit Assets; Encompass Assets.
(a) Enhabit Assets. For the purposes of this Agreement, “Enhabit Assets” shall mean, without duplication, those Assets whether now existing or hereinafter acquired, used or contemplated to be used or held for use exclusively or primarily in the ownership, operation or conduct of the Enhabit Business or relating exclusively or primarily to the Enhabit Business or to a member of the Enhabit Group, including the following:
(i) all issued and outstanding capital stock or other equity interests of any members of the Enhabit Group as of immediately prior to the Effective Time;
(ii) except as otherwise contemplated or set forth in this Section 2.2(a), all Assets of either Party or any members of its Group included or reflected as assets of the Enhabit Group on the Enhabit Balance Sheet, subject to any dispositions of such Assets subsequent to the date of the Enhabit Balance Sheet; provided that the amounts set forth on the Enhabit Balance Sheet with respect to any Assets shall not be treated as minimum amounts or limitations on the amount of such Assets that are included in the definition of Enhabit Assets pursuant to this clause (ii);
(iii) except as otherwise contemplated or set forth in this Section 2.2(a), all Assets of either Party or any of the members of its Group as of the Effective Time that are of a nature or type that would have resulted in such Assets being included as Assets of Enhabit or members of the Enhabit Group on a pro forma combined balance sheet of the Enhabit Group or any notes or subledgers thereto as of the Effective Time (were such balance sheet, notes and subledgers to be prepared on a basis consistent with the determination of the Assets included on the Enhabit Balance Sheet), it being understood that (x) the Enhabit Balance Sheet shall be used to determine the types of, and methodologies used to determine, those Assets that are included in the definition of Enhabit Assets pursuant to this clause (iii); and (y) the amounts set forth on the Enhabit Balance Sheet with respect to any Assets shall not be treated as minimum amounts or limitations on the amount of such Assets that are included in the definition of Enhabit Assets pursuant to this clause (iii);
(iv) all Assets of either Party or any of the members of its Group as of the Effective Time that are expressly provided by any provision of this Agreement or any Ancillary Agreement as Assets to be transferred to or owned by Enhabit or any other member of the Enhabit Group;
(v) all Enhabit Contracts as of the Effective Time and all rights, interests or claims of either Party or any of the members of its Group thereunder as of the Effective Time;
(vi) any and all Enhabit Accounts Receivable;
(vii) any and all inventory, supplies, components, packaging materials and other inventories, and all valuation-related adjustments relating thereto (including those relating to warranty, prompt pay discounts, royalties and other items) (“Inventory”), in each case, exclusively related to the Enhabit Business (“Enhabit Inventory”) as of the Effective Time;
(viii) any and all (x) Enhabit Books and Records, and (y) Enhabit Product and Customer Records, in each case, in the possession of either Party as of the Effective Time (collectively, “Enhabit Records”); provided that Encompass shall be permitted to retain copies of, and continue to use, (A) any Enhabit Records that as of the Effective Time are used in or necessary for the operation or conduct of the Encompass Business, (B) any Enhabit Records that Encompass is required by Law to retain (and if copies are not provided to Enhabit, then, to the extent permitted by Law, such copies will be made available to Enhabit upon Enhabit’s reasonable request), (C) one (1) copy of any Enhabit Records to the extent required to demonstrate compliance with applicable Law or pursuant to internal compliance procedures or related to any Encompass Assets or Encompass’s and/or its Affiliates’ obligations under this Agreement or any of the Ancillary Agreements, and (D) “back-up” electronic tapes of such Enhabit Records maintained by Encompass in the ordinary course of business (such material in clauses (A) through (D), the “Encompass Records”), and such copies of the Encompass Records shall be considered Encompass Assets;
(ix) all Enhabit Intellectual Property Rights as of immediately prior to the Effective Time, including any goodwill appurtenant to any Trademarks included in the Enhabit Intellectual Property Rights and the right to seek, recover and retain damages for infringement of any Enhabit Intellectual Property Rights following the Effective Time;
(x) without limiting clause (ix) above, the Enhabit Marks, and all goodwill of the Enhabit Business appurtenant thereto;
(xi) all Enhabit Technology as of immediately prior to the Effective Time;
(xii) all Enhabit Information Technology as of the Effective Time;
(xiii) all Enhabit Permits as of the Effective Time and all rights, interests or claims of either Party or any of the members of its Group thereunder as of the Effective Time;
(xiv) all Enhabit Real Property as of the Effective Time;
(xv) the Tangible Personal Property listed on Schedule 2.2(a)(xv) (collectively, the “Enhabit Tangible Personal Property”); and
(xvi) any and all Assets set forth on Schedule 2.2(a)(xvi).
Notwithstanding the foregoing, the Parties hereby acknowledge and agree that (A) while a single asset may fall within more than one of the clauses (i) through (xvi) in this Section 2.2(a), such fact does not imply that (x) such asset shall be transferred more than once or (y) any duplication of such asset is required, and (B) the Enhabit Assets shall not in any event include any Asset referred to in clauses (i) through (xi) of Section 2.2(b) or any Assets set forth on Schedule 2.2(a)(xvii).
(b) Encompass Assets. For the purposes of this Agreement, “Encompass Assets” shall mean all Assets of either Party or the members of its Group as of the Effective Time, other than the Enhabit Assets. Notwithstanding anything herein to the contrary, the Encompass Assets shall include:
(i) all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as Assets to be retained by Encompass or any other member of the Encompass Group;
(ii) all contracts and agreements of either Party or any of the members of its Group as of the Effective Time (other than the Enhabit Contracts);
(iii) all Encompass Records;
(iv) all Encompass Intellectual Property Rights and all rights, interests or claims of either Party or any of the members of its Group thereunder as of the Effective Time;
(v) all Encompass Information Technology;
(vi) all Accounts Receivable, other than the Enhabit Accounts Receivable;
(vii) all Encompass Inventory;
(viii) all Permits of either Party or any of the members of its Group as of the Effective Time (other than the Enhabit Permits) and all rights, interests or claims of either Party or any of the members of its Group thereunder as of the Effective Time;
(ix) all Real Property of either Party or any of the members of its Group as of the Effective Time (other than the Enhabit Real Property);
(x) all cash and cash equivalents of either Party or any of the members of its Group as of the Effective Time (other than cash and cash equivalents of Enhabit or any other member of the Enhabit Group as of the Effective Time, except for any cash or cash equivalents withdrawn from Enhabit Accounts in accordance with Section 2.9(d)); and
(xi) any and all Assets set forth on Schedule 2.2(b)(xi).
2.3 Enhabit Liabilities; Encompass Liabilities.
(a) Enhabit Liabilities. For the purposes of this Agreement, “Enhabit Liabilities” shall mean the following Liabilities of either Party or any of the members of its Group:
(i) all Liabilities included or reflected as liabilities or obligations of Enhabit or the members of the Enhabit Group on the Enhabit Balance Sheet, subject to any discharge of such Liabilities subsequent to the date of the Enhabit Balance Sheet; provided that the amounts set forth on the Enhabit Balance Sheet with respect to any Liabilities shall not be treated as minimum amounts or limitations on the amount of such Liabilities that are included in the definition of Enhabit Liabilities pursuant to this clause (i);
(ii) all Liabilities as of the Effective Time that are of a nature or type that would have resulted in such Liabilities being included or reflected as liabilities or obligations of Enhabit or the members of the Enhabit Group on a pro forma combined balance sheet of the Enhabit Group or any notes or subledgers thereto as of the Effective Time (were such balance sheet, notes and subledgers to be prepared on a basis consistent with the determination of the Liabilities included on the Enhabit Balance Sheet), it being understood that (x) the Enhabit Balance Sheet shall be used to determine the types of, and methodologies used to determine, those Liabilities that are included in the definition of Enhabit Liabilities pursuant to this clause (ii); and (y) the amounts set forth on the
Enhabit Balance Sheet with respect to any Liabilities shall not be treated as minimum amounts or limitations on the amount of such Liabilities that are included in the definition of Enhabit Liabilities pursuant to this clause (ii);
(iii) any and all Enhabit Accounts Payable;
(iv) any and all Liabilities that are expressly provided by this Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as Liabilities to be assumed by Enhabit or any other member of the Enhabit Group, and all agreements, obligations and Liabilities of any member of the Enhabit Group under this Agreement or any of the Ancillary Agreements;
(v) any and all Liabilities set forth on Schedule 2.3(a)(v);
(vi) except as otherwise set forth in this Section 2.3(a), all Liabilities, including any Environmental Liabilities, relating to, arising out of or resulting from the actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, at or after the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent that such Liabilities relate to, arise out of or result from the Enhabit Business or an Enhabit Asset;
(vii) except as otherwise set forth in this Section 2.3(a), any and all Liabilities relating to, arising out of or resulting from the Enhabit Contracts, the Enhabit Intellectual Property Rights, the Enhabit Technology, Enhabit Information Technology, the Enhabit Permits, the Enhabit Real Property, the Enhabit Tangible Personal Property or any Enhabit Product, whether occurring or existing prior to, at or after the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), including, for the avoidance of doubt, any and all Liabilities relating to, arising out of or resulting from the sale by any member of the Encompass Group prior to the Effective Time of Enhabit Products; and
(viii) all Liabilities arising out of claims made by any Third Party (including Encompass’s or Enhabit’s respective directors, officers, stockholders, employees and agents) against any member of the Encompass Group or the Enhabit Group to the extent relating to, arising out of or resulting from the Enhabit Business or the Enhabit Assets, or the other business, operations, activities or Liabilities referred to in clauses (i) through (vii) above, including for the avoidance of doubt the claims set forth on Schedule 2.3(a)(viii).
Notwithstanding the foregoing, the Parties hereby acknowledge and agree that (A) while a single Liability may fall within more than one of the clauses (i) through (viii) in this Section 2.3(a), such fact does not imply that (x) such Liability shall be transferred more than once or (y) any duplication of such Liability is required, and (B) the Enhabit Liabilities shall not in any event include any Liability referred to in clauses (i) through (v) of Section 2.3(b) or any Liabilities set forth on Schedule 2.3(a)(ix).
(b) Encompass Liabilities. For the purposes of this Agreement, “Encompass Liabilities” shall mean the following Liabilities of either Party or any of the members of its Group:
(i) any and all Accounts Payable, other than the Enhabit Accounts Payable;
(ii) all Liabilities, including any Environmental Liabilities, relating to, arising out of or resulting from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, at or after the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time) of any member of the Encompass Group, and, prior to the Effective Time, any member of the Enhabit Group, in each case, to the extent that such Liabilities are not Enhabit Liabilities;
(iii) all Liabilities that are expressly provided by this Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as Liabilities to be assumed by Encompass or any other member of the Encompass Group, and all agreements, obligations and Liabilities of any member of the Encompass Group under this Agreement or any of the Ancillary Agreements;
(iv) all Liabilities set forth on Schedule 2.3(b)(iv); and
(v) all Liabilities arising out of claims made by any Third Party (including Encompass’s or Enhabit’s respective directors, officers, stockholders, employees and agents) against any member of the Encompass Group or the Enhabit Group to the extent relating to, arising out of or resulting from the Encompass Business or the Encompass Assets, or the other business, operations, activities or Liabilities referred to in clauses (i) through (iv) above, including for the avoidance of doubt the claims set forth on Schedule 2.3(b)(v), in each case, to the extent that such Liabilities are not Enhabit Liabilities.
2.4 Approvals and Notifications.
(a) Approvals and Notifications for Enhabit Assets. To the extent that the Separation or the Distribution or any transaction contemplated thereby requires any Approvals or Notifications, the Parties shall use their commercially reasonable efforts to obtain or make such Approvals or Notifications as soon as reasonably practicable; provided, however, that, except to the extent expressly provided in this Agreement or any of the Ancillary Agreements or as otherwise agreed in writing between Encompass and Enhabit, neither Encompass nor Enhabit shall be obligated to contribute capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any Person in order to obtain or make such Approvals or Notifications.
(b) Delayed Enhabit Transfers. If and to the extent that the valid, complete and perfected transfer or assignment to the Enhabit Group of any Enhabit Asset or assumption by the Enhabit Group of any Enhabit Liability in connection with the Separation or the Distribution would be a violation of applicable Law or require any Approvals or Notifications that have not been obtained or made by the Effective Time then, unless the Parties mutually shall otherwise determine, the transfer or assignment to the Enhabit Group of such Enhabit Assets or the assumption by the Enhabit Group of such Enhabit Liabilities, as the case may be, shall be automatically deemed deferred and any such purported transfer, assignment or assumption shall be null and void until such time as all legal impediments are removed or such Approvals or Notifications have been obtained or made. Notwithstanding the foregoing, any such Enhabit Assets or Enhabit Liabilities shall continue to constitute Enhabit Assets and Enhabit Liabilities for all other purposes of this Agreement.
(c) Treatment of Delayed Enhabit Assets and Delayed Enhabit Liabilities. If any transfer or assignment of any Enhabit Asset (or a portion thereof) or any assumption of any Enhabit Liability (or a portion thereof) intended to be transferred, assigned or assumed hereunder, as the case may be, is not consummated at or prior to the Effective Time, whether as a result of the provisions of Section 2.4(b) or for any other reason (any such Enhabit Asset (or a portion thereof), a “Delayed Enhabit Asset” and any such Enhabit Liability (or a portion thereof), a “Delayed Enhabit Liability”), then, insofar as reasonably possible and subject to applicable Law, the member of the Encompass Group retaining such Delayed Enhabit Asset or such Delayed Enhabit Liability, as the case may be, shall thereafter hold such Delayed Enhabit Asset or Delayed Enhabit Liability, as the case may be, for the use and benefit (or the performance and obligation, in the case of a Liability) of the member of the Enhabit Group entitled thereto (at the expense of the member of the Enhabit Group entitled thereto). In addition, the member of the Encompass Group retaining such Delayed Enhabit Asset or such Delayed Enhabit Liability shall, insofar as reasonably possible and to the extent permitted by applicable Law, treat such Delayed Enhabit Asset or Delayed Enhabit Liability in the ordinary course of business in accordance with past practice and take such other actions as may be reasonably requested by the member of the Enhabit Group to whom such Delayed Enhabit Asset is to be transferred or assigned, or which will assume such Delayed Enhabit Liability, as the case may be, in order to place such member of the Enhabit Group in a substantially similar position as if such Delayed Enhabit Asset or Delayed Enhabit Liability had been transferred, assigned or assumed as contemplated hereby and so that all the benefits and burdens relating to such Delayed Enhabit Asset or Delayed Enhabit Liability, as the case may be, including use, risk of loss, potential for gain, and dominion, control and command over such Delayed Enhabit Asset or Delayed Enhabit Liability, as the case may be, and all costs and expenses related thereto, shall inure from and after the Effective Time to the Enhabit Group.
(d) Transfer of Delayed Enhabit Assets and Delayed Enhabit Liabilities. If and when the Approvals or Notifications, the absence of which caused the deferral of transfer or assignment of any Delayed Enhabit Asset or the deferral of assumption of any Delayed Enhabit Liability pursuant to Section 2.4(b), are obtained or made, and, if and when any other legal impediments for the transfer or assignment of any Delayed Enhabit Asset or the assumption of any Delayed Enhabit Liability have been removed, the transfer or assignment of the applicable Delayed Enhabit Asset or the assumption of the applicable Delayed Enhabit Liability, as the case may be, shall be effected in accordance with the terms of this Agreement and/or the applicable Ancillary Agreement.
(e) Costs for Delayed Enhabit Assets and Delayed Enhabit Liabilities; Payment of the Delayed Enhabit Asset Consideration. Except as otherwise agreed in writing between the Parties, any member of the Encompass Group retaining a Delayed Enhabit Asset or Delayed Enhabit Liability due to the deferral of the transfer or assignment of such Delayed Enhabit Asset or the deferral of the assumption of such Delayed Enhabit Liability, as the case may be, shall not be obligated, in connection with the foregoing, to expend any money unless the necessary funds are advanced (or otherwise made available) by Enhabit or the member of the Enhabit Group entitled to the Delayed Enhabit Asset or Delayed Enhabit Liability, other than reasonable out-of-pocket expenses, attorneys’ fees and recording or similar fees, all of which shall be promptly reimbursed by Enhabit or the member of the Enhabit Group entitled to such Delayed Enhabit Asset or Delayed Enhabit Liability.
(f) Approvals and Notifications for Encompass Assets. To the extent that the transfer or assignment of any Encompass Asset, the assumption of any Encompass Liability, the Separation, the Distribution or any other transaction contemplated under this Agreement requires any Approvals or Notifications, the Parties shall use their commercially reasonable efforts to obtain or make such Approvals or Notifications as soon as reasonably practicable; provided, however, that, except to the extent expressly provided in this Agreement or any of the Ancillary Agreements or as otherwise agreed between Encompass and Enhabit, neither Encompass nor Enhabit shall be obligated to contribute capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any Person in order to obtain or make such Approvals or Notifications.
(g) Delayed Encompass Transfers. If and to the extent that the valid, complete and perfected transfer or assignment to the Encompass Group of any Encompass Asset or assumption by the Encompass Group of any Encompass Liability in connection with the Separation or the Distribution would be a violation of applicable Law or require any Approvals or Notifications that have not been obtained or made by the Effective Time then, unless the Parties mutually shall otherwise determine, the transfer or assignment to the Encompass Group of such Encompass Assets or the assumption by the Encompass Group of such Encompass Liabilities, as the case may be, shall be automatically deemed deferred and any such purported transfer, assignment or assumption shall be null and void until such time as all legal impediments are removed or such Approvals or Notifications have been obtained or made. Notwithstanding the foregoing, any such Encompass Assets or Encompass Liabilities shall continue to constitute Encompass Assets and Encompass Liabilities for all other purposes of this Agreement.
(h) Treatment of Delayed Encompass Assets and Delayed Encompass Liabilities. If any transfer or assignment of any Encompass Asset (or a portion thereof) or any assumption of any Encompass Liability (or a portion thereof) intended to be transferred, assigned or assumed hereunder, as the case may be, is not consummated at or prior to the Effective Time whether as a result of the provisions of Section 2.4(g) or for any other reason (any such Encompass Asset (or a portion thereof), a “Delayed Encompass Asset” and any such Encompass Liability (or a portion thereof), a “Delayed Encompass Liability”), then, insofar as reasonably possible and subject to applicable Law, the member of the Enhabit Group retaining such Delayed Encompass Asset or such Delayed Encompass Liability, as the case may be, shall thereafter hold such Delayed Encompass Asset or Delayed Encompass Liability, as the case may be, for the use and benefit (or the performance or obligation, in the case of a Liability) of the member of the Encompass Group entitled thereto (at the expense of the member of the Encompass Group entitled thereto). In addition, the member of the Enhabit Group retaining such Delayed Encompass Asset or such Delayed Encompass Liability shall, insofar as reasonably possible and to the extent permitted by applicable Law, treat such Delayed Encompass Asset or Delayed Encompass Liability in the ordinary course of business in accordance with past practice. Such member of the Enhabit Group shall also take such other actions as may be reasonably requested by the member of the Encompass Group to which such Delayed Encompass Asset is to be
transferred or assigned, or which will assume such Delayed Encompass Liability, as the case may be, in order to place such member of the Encompass Group in a substantially similar position as if such Delayed Encompass Asset or Delayed Encompass Liability had been transferred, assigned or assumed and so that all the benefits and burdens relating to such Delayed Encompass Asset or Delayed Encompass Liability, as the case may be, including use, risk of loss, potential for gain, and dominion, control and command over such Delayed Encompass Asset or Delayed Encompass Liability, as the case may be, and all costs and expenses related thereto, shall inure from and after the Effective Time to the Encompass Group.
(i) Transfer of Delayed Encompass Assets and Delayed Encompass Liabilities. If and when the Approvals or Notifications, the absence of which caused the deferral of transfer or assignment of any Delayed Encompass Asset or the deferral of assumption of any Delayed Encompass Liability pursuant to Section 2.4(g), are obtained or made, and, if and when any other legal impediments for the transfer or assignment of any Delayed Encompass Asset or the assumption of any Delayed Encompass Liability have been removed, the transfer or assignment of the applicable Delayed Encompass Asset or the assumption of the applicable Delayed Encompass Liability, as the case may be, shall be effected in accordance with the terms of this Agreement and/or the applicable Ancillary Agreement.
(j) Costs for Delayed Encompass Assets and Delayed Encompass Liabilities. Except as otherwise agreed in writing between the Parties, any member of the Enhabit Group retaining a Delayed Encompass Asset or Delayed Encompass Liability due to the deferral of the transfer or assignment of such Delayed Encompass Asset or the deferral of the assumption of such Delayed Encompass Liability, as the case may be, shall not be obligated, in connection with the foregoing, to expend any money unless the necessary funds are advanced (or otherwise made available) by Encompass or the member of the Encompass Group entitled to the Delayed Encompass Asset or Delayed Encompass Liability, other than reasonable out-of-pocket expenses, attorneys’ fees and recording or similar fees, all of which shall be promptly reimbursed by Encompass or the member of the Encompass Group entitled to such Delayed Encompass Asset or Delayed Encompass Liability.
2.5 Assignment and Novation of Liabilities.
(a) Assignment and Novation of Enhabit Liabilities.
(i) Each of Encompass and Enhabit, at the request of the other, shall use commercially reasonable efforts to obtain, or to cause to be obtained, as soon as reasonably practicable, any consent, substitution, approval or amendment required to novate or assign all Enhabit Liabilities and obtain in writing the unconditional release of each member of the Encompass Group that is a party to or otherwise obligated under any such arrangements, to the extent permitted by applicable Law and effective as of the Effective Time, so that, in any such case, the members of the Enhabit Group shall be solely responsible for such Enhabit Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or any of the Ancillary Agreements, neither Encompass nor Enhabit shall be obligated to contribute any capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any third Person from whom any such consent, substitution, approval, amendment or release is requested. To the extent such substitution contemplated by the first sentence of this Section 2.5(a)(i) has been effected, the members of the Encompass Group shall, from and after the Effective Time, cease to have any obligation whatsoever arising from or in connection with such Enhabit Liabilities.
(ii) If Encompass or Enhabit is unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release, and the applicable member of the Encompass Group continues to be bound by such agreement, lease, license or other obligation or Liability (each, an “Unreleased Enhabit Liability”), Enhabit shall, to the extent not prohibited by Law, (A) use its commercially reasonable efforts to effect such consent, substitution, approval, amendment or release as soon as practicable following the Effective Time, but in any event within six (6) months thereof, and (B) as indemnitor, guarantor, agent or subcontractor for such member of the Encompass Group, as the case may be, (1) pay, perform and discharge fully all the obligations or other Liabilities of such member of the Encompass Group that constitute Unreleased Enhabit Liabilities from and after the Effective Time and (2) use its commercially reasonable efforts to effect such payment, performance or discharge prior to any demand for such payment, performance or discharge is permitted to be made by the obligee thereunder on any member of the Encompass Group. If and when any such consent, substitution, approval, amendment or release shall be obtained or the Unreleased Enhabit Liabilities shall otherwise become assignable or able to be novated, Encompass shall promptly assign, or cause to be assigned, and Enhabit or the applicable member of the Enhabit Group shall assume, such Unreleased Enhabit Liabilities without exchange of further consideration.
(iii) If Enhabit is unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release as set forth in clause (ii) of this Section 2.5(a), Enhabit and any relevant member of its Group that has assumed the applicable Unreleased Enhabit Liability shall indemnify, defend and hold harmless Encompass against or from such Unreleased Enhabit Liability in accordance with the provisions of Article IV and shall, as agent or subcontractor for Encompass, pay, perform and discharge fully all the obligations or other Liabilities of Encompass thereunder.
(b) Assignment and Novation of Encompass Liabilities.
(i) Each of Encompass and Enhabit, at the request of the other, shall use commercially reasonable efforts to obtain, or to cause to be obtained, as soon as reasonably practicable, any consent, substitution, approval or amendment required to novate or assign all Encompass Liabilities and obtain in writing the unconditional release of each member of the Enhabit Group that is a party to any such arrangements, so that, in any such case, the members of the Encompass Group shall be solely responsible for such Encompass Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or any of the Ancillary Agreements, neither Encompass nor Enhabit shall be obligated to contribute any capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any third Person from whom any such consent, substitution, approval, amendment or release is requested. To the extent such substitution contemplated by the first sentence of this Section 2.5(b)(i) has been effected, the members of the Enhabit Group shall, from and after the Effective Time, cease to have any obligation whatsoever arising from or in connection with such Encompass Liabilities.
(ii) If Encompass or Enhabit is unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release and the applicable member of the Enhabit Group continues to be bound by such agreement, lease, license or other obligation or Liability (each, an “Unreleased Encompass Liability”), Encompass shall, to the extent not prohibited by Law, (A) use its commercially reasonable efforts to effect such consent, substitution, approval, amendment or release as soon as practicable following the Effective Time, but in any event within six (6) months thereof, and (B) as indemnitor, guarantor, agent or subcontractor for such member of the Enhabit Group, as the case may be, (1) pay, perform and discharge fully all the obligations or other Liabilities of such member of the Enhabit Group that constitute Unreleased Encompass Liabilities from and after the Effective Time and (2) use its commercially reasonable efforts to effect such payment, performance or discharge prior to any demand for such payment, performance or discharge is permitted to be made by the obligee thereunder on any member of the Enhabit Group. If and when any such consent, substitution, approval, amendment or release shall be obtained or the Unreleased Encompass Liabilities shall otherwise become assignable or able to be novated, Enhabit shall promptly assign, or cause to be assigned, and Encompass or the applicable member of the Encompass Group shall assume, such Unreleased Encompass Liabilities without exchange of further consideration.
(iii) If Encompass is unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release as set forth in clause (ii) of this Section 2.5(b), Encompass and any relevant member of its Group (except for members of the Enhabit Group) that has assumed the applicable Unreleased Encompass Liability shall indemnify, defend and hold harmless Enhabit against or from such Unreleased Encompass Liability in accordance with the provisions of Article IV and shall, as agent or subcontractor for Enhabit, pay, perform and discharge fully all the obligations or other Liabilities of Enhabit thereunder.
2.6 Release of Guarantees. In furtherance of, and not in limitation of, the obligations set forth in Section 2.5:
(a) At or prior to the Effective Time or as soon as practicable thereafter, each of Encompass and Enhabit shall, at the request of the other Party and with the reasonable cooperation of such other Party and the applicable member(s) of such other Party’s Group, use commercially reasonable efforts to (i) have any member(s) of the Encompass Group removed as guarantor of or obligor for any Enhabit Liability to the extent that such guarantee or obligation relates to Enhabit Liabilities, including the removal of any Security Interest on or in any Encompass Asset that may serve as collateral or security for any such Enhabit Liability; and (ii) have any member(s) of the Enhabit Group removed as guarantor of or obligor for any Encompass Liability to the extent that such guarantee or obligation relates to Encompass Liabilities, including the removal of any Security Interest on or in any Enhabit Asset that may serve as collateral or security for any such Encompass Liability.
(b) To the extent required to obtain a release from a guarantee of:
(i) any member of the Encompass Group, Enhabit shall execute a guarantee agreement substantially in the form of the existing guarantee or such other form as is agreed to by the relevant parties to such guarantee agreement, which agreement shall include the removal of any Security Interest on or in any Encompass Asset that may serve as collateral or security for any such Enhabit Liability, except to the extent that such existing guarantee contains representations, covenants or other terms or provisions either (i) with which Enhabit would be reasonably unable to comply or (ii) which Enhabit would not reasonably be able to avoid breaching; and
(ii) any member of the Enhabit Group, Encompass shall execute a guarantee agreement substantially in the form of the existing guarantee or such other form as is agreed to by the relevant parties to such guarantee agreement, which agreement shall include the removal of any Security Interest on or in any Enhabit Asset that may serve as collateral or security for any such Encompass Liability, except to the extent that such existing guarantee contains representations, covenants or other terms or provisions either (i) with which Encompass would be reasonably unable to comply or (ii) which Encompass would not reasonably be able to avoid breaching.
(c) If Encompass or Enhabit is unable to obtain, or to cause to be obtained, any such required removal or release, or is expressly not required to do so, in each case as set forth in clauses (a) and (b) of this Section 2.6, (i) the Party or the relevant member of its Group that is responsible pursuant to this Agreement for the Liability associated with such guarantee shall indemnify, defend and hold harmless the guarantor or obligor, as applicable, against or from any Liability arising from or relating thereto in accordance with the provisions of Article IV and shall, as agent or subcontractor for such guarantor or obligor, pay, perform and discharge fully all the obligations or other Liabilities of such guarantor or obligor thereunder; and (ii) each of Encompass and Enhabit, on behalf of itself and the other members of its respective Group, agrees not to renew or extend the term of, increase any obligations under, or transfer to a Third Party, any loan, guarantee, lease, contract or other obligation for which the other Party or a member of its Group is or may be liable unless all obligations of such other Party and the members of such other Party’s Group with respect thereto are thereupon terminated by documentation satisfactory in form and substance to such other Party.
2.7 Termination of Agreements.
(a) Except as set forth in Section 2.7(b), in furtherance of the releases and other provisions of Section 4.1, Enhabit and each member of the Enhabit Group, on the one hand, and Encompass and each member of the Encompass Group, on the other hand, hereby terminate any and all agreements, arrangements, commitments or understandings, whether or not in writing, between or among Enhabit and/or any member of the Enhabit Group, on the one hand, and Encompass and/or any member of the Encompass Group, on the other hand, effective as of the Effective Time. No such terminated agreement, arrangement, commitment or understanding (including any provision thereof which purports to survive termination) shall be of any further force or effect after the Effective Time. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing.
(b) The provisions of Section 2.7(a) shall not apply to any of the following agreements, arrangements, commitments or understandings (or to any of the provisions thereof):
(i) this Agreement and the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement or any Ancillary Agreement to be entered into by any of the Parties or any of the members of their respective Groups or to be continued from and after the Effective Time);
(ii) any agreements, arrangements, commitments or intercompany accounts receivable, accounts payable or other intercompany accounts listed or described on Schedule 2.7(b)(ii), which shall be treated as described therein;
(iii) any agreements, arrangements, commitments or understandings to which any Third Party is a party thereto, including any Shared Contracts; and
(iv) any agreements, arrangements, commitments or understandings to which any non-wholly owned Subsidiary of Encompass or Enhabit, as the case may be, is a party (it being understood that directors’ qualifying shares or similar interests will be disregarded for purposes of determining whether a Subsidiary is wholly owned).
(c) All of the intercompany accounts receivable and accounts payable between any member of the Encompass Group, on the one hand, and any member of the Enhabit Group, on the other hand, outstanding as of the Effective Time and arising out of the contracts or agreements described in Section 2.7(b) or out of the provision, prior to the Effective Time, of the services to be provided following the Effective Time pursuant to the Ancillary Agreements shall be repaid or settled following the Effective Time in the ordinary course of business or, if otherwise mutually agreed prior to the Effective Time by duly authorized representatives of Encompass and Enhabit, cancelled. All other intercompany accounts receivable and accounts payable between any member of the Encompass Group, on the one hand, and any member of the Enhabit Group, on the other hand, outstanding as of the Effective Time shall be repaid or settled immediately prior to or as promptly as practicable after the Effective Time.
2.8 Treatment of Shared Contracts.
(a) Subject to applicable Law and without limiting the generality of the obligations set forth in Section 2.1, unless the Parties otherwise agree or the benefits of any contract, agreement, arrangement, commitment or understanding described in this Section 2.8 are expressly conveyed to the applicable Party pursuant to this Agreement or an Ancillary Agreement, any contract or agreement, a portion of which relates to matters that would be the subject of an Enhabit Contract, but the remainder of which relates to matters that would be the subject of a Encompass Asset (any such contract or agreement, including those set forth on Schedule 2.8, a “Shared Contract”), shall be assigned in relevant part to the applicable member(s) of the applicable Group, if so assignable, or appropriately amended prior to, on or after the Effective Time, so that each Party or the member of its Group shall, as of the Effective Time, be entitled to the rights and benefits, and shall assume the related portion of any Liabilities, inuring to its respective businesses; provided, however, that (i) in no event shall any member of any Group be required to assign (or amend) any Shared Contract in its entirety or to assign a portion of any Shared Contract which is not assignable (or cannot be amended) by its terms (including any terms imposing consents or conditions on an assignment where such consents or conditions have not been obtained or fulfilled) and (ii) if any Shared Contract cannot be so partially assigned by its terms or otherwise, or cannot be amended or if such assignment or amendment would impair the benefit the parties thereto derive from such Shared Contract, then the Parties shall, and shall cause each of the members of their respective Groups to, take such other reasonable and permissible actions (including by providing prompt notice to the other Party with respect to any relevant claim of Liability or other relevant matters arising in connection with a Shared Contract so as to allow such other Party the ability to exercise any applicable rights under such Shared Contract) to cause a member of the Enhabit Group or the Encompass Group, as the case may be, to receive the rights and benefits of that portion of each Shared Contract that relates to the Enhabit Business or the Encompass Business, as the case may be (in each case, to the extent so related), as if such Shared Contract had been assigned to a member of the applicable Group (or amended to allow a member of the applicable Group to exercise applicable rights under such Shared Contract) pursuant to this Section 2.8, and to bear the burden of the corresponding Liabilities (including any Liabilities that may arise by reason of such arrangement), as if such Liabilities had been assumed by a member of the applicable Group pursuant to this Section 2.8.
(b) Each of Encompass and Enhabit shall, and shall cause the members of its Group to, (i) treat for all Tax purposes the portion of each Shared Contract inuring to its respective businesses as an Asset owned by, and/or a Liability of, as applicable, such Party, or the members of its Group, as applicable, not later than the Effective Time, and (ii) neither report nor take any Tax position (on a Tax Return or otherwise) inconsistent with such treatment (unless required by applicable Law).
(c) Nothing in this Section 2.8 shall require any member of any Group to make any payment (except to the extent advanced, assumed or agreed in advance to be reimbursed by any member of the other Group), incur any obligation or grant any concession for the benefit of any member of the other Group in order to effect any transaction contemplated by this Section 2.8.
2.9 Bank Accounts; Cash Balances.
(a) Each Party agrees to take, or cause the members of its Group to take, at the Effective Time (or such earlier time as the Parties may agree), all actions necessary to amend all contracts or agreements governing each bank and brokerage account owned by Enhabit or any other member of the Enhabit Group (collectively, the “Enhabit Accounts”) and all contracts or agreements governing each bank or brokerage account owned by Encompass or any other member of the Encompass Group (collectively, the “Encompass Accounts”) so that each such Enhabit Account and Encompass Account, if currently linked (whether by automatic withdrawal, automatic deposit or any other authorization to transfer funds from or to, hereinafter “Linked”) to any Encompass Account or Enhabit Account, respectively, is de-Linked from such Encompass Account or Enhabit Account, respectively.
(b) It is intended that, following consummation of the actions contemplated by Section 2.9(a), there will be in place a cash management process pursuant to which the Enhabit Accounts will be managed and funds collected will be transferred into one (1) or more accounts maintained by Enhabit or a member of the Enhabit Group.
(c) It is intended that, following consummation of the actions contemplated by Section 2.9(a), there will continue to be in place a cash management process pursuant to which the Encompass Accounts will be managed and funds collected will be transferred into one (1) or more accounts maintained by Encompass or a member of the Encompass Group.
(d) With respect to any outstanding checks issued or payments initiated by Encompass, Enhabit, or any of the members of their respective Groups prior to the Effective Time, such outstanding checks and payments shall be honored following the Effective Time by the Person or Group owning the account on which the check is drawn or from which the payment was initiated, respectively.
(e) As between Encompass and Enhabit (and the members of their respective Groups), all payments made and reimbursements received after the Effective Time by either Party (or member of its Group) that relate to a business, Asset or Liability of the other Party (or member of its Group), shall be held by such Party in trust for the use and benefit of the Party entitled thereto and, promptly following receipt by such Party of any such payment or reimbursement, such Party shall pay over, or shall cause the applicable member of its Group to pay over, to the other Party the amount of such payment or reimbursement without right of set-off.
2.10 Ancillary Agreements. Effective at or prior to the Effective Time, each of Encompass and Enhabit will, or will cause the applicable members of its Group to, execute and deliver all Ancillary Agreements to which it is a party.
2.11 Disclaimer of Representations and Warranties. EACH OF ENCOMPASS (ON BEHALF OF ITSELF AND EACH MEMBER OF THE ENCOMPASS GROUP) AND ENHABIT (ON BEHALF OF ITSELF AND EACH MEMBER OF THE ENHABIT GROUP) UNDERSTANDS AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, NO PARTY TO THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR OTHERWISE, IS REPRESENTING OR WARRANTING IN ANY WAY AS TO THE ASSETS, BUSINESSES OR LIABILITIES TRANSFERRED OR ASSUMED AS CONTEMPLATED HEREBY OR THEREBY, AS TO ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION THEREWITH (INCLUDING GOVERNMENTAL APPROVALS OR PERMITS OF ANY KIND), AS TO THE VALUE OR FREEDOM FROM
ANY SECURITY INTERESTS OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF SUCH PARTY, OR AS TO THE ABSENCE OF ANY DEFENSES OR RIGHT OF SETOFF OR FREEDOM FROM COUNTERCLAIM WITH RESPECT TO ANY CLAIM OR OTHER ASSET, INCLUDING ANY ACCOUNTS RECEIVABLE, OF ANY PARTY, OR AS TO THE LEGAL SUFFICIENCY OF ANY ASSIGNMENT, DOCUMENT OR INSTRUMENT DELIVERED HEREUNDER TO CONVEY TITLE TO ANY ASSET OR THING OF VALUE UPON THE EXECUTION, DELIVERY AND FILING HEREOF OR THEREOF. EXCEPT AS MAY EXPRESSLY BE SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, ALL SUCH ASSETS ARE BEING TRANSFERRED ON AN “AS IS,” “WHERE IS” BASIS (AND, IN THE CASE OF ANY REAL PROPERTY, BY MEANS OF A QUITCLAIM OR SIMILAR FORM OF DEED OR CONVEYANCE) AND THE RESPECTIVE TRANSFEREES SHALL BEAR, WITHOUT LIMITATION, THE ECONOMIC AND LEGAL RISKS THAT (I) ANY CONVEYANCE WILL PROVE TO BE INSUFFICIENT TO VEST IN THE TRANSFEREE GOOD AND MARKETABLE TITLE, FREE AND CLEAR OF ANY SECURITY INTEREST, AND (II) ANY NECESSARY APPROVALS OR NOTIFICATIONS ARE NOT OBTAINED OR MADE OR THAT ANY REQUIREMENTS OF LAWS OR JUDGMENTS ARE NOT COMPLIED WITH.
2.12 Enhabit Financing Arrangements; Enhabit Debt Incurrence.
(a) Prior to the Effective Time and pursuant to the Separation Step Plan, (i) Enhabit will enter into one or more financing arrangements and agreements, as set forth on Schedule 2.12 (the “Enhabit Financing Arrangements”), pursuant to which it shall borrow prior to the Effective Time a principal amount of not less than $570 million (the “Enhabit Debt”) and (ii) Enhabit shall distribute, convey or otherwise transfer in the manner determined by Encompass some or all (as determined by Encompass) of the proceeds of the Enhabit Debt to Encompass (such distribution, conveyance or transfer, the “Cash Transfer”). Encompass and Enhabit agree to take, and shall cause the respective members of their Group to take, all necessary actions to assure the full release and discharge of Encompass and the other members of the Encompass Group from all liabilities and other obligations pursuant to the Enhabit Financing Arrangements as of no later than the Effective Time. The Parties agree that Enhabit or another member of the Enhabit Group, as the case may be, and not Encompass or any member of the Encompass Group, are and shall be responsible for all costs and expenses incurred in connection with the Enhabit Financing Arrangements.
(b) Prior the Effective Time, Encompass and Enhabit shall cooperate in the preparation of all materials as may be necessary or advisable to execute the Enhabit Financing Arrangements.
2.13 Financial Information Certifications. Encompass’s disclosure controls and procedures and internal control over financial reporting (as each is contemplated by the Exchange Act) are currently applicable to Enhabit as its wholly-owned Subsidiary (and not as a reporting company under the Exchange Act). In order to enable the principal executive officer and principal financial officer of Enhabit to make the certifications required of them under Section 302 of the Sarbanes-Oxley Act of 2002 following the Distribution in respect of any quarterly or annual fiscal period of Enhabit that begins on or prior to the Distribution Date in respect of which financial statements are not included in the Form 10 (a “Straddle Period”), upon thirty (30) Business Days’ advance written request by Enhabit, Encompass shall provide Enhabit with one (1) or more certifications with respect to such disclosure controls and procedures and the effectiveness thereof and whether there were any changes in the internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the internal control over financing reporting, which certification(s) shall (x) be with respect to the applicable Straddle Period (it being understood that no certification need be provided with respect to any period or portion of any period after the Distribution Date) and (y) be in substantially the same form as those that had been provided by officers or employees of Encompass in similar certifications delivered prior to the Distribution Date, with such changes thereto as Encompass may determine. Such certification(s) shall be provided by Encompass (and not by any officer or employee in their individual capacity).
ARTICLE III
THE DISTRIBUTION
3.1 Sole and Absolute Discretion; Cooperation.
(a) Encompass shall, in its sole and absolute discretion, determine the terms of the Distribution, including the form, structure and terms of any transaction(s) and/or offering(s) to effect the Distribution and the timing and conditions to the consummation of the Distribution. In addition, Encompass may, at any time and from time to time until the consummation of the Distribution, modify or change the terms of the Distribution, including by accelerating or delaying the timing of the consummation of all or part of the Distribution. Nothing shall in any way limit Encompass’s right to terminate this Agreement or the Distribution as set forth in Article IX or alter the consequences of any such termination from those specified in Article IX.
(b) Enhabit shall cooperate with Encompass to accomplish the Distribution and shall, at Encompass’s direction, promptly take any and all actions necessary or desirable to effect the Distribution, including in respect of the registration under the Exchange Act of Enhabit Shares on the Form 10. Encompass shall select any investment bank or manager in connection with the Distribution, as well as any financial printer, solicitation and/or exchange agent and financial, legal, accounting and other advisors for Encompass. Enhabit and Encompass, as the case may be, will provide to the Distribution Agent any information required in order to complete the Distribution.
3.2 Actions Prior to the Distribution.
(a) Subject to the conditions specified in Section 3.3, Encompass and Enhabit shall use their reasonable best efforts to consummate the Distribution. Such actions shall include, but not necessarily be limited to, those specified in this Section 3.2.
(b) Notice to NYSE. Encompass shall, to the extent possible, give the NYSE not less than ten (10) days’ advance notice of the Record Date in compliance with Rule 10b-17 under the Exchange Act.
(c) Enhabit Certificate of Incorporation and Enhabit Bylaws. On or prior to the Distribution Date, Encompass and Enhabit shall each take all actions that may be required to provide for the adoption by Enhabit of the Amended and Restated Certificate of Incorporation of Enhabit substantially in the form attached as Exhibit A and the Amended and Restated Bylaws of Enhabit substantially in the form attached as Exhibit B.
(d) Enhabit Directors and Officers. On or prior to the Distribution Date, Encompass and Enhabit shall take all necessary actions so that as of the Effective Time: (i) the directors and executive officers of Enhabit shall be those set forth in the Information Statement made available to the Record Holders prior to the Distribution Date, unless otherwise agreed by the Parties; (ii) each individual referred to in clause (i) shall have resigned from his or her position, if any, as a member of the Encompass Board and/or as an executive officer of Encompass; and (iii) Enhabit shall have such other officers as Enhabit shall appoint.
(e) Securities Law Matters. Enhabit shall file any amendments or supplements to the Form 10 as may be necessary or advisable in order to cause the Form 10 to become and remain effective as required by the SEC or federal, state or other applicable securities Laws. Encompass and Enhabit will prepare, and Enhabit will, to the extent required under applicable Law, file with the SEC any such documentation and any requisite no-action letters that Encompass determines are necessary or desirable to effectuate the Distribution, and Encompass and Enhabit shall each use reasonable best efforts to obtain all necessary approvals from the SEC with respect thereto as soon as practicable. Encompass and Enhabit shall take all such action as may be necessary or appropriate under the securities or blue sky Laws of the United States (and any comparable Laws under any foreign jurisdiction) in connection with the Distribution.
(f) NYSE Listing. Enhabit shall prepare, file and use reasonable best efforts to seek to make effective, an application for listing of the shares of Enhabit Common Stock to be distributed in the Distribution on the NYSE, subject to official notice of distribution.
(g) Availability of Information Statement. Encompass shall, as soon as is reasonably practicable after the Form 10 is declared effective under the Exchange Act and the Encompass Board has approved the Distribution, cause the Information Statement to be mailed or otherwise made available to the Record Holders.
(h) The Distribution Agent. Encompass shall enter into a distribution agent agreement with the Agent or otherwise provide instructions to the Agent regarding the Distribution.
3.3 Conditions to the Distribution.
(a) The consummation of the Distribution will be subject to the satisfaction, or waiver by Encompass in its sole and absolute discretion, of the following conditions:
(i) The SEC shall have declared effective the Form 10; no order suspending the effectiveness of the Form 10 shall be in effect; and no proceedings for such purposes shall have been instituted or threatened by the SEC;
(ii) The Information Statement shall have been mailed or otherwise made available to the Record Holders;
(iii) Encompass shall have received an opinion from its external counsel, which opinion remains valid as of the date hereof, satisfactory to the Encompass Board, regarding the qualification of the Distribution as a transaction that is generally tax free for Federal Income Tax purposes under Section 355 of the Code;
(iv) Encompass shall have received a favorable private letter ruling from the IRS, which private letter ruling remains valid as of the date hereof, satisfactory to the Encompass Board, regarding the qualification of the Distribution as a transaction that is generally tax free for Federal Income Tax purposes under Section 355 of the Code and certain other Federal Income Tax matters relating to the Separation and the Distribution;
(v) An independent valuation or financial advisory firm acceptable to Encompass shall have delivered one (1) or more opinions to the Encompass Board regarding solvency and capital adequacy matters with respect to each of Encompass and Enhabit after completion of the Distribution, and such opinions shall be in a form and substance acceptable to the Encompass Board in its sole and absolute discretion;
(vi) All actions and filings necessary or appropriate under applicable U.S. federal, state or other securities Laws or blue sky Laws and the rules and regulations thereunder relating to the Separation and the Distribution shall have been taken or made, and, where applicable, have become effective or been accepted by the applicable Governmental Authority;
(vii) Each of the Ancillary Agreements shall have been duly executed and delivered by the parties thereto;
(viii) No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation, the Distribution or any of the transactions related thereto shall be pending or in effect;
(ix) The Enhabit Shares to be distributed to the Encompass stockholders in the Distribution shall have been approved for listing on the NYSE, subject to official notice of distribution;
(x) Encompass shall have received the proceeds from the Cash Transfer and shall be satisfied in its sole and absolute discretion that, as of the Effective Time, it shall have no further Liability whatsoever under the Enhabit Financing Arrangements, and Encompass shall have completed any required refinancing of its existing indebtedness on terms satisfactory to the Encompass Board in its sole and absolute discretion; and
(xi) No other events or developments shall exist or shall have occurred that, in the judgment of the Encompass Board, in its sole and absolute discretion, makes it inadvisable to effect the Separation, the Distribution or the transactions contemplated by this Agreement or any Ancillary Agreement.
(b) The foregoing conditions are for the sole benefit of Encompass and shall not give rise to or create any duty on the part of Encompass or the Encompass Board to waive or not waive such conditions or in any way limit Encompass’s right to terminate this Agreement as set forth in Article IX or alter the consequences of any such termination from those specified in such Article. Any determination made by the Encompass Board prior to the Distribution concerning the satisfaction or waiver of any or all of the conditions set forth in this Section 3.3 shall be conclusive.
3.4 The Distribution.
(a) Subject to Section 3.3, on or prior to the Effective Time, Enhabit will deliver to the Distribution Agent, for the benefit of the Record Holders, book-entry transfer authorizations for such number of the outstanding Enhabit Shares as is necessary to effect the Distribution, and shall cause the transfer agent for the Encompass Shares to instruct the Agent to distribute at the Effective Time the appropriate number of Enhabit Shares to each such holder or designated transferee or transferees of such holder by way of direct registration in book-entry form. The Distribution shall be effective at the Effective Time.
(b) Subject to Sections 3.3 and 3.4(c), each Record Holder will be entitled to receive in the Distribution a number of whole Enhabit Shares equal to the number of Encompass Shares held by such Record Holder on the Record Date multiplied by the Distribution Ratio.
(c) No fractional shares will be distributed or credited to book-entry accounts in connection with the Distribution. Fractional shares that any Record Holder would otherwise have been entitled to receive will be aggregated and sold in the open market by the Agent. The aggregate net cash proceeds of such sales will be distributed pro rata (based on the fractional share such Record Holder would otherwise have been entitled to receive) to those Record Holders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.
(d) Any Enhabit Shares that remain unclaimed by any Record Holder one hundred eighty (180) days after the Distribution Date shall be delivered to Enhabit, and Enhabit or its transfer agent on its behalf shall hold such Enhabit Shares for the account of such Record Holder, and the Parties agree that all obligations to provide such Enhabit Shares shall be obligations of Enhabit, subject in each case to applicable escheat or other abandoned property Laws, and Encompass shall have no Liability with respect thereto.
(e) Until the Enhabit Shares are duly transferred in accordance with this Section 3.4 and applicable Law, from and after the Effective Time, Enhabit will regard the Persons entitled to receive such Enhabit Shares as record holders of Enhabit Shares in accordance with the terms of the Distribution without requiring any action on the part of such Persons. Enhabit agrees that, subject to any transfers of such shares, from and after the Effective Time, (i) each such holder will be entitled to receive all dividends, if any, payable on, and exercise voting rights and all other rights and privileges with respect to, the Enhabit Shares then held by such holder, and (ii) each such holder will be entitled, without any action on the part of such holder, to receive evidence of ownership of the Enhabit Shares then held by such holder.
ARTICLE IV
MUTUAL RELEASES; INDEMNIFICATION
4.1 Release of Pre-Distribution Claims.
(a) Enhabit Release of Encompass. Except as provided in Section 4.1(c) and Section 4.1(e), effective as of the Effective Time, Enhabit does hereby, for itself and each other member of the Enhabit Group, and their respective successors and assigns, and, to the extent permitted by Law, all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the Enhabit Group (in each case, in their respective capacities as such), remise, release and forever discharge (i) Encompass and the members of the Encompass Group, and their respective successors and assigns and (ii) all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the Encompass Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, in each case from: (A) all Enhabit Liabilities, (B) all Liabilities arising from or in connection with the transactions and all other activities to implement the Separation and the Distribution (for the avoidance of doubt this clause (B) shall not limit or affect indemnification obligations of the Parties set forth in this Agreement or any Ancillary Agreement) and (C) all Liabilities arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances (including, for the avoidance of doubt, the presence of Hazardous Materials on the Enhabit Real Property) occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case before, at or after the Effective Time), in each case to the extent relating to, arising out of or resulting from the Enhabit Business, the Enhabit Assets or the Enhabit Liabilities.
(b) Encompass Release of Enhabit. Except as provided in Section 4.1(c) and Section 4.1(e), effective as of the Effective Time, Encompass does hereby, for itself and each other member of the Encompass Group and their respective successors and assigns, and, to the extent permitted by Law, all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the Encompass Group (in each case, in their respective capacities as such), remise, release and forever discharge (i) Enhabit and the members of the Enhabit Group and their respective successors and assigns, and (ii) all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the Enhabit Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from (A) all Encompass Liabilities, (B) all Liabilities arising from or in connection with the transactions and all other activities to implement the Separation and the Distribution (for the avoidance of doubt this clause (B) shall not limit or affect indemnification obligations of the Parties set forth in this Agreement or any Ancillary Agreement) and (C) all Liabilities arising from or in connection with actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to the Effective Time (whether or not such Liabilities cease being contingent, mature, become known, are asserted or foreseen, or accrue, in each case
before, at or after the Effective Time), in each case to the extent relating to, arising out of or resulting from the Encompass Business, the Encompass Assets or the Encompass Liabilities.
(c) Acknowledgment of Unknown Losses or Claims. The Parties expressly understand and acknowledge that it is possible that unknown losses or claims exist or might come to exist or that present losses may have been underestimated in amount, severity, or both. Accordingly, the Parties are deemed expressly to understand provisions and principles of law such as Section 1542 of the Civil Code of the State of California (“Section 1542”) (as well as any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar or comparable to Section 1542), which provides: GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR. The Parties are hereby deemed to agree that the provisions of Section 1542 and all similar federal or state laws, rights, rules, or legal principles of California or any other jurisdiction that may be applicable herein, are hereby knowingly and voluntarily waived and relinquished with respect to the releases in Section 4.1(a) and Section 4.1(b).
(d) Obligations Not Affected. Nothing contained in Section 4.1(a) or 4.1(b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in Section 2.7(b) or the applicable Schedules thereto as not to terminate as of the Effective Time, in each case in accordance with its terms. Nothing contained in Section 4.1(a) or 4.1(b) shall release any Person from:
(i) any Liability provided in or resulting from any agreement among any members of the Encompass Group or any members of the Enhabit Group that is specified in Section 2.7(b) or the applicable Schedules thereto as not to terminate as of the Effective Time, or any other Liability specified in Section 2.7(b) as not to terminate as of the Effective Time;
(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group, including with respect to indemnification or contribution, under, this Agreement or any Ancillary Agreement;
(iii) any Liability for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by a member of one Group from a member of the other Group prior to the Effective Time;
(iv) any Liability for unpaid amounts for products or services or refunds owing on products or services due on a value received basis for work done by a member of one Group at the request or on behalf of a member of the other Group;
(v) any Liability provided in or resulting from any contract or understanding that is entered into after the Effective Time between any Party (and/or a member of such Party’s Group), on the one hand, and any other Party (and/or a member of the other Party’s Group), on the other hand;
(vi) any Liability provided in or resulting from any agreement between any Person, who after the Effective Time is an employee of the Enhabit Group, on the one hand, and any member of the Encompass Group, on the other hand, including any Liability resulting from any obligation of any such Person in respect of confidentiality, non-competition, non-disparagement or assignment of rights;
(vii) any Liability provided in or resulting from any agreement between any Person, who after the Effective Time is an employee of the Encompass Group, on the one hand, and any member of the Enhabit Group, on the other hand, including any Liability resulting from any obligation of any such Person in respect of confidentiality, non-competition, non-disparagement or assignment of rights;
(viii) any Liability that the Parties may have with respect to any indemnification or contribution or other obligation pursuant to this Agreement, any Ancillary Agreement or otherwise for claims brought against the Parties by third Persons, which Liability shall be governed by the provisions of this Article IV and Article V and, if applicable, the appropriate provisions of the Ancillary Agreements; or
(ix) any Liability the release of which would result in the release of any Person other than a Person expressly contemplated to be released pursuant to this Section 4.1.
In addition, nothing contained in Section 4.1(a) shall release any member of the Encompass Group from honoring its existing obligations to indemnify any director, officer or employee of Enhabit who was a director, officer or employee of any member of the Encompass Group at or prior to the Effective Time, to the extent such director, officer or employee becomes a named defendant in any Action with respect to which such director, officer or employee was entitled to such indemnification pursuant to such existing obligations; it being understood that, if the underlying obligation giving rise to such Action is an Enhabit Liability, Enhabit shall indemnify Encompass for such Liability (including Encompass’s costs to indemnify the director, officer or employee) in accordance with the provisions set forth in this Article IV.
(e) No Claims. Enhabit shall not make, and shall not permit any other member of the Enhabit Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Encompass or any other member of the Encompass Group, or any other Person released pursuant to Section 4.1(a), with respect to any Liabilities released pursuant to Section 4.1(a). Encompass shall not make, and shall not permit any other member of the Encompass Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Enhabit or any other member of the Enhabit
Group, or any other Person released pursuant to Section 4.1(b), with respect to any Liabilities released pursuant to Section 4.1(b).
(f) Execution of Further Releases. At any time at or after the Effective Time, at the request of either Party, the other Party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions of this Section 4.1.
4.2 Indemnification by Enhabit. Except as otherwise specifically set forth in this Agreement or in any Ancillary Agreement, to the fullest extent permitted by Law, Enhabit shall, and shall cause the other members of the Enhabit Group to, indemnify, defend and hold harmless Encompass, each member of the Encompass Group and each of their respective past, present and future directors, officers, employees and agents, in each case in their respective capacities as such, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “Encompass Indemnitees”), from and against any and all Liabilities of the Encompass Indemnitees relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):
(a) any Enhabit Liability;
(b) any failure of Enhabit, any other member of the Enhabit Group or any other Person to pay, perform or otherwise promptly discharge any Enhabit Liabilities in accordance with their terms, whether prior to, on or after the Effective Time;
(c) any breach by Enhabit or any other member of the Enhabit Group of this Agreement or any of the Ancillary Agreements;
(d) except to the extent it relates to an Encompass Liability, any guarantee, indemnification or contribution obligation, surety bond or other credit support agreement, arrangement, commitment or understanding for the benefit of any member of the Enhabit Group by any member of the Encompass Group that survives following the Separation; and
(e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Form 10, the Information Statement (as amended or supplemented if Enhabit shall have furnished any amendments or supplements thereto) or any other Disclosure Document, other than the matters described in clause (e) of Section 4.3.
4.3 Indemnification by Encompass. Except as otherwise specifically set forth in this Agreement or in any Ancillary Agreement, to the fullest extent permitted by Law, Encompass shall, and shall cause the other members of the Encompass Group to, indemnify, defend and hold harmless Enhabit, each member of the Enhabit Group and each of their
respective past, present and future directors, officers, employees or agents, in each case in their respective capacities as such, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “Enhabit Indemnitees”), from and against any and all Liabilities of the Enhabit Indemnitees relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):
(a) any Encompass Liability;
(b) any failure of Encompass, any other member of the Encompass Group or any other Person to pay, perform or otherwise promptly discharge any Encompass Liabilities in accordance with their terms, whether prior to, on or after the Effective Time;
(c) any breach by Encompass or any other member of the Encompass Group of this Agreement or any of the Ancillary Agreements;
(d) except to the extent it relates to an Enhabit Liability, any guarantee, indemnification or contribution obligation, surety bond or other credit support agreement, arrangement, commitment or understanding for the benefit of any member of the Encompass Group by any member of the Enhabit Group that survives following the Separation; and
(e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to statements made explicitly in Encompass’s name in the Form 10, the Information Statement (as amended or supplemented if Enhabit shall have furnished any amendments or supplements thereto) or any other Disclosure Document; it being agreed that the statements set forth on Schedule 4.3(e) shall be the only statements made explicitly in Encompass’s name in the Form 10, the Information Statement or any other Disclosure Document, and all other information contained in the Form 10, the Information Statement or any other Disclosure Document shall be deemed to be information supplied by Enhabit.
4.4 Indemnification Obligations Net of Insurance Proceeds and Other Amounts.
(a) The Parties intend that any Liability subject to indemnification, contribution or reimbursement pursuant to this Article IV or Article V will be net of Insurance Proceeds or other amounts actually recovered (net of any out-of-pocket costs or expenses incurred in the collection thereof) from any Person by or on behalf of the Indemnitee in respect of any indemnifiable Liability. Accordingly, the amount which either Party (an “Indemnifying Party”) is required to pay to any Person entitled to indemnification or contribution hereunder (an “Indemnitee”) will be reduced by any Insurance Proceeds or other amounts actually recovered (net of any out-of-pocket costs or expenses incurred in the collection thereof) from any Person by or on behalf of the Indemnitee in respect of the related Liability. If an Indemnitee receives a payment (an “Indemnity Payment”) required by this Agreement from an Indemnifying Party in respect of any Liability and subsequently receives Insurance Proceeds or any other amounts in respect of such Liability, then within ten (10) calendar days of receipt of such Insurance Proceeds, the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the Insurance Proceeds or such other amounts (net of any out-of-pocket costs or expenses incurred in the collection thereof) had been received, realized or recovered before the Indemnity Payment was made.
(b) The Parties agree that it is their intent that an insurer that would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of any provision contained in this Agreement or any Ancillary Agreement, have any subrogation rights with respect thereto, it being understood that no insurer or any other Third Party shall be entitled to a “windfall” (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification and contribution provisions hereof. Each Party shall, and shall cause the members of its Group to, use commercially reasonable efforts (taking into account the probability of success on the merits and the cost of expending such efforts, including attorneys’ fees and expenses) to collect or recover any Insurance Proceeds that may be collectible or recoverable respecting the Liabilities for which indemnification or contribution may be available under this Article IV. Notwithstanding the foregoing, an Indemnifying Party may not delay making any indemnification payment required under the terms of this Agreement, or otherwise satisfying any indemnification obligation, pending the outcome of any Action to collect or recover Insurance Proceeds, and an Indemnitee need not attempt to collect any Insurance Proceeds prior to making a claim for indemnification or contribution or receiving any Indemnity Payment otherwise owed to it under this Agreement or any Ancillary Agreement.
4.5 Procedures for Indemnification of Third-Party Claims.
(a) Notice of Claims. If, at or following the Effective Time, an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the Encompass Group or the Enhabit Group of any claim or of the commencement by any such Person of any Action (collectively, a “Third-Party Claim”) with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to Section 4.2 or 4.3, or any other Section of this Agreement or any Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof as soon as practicable, but in any event within fourteen (14) days (or sooner if the nature of the Third-Party Claim so requires) after becoming aware of such Third-Party Claim. Any such notice shall describe the Third-Party Claim in reasonable detail, including the facts and circumstances giving rise to such claim for indemnification, and include copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third-Party Claim. Notwithstanding the foregoing, the failure of an Indemnitee to provide notice in accordance with this Section 4.5(a) shall not relieve an Indemnifying Party of its indemnification obligations under this Agreement, except to the extent to which the Indemnifying Party is actually prejudiced by the Indemnitee’s failure to provide notice in accordance with this Section 4.5(a).
(b) Control of Defense. Subject to any insurer’s rights pursuant to any Policies of either Party, an Indemnifying Party may elect to defend (and seek to settle or compromise), at its own expense and with its own counsel, any Third-Party Claim; provided, that, prior to the Indemnifying Party assuming and controlling defense of such Third-Party Claim, it shall first confirm to the Indemnitee in writing that, assuming the facts presented to the Indemnifying Party by the Indemnitee being true, the Indemnifying Party shall indemnify the Indemnitee for any such damages to the extent resulting from, or arising out of, such Third-Party Claim. Notwithstanding the foregoing, if the Indemnifying Party assumes such defense and, in the course of defending such Third-Party Claim, (i) the Indemnifying Party discovers that the facts presented at the time the Indemnifying Party acknowledged its indemnification obligation in respect of such Third-Party Claim were not true in all material respects and (ii) such untruth provides a reasonable basis for asserting that the Indemnifying Party does not have an indemnification obligation in respect of such Third-Party Claim, then (A) the Indemnifying Party shall not be bound by such acknowledgment, (B) the Indemnifying Party shall promptly thereafter provide the Indemnitee written notice of its assertion that it does not have an indemnification obligation in respect of such Third-Party Claim and (C) the Indemnitee shall have the right to assume the defense of such Third-Party Claim. Within thirty (30) days after the
receipt of a notice from an Indemnitee in accordance with Section 4.5(a) (or sooner, if the nature of the Third-Party Claim so requires), the Indemnifying Party shall provide written notice to the Indemnitee indicating whether the Indemnifying Party shall assume responsibility for defending the Third-Party Claim and specifying any reservations or exceptions to its defense. If an Indemnifying Party elects not to assume responsibility for defending any Third-Party Claim as provided in this Section 4.5(b) or fails to notify an Indemnitee of its election within thirty (30) days after receipt of the notice from an Indemnitee as provided in accordance with Section 4.5(a), then the Indemnitee that is the subject of such Third-Party Claim shall be entitled to continue to conduct and control the defense of such Third-Party Claim. Notwithstanding anything herein to the contrary, to the extent a Third-Party Claim involves or would reasonably be expected to involve both an Enhabit Liability and an Encompass Liability (collectively, a “Shared Third-Party Claim”), Encompass shall have the sole right to defend and control such portion of any Action relating to such Third-Party Claim to the extent it relates to an Encompass Liability, and Enhabit shall have the sole right to defend and control such portion of any Action relating to such Third-Party Claim to the extent it relates to an Enhabit Liability. For the avoidance of doubt, “Shared Third-Party Claim” shall include those matters set forth on Schedule 4.5(b).
(c) Allocation of Defense Costs. If an Indemnifying Party has elected to assume the defense of a Third-Party Claim, whether with or without any reservations or exceptions with respect to such defense, then such Indemnifying Party shall be solely liable for all fees and expenses incurred by it in connection with the defense of such Third-Party Claim and shall not be entitled to seek any indemnification or reimbursement from the Indemnitee for any such fees or expenses incurred by the Indemnifying Party during the course of the defense of such Third-Party Claim by such Indemnifying Party, regardless of any subsequent decision by the Indemnifying Party to reject or otherwise abandon its assumption of such defense. If an Indemnifying Party elects not to assume responsibility for defending any Third-Party Claim or fails to notify an Indemnitee of its election within thirty (30) days after receipt of a notice from an Indemnitee as provided in accordance with Section 4.5(a), and the Indemnitee conducts and controls the defense of such Third-Party Claim and the Indemnifying Party has an indemnification obligation with respect to such Third-Party Claim, then the Indemnifying Party shall be liable for all reasonable fees and expenses incurred by the Indemnitee in connection with the defense of such Third-Party Claim. In the event of a Shared Third-Party Claim, each Party shall be liable for the portion of the fees and expenses incurred by such Party in connection with the defense of such Shared Third-Party Claim that is equal to the relative portion of such Party’s Liability in respect of such Shared Third-Party Claim, and shall be entitled to seek any indemnification or reimbursement from the other Party for any fees or expenses incurred by such Party during the course of the defense of such Shared Third-Party Claim in excess of such fees and expenses that are the responsibility of such Party pursuant to this Agreement.
(d) Right to Monitor and Participate. An Indemnitee that does not conduct and control the defense of any Third-Party Claim, an Indemnifying Party that has failed to elect to defend any Third-Party Claim as contemplated hereby and either Party in the case of a Shared Third-Party Claim, nevertheless shall have the right to employ separate counsel (including local counsel as necessary) of its own choosing to monitor and participate in (but not control) the defense of any Third-Party Claim for which it is a potential Indemnitee or Indemnifying Party, but the fees and expenses of such counsel shall be at the expense of such Indemnitee or Indemnifying Party, as the case may be, and the provisions of Section 4.5(c) shall not apply to such fees and expenses. Notwithstanding the foregoing, but subject to Sections 6.7 and 6.8, such Party shall cooperate with the Party entitled to conduct and control the defense of such Third-Party Claim in such defense and make available to the controlling Party, at the non-controlling Party’s expense, all witnesses, information and materials in such Party’s possession or under such Party’s control relating thereto as are reasonably required by the controlling Party. In addition to the foregoing, if any Indemnitee shall in good faith determine that such Indemnitee and the Indemnifying Party have actual or potential differing defenses or conflicts of interest between them that make joint representation inappropriate, then the Indemnitee shall have the right to employ separate counsel (including local counsel as necessary) and to participate in (but not control) the defense, compromise, or settlement thereof, and in such case the Indemnifying Party shall bear the reasonable fees and expenses of such counsel for all Indemnitees.
(e) No Settlement. Neither Party may settle or compromise any Third-Party Claim for which either Party is seeking to be indemnified hereunder without the prior written consent of the other Party, which consent may not be unreasonably withheld, unless such settlement or compromise is solely for monetary damages that are fully payable by the settling or compromising Party, does not involve any admission, finding or determination of wrongdoing or violation of Law by the other Party or another member of its Group or the Indemnitee and provides for a full, unconditional and irrevocable release of the other Party and the other members of its Group and the Indemnitee(s) from all Liability in connection with the Third-Party Claim. The Parties hereby agree that if a Party presents the other Party with a written notice containing a proposal to settle or compromise a Third-Party Claim for which either Party is seeking to be indemnified hereunder and the Party receiving such proposal does not respond in any manner to the Party presenting such proposal within thirty (30) days (or within any such shorter time period that may be required by applicable Law or court order) of receipt of such proposal, then the Party receiving such proposal shall be deemed to have consented to the terms of such proposal.
(f) Tax Matters Agreement Coordination. The provisions of Section 4.2 through Section 4.10 hereof shall not apply with respect to Taxes or Tax matters (it being understood and agreed that claims with respect to Taxes and Tax matters, including the control of Tax-related proceedings, shall be governed exclusively by the Tax Matters Agreement). In the case of any conflict between this Agreement and the Tax Matters Agreement in relation to any matters addressed by the Tax Matters Agreement, the Tax Matters Agreement shall prevail.
4.6 Additional Matters.
(a) Timing of Payments. Indemnification or contribution payments in respect of any Liabilities for which an Indemnitee is entitled to indemnification or contribution under this Article IV shall be paid reasonably promptly (but in any event within forty-five (45) days of the final determination of the amount for which the Indemnitee is entitled to indemnification or contribution under this Article IV) by the Indemnifying Party to the Indemnitee as such Liabilities are incurred upon demand by the Indemnitee, including reasonably satisfactory documentation setting forth the basis for the amount of such indemnification or contribution payment, including documentation with respect to calculations made and consideration of any Insurance Proceeds that actually reduce the amount of such Liabilities. The indemnity and contribution provisions contained in this Article IV shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Indemnitee, and (ii) the knowledge by the Indemnitee of Liabilities for which it might be entitled to indemnification hereunder.
(b) Notice of Direct Claims. Any claim for indemnification or contribution under this Agreement or any Ancillary Agreement that does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnitee to the applicable Indemnifying Party; provided, that the failure by an Indemnitee to so assert any such claim shall not prejudice the ability of the Indemnitee to do so at a later time except to the extent (if any) that the Indemnifying Party is prejudiced thereby. Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty (30)-day period, such specified claim shall be conclusively deemed a Liability of the Indemnifying Party under this Section 4.6(b) or, in the case of any written notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount of the claim (or such portion thereof) becomes finally determined. If such Indemnifying Party does not respond within such thirty (30)-day period or rejects such claim in whole or in part, such Indemnitee shall, subject to the provisions of Article VII, be free to pursue such remedies as may be available to such party as contemplated by this Agreement and the Ancillary Agreements, as applicable, without prejudice to its continuing rights to pursue indemnification or contribution hereunder.
(c) Pursuit of Claims Against Third Parties. If (i) a Party incurs any Liability arising out of this Agreement or any Ancillary Agreement; (ii) an adequate legal or equitable remedy is not available for any reason against the other Party to satisfy the Liability incurred by the incurring Party; and (iii) a legal or equitable remedy may be available to the other Party against a Third Party for such Liability, then the other Party shall use its commercially reasonable efforts to cooperate with the incurring Party, at the incurring Party’s expense, to permit the incurring Party to obtain the benefits of such legal or equitable remedy against the Third Party.
(d) Subrogation. In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim or against any other Person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.
4.7 Right of Contribution.
(a) Contribution. If any right of indemnification contained in Section 4.2 or Section 4.3 is held unenforceable or is unavailable for any reason, or is insufficient to hold harmless an Indemnitee in respect of any Liability for which such Indemnitee is entitled to indemnification hereunder, then the Indemnifying Party shall contribute to the amounts paid or payable by the Indemnitees as a result of such Liability (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the members of its Group, on the one hand, and the Indemnitees entitled to contribution, on the other hand, as well as any other relevant equitable considerations.
(b) Allocation of Relative Fault. Solely for purposes of determining relative fault pursuant to this Section 4.7: (i) any fault associated with the business conducted with the Delayed Enhabit Assets or Delayed Enhabit Liabilities (except for the gross negligence or intentional misconduct of a member of the Encompass Group) or with the ownership, operation or activities of the Enhabit Business prior to the Effective Time shall be deemed to be the fault of Enhabit and the other members of the Enhabit Group, and no such fault shall be deemed to be the fault of Encompass or any other member of the Encompass Group; (ii) any fault associated with the business conducted with Delayed Encompass Assets or Delayed Encompass Liabilities (except for the gross negligence or intentional misconduct of a member of the Enhabit Group) shall be deemed to be the fault of Encompass and the other members of the Encompass Group, and no such fault shall be deemed to be the fault of Enhabit or any other member of the Enhabit Group; and (iii) any fault associated with the ownership, operation or activities of the Encompass Business prior to the Effective Time shall be deemed to be the fault of Encompass and the other members of the Encompass Group, and no such fault shall be deemed to be the fault of Enhabit or any other member of the Enhabit Group.
4.8 Covenant Not to Sue. Each Party hereby covenants and agrees that none of it, the members of such Party’s Group or any Person claiming through it shall bring suit or otherwise assert any claim against any Indemnitee, or assert a defense against any claim asserted by any Indemnitee, before any court, arbitrator, mediator or administrative agency anywhere in the world, alleging that: (a) the assumption of any Enhabit Liabilities by Enhabit or a member of the Enhabit Group on the terms and conditions set forth in this Agreement and the Ancillary Agreements is void or unenforceable for any reason; (b) the retention of any Encompass Liabilities by Encompass or a member of the Encompass Group on the terms and conditions set forth in this Agreement and the Ancillary Agreements is void or unenforceable for any reason; or (c) the provisions of this Article IV are void or unenforceable for any reason.
4.9 Remedies Cumulative. The remedies provided in this Article IV shall be cumulative and, subject to the provisions of Article VII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.
4.10 Survival of Indemnities. The rights and obligations of each of Encompass and Enhabit and their respective Indemnitees under this Article IV shall survive (a) the sale or other transfer by either Party or any member of its Group of any Assets or businesses or the assignment by it of any Liabilities; or (b) any merger, consolidation, business combination, sale of all or substantially all of its Assets, restructuring, recapitalization, reorganization or similar transaction involving either Party or any of the members of its Group.
ARTICLE V
CERTAIN OTHER MATTERS
5.1 Names Following the Effective Time.
(a) Except as set forth in Section 5.1(b) below, neither Enhabit nor any member of its Group shall use, or have the right to use, the Encompass Marks or any name or mark that, in the reasonable judgment of Encompass, is confusingly similar to the Encompass Marks. Notwithstanding Section 5.1(b) below, neither Enhabit nor any member of its Group shall use the Encompass Marks in any manner that detracts from the goodwill and reputation of Encompass associated with the Encompass Marks.
(b) Effective upon the Effective Time and until the expiration of the applicable time period set forth on Schedule 5.1(b), Encompass shall, and shall cause members of its Group to, grant to Enhabit and members of its Group a limited, non-exclusive, royalty-free, fully paid-up, non-transferable, non-sublicenseable worldwide license or authorization, as applicable, to use the Encompass Marks solely (i) to the extent and in substantially the same manner as used immediately prior to Effective Time, (ii) in connection with any Enhabit Inventory that, as of the Effective Time, bears or incorporates the Encompass Marks, until such time as usable Enhabit Inventory existing as of the Effective Time has been exhausted; and (iii) in connection with building and other signage, in the case of this clause (iii), for a period ending at the Effective Time; provided, that such time period in clause (iii) shall be automatically extended to the extent required in connection with obtaining any necessary approvals of any landlord or other Third Party with respect thereto; provided, further, that in each case of clauses (i)-(iii), Enhabit and members of its Group use reasonable best efforts to minimize and eliminate use of the Encompass Marks by the Enhabit Group as soon as practicable after the Effective Time (and in any event within the applicable time period set forth on Schedule 5.1(b)).
(c) Any use of the Encompass Marks authorized in Section 5.1(b) shall be subject to (x) compliance with the Encompass Group’s reasonable quality control requirements and guidelines in effect for the Encompass Marks and (y) to the extent practicable, the placement of a reasonably appropriate disclaimer on any materials bearing the Encompass Marks (including stationery, business cards, signage, advertising materials, inventory, packaging, product, service and training literature, and other similar materials) identifying in a readily observable manner that Enhabit and members of its Group are no longer Affiliates of the Encompass Group. Any and all goodwill arising from the use of the Encompass Marks (including names) as described in Section 6.6(b) shall inure to the sole and exclusive benefit of the Encompass Group.
(d) Except as set forth in Section 5.1(e) below, neither Encompass nor any member of its Group shall use, or have the right to use, the Enhabit Marks or any name or mark that, in the reasonable judgment of Enhabit, is confusingly similar to the Enhabit Marks. Notwithstanding Section 5.1(e) below, neither Encompass nor any member of its Group shall use the Enhabit Marks in any manner that detracts from the goodwill and reputation of Enhabit associated with the Enhabit Marks.
(e) Effective upon the Effective Time and until the expiration of the applicable time period set forth on Schedule 5.1(b), Enhabit shall, and shall cause members of its Group to, grant to Encompass and members of its Group a limited, non-exclusive, royalty-free, fully paid-up, non-transferable, non-sublicenseable worldwide license or authorization, as applicable, to use the Enhabit Marks solely (i) to the extent and in substantially the same manner as used immediately prior to Effective Time, (ii) in connection with any Encompass Inventory or Enhabit Inventory (to the extent such Enhabit Inventory is sold by Encompass pursuant to any contracts, arrangements or understandings between Encompass and Enhabit) that, as of the Effective Time, bears or incorporates the Enhabit Marks, until such time as such usable Encompass Inventory or Enhabit Inventory existing as of the Effective Time has been exhausted; and (iii) in connection with building and other signage, in the case of this clause (iii), for a period ending at the Effective Time; provided, that such time period in clause (iii) shall be automatically extended to the extent required in connection with obtaining any necessary approvals of any landlord or other Third Party with respect thereto; provided, further, that in each case of clauses (i)-(iii) Encompass and members of its Group use reasonable best efforts to minimize and eliminate use of the Enhabit Marks by the Encompass Group as soon as practicable after the Effective Time (and in any event within the applicable time period set forth on Schedule 5.1(b)).
(f) Any use of the Enhabit Marks authorized in Section 5.1(e) shall be subject to (x) compliance with the Enhabit Group’s reasonable quality control requirements and guidelines in effect for the Enhabit Marks and (y) to the extent practicable, the placement of a reasonably appropriate disclaimer on any materials bearing the Enhabit Marks (including stationery, business cards, signage, advertising materials, inventory, packaging, product, service and training literature, and other similar materials) identifying in a readily observable manner that Encompass and members of its Group are no longer Affiliates of the Enhabit Group. Any and all goodwill arising from the use of the Enhabit Marks as described in Section 5.1(e) shall inure to the sole and exclusive benefit of the Enhabit Group.
(g) Notwithstanding anything to the contrary in this Section 5.1, nothing set forth in this Section 5.1 shall limit either Party’s nominative use of the Enhabit Marks (in the case of Encompass) or the Encompass Marks (in the case of Enhabit), respectively, including for the purposes of referring to the other Party and the transactions contemplated hereby.
5.2 Insurance Matters.
(a) Subject to the terms and conditions of this Agreement, Encompass and Enhabit agree to cooperate in good faith to attempt to implement an orderly transition of applicable insurance coverage from the date hereof through the Effective Time. In no event shall Encompass, any other member of the Encompass Group or any Encompass Indemnitee have Liability or obligation whatsoever to any member of the Enhabit Group in the event that any insurance policy or insurance policy related contract shall be terminated or otherwise cease to be in effect for any reason, shall be unavailable or inadequate to cover any Liability of any member of the Enhabit Group for any reason whatsoever or shall not be renewed or extended beyond the current expiration date.
(b) From and after the Effective Time, with respect to any losses, damages and Liability incurred by any member of the Enhabit Group prior to the Effective Time that constitutes an Enhabit Liability, at the request of Enhabit, Encompass will use commercially reasonable efforts to pursue claims, at Enhabit’s sole cost and expense (to the extent not otherwise covered by such insurance policies then in effect prior to the Effective Time), on behalf of the applicable member of the Enhabit Group under (with such member of the Enhabit Group entitled to all Insurance Proceeds resulting from or arising out of any such claims) Policies of Encompass or any other member of the Encompass Group in place immediately prior to the Effective Time (and any extended reporting periods for claims-made Policies of Encompass or any other member of the Encompass Group) and historical Policies of Encompass or any other member of the Encompass Group (such Policies, collectively, the “Encompass Policies”), but solely to the extent that such Encompass Policies provided coverage for the applicable member of the Enhabit Group prior to the Effective Time; provided that such obligation of Encompass to make claims on behalf of the applicable member of the Enhabit Group under such Encompass Policies shall be subject to the terms and conditions of such Encompass Policies, including any limits on coverage or scope, any deductibles, self-insured retentions and other fees and expenses, and shall be subject to the following additional conditions:
(i) Enhabit shall provide written notification to Encompass of any request for Encompass to pursue a claim on behalf of the applicable member of the Enhabit Group pursuant to this Section 5.2(b), and Encompass shall use commercially reasonable efforts to pursue such claim, at Enhabit’s sole cost and expense (to the extent not otherwise covered by such insurance policies then in effect prior to the Effective Time), as promptly as is reasonably practicable;
(ii) Enhabit and the other members of the Enhabit Group shall indemnify, hold harmless and reimburse Encompass and the other members of the Encompass Group for any deductibles, self-insured retention, retrospective premium payments, indemnity payments, settlements, judgments, legal fees, allocated claims expenses, claim handling fees and expenses, and other expenses incurred by Encompass or any other member of the Encompass Group to the extent resulting from any pursuit of any claims on behalf of Enhabit or any other members of the Enhabit Group, whether such claims are pursued on behalf of Enhabit or any other members of the Enhabit Group, employees of Enhabit or any other members of the Enhabit Group, or Third Parties;
(iii) Enhabit shall, and shall cause the other members of the Enhabit Group to, cooperate with and assist Encompass and the other members of the Encompass Group and share such information as is reasonably necessary in order to permit Encompass and the other members of the Encompass Group to manage and conduct the insurance matters contemplated by this Section 5.2; and
(iv) Enhabit shall exclusively bear (and neither Encompass nor any other member of the Encompass Group shall have any obligation to repay or reimburse Enhabit or any other member of the Enhabit Group for) and shall be liable for all excluded, uninsured, uncovered, unavailable or uncollectible amounts of all such claims pursued on behalf of Enhabit or any other member of the Enhabit Group under the Encompass Policies as provided for in this Section 5.2(b). In the event an Encompass Policy aggregate is exhausted, or believed likely to be exhausted, due to noticed claims, the Enhabit Group, on the one hand, and the Encompass Group, on the other hand, shall be responsible for their pro rata portion of the reinstatement premium, if any, based upon the losses of such Group submitted to Encompass’s insurance carrier(s) (including any submissions prior to the Effective Time). To the extent that the Enhabit Group or the Encompass Group is allocated more than its pro rata portion of such premium due to the
timing of losses submitted to Encompass’s insurance carrier(s), the other party shall promptly pay the first party an amount so that each Group has been properly allocated its pro rata portion of the reinstatement premium. Subject to the following sentence, Encompass may elect not to reinstate the Encompass Policy aggregate. In the event that Encompass elects not to reinstate the Encompass Policy aggregate, it shall provide prompt written notice to Enhabit, and Enhabit may direct Encompass in writing to, and Encompass shall, in such case reinstate the Encompass Policy aggregate; provided that Enhabit shall be responsible for all reinstatement premiums and other costs associated with such reinstatement.
In the event that any member of the Encompass Group incurs any losses, damages or Liability prior to or in respect of the period prior to the Effective Time for which such member of the Encompass Group is entitled to coverage under the Policies of Enhabit or any other member of the Enhabit Group, the same process pursuant to this Section 5.2(b) shall apply, substituting “Encompass” for “Enhabit” and “Enhabit” for “Encompass,” as applicable.
(c) Except as provided in Section 5.2(a) and Section 5.2(b), from and after the Distribution Date, neither Enhabit nor any member of the Enhabit Group shall have any rights to or under any of the Policies of Encompass or any other member of the Encompass Group. At the Distribution Date, Enhabit shall have in effect all insurance programs required to comply with Enhabit’s contractual obligations and such other Policies required by Law or as reasonably necessary or appropriate for companies operating a business similar to Enhabit’s.
(d) In connection with Encompass’s pursuit of a claim on behalf of Enhabit or any other member of the Enhabit Group under any Encompass Policy pursuant to this Section 5.2, Encompass shall not be required to take any action that would be reasonably likely to: (i) have an adverse impact on the then-current relationship between Encompass or any member of the Encompass Group, on the one hand, and the applicable insurance company, on the other hand; (ii) result in the applicable insurance company terminating or reducing coverage, or increasing the amount of any premium owed by Encompass or any other member of the Encompass Group under the applicable Encompass Policy; or (iii) otherwise compromise, jeopardize or interfere with the rights of Encompass or any other member of the Encompass Group under the applicable Encompass Policy.
(e) All payments and reimbursements by Enhabit pursuant to this Section 5.2 shall be made within forty-five (45) days after Enhabit’s receipt of an invoice therefor from Encompass. If Encompass incurs costs to enforce Enhabit’s obligations herein, Enhabit agrees to indemnify and hold harmless Encompass for such enforcement costs, including reasonable attorneys’ fees pursuant to Section 4.6. Encompass shall retain the exclusive right to control the Encompass Policies and the insurance programs of Encompass or any other member of the Encompass Group, including the right to exhaust, settle, release, commute, buy back or otherwise resolve disputes with respect to any such Encompass Policies and programs and to amend, modify or waive any rights under any such Encompass Policies and programs, notwithstanding whether any such Encompass Policies or programs apply to any Enhabit Liabilities and/or claims Enhabit has made or could make in the future, and no member of the Enhabit Group shall erode, exhaust, settle, release, commute, buy back or otherwise resolve disputes with insurers of Encompass or any other member of the Encompass Group with respect to any of the Encompass Policies and the insurance programs of Encompass or any other member of the Encompass Group, or amend, modify or waive any rights under any such Encompass Policies and programs. No member of the Encompass Group shall have any obligation to secure extended reporting for any claims under any Encompass Policy for any acts or omissions of any member of the Enhabit Group incurred prior to the Effective Time.
(f) This Agreement shall not be considered as an attempted assignment of any Policy or other Policy-related contract and shall not be construed to waive any right or remedy of any member of the Encompass Group in respect of any Policy or other Policy-related contract.
(g) Enhabit does hereby, for itself and each other member of the Enhabit Group, agree that no member of the Encompass Group shall have any Liability whatsoever as a result of the Encompass Policies or the insurance practices of Encompass or any other member of the Encompass Group as in effect at any time, including as a result of the level or scope of any insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy, or the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise.
5.3 Late Payments. Except as expressly provided to the contrary in this Agreement or in any Ancillary Agreement, or as otherwise agreed in writing by the Parties, any amount not paid when due pursuant to this Agreement or any Ancillary Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within forty five (45) days of such bill, invoice or other demand) shall accrue interest at a rate per annum equal to the Prime Rate plus two percent (2%); provided, that notice of any such late payment has been provided and the other Party has been provided fifteen (15) days to cure any such late payment.
5.4 Inducement. Enhabit acknowledges and agrees that Encompass’s willingness to cause, effect and consummate the Separation and the Distribution has been conditioned upon and induced by Enhabit’s covenants and agreements in this Agreement and the Ancillary Agreements, including Enhabit’s assumption of the Enhabit Liabilities pursuant to the Separation and the provisions of this Agreement and Enhabit’s covenants and agreements contained in Article IV.
5.5 Post-Effective Time Conduct. The Parties acknowledge that, after the Effective Time, each Party shall be independent of the other Party, with responsibility for its own actions and inactions and its own Liabilities relating to, arising out of or resulting from the conduct of its business, operations and activities following the Effective Time, except as may otherwise be provided in any Ancillary Agreement, and each Party shall (except as otherwise provided in Article IV) use commercially reasonable efforts to prevent such Liabilities from being inappropriately borne by the other Party.
ARTICLE VI
EXCHANGE OF INFORMATION; CONFIDENTIALITY
6.1 Agreement for Exchange of Information.
(a) Subject to Section 6.9 and any other applicable confidentiality obligations, each of Encompass and Enhabit, on behalf of itself and each member of its respective Group, agrees to use commercially reasonable efforts to provide or make available, or cause to be provided or made available, to the other Party and the members of such other Party’s Group, at any time before, on or after the Effective Time, as soon as reasonably practicable after written request therefor is received by such Party’s legal department from the requesting Party’s legal department, any information (or a copy thereof) in the possession or under the control of such Party or its Group which the requesting Party’s legal department requests to the extent that (i) such information relates to the Enhabit Business, or any Enhabit Asset or Enhabit Liability, if Enhabit is the requesting Party, or to the Encompass Business, or any Encompass Asset or Encompass Liability, if Encompass is the requesting Party; (ii) such information is required by the requesting Party to comply with its obligations under this Agreement or any Ancillary Agreement; or (iii) such information is required by the requesting Party to comply with any obligation imposed by any Governmental Authority; provided, however, that, in the event that the Party to whom the request has been made determines that any such provision of information could be detrimental to the Party providing the information, violate any Law or agreement, or waive any privilege available under applicable Law, including any attorney-client privilege, then the Parties shall use commercially reasonable efforts to permit compliance with such obligations to the extent and in a manner that avoids any such harm or consequence. The Party providing information pursuant to this Section 6.1 shall only be obligated to provide such information in the form, condition and format in which it then exists, and in no event shall such Party be required to perform any improvement, modification, conversion, updating or reformatting of any such information, and nothing in this Section 6.1 shall expand the obligations of a Party under Section 6.4.
(b) Without limiting the generality of the foregoing, until the end of Encompass’s fiscal year during which the Distribution Date occurs (and for a reasonable period of time afterwards as required for each Party to prepare consolidated financial statements or complete a financial statement audit for the fiscal year during which the Distribution Date occurs), each Party shall use commercially reasonable efforts to cooperate with the other Party’s information requests to enable (i) the other Party to meet its timetable for dissemination of its earnings releases, financial statements and management’s assessment of the effectiveness of its disclosure controls and procedures and its internal control over financial reporting in accordance with Items 307 and 308, respectively, of Regulation S-K promulgated under the Exchange Act and (ii) the other Party’s accountants to timely complete their review of the quarterly financial statements and audit of the annual financial statements, including, to the extent applicable to such Party, its auditor’s audit of its internal control over financial reporting and management’s assessment thereof in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the SEC’s and Public Company Accounting Oversight Board’s rules and auditing standards thereunder and any other applicable Laws.
6.2 Ownership of Information. The provision of any information pursuant to Section 6.1 or Section 6.7 shall not affect the ownership of such information (which shall be determined solely in accordance with the terms of this Agreement and the Ancillary Agreements), or constitute a grant of rights in or to any such information.
6.3 Compensation for Providing Information. The Party requesting information after the Effective Time agrees to reimburse the other Party for the reasonable costs, if any, of creating, gathering, copying, transporting and otherwise complying with the request with respect to such information (including any reasonable costs and expenses incurred in any review of information for purposes of protecting the Privileged Information of the providing Party or in connection with the restoration of backup media for purposes of providing the requested information). Except as may be otherwise specifically provided elsewhere in this Agreement, any Ancillary Agreement or any other agreement between the Parties, such costs shall be computed in accordance with the providing Party’s standard methodology and procedures.
6.4 Record Retention.
(a) To facilitate the possible exchange of information pursuant to this Article VI and other provisions of this Agreement after the Effective Time, the Parties agree to use their commercially reasonable efforts, which shall be no less rigorous than those used for retention of such Party’s own information, to retain all information in their respective possession or control on the Effective Time in accordance with their respective policies regarding retention of records. No Party will destroy, or permit any of its Subsidiaries to destroy, any information which the other Party may have the right to obtain pursuant to this Agreement prior to the end of the retention period set forth in such policies without first notifying the other Party of the proposed destruction and giving the other Party the opportunity to take possession of such information prior to such destruction. Notwithstanding anything in this Article VI to the contrary, the Tax Matters Agreement exclusively governs the retention of Tax related records and the exchange of Tax-related information.
(b) Each Party shall preserve and keep all documents subject to a litigation hold as of the date of this Agreement until such Party has been notified that such litigation hold is no longer applicable.
6.5 Limitations of Liability. Neither Party shall have any Liability to the other Party in the event that any information exchanged or provided pursuant to this Agreement is found to be inaccurate in the absence of gross negligence, bad faith or willful misconduct by the Party providing such information. Neither Party shall have any Liability to any other Party if any information is destroyed after commercially reasonable efforts by such Party to comply with the provisions of Section 6.4.
6.6 Other Agreements Providing for Exchange of Information.
(a) The rights and obligations granted under this Article VI are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange, retention, destruction or confidential treatment of information set forth in any Ancillary Agreement.
(b) Any party that receives, pursuant to a request for information in accordance with this Article VI, Tangible Information that is not relevant to its request shall, at the request of the providing Party, (i) return it to the providing Party or, at the providing Party’s request, destroy such Tangible Information; and (ii) deliver to the providing Party written confirmation that such Tangible Information was returned or destroyed, as the case may be, which confirmation shall be signed by an authorized representative of the requesting Party.
6.7 Production of Witnesses; Records; Cooperation.
(a) After the Effective Time, except in the case of a Dispute between Encompass and Enhabit, or any members of their respective Groups, each Party shall use its commercially reasonable efforts to make available to the other Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available without undue burden, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action in which the requesting Party (or member of its Group) may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting Party shall bear all costs and expenses in connection therewith.
(b) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third-Party Claim, the other Party shall make available to such Indemnifying Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available without undue burden, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be, and shall otherwise cooperate in such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be.
(c) Without limiting the foregoing, the Parties shall cooperate and consult to the extent reasonably necessary with respect to any of the Actions described in clauses (a), (b) and (d) of this Section 6.7.
(d) Without limiting any provision of this Section 6.7, each of the Parties agrees to cooperate, and to cause each member of its respective Group to cooperate, with each other in the defense of any infringement or similar claim with respect to any Intellectual Property Rights and shall not claim to acknowledge, or permit any member of its respective Group to claim to acknowledge, the validity or infringing use of any Intellectual Property Rights of a third Person in a manner that would hamper or undermine the defense of such infringement or similar claim.
(e) The obligation of the Parties to provide witnesses pursuant to this Section 6.7 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to provide as witnesses directors, officers, employees, other personnel and agents without regard to whether such person could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 6.7(a)).
6.8 Privileged Matters.
(a) The Parties recognize that legal and other professional services that have been and will be provided prior to the Effective Time have been and will be rendered for the collective benefit of each of the members of the Encompass Group and the Enhabit Group, and that each of the members of the Encompass Group and the Enhabit Group should be deemed to be the client with respect to such services for the purposes of asserting all privileges which may be asserted under applicable Law in connection therewith. The Parties recognize that legal and other professional services will be provided following the Effective Time, which services will be rendered solely for the benefit of the Encompass Group or the Enhabit Group, as the case may be. In furtherance of the foregoing, each Party shall authorize the delivery to and/or retention by the other Party of materials existing as of the Effective Time that are necessary for such other Party to perform such services.
(b) The Parties agree as follows:
(i) Except as set forth on Schedule 6.8(b)(i), Encompass shall be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to the Encompass Business and not to the Enhabit Business, whether or not the Privileged Information is in the possession or under the control of any member of the Encompass Group or any member of the Enhabit Group. Except as set forth on Schedule 6.8(b)(i), Encompass shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to any Encompass Liabilities resulting from any Actions that are now pending or may be asserted in the future, whether or not the Privileged Information is in the possession or under the control of any member of the Encompass Group or any member of the Enhabit Group;
(ii) Except as set forth on Schedule 6.8(b)(ii),Enhabit shall be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to the Enhabit Business and not to the Encompass Business. Except as set forth on Schedule 6.8(b)(ii), Enhabit shall also be entitled, in perpetuity, to control the assertion or waiver of all privileges and immunities in connection with any Privileged Information that relates solely to any Enhabit Liabilities resulting from any Actions that are now pending or may be asserted in the future; and
(iii) if the Parties do not agree as to whether certain information is Privileged Information, then such information shall be treated as Privileged Information, and the Party that believes that such information is Privileged Information shall be entitled to control the assertion or waiver of all privileges and immunities in connection with any such information unless the Parties otherwise agree. The Parties shall use the procedures set forth in Article VII to resolve any disputes as to whether any information relates solely to the Encompass Business, solely to the Enhabit Business, or to both the Encompass Business and the Enhabit Business.
(c) Subject to the remaining provisions of this Section 6.8, the Parties agree that they shall have a shared privilege or immunity with respect to all privileges and immunities not allocated pursuant to Section 6.8(b) and all privileges and immunities relating to any Actions or other matters that involve both Parties (or one or more members of their respective Groups) and in respect of which both Parties have Liabilities under this Agreement, and that no such shared privilege or immunity may be waived by either Party without the prior written consent of the other Party.
(d) If any Dispute arises between the Parties or any members of their respective Groups regarding whether a privilege or immunity should be waived to protect or advance the interests of either Party and/or any member of their respective Groups, each Party agrees that it shall (i) negotiate with the other Party in good faith; (ii) endeavor to minimize any prejudice to the rights of the other Party; and (iii) not unreasonably withhold consent to any request for waiver by the other Party. Further, each Party specifically agrees that it shall not withhold its consent to the waiver of a privilege or immunity for any purpose except in good faith to protect its own legitimate interests.
(e) In the event of any Dispute between Encompass and Enhabit, or any members of their respective Groups, either Party may waive a privilege in which the other Party or member of such other Party’s Group has a shared privilege, without obtaining prior written consent pursuant to Section 6.8(c); provided that the Parties intend such waiver of a shared privilege to be effective only as to the use of information with respect to the Action between the Parties and/or the applicable members of their respective Groups, and is not intended to operate as a waiver of the shared privilege with respect to any Third Party.
(f) Upon receipt by either Party, or by any member of its respective Group, of any subpoena, discovery or other request that may reasonably be expected to result in the production or disclosure of Privileged Information subject to a shared privilege or immunity or as to which another Party has the sole right hereunder to assert a privilege or immunity, or if either Party obtains knowledge that any of its, or any member of its respective Group’s, current or former directors, officers, agents or employees have received any subpoena, discovery or other requests that may reasonably be expected to result in the production or disclosure of such Privileged Information, such Party shall promptly notify the other Party of the existence of the request (which notice shall be delivered to such other Party no later than five (5) Business Days following the receipt of any such subpoena, discovery or other request) and shall provide the other Party a reasonable opportunity to review the Privileged Information and to assert any rights it or they may have under this Section 6.8 or otherwise, to prevent the production or disclosure of such Privileged Information.
(g) Any furnishing of, or access or transfer of, any information pursuant to this Agreement is made in reliance on the agreement of Encompass and Enhabit set forth in this Section 6.8 and in Section 6.9 to maintain the confidentiality of Privileged Information and to assert and maintain all applicable privileges and immunities. The Parties agree that their respective rights to any access to information, witnesses and other Persons, the furnishing of notices and documents and other cooperative efforts between the Parties contemplated by this Agreement, and the transfer of Privileged Information between the Parties and members of their respective Groups as needed pursuant to this Agreement, is not intended to be deemed a waiver of any privilege that has been or may be asserted under this Agreement or otherwise.
(h) In connection with any matter contemplated by Section 6.7 or this Section 6.8, the Parties agree to, and to cause the applicable members of their Group to, use commercially reasonable efforts to maintain their respective separate and joint privileges and immunities, including by executing joint defense and/or common interest agreements where necessary or useful for this purpose.
6.9 Confidentiality.
(a) Confidentiality. Subject to Section 6.10, from and after the Effective Time until the five (5)-year anniversary of the Effective Time, each of Encompass and Enhabit, on behalf of itself and each member of its respective Group, agrees to hold, and to cause its respective Representatives to hold, in strict confidence, with at least the same degree of care that applies to Encompass’s confidential and proprietary information pursuant to policies in effect as of the Effective Time, all confidential and proprietary information concerning the other Party or any member of the other Party’s Group or their respective businesses (giving effect to the Separation) that is either in its possession (including confidential and proprietary information in its possession prior to the date hereof) or furnished by any such other Party or any member of such Party’s Group or their respective Representatives at any time pursuant to this Agreement, any Ancillary Agreement or otherwise, and shall not use any such confidential and proprietary information other than for such purposes as shall be expressly permitted hereunder or thereunder, except, in each case, to the extent that such confidential and proprietary information has been (i) in the public domain or generally available to the public, other than as a result of a disclosure by such Party or any member of such Party’s Group or any of their respective Representatives in violation of this Agreement, (ii) later lawfully acquired from other sources by such Party (or any member of such Party’s Group) which sources are not themselves bound by a confidentiality obligation or other contractual, legal or fiduciary obligation of confidentiality with respect to such confidential and proprietary information, or (iii) independently developed or generated without reference to or use of any proprietary or confidential information of the other Party or any member of such Party’s Group. If any confidential and proprietary information of one Party or any member of its Group is disclosed to the other Party or any member of such other Party’s Group in connection with providing services to such first Party or any member of such first Party’s Group under this Agreement or any Ancillary Agreement, then such disclosed confidential and proprietary information shall be used only as required to perform such services.
(b) No Release; Return or Destruction. Each Party agrees not to release or disclose, or permit to be released or disclosed, any information addressed in Section 6.9(a) to any other Person, except its Representatives who need to know such information in their capacities as such (who shall be advised of their obligations hereunder with respect to such information), and except in compliance with Section 6.10. Without limiting the foregoing, when any such information is no longer needed for the purposes contemplated by this Agreement or any Ancillary Agreement, and is no longer subject to any legal hold or other document preservation obligation, each Party will promptly after request of the other Party either return to the other Party all such information in a tangible form (including all copies thereof and all notes, extracts or summaries based thereon) or notify the other Party in writing that it has destroyed such information (and such copies thereof and such notes, extracts or summaries based thereon); provided that the Parties may retain electronic back-up versions of such information maintained on routine computer system backup tapes, disks or other backup storage devices; provided, further, that any such information so retained shall remain subject to the confidentiality provisions of this Agreement or any Ancillary Agreement.
(c) Third-Party Information; Privacy or Data Protection Laws. Each Party acknowledges that it and members of its Group may presently have and, following the Effective Time, may gain access to or possession of confidential or proprietary information of, or legally protected personal information relating to, Third Parties (i) that was received under privacy policies and/or confidentiality or non-disclosure agreements entered into between such Third Parties, on the one hand, and the other Party or members of such other Party’s Group, on the other hand, prior to the Effective Time; or (ii) that, as between the two Parties, was originally collected by the other Party or members of such other Party’s Group and that may be subject to and protected by privacy policies, as well as privacy, data protection or other applicable Laws. Each Party agrees that it shall hold, protect and use, and shall cause the members of its Group and its and their respective Representatives to hold, protect and use, in strict confidence the confidential and proprietary information of, or legally protected personal information relating to, Third Parties in accordance with privacy policies and privacy, data protection or other applicable Laws and the terms of any agreements that were either entered into before the Effective Time or affirmative commitments or representations that were made before the Effective Time by, between or among the other Party or members of the other Party’s Group, on the one hand, and such Third Parties, on the other hand. With respect to legally protected personal information received from consumers before the Effective Time, each Party agrees that it will not use data in a manner that is materially inconsistent with promises made at the time the data was collected unless it first obtains affirmative express consent from the relevant consumer. Nothwithstanding anything to the contrary herein, each Party agrees that the treatment of protected health information that is subject to the Health Insurance Portability and Accountability Act of 1996, as amended, shall be governed by the Business Associates Agreement.
6.10 Protective Arrangements. In the event that a Party or any member of its Group either determines on the advice of its counsel that it is required to disclose any information pursuant to applicable Law or receives any request or demand under lawful process or from any Governmental Authority to disclose or provide information of the other Party (or any member of the other Party’s Group) that is subject to the confidentiality provisions hereof, such Party shall notify the other Party (to the extent legally permitted) as promptly as practicable under the circumstances prior to disclosing or providing such information and shall cooperate, at the expense of the other Party, in seeking any appropriate protective order requested by the other Party. In the event that such other Party fails to receive such appropriate protective order in a timely manner, then the Party that received such request or demand may thereafter disclose or provide information to the extent required by such Law (as so advised by its counsel) or by lawful process or such Governmental Authority, and the disclosing Party shall promptly provide the other Party with a copy of the information so disclosed, in the same form and format so
disclosed, together with a list of all Persons to whom such information was disclosed, in each case to the extent legally permitted.
ARTICLE VII
DISPUTE RESOLUTION
7.1 Good-Faith Officer Negotiation. Subject to Section 7.4, either Party seeking resolution of any dispute, controversy or claim arising out of or relating to this Agreement or any Ancillary Agreement (other than the Tax Matters Agreement), including regarding whether any Assets are Enhabit Assets, any Liabilities are Enhabit Liabilities or the validity, interpretation, breach or termination of this Agreement or any Ancillary Agreement (a “Dispute”), shall provide written notice thereof to the other Party (the “Officer Negotiation Request”). Within fifteen (15) days of the delivery of the Officer Negotiation Request, the Parties shall attempt to resolve the Dispute through good faith negotiation. All such negotiations shall be conducted by executives who hold, at a minimum, the title of Senior Vice President and who have authority to settle the Dispute. All such negotiations shall be confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. If the Parties are unable for any reason to resolve a Dispute within thirty (30) days of receipt of the Officer Negotiation Request, and such thirty (30)-day period is not extended by mutual written consent of the Parties, the Chief Executive Officers of the Parties shall enter into good-faith negotiations in accordance with Section 7.2.
7.2 Good-Faith Negotiation. If any Dispute is not resolved pursuant to Section 7.1, the Party that delivered the Officer Negotiation Request shall provide written notice of such Dispute to the Chief Executive Officer of each Party (a “CEO Negotiation Request”). As soon as reasonably practicable following receipt of a CEO Negotiation Request, the Chief Executive Officers of the Parties shall begin conducting good-faith negotiations with respect to such Dispute. All such negotiations shall be confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. If the Chief Executive Officers of the Parties are unable for any reason to resolve a Dispute within thirty (30) days of receipt of a CEO Negotiation Request, and such thirty (30)-day period is not extended by mutual written consent of the Parties, the Dispute shall be submitted to arbitration in accordance with Section 7.3.
7.3 Arbitration.
(a) In the event that a Dispute has not been resolved within thirty (30) days of the receipt of a CEO Negotiation Request in accordance with Section 7.2, or within such longer period as the Parties may agree to in writing, then such Dispute shall, upon the written request of a Party (the “Arbitration Request”) be submitted to be finally resolved by binding arbitration in accordance with the then-current JAMS Comprehensive Arbitration Rules and Procedures (“JAMS Rules”), except as modified herein. The arbitration shall be held, and the award shall be rendered, in (i) Birmingham, Alabama, or (ii) such other place as the Parties may mutually agree in writing. The arbitration shall be conducted in the English language. Unless otherwise agreed by the Parties in writing, any Dispute to be decided pursuant to this Section 7.3 will be decided (i) before a sole arbitrator if the amount in dispute, inclusive of all claims and counterclaims, totals less than $5 million; or (ii) by a panel of three (3) arbitrators if the amount in dispute, inclusive of all claims and counterclaims, totals $5 million or more.
(b) The panel of three (3) arbitrators will be chosen as follows: (i) within thirty (30) days from the date of the receipt of the Arbitration Request, each Party will name an arbitrator; and (ii) the two (2) Party-appointed arbitrators will thereafter, within thirty (30) days from the date on which the second of the two (2) arbitrators was named, name a third independent arbitrator who will act as chairperson of the arbitral tribunal. In the event that either Party fails to name an arbitrator within thirty (30) days from the date of receipt of the Arbitration Request, then upon written application by either Party, that arbitrator shall be appointed pursuant to the JAMS Rules. In the event that the two (2) Party-appointed arbitrators fail to appoint the third, then the third independent arbitrator will be appointed pursuant to the JAMS Rules. If the arbitration will be before a sole independent arbitrator, then the sole independent arbitrator will be appointed by agreement of the Parties within thirty (30) days of the date of receipt of the Arbitration Request. If the Parties cannot agree to a sole independent arbitrator during such thirty (30)-day period, then upon written application by either party, the sole independent arbitrator will be appointed pursuant to the JAMS Rules.
(c) The arbitrator(s) will have the right to award, on an interim basis, or include in the final award, any relief which it deems proper in the circumstances, including money damages (with interest on unpaid amounts from the due date), injunctive relief (including specific performance) and attorneys’ fees and costs; provided that the arbitrator(s) will not award any relief not specifically requested by the Parties and, in any event, will not award any indirect, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages of the other arising in connection with the transactions contemplated hereby (other than any such Liability with respect to a Third-Party Claim). Upon selection of the arbitrator(s) following any grant of interim relief by a special arbitrator or court pursuant to Section 7.4, the arbitrator(s) may affirm or disaffirm that relief, and the Parties will seek modification or rescission of the order entered by the court as necessary to accord with the decision of the arbitrator(s). The award of the arbitrator(s) shall be final and binding on the Parties, and may be enforced in any court of competent jurisdiction. The initiation of arbitration pursuant to this Article VII will toll the applicable statute of limitations for the duration of any such proceedings.
7.4 Litigation and Unilateral Commencement of Arbitration. Notwithstanding the foregoing provisions of this Article VII, (a) a Party may seek preliminary provisional or injunctive judicial relief with respect to a Dispute without first complying with the procedures set forth in Section 7.1, Section 7.2 and Section 7.3 if such action is reasonably necessary to avoid irreparable damage and (b) either Party may initiate arbitration before the expiration of the periods specified in Section 7.1, Section 7.2 and/or Section 7.3 if such Party has submitted an Officer Negotiation Request, a CEO Negotiation Request and/or an Arbitration Request and the other Party has failed to comply with Section 7.1, Section 7.2 and/or Section 7.3 in good faith with respect to such negotiation and/or the commencement and engagement in arbitration. In such event, the other Party may commence and prosecute such arbitration unilaterally in accordance with the JAMS Rules.
7.5 Conduct During Dispute Resolution Process. Unless otherwise agreed in writing, the Parties shall, and shall cause the respective members of their Groups to, continue to honor all commitments under this Agreement and each Ancillary Agreement to the extent required by such agreements during the course of dispute resolution pursuant to the provisions of this Article VII, unless such commitments are the specific subject of the Dispute at issue.
7.6 Dispute Resolution Coordination. Except to the extent otherwise provided in the Tax Matters Agreement, the provisions of this Article VII (other than this Section 7.6) shall not apply with respect to the resolution of any dispute, controversy or claim arising out of or relating to Taxes or Tax matters (it being understood and agreed that the resolution of any dispute, controversy or claim arising out of or relating to Taxes or Tax matters shall be governed by the Tax Matters Agreement).
ARTICLE VIII
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
8.1 Further Assurances.
(a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties shall use its reasonable best efforts, prior to, on and after the Effective Time, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements.
(b) Without limiting the foregoing, prior to, on and after the Effective Time, each Party hereto shall cooperate with the other Party, and without any further consideration, but at the expense of the requesting Party, to execute and deliver, or use its reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all Approvals or Notifications of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument (including any consents or Governmental Approvals), and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the transfers of the Enhabit Assets and the Encompass Assets and the assignment and assumption of the Enhabit Liabilities and the Encompass Liabilities and the other transactions contemplated hereby and thereby. Without limiting the foregoing, each Party will, at the reasonable request, cost and expense of the other Party, take such other actions as may be reasonably necessary to vest in such other Party good and marketable title to the Assets allocated to such Party under this Agreement or any of the Ancillary Agreements, free and clear of any Security Interest, if and to the extent it is practicable to do so.
(c) At or prior to the Effective Time, Encompass and Enhabit, in their respective capacities as direct and indirect stockholders of the members of their Groups, shall each ratify any actions which are reasonably necessary or desirable to be taken by Encompass, Enhabit or any of the members of their respective Groups, as the case may be, to effectuate the transactions contemplated by this Agreement and the Ancillary Agreements.
ARTICLE IX
TERMINATION
9.1 Termination. This Agreement and all Ancillary Agreements may be terminated and the Distribution may be amended, modified or abandoned at any time prior to the Effective Time by Encompass, in its sole and absolute discretion, without the approval or consent of any other Person, including Enhabit. After the Effective Time, this Agreement may not be terminated, except by an agreement in writing signed by a duly authorized officer of each of the Parties.
9.2 Effect of Termination. In the event of any termination of this Agreement prior to the Effective Time, no Party (nor any of its directors, officers or employees) shall have any Liability or further obligation to the other Party by reason of this Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Counterparts; Entire Agreement; Corporate Power.
(a) This Agreement and each Ancillary Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party.
(b) This Agreement, the Ancillary Agreements and the Exhibits, Schedules and appendices hereto and thereto contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein. This Agreement and the Ancillary Agreements together govern the arrangements in connection with the Separation and Distribution and would not have been entered independently.
(c) Encompass represents on behalf of itself and each other member of the Encompass Group, and Enhabit represents on behalf of itself and each other member of the Enhabit Group, as follows:
(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and
(ii) this Agreement and each Ancillary Agreement to which it is a party has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms thereof.
(d) Each Party acknowledges that it and each other Party is executing certain of the Ancillary Agreements by facsimile, stamp, electronic (including via DocuSign) or mechanical signature, and that delivery of an executed counterpart of a signature page to this Agreement or any Ancillary Agreement (whether executed by manual, stamp, electronic (including via DocuSign) or mechanical signature) by facsimile or by e-mail in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement or any Ancillary Agreement. Each Party expressly adopts and confirms each such facsimile, stamp, electronic (including via DocuSign) or mechanical signature (regardless of whether delivered in person, by mail, by courier, by facsimile or by e-mail in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it will not assert that any such signature or delivery is not adequate to bind such Party to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it will as promptly as reasonably practicable cause each such Ancillary Agreement to be manually executed (any such execution to be as of the date of the initial date thereof) and delivered in person, by mail or by courier.
10.2 Governing Law. This Agreement and, unless expressly provided therein, each Ancillary Agreement (and any claims or disputes arising out of or related hereto or thereto or to the transactions contemplated hereby and thereby or to the inducement of any party to enter herein and therein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Delaware irrespective of the choice of laws principles of the State of Delaware including all matters of validity, construction, effect, enforceability, performance and remedies.
10.3 Assignability. Except as set forth in any Ancillary Agreement, this Agreement and each Ancillary Agreement shall be binding upon and inure to the benefit of the Parties and the parties thereto, respectively, and their respective successors and permitted assigns; provided, however, that neither Party nor any such party thereto may assign its rights or delegate its obligations under this Agreement or any Ancillary Agreement without the express prior written consent of the other Party hereto or other parties thereto, as applicable. Notwithstanding the foregoing, no such consent shall be required for the assignment of a party’s rights and obligations under this Agreement and the Ancillary Agreements (except as may be otherwise provided in any such Ancillary Agreement) in whole (i.e., the assignment of a party’s rights and obligations under this Agreement and all Ancillary Agreements all at the same time) in connection with a Change of Control of a Party so long as the resulting, surviving or transferee Person assumes all the obligations of the relevant party thereto by operation of Law or pursuant to an agreement in form and substance reasonably satisfactory to the other Party.
10.4 Third-Party Beneficiaries. Except for the indemnification rights under this Agreement and each Ancillary Agreement of any Encompass Indemnitee or Enhabit Indemnitee in their respective capacities as such, (a) the provisions of this Agreement and each Ancillary Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person except the Parties any rights or remedies hereunder, and (b) there are no third-party beneficiaries of this Agreement or any Ancillary Agreement and neither this Agreement nor any Ancillary Agreement shall provide any third person with any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement or any Ancillary Agreement.
10.5 Notices. All notices and other communications given or made hereunder by one or more Parties to one or more of the other Parties shall, unless otherwise specified herein, be in writing and shall be deemed to have been duly given or made on the date of receipt by the recipient thereof if received prior to 5:00 p.m. Birmingham, Alabama time (or otherwise on the next succeeding Business Day) if (a) served by personal delivery or by a nationally recognized overnight courier service upon the Party or Parties for whom it is intended, (b) delivered by registered or certified mail, return receipt requested or (c) sent by e-mail; provided that the e-mail transmission is promptly confirmed by telephone, a responsive electronic communication by the recipient thereof or otherwise or clearly evidenced (excluding out-of-office replies or other automatically generated responses) or is followed up within one (1) Business Day after e-mail by dispatch pursuant to one of the methods described in the foregoing clauses (a) and (b) of this Section 10.5. Such communications must be sent to the respective Parties at the following street addresses, facsimile numbers or e-mail addresses or at such street address or e-mail address previously made available or at such other street address or e-mail address for a Party as shall be specified for such purpose in a notice given in accordance with this Section 10.5) (it being understood that rejection or other refusal to accept or the inability to deliver because of changed street address or e-mail address of which no notice was given shall be deemed to be receipt of such communication as of the date of such rejection, refusal or inability to deliver):
If to Encompass. to:
Encompass Health Corporation
9001 Liberty Parkway
Birmingham, Alabama 35242
Attention: General Counsel
E-mail: * * *
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Igor Kirman
Elina Tetelbaum
Zachary S. Podolsky
E-mail: IKirman@wlrk.com
ETetelbaum@wlrk.com
ZSPodolsky@wlrk.com
Facsimile: (212) 403-2000
If to Enhabit, to:
Enhabit, Inc.
6688 N. Central Expressway
Suite 1300
Dallas, Texas 75206
Attention: General Counsel
E-mail: * * *
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Igor Kirman
Elina Tetelbaum
Zachary S. Podolsky
E-mail: IKirman@wlrk.com
ETetelbaum@wlrk.com
ZSPodolsky@wlrk.com
Facsimile: (212) 403-2000
and to:
Bradley Arant Boult Cummings LLP
One Federal Place
1819 5th Avenue N.
Birmingham, Alabama 35209
Attention: Charles Roberts
Stephen Hinton
Email: croberts@bradley.com
shinton@bradley.com
A Party may, by notice to the other Party, change the address to which such notices are to be given.
10.6 Severability. If any provision of this Agreement or any Ancillary Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or thereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
10.7 Force Majeure. No Party shall be deemed in default of this Agreement or, unless otherwise expressly provided therein, any Ancillary Agreement for any delay or failure to
fulfill any obligation (other than a payment obligation) hereunder or thereunder so long as and to the extent to which any delay or failure in the fulfillment of such obligation is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure. In the event of any such excused delay, the time for performance of such obligations (other than a payment obligation) shall be extended for a period equal to the time lost by reason of the delay. A Party claiming the benefit of this provision shall, as soon as reasonably practicable after the occurrence of any such event, (a) provide written notice to the other Party of the nature and extent of any such Force Majeure condition; and (b) use commercially reasonable efforts to remove any such causes and resume performance under this Agreement and the Ancillary Agreements, as applicable, as soon as reasonably practicable.
10.8 No Set-Off. Except as expressly set forth in any Ancillary Agreement or as otherwise mutually agreed to in writing by the Parties, neither Party nor any member of such Party’s Group shall have any right of set-off or other similar rights with respect to (a) any amounts received pursuant to this Agreement or any Ancillary Agreement; or (b) any other amounts claimed to be owed to the other Party or any member of its Group arising out of this Agreement or any Ancillary Agreement.
10.9 Expenses. Except as otherwise expressly set forth in this Agreement or any Ancillary Agreement, or as otherwise agreed to in writing by the Parties, all fees, costs and expenses incurred on or prior to the Effective Time in connection with the preparation, execution, delivery and implementation of this Agreement, including the Separation and the Distribution, and any Ancillary Agreement, the Separation, the Form 10, the Separation Step Plan and the consummation of the transactions contemplated hereby and thereby will be borne by the Party or its applicable Subsidiary incurring such fees, costs or expenses. The Parties agree that certain specified costs and expenses shall be allocated between the Parties, and borne and be the responsibility of the applicable Party, as set forth on Schedule 10.9.
10.10 Headings. The article, section and paragraph headings contained in this Agreement and in the Ancillary Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any Ancillary Agreement.
10.11 Survival of Covenants. Except as expressly set forth in this Agreement or any Ancillary Agreement, the covenants, representations and warranties contained in this Agreement and each Ancillary Agreement, and Liability for the breach of any obligations contained herein, shall survive the Separation and the Distribution and shall remain in full force and effect.
10.12 Waivers of Default. Waiver by a Party of any default by the other Party of any provision of this Agreement or any Ancillary Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the other Party. No failure or delay by a Party in exercising any right, power or privilege under this Agreement or any Ancillary Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof prejudice any other or further exercise thereof or the exercise of any other right, power or privilege.
10.13 Specific Performance. Subject to the provisions of Article VII, in the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement or any Ancillary Agreement, the Party or Parties who are, or are to be, thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief in respect of its or their rights under this Agreement or such Ancillary Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any Action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived by each of the Parties.
10.14 Amendments. No provisions of this Agreement or any Ancillary Agreement shall be deemed waived, amended, supplemented or modified by a Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom it is sought to enforce such waiver, amendment, supplement or modification.
10.15 Interpretation. In this Agreement and any Ancillary Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other genders as the context requires; (b) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement (or the applicable Ancillary Agreement) as a whole (including all of the Schedules, Exhibits and Appendices hereto and thereto) and not to any particular provision of this Agreement (or such Ancillary Agreement); (c) Article, Section, Schedule, Exhibit and Appendix references are to the Articles, Sections, Schedules, Exhibits and Appendices to this Agreement (or the applicable Ancillary Agreement) unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement and each Ancillary Agreement) shall be deemed to include the exhibits, schedules and annexes (including all Schedules, Exhibits and Appendices) to such agreement; (e) the word “including” and words of similar import when used in this Agreement (or the applicable Ancillary Agreement) shall mean “including, without limitation,” unless otherwise specified; (f) the word “or” shall not be exclusive; (g) unless otherwise specified in a particular case, the word “days” refers to calendar days; (h) references herein to this Agreement or any other agreement contemplated herein shall be deemed to refer to this Agreement or such other agreement as of the date on which it is executed and as it may be amended, modified or supplemented thereafter, unless otherwise specified; and (i) unless expressly stated to the contrary in this Agreement or in any Ancillary Agreement, all references to “the date hereof,” “the date of this Agreement,” “hereby” and “hereupon” and words of similar import shall all be references to June 30, 2022.
10.16 Limitations of Liability. Notwithstanding anything in this Agreement to the contrary, neither Enhabit or any member of the Enhabit Group, on the one hand, nor Encompass or any member of the Encompass Group, on the other hand, shall be liable under this Agreement to the other for any special, indirect, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages of the other arising in connection with the transactions contemplated hereby (other than any such Liability with respect to a Third-Party Claim).
10.17 Performance. Encompass will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement or in any Ancillary Agreement to be performed by any member of the Encompass Group. Enhabit will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement or in any Ancillary Agreement to be performed by any member of the Enhabit Group. Each Party (including its permitted successors and assigns) further agrees that it will (a) give timely notice of the terms, conditions and continuing obligations contained in this Agreement and any applicable Ancillary Agreement to all of the other members of its Group and (b) cause all of the other members of its Group not to take any action or fail to take any such action inconsistent with such Party’s obligations under this Agreement, any Ancillary Agreement or the transactions contemplated hereby or thereby.
10.18 Mutual Drafting. This Agreement and the Ancillary Agreements shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable.
10.19 Ancillary Agreements.
(a) In the event of any conflict or inconsistency between the terms of this Agreement and the terms of the Transition Services Agreement, the Tax Matters Agreement or the Employee Matters Agreement (each, a “Specified Ancillary Agreement”), the terms of the applicable Specified Ancillary Agreement shall control with respect to the subject matter addressed by such Specified Ancillary Agreement to the extent of such conflict or inconsistency.
(b) In the event of any conflict or inconsistency between the terms of this Agreement or any Specified Ancillary Agreement, on the one hand, and any Transfer Document, on the other hand, including with respect to the allocation of Assets and Liabilities as among the Parties or the members of their respective Groups, this Agreement or such Specified Ancillary Agreement shall control.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, the Parties have caused this Separation and Distribution Agreement to be executed by their duly authorized representatives as of the date first written above.
ENCOMPASS HEALTH CORPORATION
By: /s/ Patrick Darby
Name: Patrick Darby
Title: Executive Vice President, General Counsel and Secretary
ENHABIT, INC.
By: /s/ Barbara A. Jacobsmeyer
Name: Barbara A. Jacobsmeyer
Title: President and Chief Executive Officer
[Signature Page to Separation and Distribution Agreement]
TRANSITION SERVICES AGREEMENT
BY AND BETWEEN
ENCOMPASS HEALTH CORPORATION
AND
ENHABIT, INC.
_________________
Dated as of June 30, 2022
TABLE OF CONTENTS
Page
| | | | | |
| ARTICLE I DEFINITIONS | |
| ARTICLE II SERVICES, DURATION AND SERVICES MANAGERS | |
2.1 Services | |
2.2 Duration of Services | |
2.3 Additional Unspecified Services | |
2.4 Services Not Included | |
2.5 Transitional Nature of Services | |
2.6 Transition Services Managers | |
2.7 Personnel | |
2.8 Third-Party Providers | |
2.9 Local Agreements | |
2.10 Intellectual Property | |
| ARTICLE III ADDITIONAL ARRANGEMENTS | |
3.1 System Security; HIPAA | |
3.2 Access | |
3.3 Data Privacy | |
3.4 Cooperation | |
| ARTICLE IV COSTS AND DISBURSEMENTS | |
4.1 Costs and Disbursements | |
4.2 Tax Matters | |
| ARTICLE V STANDARD FOR SERVICE | |
5.1 Standard for Service | |
5.2 Disclaimer of Warranties | |
5.3 Compliance with Laws and Regulations | |
| ARTICLE VI LIMITED LIABILITY AND INDEMNIFICATION | |
6.1 Consequential and Other Damages | |
6.2 Limitation of Liability | |
6.3 Obligation to Re-perform; Liabilities | |
6.4 Release and Recipient Indemnity | |
6.5 Provider Indemnity | |
6.6 Indemnification Procedures | |
6.7 Liability for Payment Obligations | |
6.8 Exclusion of Other Remedies | |
6.9 Confirmation | |
| ARTICLE VII TERM AND TERMINATION | |
7.1 Term and Termination | |
7.2 Effect of Termination | |
7.3 Force Majeure | |
| | | | | |
| ARTICLE VIII DISPUTE RESOLUTION | |
8.1 Dispute Resolution | |
| ARTICLE IX GENERAL PROVISIONS | |
9.1 No Agency | |
9.2 Treatment of Confidential Information | |
9.3 Further Assurances | |
9.4 Notices | |
9.5 Severability | |
9.6 Entire Agreement | |
9.7 No Third-Party Beneficiaries | |
9.8 Governing Law | |
9.9 Amendment | |
9.10 Rules of Construction | |
9.11 Precedence of Schedules | |
9.12 Counterparts | |
9.13 Assignability; Change of Control | |
9.14 Non-Recourse | |
9.15 Mutual Drafting | |
| |
| SCHEDULE A Encompass Services | A-1 |
| SCHEDULE B Enhabit Services | B-1 |
| EXHIBIT I Services Managers | I-1 |
| EXHIBIT II Business Associate Agreement | II-1 |
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT, dated as of June 30, 2022 (this “Agreement”), is by and between Encompass Health Corporation, a Delaware corporation (“Encompass”), and Enhabit, Inc., a Delaware corporation (“Enhabit”). Unless otherwise defined in this Agreement, all capitalized terms used in this Agreement shall have the meaning set forth in the Separation and Distribution Agreement, dated as of the date hereof, by and between Encompass and Enhabit (as amended, modified or supplemented from time to time in accordance with its terms, the “Separation Agreement”).
R E C I T A L S
WHEREAS, in furtherance of the foregoing, the Board of Directors of Encompass (the “Encompass Board”) has determined that it is appropriate and desirable to separate the Enhabit Business from the Encompass Business (the “Separation”) and, following the Separation, make a distribution, on a pro rata basis, to holders of Encompass Shares on the Record Date of all of the outstanding Enhabit Shares owned by Encompass (the “Distribution”);
WHEREAS, Encompass and Enhabit have entered into the Separation Agreement on or about the date hereof pursuant to which, and subject to the terms thereof, the Parties will effect the Separation and the Distribution and the transactions contemplated therein and thereby;
WHEREAS, in order to facilitate and provide for an orderly transition under the Separation Agreement, the Parties desire to enter into this Agreement to set forth the terms and conditions pursuant to which each of the Parties or a member of their respective Groups shall provide to the other the Services (as defined herein) for a transitional period; and
WHEREAS, the Parties acknowledge that this Agreement, the Separation Agreement, and the other Ancillary Agreements represent the integrated agreement of Encompass and Enhabit relating to the Separation and Distribution, are being entered together, and would not have been entered independently.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained in this Agreement, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
The following capitalized terms used in this Agreement shall have the meanings set forth below:
“Additional Services” shall have the meaning set forth in Section 2.3(a).
“Agreement” shall have the meaning set forth in the Preamble.
“Confidential Information” shall have the meaning set forth in Section 9.2(a).
“Covid-19” shall mean SARS-CoV-2 or Covid-19, and any evolutions or variants thereof or related or associated epidemics, pandemics or disease outbreaks.
“Covid-19 Measures” shall mean any quarantine, “shelter in place,” “stay at home,” workforce reduction, social or physical distancing, shutdown, closure, sequester, safety or similar Law, directive, guidelines or recommendations promulgated by any industry group, nationally or internationally recognized organization or any Governmental Authority, including the Centers for Disease Control and Prevention and the World Health Organization, in each case, in connection with or in response to Covid-19, including the CARES Act, Families First Act and American Rescue Plan Act of 2021.
“Dispute” shall have the meaning set forth in Section 8.1(a).
“Distribution” shall have the meaning set forth in the Recitals.
“Distribution Date” shall mean the date of the consummation of the Distribution, which shall be determined by the Encompass Board in its sole and absolute discretion.
“Effective Time” shall mean 12:01 a.m., New York City time, on the Distribution Date.
“Encompass” shall have the meaning set forth in the Preamble.
“Encompass Board” shall have the meaning set forth in the Recitals.
“Encompass Functional Area Service Manager” shall have the meaning set forth in Section 2.6(a).
“Encompass Monthly Charges” shall have the meaning set forth in Section 4.1(d).
“Encompass Services” shall have the meaning set forth in Section 2.1.
“Encompass Services Managers” shall have the meaning set forth in Section 2.6(a).
“Enhabit” shall have the meaning set forth in the Preamble.
“Enhabit Change of Control” shall mean, with respect to Enhabit, (a) a transaction whereby any Person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) would acquire, directly or indirectly, voting securities representing more than fifty percent (50%) of the total voting power of Enhabit; (b) a merger, consolidation, recapitalization or reorganization of Enhabit, unless securities representing more than fifty percent (50%) of the total voting power of the legal successor to Enhabit as a result of such merger, consolidation, recapitalization or reorganization are immediately thereafter beneficially owned, directly or indirectly, by the Persons who beneficially owned Enhabit’s outstanding voting securities immediately prior to such transaction; or (c) the sale of all or substantially all of the consolidated assets of the Enhabit Group. For the avoidance of doubt, no transaction contemplated by the Separation Agreement shall be considered an Enhabit Change of Control.
“Enhabit Functional Area Service Manager” shall have the meaning set forth in Section 2.6(b).
“Enhabit Monthly Charges” shall have the meaning set forth in Section 4.1(d).
“Enhabit Services” shall have the meaning set forth in Section 2.1.
“Enhabit Services Managers” shall have the meaning set forth in Section 2.6(b).
“Force Majeure” shall mean, with respect to a Party, an event beyond the control of such Party (or any Person acting on its behalf), which event (a) does not arise or result from the fault or negligence of such Party (or any Person acting on its behalf) and (b) by its nature would not reasonably have been foreseen by such Party (or such Person), or, if it would reasonably have been foreseen, was unavoidable, and includes acts of God, acts of civil or military authority, embargoes, acts of terrorism, cyberattacks, epidemics, pandemics or diseases (including Covid-19) or other health crises or public health events, or any worsening of any of the foregoing, quarantine or government health alert that prohibits or restricts travel or prevents any individual from reporting to a work location, changes in Law (including any proposed Law, and including any governmental or quasi-governmental action, including Covid-19 Measures or any changes to existing Covid-19 Measures), war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts or, in the case of computer systems, any failure in electrical or air conditioning equipment.
“HIPAA” shall mean the Health Insurance Portability and Accountability Act of 1996, as amended and implemented through regulation.
“Interest Payment” shall have the meaning set forth in Section 4.1(d).
“Local Agreement” shall have the meaning set forth in Section 2.9.
“Net Monthly Charges” shall have the meaning set forth in Section 4.1(d).
“Non-Income Taxes” shall have the meaning set forth in Section 4.2(a).
“Parties” shall mean the parties to this Agreement.
“Personal Data” shall mean data relating to an identified or identifiable natural person, whether on a stand-alone basis or when aggregated with other data, that is either (a) provided by the Recipient or any Affiliate of the Recipient to the Provider or any Affiliate of the Provider under this Agreement or (b) accessed and/or processed by the Provider or any Affiliate of the Provider on behalf of the Recipient or any Affiliate of the Recipient in connection with this Agreement.
“Provider” shall mean the Party or its Subsidiary or Affiliate providing a Service under this Agreement.
“Provider Indemnified Party” shall have the meaning set forth in Section 6.4.
“Recipient” shall mean the Party or its Subsidiary or Affiliate to whom a Service under this Agreement is being provided.
“Recipient Indemnified Party” shall have the meaning set forth in Section 6.5.
“Reimbursement Charge(s)” shall have the meaning set forth in Section 4.1(c).
“Schedule(s)” shall have the meaning set forth in Section 2.2.
“Separation” shall have the meaning set forth in the Recitals.
“Separation Agreement” shall have the meaning set forth in the Preamble.
“Service Charge(s)” shall have the meaning set forth in Section 4.1(a).
“Service Extension” shall have the meaning set forth in Section 7.1(d).
“Service Increases” shall have the meaning set forth in Section 2.3(b).
“Services” shall have the meaning set forth in Section 2.1.
“Taxes” shall have the meaning set forth in the Tax Matters Agreement.
“Third-Party Provider” shall have the meaning set forth in Section 2.8.
ARTICLE II
SERVICES, DURATION AND SERVICES MANAGERS
2.1 Services. Subject to the terms and conditions of this Agreement, commencing as of the Effective Time, (a) Encompass shall provide or cause to be provided to the Enhabit Group the services listed on Schedule A to this Agreement (the “Encompass Services”) and (b) Enhabit shall provide or cause to be provided to the Encompass Group the services listed on Schedule B to this Agreement (the “Enhabit Services,” and, collectively with the Encompass Services, any Additional Services and any Service Increases, the “Services”). All of the Services shall be for the sole use and benefit of the respective Recipient and its respective Party.
2.2 Duration of Services. Subject to the terms of this Agreement, each of Encompass and Enhabit shall provide or cause to be provided to the respective Recipients each Service until the earlier to occur of, with respect to each such Service, (a) the expiration of the term for such Service (or, subject to the terms of Section 7.1(d), the expiration of any Service Extension) as set forth on Schedule A or Schedule B (each, a “Schedule,” and, collectively, the “Schedules”), (b) the date on which such Service is terminated under Section 7.1(b), or (c) the date that is the twenty-four (24)-month anniversary of the Distribution Date; provided, to the extent that a Provider’s ability to provide a Service is dependent on the continuation of either an Encompass Service or an Enhabit Service (and such dependence has been made known to the other Party), as the case may be, and the Provider’s ability to provide a particular Service in accordance with this Agreement is materially and adversely affected by the termination of such supporting Encompass Service or Enhabit Service, as the case may be, then the Provider’s obligation to provide such dependent Service shall terminate automatically with the termination of such supporting Encompass Service or supporting Enhabit Service, as the case may be.
2.3 Additional Unspecified Services.
(a) After the date of this Agreement, if Encompass or Enhabit (i) identifies a service that (x) the Encompass Group provided to the Enhabit Group prior to the Distribution Date that Enhabit reasonably needs in order for the Enhabit Business to continue to operate in substantially the same manner in which the Enhabit Business operated prior to the Distribution Date, and such service was not included on Schedule A (other than because the Parties expressly agreed that such service shall not be provided), or (y) the Enhabit Group provided to the Encompass Group prior to the Distribution Date that Encompass reasonably needs in order for the Encompass Business to continue to operate in substantially the same manner in which the Encompass Business operated prior to the Distribution Date, and such service was not included on Schedule B (other than because the Parties expressly agreed that such service shall not be provided) and (ii) provides written notice to the other Party prior to the date that is sixty (60) days following the Distribution Date requesting such additional services, then such other Party shall use its commercially reasonable efforts to provide such requested additional services (such requested additional services, the “Additional Services”); provided, however, that no Party shall be obligated to provide any Additional Service if it does not, in its reasonable judgment, have adequate resources to provide such Additional Service or if the provision of such Additional Service would significantly disrupt the operation of its businesses; and provided, further, that a Provider shall not be required to provide any Additional Services if the Parties, despite using good-faith efforts, are unable to reach agreement on the terms thereof (including with respect to Service Charges therefor). If the Parties agree that any Additional Service shall be provided and received in accordance with this Section 2.3(a), the Encompass Services Managers (as defined below) and the relevant Encompass Functional Area Service Manager (as defined below) with respect to such Additional Service, on the one hand, and the Enhabit Services Managers (as defined below) and the relevant Enhabit Functional Area Service Manager (as defined below) with respect to such Additional Service, on the other, shall in good faith negotiate on an arm’s-length basis the terms of a supplement to the applicable Schedule, which terms shall be consistent with the terms of, and the pricing methodology used for, similar Services provided under this Agreement. Upon the mutual written agreement of the Parties, the supplement to the applicable Schedule shall describe in reasonable detail the Service Charge and the nature, scope, service period(s) (which, with respect to any such Additional Service, shall expire no later than the date set forth in clause (c) of Section 2.2), termination provisions and other terms applicable to such Additional Services in a manner similar to that in which the Services are described in the existing Schedules. Each supplement to the applicable Schedule, as agreed in writing by the Parties, shall be deemed part of this Agreement as of the date of such agreement, and the Additional Services set forth therein shall be deemed “Services” provided under this Agreement, in each case, subject to the terms and conditions of this Agreement.
(b) After the date of this Agreement, if (i) a Recipient requests a Provider to increase, relative to historical levels prior to the Distribution Date, the volume, amount, level or frequency, as applicable, of any Service provided by such Provider of such Service and (ii) such increase is reasonably determined by such Recipient as necessary for such Recipient to operate its businesses (such increases, the “Service Increases”), then such Provider shall consider such request in good faith; provided, however, that no Party shall be obligated to provide any Service Increase, including because, after good-faith negotiations between the Parties, the Parties fail to reach an agreement with respect to the terms thereof (including with respect to Service Charges therefor). In connection with any request for Service Increases in accordance with this Section 2.3(b), the Encompass Services Managers and the relevant Encompass Functional Area Service Manager with respect to such Service Increase, on the one hand, and the Enhabit Services Managers and the relevant Enhabit Functional Area Service Manager with respect to such Service Increase, on the other, shall in good faith negotiate on an arm’s-length basis the terms of an amendment to the applicable Schedule, which amendment shall be consistent with the terms of, and the pricing methodology used for, the applicable Service.
(c) Each amended Schedule, as agreed in writing by the Parties, shall be deemed part of this Agreement as of the date of such agreement, and the Service Increases set forth therein shall be deemed a part of the “Services” provided under this Agreement, in each case, subject to the terms and conditions of this Agreement.
2.4 Services Not Included. It is not the intent of any Provider to render, nor of any Recipient to receive from any Provider, professional advice or opinions, whether with regard to Tax, legal, treasury, finance, employment or other business or financial matters, technical advice, whether with regard to information technology or other matters, or the handling of or addressing of environmental matters; no Recipient shall rely on, or construe, any Service rendered by or on behalf of a Provider as such professional advice or opinions or technical advice; and all Recipients shall seek all third-party professional advice or opinions or technical advice as it may desire or need.
2.5 Transitional Nature of Services. The Parties acknowledge the transitional nature of the Services and agree to cooperate in good faith and to use commercially reasonable efforts to avoid a disruption in the transition of the Services from the applicable Provider to the applicable Recipient (or its designee). Each Recipient agrees to use commercially reasonable efforts to reduce or eliminate its and its Affiliates’ dependency on each Service to the extent and as soon as is reasonably practicable.
2.6 Transition Services Managers.
(a) Encompass hereby appoints and designates the individuals set forth on Exhibit I-A to act as its initial services managers (the “Encompass Services Managers”), who will each be directly responsible for coordinating and managing the delivery of the Encompass Services and have authority to act on Encompass’s behalf with respect to matters relating to the provision of Services under this Agreement. The Encompass Services Managers will work with the personnel of the Encompass Group to periodically address issues and matters raised by Enhabit relating to the provision of Services under this Agreement. Notwithstanding the requirements of Section 9.4, all communications from Enhabit to Encompass pursuant to this Agreement regarding routine matters involving a Service shall be made first through the individual or individuals, as the case may be, specified as the functional area service manager (the “Encompass Functional Area Service Manager”) with respect to such Service on Exhibit I-B or such other individual as may be specified by an Encompass Services Manager in writing and delivered to Enhabit by email or facsimile transmission with receipt confirmed; provided that, if the Encompass Functional Area Service Manager is not available, communication shall thereafter be made through an Encompass Services Manager. Encompass shall notify Enhabit of the appointment of a different Encompass Services Manager or Encompass Functional Area Service Manager(s), if necessary, in accordance with Section 9.4.
(b) Enhabit hereby appoints and designates the individuals set forth on Exhibit I-A to act as its initial services managers (the “Enhabit Services Managers”), who will each be directly responsible for coordinating and managing the delivery of the Enhabit Services and have authority to act on Enhabit’s behalf with respect to matters relating to this Agreement. The Enhabit Services Managers will work with the personnel of the Enhabit Group to periodically address issues and matters raised by Encompass relating to this Agreement. Notwithstanding the requirements of Section 9.4, all communications from Encompass to Enhabit pursuant to this Agreement regarding routine matters involving a Service shall be made through the individual or individuals, as the case may be, specified as the functional area service manager (the “Enhabit Functional Area Service Manager”) with respect to such Service on Exhibit I-B or as specified by an Enhabit Services Manager in writing and delivered to Encompass by email or facsimile transmission with receipt confirmed; provided that, if the Enhabit Functional Area Service Manager is not available, communication shall thereafter be made through an Enhabit Services Manager. Enhabit shall notify Encompass of the appointment of a different Enhabit Services Manager or Enhabit Functional Area Service Manager(s), if necessary, in accordance with Section 9.4.
2.7 Personnel.
(a) The Provider of any Service will make available to the Recipient of such Service such appropriately qualified personnel as may be necessary to provide such Service, on the understanding that such personnel shall remain employed and/or engaged by the Provider. The Provider will have the right, in its reasonable discretion, to (i) designate which personnel it will assign to perform such Service and (ii) remove and replace such personnel at any time; provided, however, that any such removal or replacement shall not be the basis for any increase in any Service Charge or Reimbursement Charge payable hereunder or relieve the Provider of its obligation to provide any Service hereunder; and provided, further, that the Provider will use its commercially reasonable efforts to limit the disruption to the Recipient in the transition of the Services to different personnel.
(b) In the event that the provision of any Service by the applicable Provider requires the cooperation and services of the personnel of the Recipient, the applicable Recipient will make available to the Provider such personnel (who shall be appropriately qualified for purposes of so supporting the provision of such Service by the Provider) as may be necessary for the Provider to provide such Service, on the understanding that such personnel shall remain employed and/or engaged by the Recipient. The Recipient will have the right, in its reasonable discretion, to (i) designate which personnel it will make available to the Provider in connection with the provision of such Service and (ii) remove and replace such personnel at any time; provided, however, that any directly resulting increase in costs to the Provider shall be borne by the Recipient and any directly resulting adverse effect to the provision of such Service by the Provider shall not be deemed a breach of this Agreement; and provided, further, that the Recipient will use its commercially reasonable efforts to limit the disruption to the Provider in the transition of such personnel.
(c) No Provider shall be liable under this Agreement for any Liabilities incurred by the Recipient Indemnified Parties that are primarily attributable to, or that are primarily a consequence of, any actions or inactions of the personnel of the Recipient, except for any such actions or inactions undertaken pursuant to the direction of the Provider.
(d) Nothing in this Agreement shall grant any Provider, or its employees or agents that are performing the Services, the right directly or indirectly to control or direct the operations of the applicable Recipient or any member of its Group. Such employees and agents shall not be required to report to the management of the applicable Recipient, nor be deemed to be under the management or direction of such Recipient. Each Recipient acknowledges and agrees that, except as may be expressly set forth herein as a Service (including any Additional Services or Service Increases) or otherwise expressly set forth in the Separation Agreement, another Ancillary Agreement or any other applicable agreement, no Provider or any member of its Group shall be obligated to provide, or cause to be provided, any service or goods to such Recipient or any member of its Group, or to expand or modify any facilities, incur any capital expenditures, acquire any additional equipment or software or hire or retain any additional personnel in connection with its obligation to provide Services hereunder.
2.8 Third-Party Providers. The Parties acknowledge that each Provider may provide the applicable Services directly (including through a Subsidiary or an Affiliate), or through one or more third parties engaged by the applicable Provider to provide the applicable Services in accordance with the terms of this Section 2.8 (each such third party, a “Third-Party Provider”). Each Provider shall make, in its sole discretion, any decisions as to whether it will provide applicable Services directly or through a Third-Party Provider; provided that (a) each Provider shall use at least the same degree of care in selecting any such Third-Party Provider (or replacement thereof) as it would if such Third-Party Provider was being retained to provide similar services to such Provider, and (b) such Provider shall remain responsible for all of its obligations under this Agreement with respect to the scope, standard and content of the Services provided to the Recipient.
2.9 Local Agreements. Encompass and Enhabit each recognize and agree that there may be a need to document the Services provided hereunder from time to time or to otherwise modify the scope or nature of such Services to the extent necessary to comply with applicable Law. If such an agreement is required by applicable Law, or if Encompass and Enhabit mutually determine it to be necessary or desirable, in order for a Provider to provide the Services in a particular jurisdiction, Encompass and Enhabit shall cause the applicable Providers and Recipients to enter into local implementing agreements in form and content reasonably acceptable to the Parties (each, a “Local Agreement”); provided, however, that the execution or performance of any such Local Agreement shall in no way alter or modify any term or condition hereof nor the effect thereof. In accordance with Section 9.9, Encompass and Enhabit may from time to time agree in writing to amend any terms of this Agreement, and, in such cases, such amendment will be deemed to amend the terms of all Local Agreements, except to the extent expressly provided to the contrary in an amendment to this Agreement.
2.10 Intellectual Property.
(a) This Agreement and the performance of the Services hereunder will not affect or result in the transfer of any rights in or to, or the ownership of, any Intellectual Property Rights, Information Technology, Software or other Technology of the Provider or any of its Affiliates. Except as expressly provided under the terms of the Separation Agreement or any other Ancillary Agreement, neither Party shall acquire, by virtue of this Agreement or the provision of the Services hereunder, by implication or otherwise, any right, title or interest (except for the express license rights set forth in Section 2.10(b) and Section 2.10(c)) of any Intellectual Property Rights, Information Technology, Software or other Technology owned or licensed by the other. For the avoidance of doubt, nothing in this Agreement shall limit or modify the transfer of the rights in and to, the ownership of, or the licenses with respect to any Intellectual Property Rights, Information Technology, Software or other Technology as set forth in the Separation Agreement or any other Ancillary Agreement.
(b) Subject to Section 2.10(a), solely to the extent that in connection with receiving the benefit of any Service, the Recipient provides the Provider with any Information Technology, Software or other Technology owned or controlled by the Recipient or any of its Affiliates that is necessary to enable the Provider to provide such Service, the Recipient hereby grants to the Provider a non-exclusive, worldwide, non-transferable, non-sublicensable (except solely to the extent necessary for the Provider to provide the Services, to Provider’s subcontractors), revocable, fully paid-up, royalty-free license under any Intellectual Property Rights of the Recipient to use such Information Technology, Software or other Technology, solely during the term of the applicable Service, and for the sole and limited purpose of providing, and only to the extent reasonably necessary for the provision of, such Service.
(c) Subject to Section 2.10(a), solely to the extent that in connection with providing any Service, the Provider provides the Recipient with any Information Technology, Software or other Technology owned or controlled by the Provider or any of its Affiliates that is necessary to enable the Recipient to receive the benefit of such Service, the Provider hereby grants to the Recipient a limited, non-exclusive, non-transferable, non-sublicensable, revocable, fully paid-up, royalty-free license under any Intellectual Property Rights of the Provider to use such Information Technology, Software or other Technology, solely during the term of the applicable Service, for the sole and limited purpose of receiving such Service, and only to the extent necessary for receipt of such Service.
ARTICLE III
ADDITIONAL ARRANGEMENTS
3.1 System Security; HIPAA.
(a) From and after the date of this Agreement, if a Party or its Affiliates is given access to the internal computer systems and intranet or such other computer software, networks, hardware, technology or computer-based resources of the other Party or its Affiliates pursuant to this Agreement or any other Ancillary Agreement, or in connection with performance, receipt or delivery of a Service, such accessing party shall comply with all security guidelines (including physical security, network access, internet security, confidentiality and personal data security guidelines) of such granting party. The Parties shall ensure that the access contemplated by this Section 3.1(a) shall be used by such personnel only for the purposes contemplated by, and subject to the terms of, this Agreement.
(b) Effective at or prior to the Effective Time, the Parties will enter into and abide by the terms of the Business Associate Agreement attached hereto as Exhibit II.
3.2 Access.
(a) Enhabit shall, and shall cause its Subsidiaries to, allow Encompass and its Representatives reasonable access to the facilities of Enhabit necessary for Encompass to fulfill its obligations under this Agreement.
(b) Encompass shall, and shall cause its Subsidiaries to, allow Enhabit and its Representatives reasonable access to the facilities of Encompass necessary for Enhabit to fulfill its obligations under this Agreement.
(c) Notwithstanding the other rights of access of the Parties under this Agreement, each Party shall, and shall cause its Subsidiaries to, afford the other Party, its Subsidiaries and Representatives, following not less than five (5) business days’ prior written notice from the other Party, reasonable access during normal business hours to the facilities, information, systems, infrastructure and personnel of the relevant Providers as reasonably necessary for the other Party to verify the adequacy of internal controls over Information Technology, reporting of financial data and related processes employed in connection with the Services, including in connection with verifying compliance with Section 404 of the Sarbanes-Oxley Act of 2002; provided, however, that such access shall not unreasonably interfere with any of the business or operations of such Party or its Subsidiaries.
(d) Except as otherwise permitted by the other Party in writing, each Party shall permit only its authorized Representatives, Third-Party Providers, contractors, invitees or licensees to access the other Party’s facilities.
3.3 Data Privacy. Each Party agrees to use reasonable best efforts to comply with, and to cause its controlled Affiliates and its and their respective employees, agents and subcontractors to comply with all applicable data privacy and data protection Laws in connection with the performance of their obligations under this Agreement. The Parties agree that with respect to any Personal Data: (a) the Recipient is a data controller (or equivalent term under applicable Law) and the Provider is acting only as a data processor (or equivalent term under applicable Law); (b) the Provider shall only undertake processing of Personal Data to the extent reasonably necessary or advisable to enable it to perform its obligations under this Agreement; and (c) the Provider shall ensure that all personnel with access to or involved in the processing of Personal Data are bound by appropriate confidentiality obligations.
3.4 Cooperation. It is understood that it will require the significant efforts of both Parties to implement this Agreement and to ensure performance of this Agreement by the Parties at the agreed-upon levels in accordance with all of the terms and conditions of this Agreement. The Parties will cooperate, acting in good faith and using commercially reasonable efforts, to effect a smooth and orderly transition of the Services provided under this Agreement from the Provider to the Recipient (including repairs and maintenance Services and the assignment or transfer of the rights and obligations under any third-party contracts relating to the Services); provided, however, that this Section 3.4 shall not require either Party to incur any out-of-pocket costs or expenses unless and except as expressly provided in this Agreement or otherwise agreed in writing by the Parties.
ARTICLE IV
COSTS AND DISBURSEMENTS
4.1 Costs and Disbursements.
(a) Except as otherwise provided in this Agreement or in the Schedules to this Agreement, a Recipient of Services (or its designee) shall pay to the Provider of such Services (or its designee) a monthly fee for the Services (or category of Services, as applicable) (each fee constituting a “Service Charge,” and, collectively, “Service Charges”) as listed on the Schedules hereto. Except as otherwise set forth on the Schedules hereto, all Service Charges shall be exclusive of any Taxes (responsibility for which shall be governed by Section 4.2).
(b) During the term of this Agreement, the amount of a Service Charge for any Services (or category of Services, as applicable) may increase to the extent of: (i) any increases mutually agreed to by the Parties; (ii) any Service Charges applicable to any Additional Services or Service Increases; (iii) subject to Section 7.1(d), any increases applicable to Service Extensions; and (iv) subject to the terms and conditions of this Agreement, any increase in the rates or charges imposed by any Third-Party Provider that is providing Services. Together with any monthly invoice for Service Charges and Reimbursement Charges (as defined below), the Provider shall, upon request, provide the Recipient with documentation to support the calculation of such Service Charges or any Reimbursement Charges.
(c) Each Recipient shall reimburse the applicable Provider for reasonable unaffiliated third-party out-of-pocket costs and expenses incurred by such Provider or its Affiliates in connection with providing the Services (including reasonable travel-related expenses) (each such cost or expense, a “Reimbursement Charge,” and, collectively, “Reimbursement Charges”); provided, however, that any such cost or expense that is materially inconsistent with historical practice between the Parties for any Service (including business travel and related expenses) shall require advance approval of the Recipient. Any authorized travel-related expenses incurred in performing the Services shall be incurred and charged to the applicable Recipient in accordance with the applicable Provider’s then-applicable business travel policies made known to the Recipient.
(d) The Service Charges and Reimbursement Charges due and payable hereunder shall be invoiced and paid in U.S. dollars, unless otherwise set forth on the Schedules hereto or unless the Parties otherwise agree. Except as otherwise agreed by the Parties, on a monthly basis, Encompass shall prepare an invoice for such fiscal month noting, in reasonable detail, (i) the Service Charges and Reimbursement Charges with respect to Encompass Services (the “Encompass Monthly Charges”), (ii) the Service Charges and Reimbursement Charges with respect to Enhabit Services (the “Enhabit Monthly Charges”), and (iii) the Net Monthly Charges (as defined below). For purposes of this Agreement, the “Net Monthly Charges” shall be the
Encompass Monthly Charges minus the Enhabit Monthly Charges (which may be positive or negative). If the Net Monthly Charges is positive, the relevant Recipient that is a member of the Enhabit Group (or its designee) shall pay the amount of the Net Monthly Charges by wire transfer (or such other method of payment as may be agreed between the Parties) to the relevant Provider that is a member of the Encompass Group (or its designee) within thirty (30) days of the receipt of each such invoice, including appropriate documentation as described herein, as instructed by the applicable Provider. If the Net Monthly Charges is negative, the relevant Recipient that is a member of the Encompass Group (or its designee) shall pay the amount of the Net Monthly Charges by wire transfer (or such other method of payment as may be agreed between the Parties) to the relevant Provider that is a member of the Enhabit Group (or its designee) within thirty (30) days of the receipt of each such invoice, including appropriate documentation as described herein, as instructed by the applicable Provider. In the absence of a timely notice of billing dispute in accordance with the provisions of Article VIII of this Agreement, if the applicable Recipient fails to pay such amount by the due date, the Recipient shall be obligated to pay to the Provider, in addition to the amount due, interest at an annual default interest rate of the Prime Rate (as published in The Wall Street Journal as of the date of payment) plus two percent (2%), or the maximum legal rate, whichever is lower (the “Interest Payment”), accruing from the date the payment was due up to the date of actual payment. In the event of any billing dispute, the Recipient shall promptly pay any undisputed amount. Payments under this Agreement shall be made without set-off or counterclaim, except as expressly set forth in this Agreement.
(e) Subject to the confidentiality provisions set forth in Section 9.2, each Party shall, and shall cause their respective Affiliates to, provide, upon ten (10) days’ prior written notice from the other Party, any information within such Party’s or its Affiliates’ possession that the requesting Party reasonably requests in connection with any Services being provided to such requesting Party by a Third-Party Provider, including any applicable invoices, agreements documenting the arrangements between such Third-Party Provider and the Provider and other supporting documentation.
4.2 Tax Matters.
(a) Without limiting any provisions of this Agreement, the Recipient shall be responsible for and shall pay any and all excise, sales, use, value-added, goods and services, transfer, stamp, documentary, filing, recordation and other similar Taxes, in each case, imposed on, payable with respect to, or assessed as a result of the provision of Services by the Provider or any fees or charges (including any Service Charges) payable by the Recipient pursuant to this Agreement (collectively, “Non-Income Taxes”). The Party required to account for such Non-Income Tax shall provide to the other Party, upon such Party’s request, appropriate tax invoices and, if applicable, evidence of the remittance of the amount of such Non-Income Tax to the relevant Governmental Authority. The Parties shall use commercially reasonable efforts to minimize Non-Income Taxes and obtain any refund, return, rebate or the like of any Non-Income Tax, including by filing any necessary exemption or other similar forms, certificates or other similar documents, in each case, to the extent legally permissible. The Recipient shall promptly reimburse the Provider for any unaffiliated third-party out-of-pocket costs incurred by the Provider or its Affiliates in connection with the Provider obtaining a refund or credit of any Non-Income Tax for the benefit of the Recipient. For the avoidance of doubt, any net income-based
Taxes imposed or assessed as a result of the provision of Services by the Provider shall be borne exclusively by the Provider.
(b) Notwithstanding anything to the contrary set forth in this Agreement, the Recipient shall be entitled to deduct and withhold from any payment to the Provider any such Taxes that the Recipient is required by any applicable Law to withhold. To the extent any amounts are so withheld, the Recipient shall timely pay when due such deducted and withheld amounts to the proper Governmental Authority, promptly provide to the Provider evidence of such payment to such Governmental Authority and shall promptly pay to the Provider such additional amounts as to result in the Provider receiving the same net amount as the Provider would have received had such deduction and withholding not been made. The Parties shall use commercially reasonable efforts to minimize withholding Taxes to the extent legally permissible.
(c) If the Provider (i) receives any refund (whether by payment, offset, credit or otherwise) or (ii) utilizes any overpayment, in each case, of Taxes that were borne by the Recipient pursuant to this Agreement, then the Provider shall promptly pay, or cause to be paid, to the Recipient an amount equal to such refund or overpayment, net of any additional Taxes payable by the Provider as a result of the receipt of such refund or such overpayment.
ARTICLE V
STANDARD FOR SERVICE
5.1 Standard for Service.
(a) The Provider agrees (i) to perform the Services in a manner that is substantially similar in all material respects to which the same or similar services were performed by or on behalf of the Provider prior to the Distribution Date or, if not so previously provided, then substantially similar in all material respects to which similar services are provided by or on behalf of such Provider to the Provider’s Affiliates or other business components; and (ii) upon receipt of written notice from the Recipient identifying any outage, interruption or other failure of any Service, to respond to such outage, interruption or other failure of such Service in a manner that is substantially similar in all material respects to the manner in which such Provider or its Affiliates responded to any outage, interruption or other failure of the same or similar services prior to the Distribution Date. The Parties acknowledge that an outage, interruption or other failure of any Service shall not be deemed to be a breach of the provisions of this Section 5.1 so long as the applicable Provider complies with the foregoing clause (ii).
(b) Notwithstanding anything to the contrary set forth in this Agreement, nothing in this Agreement shall require the Provider to perform or cause to be performed any Service to the extent the manner of such performance would constitute a violation of applicable Law or any existing contract or agreement with a third party. If the Provider is or becomes aware of any restriction on the Provider by an existing contract with a third party that would restrict the nature, quality, standard of care or service levels applicable to delivery of the Services to be provided by the Provider to the Recipient, the Provider shall use commercially reasonable efforts to promptly notify the Recipient of any such restriction. The Parties each agree to cooperate and use commercially reasonable efforts to obtain any necessary third-party consents required under any existing contract or agreement with a third party to allow the Provider to perform or cause to be
performed any Service in accordance with the standards set forth in this Section 5.1. Any out-of-pocket costs and expenses incurred by either Party in connection with obtaining any such third-party consent that is required to allow the Provider to perform or cause to be performed any Service shall be solely the responsibility of the Recipient. If, with respect to a Service, the Parties, despite the use of such commercially reasonable efforts, are unable to obtain a required third-party consent, or the performance of such Service by the Provider would continue to constitute a violation of applicable Laws, the Provider shall use commercially reasonable efforts in good faith to provide such Services in a manner as closely as possible to the standards described in this Section 5.1 that would apply absent the exception provided for in the first sentence of this Section 5.1(b).
5.2 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PARTIES ACKNOWLEDGE AND AGREE THAT THE SERVICES ARE PROVIDED AS-IS, THAT EACH RECIPIENT ASSUMES ALL RISKS AND LIABILITY ARISING FROM OR RELATING TO ITS USE OF AND RELIANCE UPON THE SERVICES, AND EACH PROVIDER, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT THERETO. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH PROVIDER HEREBY EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES REGARDING THE SERVICES, WHETHER EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, INCLUDING ANY REPRESENTATION OR WARRANTY IN REGARD TO QUALITY, PERFORMANCE, NON-INFRINGEMENT, COMMERCIAL UTILITY, MERCHANTABILITY OR FITNESS OF ANY SERVICE FOR A PARTICULAR PURPOSE.
5.3 Compliance with Laws and Regulations. Each Party shall be responsible for its own compliance with any and all Laws applicable to its performance under this Agreement, including, without limitation, the federal physician self-referral law (commonly known as the “Stark Law,” 42 U.S.C. §§ 1395nn et seq.) and the anti-fraud and abuse provisions of the Social Security Act (42 U.S.C. §§ 1320a-7 et seq.) and applicable state and federal laws and regulations relating to the security and privacy of protected health information (including HIPAA), as they may be amended from time to time. No Party will knowingly take any action in violation of any such applicable Law that results in liability being imposed on the other Party. This Agreement does not require, and is not to be interpreted in any manner so as to require, the referral of patients by one Party to the other Party in violation of any applicable law or regulation.
ARTICLE VI
LIMITED LIABILITY AND INDEMNIFICATION
6.1 Consequential and Other Damages. Notwithstanding anything to the contrary set forth in the Separation Agreement or this Agreement, the Provider shall not be liable to the Recipient or any of its Affiliates or Representatives, whether in contract, tort (including negligence and strict liability) or otherwise, at law or equity, for any special, indirect, incidental, punitive or consequential damages whatsoever (including lost profits or damages calculated on multiples of earnings approaches), which in any way arise out of, relate to or are a consequence of, the performance or non-performance by the Provider (including any Affiliates and
Representatives of the Provider and any Third-Party Providers, in each case, providing the applicable Services) under this Agreement or the provision of, or failure to provide, any Services under this Agreement, including with respect to loss of profits, business interruptions or claims of patients, vendors or referral sources, and that each Party hereby waives on behalf of itself, its Subsidiaries and its Representatives that are Recipients hereunder any claim for such damages.
6.2 Limitation of Liability. The Liabilities of each Provider and its Affiliates and Representatives, collectively, under this Agreement for any act or failure to act in connection herewith (including the performance or breach of this Agreement), or from the sale, delivery, provision or use of any Services provided under or contemplated by this Agreement, whether in contract, tort (including negligence and strict liability) or otherwise, at law or equity, shall not exceed the total aggregate Service Charges (excluding any Reimbursement Charges) actually paid or payable to such Provider by the Recipient pursuant to this Agreement.
6.3 Obligation to Re-perform; Liabilities. In the event of any breach of this Agreement by any Provider with respect to the provision of any Services (with respect to which the Provider can reasonably be expected to re-perform in a commercially reasonable manner), the Provider shall (a) promptly correct in all material respects such error, defect or breach or to perform again in all material respects such Services at the request of the Recipient and at the sole cost and expense of the Provider and (b) subject to the limitations set forth in Section 6.1 and Section 6.2, reimburse the Recipient and its Affiliates and Representatives for Liabilities attributable to such breach by the Provider. The remedy set forth in this Section 6.3 shall be the sole and exclusive remedy of the Recipient for any such breach of this Agreement. Any request for re-performance in accordance with this Section 6.3 by the Recipient must be in writing and specify in reasonable detail the particular error, defect or breach, and such request must be made no more than one (1) month from the date such error, defect or breach becomes apparent to Encompass or should have reasonably become apparent to Encompass. This Section 6.3 shall survive any termination of this Agreement.
6.4 Release and Recipient Indemnity. In addition to (but not in duplication of) its other indemnification obligations (if any) under the Separation Agreement, this Agreement or any other Ancillary Agreement, and subject to Section 6.1 and Section 6.2, each Recipient hereby releases the applicable Provider and its Affiliates and Representatives (each, a “Provider Indemnified Party”), and each Recipient hereby agrees to indemnify, defend and hold harmless each such Provider Indemnified Party from and against any and all Liabilities arising from, relating to or in connection with (a) the use of any Services by such Recipient or any of its Affiliates, Representatives or other Persons using such Services or (b) the sale, delivery, provision or use of any Services provided under or contemplated by this Agreement, in the case of each of clauses (a) and (b), except to the extent that such Liabilities arise out of, relate to or are a consequence of the applicable Provider Indemnified Party’s gross negligence, bad faith, willful misconduct or fraud.
6.5 Provider Indemnity. In addition to (but not in duplication of) its other indemnification obligations (if any) under the Separation Agreement, this Agreement or any other Ancillary Agreement, and subject to Section 6.1 and Section 6.2, each Provider hereby agrees to indemnify, defend and hold harmless the applicable Recipient and its Affiliates and Representatives (each, a “Recipient Indemnified Party”), from and against any and all Liabilities
arising from, relating to or in connection with (a) the use of any Services by such Recipient or any of its Affiliates, Representatives or other Persons using such Services or (b) the sale, delivery, provision or use of any Services provided under or contemplated by this Agreement, in the case of each of clauses (a) and (b), to the extent that such Liabilities arise out of, relate to or are a consequence of the applicable Provider’s gross negligence, bad faith or willful misconduct or fraud.
6.6 Indemnification Procedures. Subject to the provisions of this Article VI, the provisions of Article IV of the Separation Agreement shall govern claims for indemnification under this Agreement.
6.7 Liability for Payment Obligations. Nothing in this Article VI shall be deemed to eliminate or limit, in any respect, Encompass’s or Enhabit’s express obligation in this Agreement to pay Service Charges and Reimbursement Charges for Services rendered in accordance with this Agreement.
6.8 Exclusion of Other Remedies. The provisions of Section 6.3, Section 6.4 and Section 6.5 shall, to the maximum extent permitted by applicable Law, be the sole and exclusive remedies of the Provider Indemnified Parties and the Recipient Indemnified Parties, as applicable, for any claim, loss, damage, expense or liability, whether arising from statute, principle of common or civil law, principles of strict liability, tort, contract or otherwise under this Agreement, except as set forth in Section 9.2.
6.9 Confirmation. Neither Party excludes responsibility for any Liability that cannot be excluded pursuant to applicable Law.
ARTICLE VII
TERM AND TERMINATION
7.1 Term and Termination.
(a) This Agreement shall commence immediately upon the Effective Time and shall terminate upon the earlier to occur of: (i) the last date on which either Party is obligated to provide any Service to the other Party in accordance with the terms of this Agreement; (ii) the mutual written agreement of the Parties to terminate this Agreement in its entirety; or (iii) a termination by Encompass in accordance with Section 9.13(b).
(b) Without prejudice to a Recipient’s rights with respect to a Force Majeure, a Recipient may from time to time terminate this Agreement with respect to the entirety of any individual Service but not a portion thereof, for any reason or no reason, upon providing at least thirty (30) days’ prior written notice to the Provider; provided, however, that the Recipient shall pay to the Provider the necessary and reasonable documented out-of-pocket costs incurred in connection with the wind down of such Service other than any employee severance and relocation expenses, but including unamortized license fees and costs for equipment used to provide such Service, contractual obligations under agreements used to provide such Service, any breakage or termination fees and any other termination costs payable by the Provider with respect to any resources or pursuant to any other third-party agreements that were used by the Provider to provide such Service (or an equitably allocated portion thereof, in the case of any
such equipment, resources or agreements that also were used for purposes other than providing Services).
(c) A Provider may terminate this Agreement with respect to one or more Services, in whole but not in part, at any time upon prior written notice to the Recipient if the Recipient has failed to perform any of its material obligations under this Agreement relating to such Services, including making payment of Service Charges when due, and such failure shall continue uncured for a period of thirty (30) days after receipt by the Recipient of a written notice of such failure from the Provider. In the event that any Service is terminated other than at the end of a month, the Service Charge associated with such Service shall be pro-rated appropriately. The Parties acknowledge that there may be interdependencies among the Services being provided under this Agreement that may not be identified on the applicable Schedules and agree that, if the Provider’s ability to provide a particular Service in accordance with this Agreement is materially and adversely affected by the termination of another Service in accordance with Section 7.1(b), then the Parties shall negotiate in good faith to amend the Schedule relating to such affected continuing Service, which amendment shall be consistent with the terms of, and the pricing methodology used for, comparable Services.
(d) In connection with the termination of any Service, if the Recipient reasonably determines that it will require such Service to continue beyond the date on which such Service is scheduled to terminate, the Recipient may request that the Provider extend such Service (any such extension, a “Service Extension”) for a specified period beyond the scheduled termination of such Service (which period shall in no event (i) be longer than one hundred eighty (180) days (or such longer period as the Provider of such Service agrees in its sole discretion, subject to the following clause (ii)) or (ii) end later than the date that is the twenty-four (24)-month anniversary of the Distribution Date) by written notice to the Provider no less than thirty (30) days prior to the date of such scheduled termination, and the Parties shall use commercially reasonable efforts to comply with such Service Extension; provided that the Provider shall not be obligated to provide such Service Extension if a third-party consent is required and cannot be obtained by the Provider. In connection with any request for Service Extensions in accordance with this Section 7.1(d), the Encompass Services Managers and the relevant Encompass Functional Area Service Manager with respect to such Service, on the one hand, and the Enhabit Services Managers and the relevant Enhabit Functional Area Service Manager with respect to such Service, on the other, shall in good faith (x) negotiate the terms of an amendment to the applicable Schedule, which amendment shall be consistent with the terms of, and the pricing methodology used for, the applicable Service (including, as applicable, increases in the applicable Service Charge for each such Service Extension as mutually agreed by the Parties), and (y) determine the costs and expenses (other than Service Charges), if any, that would be incurred by the Provider or the Recipient, as the case may be, in connection with the provision of such Service Extension, which costs and expenses shall be borne solely by the Party requesting the Service Extension. Each amended Schedule to implement a Service Extension, as agreed in writing by the Parties, shall be deemed part of this Agreement as of the date of such agreement and any Services provided pursuant to such Service Extensions shall be deemed “Services” provided under this Agreement, in each case, subject to the terms and conditions of this Agreement.
7.2 Effect of Termination. Upon termination of any Service pursuant to this Agreement, the Provider of the terminated Service will have no further obligation to provide the
terminated Service, and the relevant Recipient will have no obligation to pay any future Service Charges relating to any such Service; provided, however, that the Recipient shall remain obligated to the relevant Provider for (a) the Service Charges and Reimbursement Charges owed and payable in respect of Services provided prior to the effective date of termination and (b) any applicable charges described in Section 7.1(b), which charges shall be payable only in the event that the Recipient terminates any Service pursuant to Section 7.1(b). In connection with the termination of any Service, the provisions of this Agreement not relating solely to such terminated Service shall survive any such termination, and in connection with a termination of this Agreement, Article I, Article VI (including liability in respect of any indemnifiable Liabilities under this Agreement arising or occurring on or prior to the date of termination), this Article VII, Article IX and all confidentiality obligations under this Agreement and liability for all due and unpaid Service Charges and Reimbursement Charges and any applicable charges payable pursuant to Section 7.1(b), shall continue to survive indefinitely.
7.3 Force Majeure.
(a) Neither Party (nor any Person acting on its behalf) shall have any liability or responsibility for failure to fulfill any obligation (other than a payment obligation) under this Agreement so long as and to the extent to which the fulfillment of such obligation is prevented, frustrated, hindered or delayed as a consequence of a Force Majeure. In the event of an occurrence of a Force Majeure, the Party whose performance is affected thereby shall give notice of suspension as soon as reasonably practicable to the other stating the date and extent of such suspension and the cause thereof, and such Party shall use commercially reasonable efforts to remove any such causes and resume the performance of such obligations as soon as reasonably practicable after the removal of such cause.
(b) During the period of a Force Majeure, the Recipient shall be entitled to seek an alternative service provider with respect to such Service(s) and, in the event a Force Majeure shall continue to exist for more than thirty (30) consecutive days, permanently terminate such Service(s), it being understood that Recipient shall not be required to provide any advance notice of such termination to Provider or pay any charges in connection therewith. The Recipient shall be relieved of the obligation to pay Service Charges for the affected Service(s) throughout the duration of such Force Majeure.
ARTICLE VIII
DISPUTE RESOLUTION
8.1 Dispute Resolution.
(a) In the event of any dispute, controversy or claim arising out of or relating to the transactions contemplated by this Agreement, or the validity, interpretation, breach or termination of any provision of this Agreement, or calculation or allocation of the costs of any Service, including claims seeking redress or asserting rights under any Law (each, a “Dispute”), Encompass and Enhabit agree that the Encompass Services Managers and the Enhabit Services Managers (or such other persons as Encompass and Enhabit may designate) shall negotiate in good faith in an attempt to resolve such Dispute amicably. If such Dispute has not been resolved to the mutual satisfaction of Encompass and Enhabit within fifteen (15) days after the initial
written notice of the Dispute (or after such longer period as the Parties may agree), then such Dispute shall be resolved in accordance with the dispute resolution process referred to in Article VII of the Separation Agreement; provided, however, that such dispute resolution process shall not modify or add to the remedies available to the Parties under this Agreement.
(b) In any Dispute regarding the amount of a Service Charge, if such Dispute is finally resolved pursuant to the dispute resolution process set forth or referred to in Section 8.1(a), and it is determined that the Service Charge that the Provider has invoiced the Recipient, and that the Recipient has paid to the Provider, is greater or less than the amount that the Service Charge should have been, then (i) if it is determined that the Recipient has overpaid the Service Charge, the Provider shall within five (5) business days after such determination reimburse the Recipient an amount of cash equal to such overpayment, plus the Interest Payment, accruing from the date of payment by the Recipient to the time of reimbursement by the Provider; and (ii) if it is determined that the Recipient has underpaid the Service Charge, the Recipient shall within five (5) business days after such determination reimburse the Provider an amount of cash equal to such underpayment, plus the Interest Payment, accruing from the date such payment originally should have been made by the Recipient to the time of payment by the Recipient.
ARTICLE IX
GENERAL PROVISIONS
9.1 No Agency. Nothing in this Agreement shall be deemed in any way or for any purpose to constitute any Party as an agent of an unaffiliated party in the conduct of such other party’s business. A Provider of any Service under this Agreement shall act as an independent contractor and not as the agent of the Recipient in performing such Service, maintaining control over its employees, its subcontractors and their employees and complying with all withholding of income at source requirements, whether federal, national, state, local or foreign.
9.2 Treatment of Confidential Information.
(a) The Parties shall not, and shall cause all other Persons providing Services or having access to information of the other Party that is known to such Party as confidential or proprietary (the “Confidential Information”) not to, disclose to any other Person or use, except for purposes of this Agreement, any Confidential Information of the other Party; provided, however, that the Confidential Information may be used by such Party to the extent that such Confidential Information has been (i) in the public domain through no fault of such Party or any member of such Group or any of their respective Representatives or (ii) later lawfully acquired from other sources by such Party (or any member of such Party’s Group), which sources are not themselves bound by a confidentiality obligation; provided, further, that each Party may disclose Confidential Information of the other Party, to the extent not prohibited by applicable Law: (A) to its Representatives on a need-to-know basis in connection with the performance of such Party’s obligations under this Agreement; (B) in any report, statement, testimony or other submission required to be made to any Governmental Authority having jurisdiction over the disclosing Party; or (C) in order to comply with applicable Law, or in response to any summons, subpoena or other legal process or formal or informal investigative demand issued to the disclosing Party in the course of any litigation, investigation or administrative proceeding. In the event that a Party becomes legally compelled (based on advice of counsel) by deposition,
interrogatory, request for documents subpoena, civil investigative demand or similar judicial or administrative process to disclose any Confidential Information of the other Party, such disclosing Party shall provide the other Party with prompt prior written notice of such requirement, and, to the extent reasonably practicable, cooperate with the other Party (at such other Party’s expense) to obtain a protective order or similar remedy to cause such Confidential Information not to be disclosed, including interposing all available objections thereto, such as objections based on settlement privilege. In the event that such protective order or other similar remedy is not obtained, the disclosing Party shall furnish only that portion of the Confidential Information that has been legally compelled, and shall exercise its commercially reasonable efforts (at such other Party’s expense) to obtain assurance that confidential treatment will be accorded such Confidential Information.
(b) Each Party shall, and shall cause its Representatives to, protect the Confidential Information of the other Party by using the same degree of care to prevent the unauthorized disclosure of such as the Party uses to protect its own confidential information of a like nature, but in any event no less than a reasonable degree of care.
(c) Each Party shall be liable for any failure by its respective Representatives to comply with the restrictions on use and disclosure of Confidential Information contained in this Agreement.
9.3 Further Assurances. Each Party covenants and agrees that, without any additional consideration, it shall execute and deliver any further legal instruments and perform any acts that are or may become necessary to effectuate this Agreement.
9.4 Notices. Except with respect to routine communications by the Encompass Services Managers, the Enhabit Services Managers, the Encompass Functional Area Service Managers and the Enhabit Functional Area Service Managers under Section 2.6, all notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by facsimile or electronic transmission with receipt confirmed or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 9.4):
If to Encompass, to:
Encompass Health Corporation
9001 Liberty Parkway
Birmingham, Alabama 35242
Attention: General Counsel
E-mail: * * *
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Igor Kirman
Elina Tetelbaum
Zachary S. Podolsky
E-mail: IKirman@wlrk.com
ETetelbaum@wlrk.com
ZSPodolsky@wlrk.com
Facsimile: (212) 403-2000
If to Enhabit, to:
Enhabit, Inc.
6688 N. Central Expressway, Suite 1300
Dallas, Texas 75206
Attention: General Counsel
E-mail: * * *
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Igor Kirman
Elina Tetelbaum
Zachary S. Podolsky
E-mail: IKirman@wlrk.com
ETetelbaum@wlrk.com
ZSPodolsky@wlrk.com
and to:
Bradley Arant Boult Cummings LLP
One Federal Place
1819 5th Avenue N.
Birmingham, Alabama 35209
Attention: Charles Roberts
Stephen Hinton
Email: croberts@bradley.com
shinton@bradley.com
A Party may, by notice to the other Party, change the address to which such notices are to be given.
9.5 Severability. If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
9.6 Entire Agreement. This Agreement, the Separation Agreement and any other Ancillary Agreements, and the Exhibits, Schedules and appendices hereto and thereto, contain the entire agreement between the Parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein. This Agreement, the Separation Agreement and any other Ancillary Agreements together govern the arrangements in connection with the Separation and the Distribution and would not have been entered independently.
9.7 No Third-Party Beneficiaries. Except as provided in Article VI with respect to Provider Indemnified Parties and Recipient Indemnified Parties, this Agreement is for the sole benefit of the Parties and their permitted successors and assigns and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person, including any union or any employee or former employee of Encompass or Enhabit, any legal or equitable right, benefit or remedy of any nature whatsoever, including any rights of employment for any specified period, under or by reason of this Agreement.
9.8 Governing Law. This Agreement (and any claims or Disputes arising out of or related hereto or thereto or to the transactions contemplated hereby and thereby or to the inducement of any party to enter herein and therein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Delaware irrespective of the choice of laws principles of the State of Delaware, including all matters of validity, construction, effect, enforceability, performance and remedies.
9.9 Amendment. No provisions of this Agreement, including any Schedules to this Agreement, shall be deemed waived, amended, supplemented or modified by a Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom it is sought to enforce such waiver, amendment, supplement or modification.
9.10 Rules of Construction. In this Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other genders as the context requires; (b) the terms “hereof,” “herein” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules, Exhibits and Appendices hereto) and not to any particular provision of this Agreement; (c) Article, Section, Schedule, Exhibit and Appendix
references are to the Articles, Sections, Schedules, Exhibits and Appendices to this Agreement unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement) shall be deemed to include the exhibits, schedules and annexes (including all Schedules, Exhibits and Appendixes) to such agreement; (e) the word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless otherwise specified; (f) the word “or” need not be exclusive; (g) unless otherwise specified in a particular case, the word “days” refers to calendar days; (h) references herein to this Agreement or any other agreement contemplated herein shall be deemed to refer to this Agreement or such other agreement as of the date on which it is executed and as it may be amended, modified or supplemented thereafter, unless otherwise specified; (i) unless expressly stated to the contrary in this Agreement, all references to “the date hereof,” “the date of this Agreement,” “hereby” and “hereupon” and words of similar import shall all be references to June 30, 2022; and (j) the word “extent” and the phrase “to the extent” shall mean the degree to which a subject or other thing extends, and such word or phrase shall not merely mean “if.”
9.11 Precedence of Schedules. Each Schedule attached to or referenced in this Agreement is hereby incorporated into and shall form a part of this Agreement; provided, however, that the terms contained in such Schedule shall only apply with respect to the Services provided under that Schedule. In the event of a conflict between the terms contained in an individual Schedule and the terms in the body of this Agreement, the terms in the Schedule shall take precedence with respect to the Services under such Schedule only. No terms contained in individual Schedules shall otherwise modify the terms of this Agreement.
9.12 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party.
9.13 Assignability; Change of Control.
(a) This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns; provided that neither Party may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other Party hereto. Notwithstanding the foregoing but subject to Section 9.13(b), no such consent shall be required for the assignment of a Party’s rights and obligations under this Agreement, the Separation Agreement and the other Ancillary Agreements (except as may be otherwise provided in any such other Ancillary Agreement) in whole (i.e., the assignment of a party’s rights and obligations under this Agreement, the Separation Agreement and all other Ancillary Agreements all at the same time) in connection with a change of control of a Party so long as the resulting, surviving or transferee Person assumes all the obligations of the relevant party thereto by operation of Law or pursuant to an agreement in form and substance reasonably satisfactory to the other Party.
(b) To the extent legally permissible, Enhabit shall notify Encompass in writing at least ninety (90) calendar days prior to the completion of any Enhabit Change of Control. In the event of an Enhabit Change of Control, notwithstanding anything to the contrary herein, Encompass shall be entitled to terminate this Agreement, in whole or in part, without any
penalty, liability or further obligation with thirty (30) calendar days’ prior written notice to Enhabit.
9.14 Non-Recourse. No past, present or future director, officer, employee, incorporator, member, partner, shareholder, Affiliate, agent, attorney or representative of either Encompass or Enhabit or their Affiliates shall have any liability for any obligations or liabilities of Encompass or Enhabit, respectively, under this Agreement or for any claims based on, in respect of, or by reason of, the transactions contemplated by this Agreement.
9.15 Mutual Drafting. This Agreement shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.
ENCOMPASS HEALTH CORPORATION
| | | | | | | | |
| By: | /s/ Douglas E. Coltharp |
| Name: | Douglas E. Coltharp |
| Title: | Executive Vice President and Chief Financial Officer |
ENHABIT, INC.
| | | | | | | | |
| By: | /s/ Crissy Carlisle |
| Name: | Crissy Carlisle |
| Title: | Chief Financial Officer |
[Signature Page to Transition Services Agreement]
TAX MATTERS AGREEMENT
BY AND BETWEEN
ENCOMPASS HEALTH CORPORATION
and
ENHABIT, INC.
DATED AS OF JUNE 30, 2022
TABLE OF CONTENTS
Page
TAX MATTERS AGREEMENT
This TAX MATTERS AGREEMENT, dated as of June 30, 2022 (this “Agreement”), is by and between Encompass Health Corporation, a Delaware corporation (“Encompass”) and Enhabit, Inc., a Delaware corporation formerly named “Encompass Health Home Health Holdings, Inc.” (“Enhabit”) (together, the “Companies,” and each, a “Company”).
R E C I T A L S
WHEREAS, Encompass and Enhabit have entered into a Separation and Distribution Agreement, dated as of June 30, 2022 (including the Separation Step Plan set forth on Schedule I thereto, the “Separation Agreement”), providing for the separation of the Enhabit Group from the Encompass Affiliated Group (the “Separation”);
WHEREAS, Encompass and its Subsidiaries have engaged in certain restructuring transactions to facilitate the Separation as set forth in the Separation Step Plan;
WHEREAS, pursuant to the Separation Step Plan and the terms of the Separation Agreement, among other things, following certain preparatory transactions described in the Separation Step Plan, (a) Encompass IP Holding Corp. (“IP NewCo”) contributed to Enhabit Holdings, LLC, a Delaware limited liability company (which, at the time of such transfer, was treated as disregarded from IP NewCo for Federal Income Tax purposes) (“HHH NewCo”) all of the issued and outstanding membership interests in Advanced Homecare Management, LLC, also a Delaware limited liability company and, following such transfer, HHH NewCo converted from a limited liability company to a corporation pursuant to Delaware law (together, the “Contribution”), (b) IP NewCo distributed to Advanced Homecare Holdings, Inc. (“AH Holdings”) all of the issued and outstanding stock of HHH NewCo (the “First Internal Distribution”), (c) AH Holdings distributed to Enhabit all of the issued and outstanding stock of HHH NewCo (the “Second Internal Distribution”), (d) Enhabit distributed to Encompass all of the issued and outstanding stock of AH Holdings (the “Third Internal Distribution”), (e) Enhabit transferred the net proceeds of new revolving and term loan facilities of approximately $566.5 million to Encompass, (f) Enhabit recapitalized its issued and outstanding stock through a forward stock split, and (g) Encompass shall make a distribution of all the outstanding Enhabit Shares pro rata to holders of Encompass Shares (the “Distribution”);
WHEREAS, for Federal Income Tax purposes, it is intended that (a) the First Internal Distribution (together with the Contribution) shall qualify as a transaction that is generally tax-free pursuant to Sections 355(a) and 368(a)(1)(D) of the Code and (b) the Second Internal Distribution, the Third Internal Distribution and the Distribution shall each qualify as a transaction that is generally tax-free pursuant to Section 355(a) of the Code;
WHEREAS, as of the date hereof, Encompass is the common parent of an affiliated group (as defined in Section 1504 of the Code) of corporations, including Enhabit, which has elected to file consolidated Federal Income Tax Returns (the “Encompass Affiliated Group”);
WHEREAS, Encompass and Enhabit entered into an Amended and Restated Consolidated Tax Allocation Agreement, dated as of January 1, 2015 (such agreement, as it exists immediately prior to its termination pursuant to Section 11 hereof, the “Existing Tax Allocation Agreement”), setting forth their agreement with respect to certain Tax matters; and
WHEREAS, the Parties desire to provide for and agree upon the allocation between the Parties of liabilities for Taxes arising prior to, as a result of, and subsequent to the Distribution, and to provide for and agree upon other matters relating to Taxes.
NOW THEREFORE, in consideration of the mutual agreements contained herein, the Parties hereby agree as follows:
Section 1. Definition of Terms. For purposes of this Agreement (including the Recitals hereof), the following terms have the following meanings, and capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Separation Agreement:
“Adjustment Request” shall mean any formal or informal claim or request filed with any Tax Authority, or with any administrative agency or court, for the adjustment, refund or credit of Taxes, including (a) any amended Tax Return claiming adjustment to the Taxes as reported on the Tax Return or, if applicable, as previously adjusted, (b) any claim for equitable recoupment or other offset, and (c) any claim for refund or credit of Taxes previously paid.
“Affiliate” shall mean any entity that is directly or indirectly “controlled” by either the Person in question or an Affiliate of such Person. For purposes of this definition, “control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. The term Affiliate shall refer to Affiliates of a Person as determined immediately after the Distribution.
“Agreement” shall have the meaning set forth in the Preamble.
“AH Holdings” shall have the meaning set forth in the Recitals.
“Capital Stock” shall mean all classes or series of capital stock, including (a) common stock, (b) all options, warrants and other rights to acquire such capital stock and (c) all instruments properly treated as stock for Federal Income Tax purposes.
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Companies” and “Company” shall have the meaning set forth in the Preamble.
“Compensatory Equity Interests” shall have the meaning set forth in Section 6.02(a).
“Contribution” shall have the meaning set forth in the Recitals.
“DGCL” shall mean the Delaware General Corporation Law.
“Distribution” shall have the meaning set forth in the Recitals.
“Distribution-Related Tax Contest” shall mean any Tax Contest in which the IRS, another Tax Authority or any other Person asserts a position that could reasonably be expected to adversely affect the Tax-Free Status.
“Distributions” shall mean the First Internal Distribution, the Second Internal Distribution, the Third Internal Distribution, and the Distribution.
“Encompass” shall have the meaning set forth in the Preamble, and references herein to Encompass shall include any entity treated as a successor to Encompass.
“Encompass Adjustment” shall mean any proposed adjustment by a Tax Authority or claim for refund asserted in a Tax Contest to the extent Encompass would be exclusively liable for any resulting Tax under this Agreement or exclusively entitled to receive any resulting Tax Benefit under this Agreement.
“Encompass Affiliated Group” shall have the meaning set forth in the Recitals.
“Encompass Federal Consolidated Income Tax Return” shall mean any Federal Income Tax Return for the Encompass Affiliated Group.
“Encompass Foreign Combined Income Tax Return” shall mean a consolidated, combined or unitary or other similar Foreign Income Tax Return or any Foreign Income Tax Return with respect to any profit- and/or loss-sharing group, group payment or similar group or fiscal unity that actually includes, by election or otherwise, one or more members of the Encompass Group together with one or more members of the Enhabit Group.
“Encompass Group” shall mean Encompass and each Person that is a Subsidiary of Encompass as determined immediately after the Distribution.
“Encompass Group Employee” shall have the meaning set forth in the Employee Matters Agreement.
“Encompass Separate Return” shall mean any Separate Return of Encompass or any member of the Encompass Group.
“Encompass State Combined Income Tax Return” shall mean a consolidated, combined or unitary Tax Return with respect to State Income Taxes that actually includes, by election or otherwise, one or more members of the Encompass Group and one or more members of the Enhabit Group.
“Enhabit” shall have the meaning set forth in the Preamble, and references herein to Enhabit shall include any entity treated as a successor to Enhabit.
“Enhabit Active Business” shall mean the active conduct (as defined in Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder) (a) by HHH NewCo and its “separate affiliated group” (as defined in Section 355(b)(3)(B) of the Code) of the trade(s) or business(es) relied upon to satisfy Section 355(b) of the Code with respect to the First Internal Distribution and the Second Internal Distribution (as described in the Ruling Request and the Representation Letters), as conducted immediately prior to the First Internal Distribution and the Second Internal Distribution, as applicable, and (b) by Enhabit and its “separate affiliated group” (as defined in Section 355(b)(3)(B) of the Code) of the trade(s) or business(es) relied upon to satisfy Section 355(b) of the Code with respect to the Third Internal Distribution and the Distribution (as described in the Ruling Request and the Representation Letters), as conducted immediately prior to the Third Internal Distribution and the Distribution, as applicable.
“Enhabit Adjustment” shall mean any proposed adjustment by a Tax Authority or claim for refund asserted in a Tax Contest to the extent Enhabit would be exclusively liable for any resulting Tax under this Agreement or exclusively entitled to receive any resulting Tax Benefit under this Agreement.
“Enhabit Carryback” shall mean any net operating loss, net capital loss, excess tax credit or other similar Tax Item of any member of the Enhabit Group which may or must be carried from one Tax Period to another prior Tax Period under the Code or other applicable Tax Law.
“Enhabit CFO Certificate” shall have the meaning set forth in Section 7.02(d).
“Enhabit Federal Consolidated Income Tax Return” shall mean any Federal Income Tax Return for an affiliated group (as defined in Section 1504 of the Code) of which Enhabit is the common parent.
“Enhabit Group” shall mean Enhabit and each Person that is a Subsidiary of Enhabit, as determined immediately after the Distribution.
“Enhabit Group Employee” shall have the meaning set forth in the Employee Matters Agreement.
“Enhabit Group Federal Consolidated Income Tax Sharing Payment” shall have the meaning set forth in Section 2.02(a).
“Enhabit Group Foreign Combined Income Tax Sharing Payment” shall have the meaning set forth in Section 2.04(a).
“Enhabit Group State Combined Income Tax Sharing Payment” shall have the meaning set forth in Section 2.03(a).
“Enhabit Separate Return” shall mean any Separate Return of Enhabit or any member of the Enhabit Group.
“Existing Tax Allocation Agreement” shall have the meaning set forth in the Recitals.
“Federal Income Tax” shall mean any Tax imposed by Subtitle A of the Code, and any interest, penalties, additions to tax or additional amounts in respect of the foregoing.
“Federal Other Tax” shall mean any Tax imposed by the federal government of the United States other than any Federal Income Taxes, and any interest, penalties, additions to tax or additional amounts in respect of the foregoing.
“Fifty-Percent or Greater Interest” shall have the meaning ascribed to such term for purposes of Sections 355(d) and (e) of the Code.
“Final Determination” shall mean the final resolution of liability for any Tax, which resolution may be for a specific issue or adjustment or for a Tax Period, (a) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by a comparable form under the laws of a state, local or foreign taxing jurisdiction, except that a Form 870 or 870-AD or comparable form shall not constitute a Final Determination to the extent that it reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund or the right of the Tax Authority to assert a further deficiency in respect of such issue or adjustment or for such Tax Period (as the case may be); (b) by a decision, judgment, decree or other order by a court of competent jurisdiction, which has become final and unappealable; (c) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or a comparable agreement under the laws of a state, local or foreign taxing jurisdiction; (d) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all Tax Periods during which such refund may be recovered (including by way of offset) by the jurisdiction imposing such Tax; or (e) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the Parties.
“First Internal Distribution” shall have the meaning set forth in the Recitals.
“Foreign Income Tax” shall mean any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or U.S. possession, which is an income tax as defined in Treasury Regulations Section 1.901-2, and any interest, penalties, additions to tax or additional amounts in respect of the foregoing.
“Foreign Other Tax” shall mean any Tax imposed by any foreign country or any possession of the United States, or by any political subdivision of any foreign country or U.S. possession, other than any Foreign Income Taxes, and any interest, penalties, additions to tax or additional amounts in respect of the foregoing.
“Foreign Tax” shall mean any Foreign Income Tax or Foreign Other Tax.
“Former Encompass Group Employee” shall have the meaning set forth in the Employee Matters Agreement.
“Former Enhabit Group Employee” shall have the meaning set forth in the Employee Matters Agreement.
“Group” shall mean the Encompass Group, the Enhabit Group or both, as the context requires.
“HHH NewCo” shall have the meaning set forth in the Recitals.
“Income Tax” shall mean any Federal Income Tax, State Income Tax or Foreign Income Tax.
“Internal Distributions” shall mean the First Internal Distribution, the Second Internal Distribution, and the Third Internal Distribution.
“IP NewCo” shall have the meaning set forth in the Recitals.
“IRS” shall mean the U.S. Internal Revenue Service.
“Joint Adjustment” shall mean any proposed adjustment by a Tax Authority or claim for refund asserted in a Tax Contest that is not an Enhabit Adjustment or an Encompass Adjustment.
“Joint Return” shall mean any Tax Return of a member of the Encompass Group or the Enhabit Group that is not a Separate Return.
“Notified Action” shall have the meaning set forth in Section 7.04(a).
“Other Tax” shall mean any Federal Other Tax, State Other Tax or Foreign Other Tax.
“Parties” shall mean the parties to this Agreement.
“Past Practices” shall have the meaning set forth in Section 4.04(a).
“Payment Date” shall mean (a) with respect to any Encompass Federal Consolidated Income Tax Return, the due date for any required installment of estimated Taxes determined under Section 6655 of the Code, the due date (determined without regard to extensions) for filing the Tax Return determined under Section 6072 of the Code, and the date the Tax Return is filed, and (b) with respect to any other Tax Return, the corresponding dates determined under applicable Tax Law; in each case, taking into account any automatic or validly elected extensions, deferrals or postponements of the due date for payment of any such estimated Taxes or any Tax shown on such Tax Return, as applicable.
“Payor” shall have the meaning set forth in Section 5.02(a).
“Person” shall mean any individual, partnership, corporation, limited liability company, association, joint-stock company, trust, joint venture, unincorporated organization or a Governmental Authority or any department, agency or political subdivision thereof, without regard to whether any entity is treated as disregarded for Federal Income Tax purposes.
“Post-Distribution Period” shall mean any Tax Period beginning after the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period beginning the day after the Distribution Date.
“Pre-Distribution Period” shall mean any Tax Period ending on or prior to the Distribution Date, and, in the case of any Straddle Period, the portion of such Straddle Period ending on and including the Distribution Date.
“Privilege” shall mean any privilege that may be asserted under applicable law, including any privilege arising under or relating to the attorney-client relationship (including the attorney-client and work product privileges), the accountant-client privilege and any privilege relating to internal evaluation processes.
“Proposed Acquisition Transaction” shall mean, with respect to Enhabit, a transaction or series of transactions (or any agreement, understanding or arrangement, within the meaning of Section 355(e) of the Code and Treasury Regulations Section 1.355-7 or any other Treasury Regulations promulgated thereunder, to enter into a transaction or series of transactions), whether such transaction is supported by the management or shareholders of Enhabit, is a hostile acquisition, or otherwise, as a result of which Enhabit would merge or consolidate with any other Person or as a result of which any Person or Persons would (directly or indirectly) acquire, or have the right to acquire, from Enhabit and/or one or more holders of outstanding shares of Capital Stock of Enhabit, a number of shares of Capital Stock of Enhabit that would, when combined with any other changes in ownership of Capital Stock of Enhabit pertinent for purposes of Section 355(e) of the Code, comprise 45% or more of (a) the value of all outstanding shares of Capital Stock of Enhabit as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series, or (b) the total combined voting power of all outstanding shares of voting stock of Enhabit as of the date of such transaction, or in the case of a series of transactions, the date of the last transaction of such series. Notwithstanding the foregoing, a Proposed Acquisition Transaction shall not include (i) the adoption by Enhabit of a shareholder rights plan or (ii) issuances by Enhabit that satisfy Safe Harbor VIII (relating to acquisitions in connection with a Person’s performance of services) or Safe Harbor IX (relating to acquisitions by a retirement plan of an employer) of Treasury Regulations Section 1.355-7(d). For purposes of determining whether a transaction constitutes an indirect acquisition, any recapitalization resulting in a shift of voting power or any redemption of shares of stock shall be treated as an indirect acquisition of shares of stock by the non-exchanging shareholders. This definition and the application thereof is intended to monitor compliance with Section 355(e) of the Code and shall be interpreted accordingly. Any clarification of, or change in, the statute or Treasury Regulations promulgated under Section 355(e) of the Code shall be incorporated into this definition and its interpretation.
“Representation Letters” shall mean the representation letters and any other materials (including, without limitation, the Ruling Request and any related supplemental submissions to the IRS or other Tax Authority) delivered by, or on behalf of, Encompass, Enhabit or others to a Tax Advisor (or a Tax Authority) in connection with the issuance by such Tax Advisor (or Tax Authority) of a Tax Opinion/Ruling.
“Required Party” shall have the meaning set forth in Section 5.02(a).
“Responsible Company” shall mean, with respect to any Tax Return, the Company having responsibility for preparing and filing such Tax Return under this Agreement.
“Restriction Period” shall mean the period beginning on the date hereof and ending on the two-year anniversary of the Distribution Date.
“Retention Date” shall have the meaning set forth in Section 9.01.
“Ruling Request” shall mean the request for private letter rulings filed by Encompass on December 14, 2021 with the IRS (including all attachments, exhibits, and other materials submitted with such ruling request letter) and any amendments or supplements to such request.
“Second Internal Distribution” shall have the meaning set forth in the Recitals.
“Section 336(e) Election” shall have the meaning set forth in Section 7.06.
“Section 7.02(d) Acquisition Transaction” shall mean any transaction or series of transactions that is not a Proposed Acquisition Transaction but would be a Proposed Acquisition Transaction if the percentage reflected in the definition of Proposed Acquisition Transaction were 30% instead of 45%.
“Separate Return” shall mean (a) in the case of any Tax Return of any member of the Enhabit Group (including any consolidated, combined or unitary return), any such Tax Return that does not include any member of the Encompass Group, and (b) in the case of any Tax Return of any member of the Encompass Group (including any consolidated, combined or unitary return), any such Tax Return that does not include any member of the Enhabit Group.
“Separation” shall have the meaning set forth in the Recitals.
“Separation Agreement” shall have the meaning set forth in the Recitals.
“Separation Transactions” shall mean the Contribution, the Distributions, and the other transactions contemplated by the Separation Agreement and the Separation Step Plan.
“State Income Tax” shall mean any Tax imposed by any state of the United States (or by any political subdivision of any such state) or the District of Columbia, or any city, county, parish, authority or municipality located therein, that is imposed on or measured by net income, including state and local franchise or similar Taxes measured by net income, and any interest, penalties, additions to Tax or additional amounts in respect of the foregoing.
“State Other Tax” shall mean any Tax imposed by any state of the United States (or by any political subdivision of any such state) or the District of Columbia, or any city, county, parish, authority or municipality located therein, other than any State Income Taxes, and any interest, penalties, additions to Tax or additional amounts in respect of the foregoing.
“Straddle Period” shall mean any Tax Period that begins on or before and ends after the Distribution Date.
“Tax” or “Taxes” shall mean any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers’ compensation, unemployment, unclaimed property, escheatment, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value-added, alternative minimum, estimated or other tax (including any fee, assessment or other charge in the nature of or in lieu of any tax) imposed by any Governmental Authority or political subdivision thereof, and any interest, penalties, additions to tax or additional amounts in respect of the foregoing.
“Tax Advisor” shall mean any Tax counsel or accountant of recognized national standing in the United States.
“Tax Advisor Dispute” shall have the meaning set forth in Section 14.
“Tax Attribute” shall mean a net operating loss, net capital loss, unused investment credit, unused foreign tax credit, excess charitable contribution, general business credit or any other Tax Item that could reduce a Tax.
“Tax Authority” shall mean, with respect to any Tax, the Governmental Authority or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision.
“Tax Benefit” shall mean any reduction in liability for Tax as a result of any loss, deduction, refund, credit or other item reducing Taxes otherwise payable.
“Tax Contest” shall mean an audit, review, examination, assessment or any other administrative or judicial proceeding with the purpose or effect of redetermining Taxes (including any administrative or judicial review of any claim for refund).
“Tax-Free Status” shall mean, (a) with respect to the Contribution and the First Internal Distribution, taken together, the qualification thereof (i) as a transaction described in Section 368(a)(1)(D) and Section 355(a) of the Code, (ii) in which the stock distributed thereby is “qualified property” for purposes of Sections 355(c)(2) and 361(c)(2) of the Code and (iii) in which Encompass, Enhabit and members of their respective Groups (as relevant) recognize no income or gain for Federal Income Tax purposes pursuant to Sections 355, 357, 361 and/or 1032 of the Code; (b) with respect to each of the Second Internal Distribution, the Third Internal Distribution and the Distribution, the qualification thereof (i) as a transaction described in Section 355(a) of the Code, (ii) as a transaction in which the stock distributed thereby is “qualified property” for purposes of Section 355(c)(2) of the Code, and (iii) as a transaction in which Encompass, Enhabit and members of their respective Groups (as relevant) recognize no income or gain for Federal Income Tax purposes pursuant to Section 355 of the Code, other than, in the case of the Distribution, intercompany items or excess loss accounts taken into account pursuant to the Treasury Regulations promulgated pursuant to Section 1502 of the Code; and (c) with respect to any other Separation Transaction that is covered by a Tax Opinion/Ruling addressing the Federal Income Tax treatment thereof, the qualification of such transaction for the Federal Income Tax treatment set forth in such Tax Opinion/Ruling.
“Tax Item” shall mean, with respect to any Income Tax, any item of income, gain, loss, deduction or credit.
“Tax Law” shall mean the law of any Governmental Authority or political subdivision thereof relating to any Tax.
“Tax Opinion/Ruling” shall mean each opinion of a Tax Advisor or ruling by the IRS or another Tax Authority delivered or issued to Encompass in connection with and regarding the Federal Income Tax treatment of the Separation Transactions.
“Tax Period” shall mean, with respect to any Tax, the period for which the Tax is reported as provided under the Code or other applicable Tax Law.
“Tax Records” shall mean any Tax Returns, Tax Return workpapers, documentation relating to any Tax Contests and any other books of account or records (whether or not in written, electronic or other tangible or intangible forms and whether or not stored on electronic or any other media) required to be maintained under the Code or other applicable Tax Laws or under any record retention agreement with any Tax Authority.
“Tax-Related Losses” shall mean (a) all Taxes imposed pursuant to (or any reduction in a refund resulting from) any settlement, Final Determination, judgment or otherwise; (b) all accounting, legal and other professional fees and court costs incurred in connection with such Taxes (or reduction in a refund); and (c) all costs, expenses and damages associated with stockholder litigation or controversies and any amount paid by Encompass (or any Encompass Affiliate) or Enhabit (or any Enhabit Affiliate) in respect of the liability of shareholders, whether paid to shareholders or to the IRS or any other Governmental Authority, in each case, resulting from the failure of the Tax-Free Status.
“Tax Return” shall mean any report of Taxes due, any claim for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration or document filed or required to be filed under the Code or other Tax Law, including any attachments, exhibits or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing.
“Third Internal Distribution” shall have the meaning set forth in the Recitals.
“Treasury Regulations” shall mean the regulations promulgated from time to time under the Code as in effect for the relevant Tax Period.
“Unqualified Tax Opinion” shall mean an unqualified opinion of a Tax Advisor on which Encompass may rely to the effect that a transaction will not (a) affect the Tax-Free Status or (b) adversely affect any of the conclusions set forth in any Tax Opinion/Ruling regarding the Tax-Free Status; provided, that any tax opinion obtained in connection with a proposed acquisition of Capital Stock of Enhabit or HHH NewCo (and, in each case, any successor thereto) entered into during the Restriction Period shall not qualify as an Unqualified Tax Opinion unless such tax opinion concludes that such proposed acquisition will not be treated as “part of a plan (or series of related transactions),” within the meaning of Section 355(e) of the Code and the Treasury Regulations promulgated thereunder, that includes any of the Distributions. Any such tax opinion must assume that the relevant Distribution(s) would have qualified for Tax-Free Status if the transaction in question did not occur.
Section 2. Allocation of Tax Liabilities.
Section 2.01 General Rule.
(a) Encompass Liability. Encompass shall be liable for, and shall indemnify and hold harmless the Enhabit Group from and against any liability for, Taxes that are allocated to Encompass under this Section 2.
(b) Enhabit Liability. Enhabit shall be liable for, and shall indemnify and hold harmless the Encompass Group from and against any liability for, Taxes that are allocated to Enhabit under this Section 2.
Section 2.02 Allocation of Federal Income Tax and Federal Other Tax. Except as otherwise provided in Section 2.05, Federal Income Tax and Federal Other Tax shall be allocated as follows:
(a) Allocation of Tax Relating to Encompass Federal Consolidated Income Tax Returns. With respect to any Encompass Federal Consolidated Income Tax Return (i) for any Pre-Distribution Period, (A) Encompass shall be responsible for any and all Federal Income Taxes due or required to be reported on any such Tax Return (including any increase in such Tax as a result of a Final Determination) reduced by the aggregate amount in respect of such Federal Income Taxes for which members of the Enhabit Group are or would be responsible with respect to such period pursuant to the Existing Tax Allocation Agreement (without giving effect to the termination thereof pursuant to Section 11 hereof) (“Enhabit Group Federal Consolidated Income Tax Sharing Payment”), and (B) Enhabit shall be responsible for the Enhabit Group Federal Consolidated Income Tax Sharing Payment (including any increase thereof as a result of a Final Determination); and (ii) for any Post-Distribution Period, Encompass shall be responsible for any and all Federal Income Taxes due or required to be reported on any such Tax Return (including any increase in such Tax as a result of a Final Determination).
(b) Allocation of Tax Relating to Federal Separate Income Tax Returns. (i) Encompass shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any Encompass Separate Return and (ii) Enhabit shall be responsible for any and all Federal Income Taxes due with respect to or required to be reported on any Enhabit Separate Return (in each case, including any increase in such Tax as a result of a Final Determination).
(c) Allocation of Federal Other Tax. Federal Other Taxes (in each case, including any increase in such Tax as a result of a Final Determination) shall be allocated in a manner consistent with past practice, as reasonably determined by Encompass.
Section 2.03 Allocation of State Income and State Other Taxes. Except as otherwise provided in Section 2.05, State Income Tax and State Other Tax shall be allocated as follows:
(a) Allocation of Tax Relating to Encompass State Combined Income Tax Returns. With respect to any Encompass State Combined Income Tax Return (i) for any Pre-Distribution Period, (A) Encompass shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any such Tax Return (including any increase in such Tax as a result of a Final Determination) reduced by the aggregate amount in respect of such State Income Taxes for which members of the Enhabit Group are or would be responsible with respect to such period pursuant to the Existing Tax Allocation Agreement (without giving effect to the termination thereof pursuant to Section 11 hereof) (“Enhabit Group State Combined Income Tax Sharing Payment”), and (B) Enhabit shall be responsible for the Enhabit Group State Combined Income Tax Sharing Payment (including any increase thereof as a result of a Final Determination); and (ii) for any Post-Distribution Period, Encompass shall be responsible for any and all State Income Taxes due or required to be reported on any such Tax Return (including any increase in such Tax as a result of a Final Determination).
(b) Allocation of Tax Relating to State Separate Income Tax Returns. (i) Encompass shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Encompass Separate Return and (ii) Enhabit shall be responsible for any and all State Income Taxes due with respect to or required to be reported on any Enhabit Separate Return (in each case, including any increase in such Tax as a result of a Final Determination).
(c) Allocation of State Other Tax. State Other Taxes (in each case, including any increase in such Tax as a result of a Final Determination) shall be allocated in a manner consistent with past practice, as reasonably determined by Encompass.
Section 2.04 Allocation of Foreign Taxes. Except as otherwise provided in Section 2.05, Foreign Income Tax and Foreign Other Tax shall be allocated as follows:
(a) Allocation of Tax Relating to Encompass Foreign Combined Income Tax Returns. With respect to any Encompass Foreign Combined Income Tax Return (i) for any Pre-Distribution Period, (A) Encompass shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on such Tax Return (including any increase in such Tax as a result of a Final Determination) reduced by the aggregate amount in respect of such Foreign Income Taxes that would be incurred by the Enhabit Group and/or its members for such Tax Period had the Enhabit Group and/or its members not been included in such Encompass Foreign Combined Income Tax Return (“Enhabit Group Foreign Combined Income Tax Sharing Payment”), and (B) Enhabit shall be responsible for the Enhabit Group Foreign Combined Income Tax Sharing Payment (including any increase thereof as a result of a Final Determination); and (ii) for any Post-Distribution Period, Encompass shall be responsible for any and all Foreign Income Taxes due or required to be reported on any such Tax Return (including any increase in such Tax as a result of a Final Determination).
(b) Allocation of Tax Relating to Foreign Separate Income Tax Returns. (i) Encompass shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Encompass Separate Return and (ii) Enhabit shall be responsible for any and all Foreign Income Taxes due with respect to or required to be reported on any Enhabit Separate Return (in each case, including any increase in such Tax as a result of a Final Determination).
(c) Allocation of Foreign Other Tax. Foreign Other Taxes (in each case, including any increase in such Tax as a result of a Final Determination) shall be allocated in a manner consistent with past practice, as reasonably determined by Encompass.
Section 2.05 Certain Transaction and Other Taxes.
(a) Enhabit Liability. Enhabit shall be liable for, and shall indemnify and hold harmless the Encompass Group from and against any liability for:
(i) any stamp, sales and use, gross receipts or other transfer Tax imposed by any Tax Authority on any member of the Enhabit Group (if such member is primarily liable for such Tax) on any transfers occurring pursuant to the Separation Transactions;
(ii) any value-added or goods and services Tax imposed by any Tax Authority on any transfer occurring pursuant to the Separation Transactions to the extent any member of the Enhabit Group is the transferee with respect to the relevant transfer;
(iii) any Tax (other than Tax-Related Losses) resulting from a breach by Enhabit of any covenant made by Enhabit (or any other member of the Enhabit Group) in this Agreement, the Separation Agreement or any Ancillary Agreement; and
(iv) any Tax-Related Losses for which Enhabit is responsible pursuant to Section 7.05.
The amounts for which Enhabit is liable pursuant to Sections 2.05(a)(i), (ii), and (iii) shall include all accounting, legal and other professional fees and court costs incurred in connection with the relevant Taxes.
(b) Encompass Liability. Encompass shall be liable for, and shall indemnify and hold harmless the Enhabit Group from and against any liability for:
(i) any stamp, sales and use, gross receipts or other transfer Tax imposed by any Tax Authority on any member of the Encompass Group (if such member is primarily liable for such Tax) on any transfers occurring pursuant to the Separation Transactions;
(ii) any value-added or goods and services Tax imposed by any Tax Authority on any transfer occurring pursuant to the Separation Transactions to the extent any member of the Encompass Group is the transferee with respect to the relevant transfer;
(iii) any Tax (other than Tax-Related Losses) resulting from a breach by Encompass of any covenant made by Encompass (or any other member of the Encompass Group) in this Agreement, the Separation Agreement or any Ancillary Agreement; and
(iv) any Tax-Related Losses for which Encompass is responsible pursuant to Section 7.05.
The amounts for which Encompass is liable pursuant to Sections 2.05(b)(i), (ii), and (iii) shall include all accounting, legal and other professional fees and court costs incurred in connection with the relevant Taxes.
Section 3. Proration of Taxes for Straddle Periods.
(a) General Method of Proration. In the case of any Straddle Period, Tax Items shall be apportioned between Pre-Distribution Periods and Post-Distribution Periods in accordance with the principles of Treasury Regulations Section 1.1502-76(b) as reasonably interpreted and applied by Encompass. With respect to the Encompass Federal Consolidated Income Tax Return for the Tax Period that includes the Distribution, Encompass may determine in its sole discretion whether to make a ratable allocation election under Treasury Regulations Section 1.1502-76(b)(2)(ii) with respect to Enhabit. Enhabit shall, and shall cause each member of the Enhabit Group to, take all actions necessary to give effect to such election.
(b) Distribution Treated as Extraordinary Items. In determining the apportionment of Tax Items between Pre-Distribution Periods and Post-Distribution Periods, any Tax Items relating to the Distribution shall be treated as extraordinary items described in Treasury Regulations Section 1.1502-76(b)(2)(ii)(C) and shall (to the extent arising on or prior to the Distribution Date) be allocated to Pre-Distribution Periods, and any Taxes related to such items shall be treated under Treasury Regulations Section 1.1502-76(b)(2)(iv) as relating to such extraordinary item and shall (to the extent arising on or prior to the Distribution Date) be allocated to Pre-Distribution Periods.
Section 4. Preparation and Filing of Tax Returns.
Section 4.01 General. Except as otherwise provided in this Section 4, Tax Returns shall be prepared and filed when due (taking into account extensions) by the Person obligated to file such Tax Returns under the Code or applicable Tax Law. The Companies shall, and shall cause their respective Affiliates to, provide assistance and cooperation to one another in accordance with Section 8 with respect to the preparation and filing of Tax Returns (including by providing information required to be provided pursuant to Section 8).
Section 4.02 Encompass’s Responsibility. Encompass has the exclusive obligation and right to prepare and file, or to cause to be prepared and filed:
(a) Encompass Federal Consolidated Income Tax Returns for any Tax Periods;
(b) Encompass State Combined Income Tax Returns, Encompass Foreign Combined Income Tax Returns and any other Joint Returns that Encompass reasonably determines are required to be filed (or that Encompass chooses to be filed) by the Companies or any of their Affiliates for any Tax Periods;
(c) Encompass Separate Returns that Encompass reasonably determines are required to be filed by the Companies or any of their Affiliates for any Tax Periods; and
(d) Enhabit Separate Returns that Encompass reasonably determines are required to be filed by the Companies or any of their Affiliates on or before the Distribution Date.
Section 4.03 Enhabit’s Responsibility. Enhabit shall prepare and file, or shall cause to be prepared and filed, all Tax Returns required to be filed by or with respect to members of the Enhabit Group other than those Tax Returns that Encompass is required or entitled to prepare and file under Section 4.02. The Tax Returns required to be prepared and filed by Enhabit under this Section 4.03 shall include (a) any Enhabit Federal Consolidated Income Tax Return for Tax Periods ending after the Distribution Date and (b) Enhabit Separate Returns required to be filed after the Distribution Date. For the avoidance of doubt, the Parties’ rights and obligations under Sections 4.02 and 4.03 shall not be affected by any provisions of the Transition Services Agreement.
Section 4.04 Tax Accounting Practices.
(a) General Rule. Except as otherwise provided in Section 4.04(b), with respect to any Tax Return that Enhabit has the obligation and right to prepare and file, or cause to be prepared and filed, under Section 4.03, for any Pre-Distribution Period or any Straddle Period (or any Tax Period beginning after the Distribution Date to the extent items reported on such Tax Return could reasonably be expected to affect items reported on any Tax Return that Encompass has the obligation or right to prepare and file for any Pre-Distribution Period or any Straddle Period), such Tax Return shall be prepared in accordance with past practices, accounting methods, elections or conventions (“Past Practices”) used with respect to the Tax Returns in question (unless there is no reasonable basis for the use of such Past Practices), and to the extent any items are not covered by Past Practices (or in the event that there is no reasonable basis for the use of such Past Practices), in accordance with reasonable Tax accounting practices selected by Enhabit. Except as otherwise provided in Section 4.04(b), Encompass shall prepare any Tax Return that it has the obligation or right to prepare and file, or cause to be prepared and filed, under Section 4.02 in accordance with reasonable Tax accounting practices selected by Encompass.
(b) Reporting of Transactions. Except to the extent otherwise required (x) by a change in applicable law or (y) as a result of a Final Determination, (i) neither Encompass nor Enhabit shall (and neither shall permit or cause any member of its respective Group to) take any position that is inconsistent with the Tax-Free Status (or analogous status under state or local law) or with any of the Separation Transactions not described in the Tax Opinions/Rulings having the tax treatment described in the Separation Step Plan; provided, that in any case or with respect to any item where there is no relevant Tax Opinion/Ruling or description in the Separation Step Plan, the tax treatment of any of the Separation Transactions shall be as determined by Encompass in its sole and absolute discretion; and (ii) Enhabit shall not (and shall not permit or cause any member of the Enhabit Group to) take any position with respect to any material item of income, deduction, gain, loss, or credit on a Tax Return, or otherwise treat such item in a manner that is inconsistent with the manner such item is reported on a Tax Return permitted or required to be prepared or filed by Encompass pursuant to Section 4.02 (including, without limitation, the claiming of a deduction previously claimed on any such Tax Return).
Section 4.05 Consolidated or Combined Tax Returns. Enhabit will elect and join, and will cause its Affiliates to elect and join, in filing any Encompass Federal Consolidated Income Tax Returns, Encompass State Combined Income Tax Returns, Encompass Foreign Combined Income Tax Returns, and any other Joint Returns that Encompass determines are required to be filed by the Companies or any of their Affiliates or that Encompass chooses to file pursuant to Section 4.02(a) and Section 4.02(b). With respect to any Tax Returns relating to any Pre-Distribution Period, which Tax Returns would otherwise be Enhabit Separate Returns, Enhabit will elect and join, and will cause its respective Affiliates to elect and join, in filing consolidated, unitary, combined or other similar joint Tax Returns, to the extent each entity is eligible to join in such Tax Returns, upon Encompass’s request.
Section 4.06 Right to Review Tax Returns.
(a) General. The Responsible Company with respect to any material Tax Return shall make such Tax Return (or the relevant portions thereof) and related workpapers available for review by the other Company, if requested, to the extent the requesting party (i) is or would reasonably be expected to be liable, in whole or in part, for Taxes reflected on such Tax Return, (ii) is or would reasonably be expected to be liable, in whole or in part, for any additional Taxes owing as a result of adjustments to the amount of such Taxes reported on such Tax Return, (iii) has or would reasonably be expected to have a claim for Tax Benefits under this Agreement in respect of items reflected on such Tax Return, or (iv) reasonably requires such documents to confirm compliance with the terms of this Agreement; provided, however, that notwithstanding anything in this Agreement to the contrary, Encompass shall not be required to make any Encompass Federal Consolidated Income Tax Return or Encompass State Combined Income Tax Return available for review by Enhabit. The Responsible Company shall use reasonable efforts to make such Tax Return (or the relevant portions thereof) and related workpapers available for review as required under this paragraph sufficiently in advance of the due date for filing such Tax Return to provide the requesting Party with a meaningful opportunity to review and comment on such Tax Return and shall consider such comments in good faith. The Companies shall attempt in good faith to resolve any material disagreement arising out of the review of such Tax Return and, failing such resolution, any material disagreement shall be resolved in accordance with the provisions of Section 14 as promptly as practicable.
(b) Execution of Tax Returns Prepared by Other Party. In the case of any Tax Return that is required to be prepared by one Company under this Agreement and that is required by law to be signed by the other Company (or by its authorized representative), the Company that is legally required to sign such Tax Return shall not be required to sign such Tax Return under this Agreement unless there is at least a “reasonable basis” (or comparable standard under state, local or foreign law) for the Tax treatment of each material item reported on the Tax Return.
Section 4.07 Enhabit Carrybacks and Claims for Refund. Enhabit hereby agrees that, unless Encompass consents in writing, (i) no Adjustment Request with respect to any Joint Return (or any other Tax Return reflecting Taxes for which both Encompass and Enhabit are responsible under Section 2) shall be filed, and (ii) any available elections to waive the right to claim in any Pre-Distribution Period with respect to any Joint Return (or any other Tax Return reflecting Taxes for which both Encompass and Enhabit are responsible under Section 2) any Enhabit Carryback arising in a Post-Distribution Period shall be made, and no affirmative election shall be made to claim any such Enhabit Carryback; provided, however, that the Parties agree that any such Adjustment Request shall be made with respect to any Enhabit Carryback related to Federal or State Income Taxes, upon the reasonable request of Enhabit, if (x) such Enhabit Carryback is necessary to prevent the loss of the Federal and/or State Income Tax Benefit of such Enhabit Carryback (including, but not limited to, an Adjustment Request with respect to an Enhabit Carryback of a federal or state capital loss arising in a Post-Distribution Period to a Pre-Distribution Period) and (y) such Adjustment Request, based on Encompass’s sole determination, will cause no Tax detriment to Encompass, the Encompass Group or any member of the Encompass Group. Any Adjustment Request to which Encompass consents under this Section 4.07 shall be prepared and filed by the Responsible Company with respect to the Tax Return to be adjusted.
Section 4.08 Apportionment of Earnings and Profits and Tax Attributes.
(a) If the Encompass Affiliated Group has a Tax Attribute, the portion, if any, of such Tax Attribute apportioned to Enhabit or any member of the Enhabit Group and/or treated as a carryover to the first Post-Distribution Period of Enhabit (or such member) shall be determined by Encompass in accordance with Treasury Regulations Sections 1.1502-21, 1.1502-21T, 1.1502-22, 1.1502-79 and, if applicable, 1.1502-79A.
(b) No Tax Attribute with respect to any consolidated Federal Income Tax of the Encompass Affiliated Group, other than those described in Section 4.08(a), and no Tax Attribute with respect to any consolidated, combined or unitary State or Foreign Income Tax, in each case, arising in respect of a Joint Return, shall be apportioned to Enhabit or any member of the Enhabit Group, except as Encompass (or such member of the Encompass Group as Encompass shall designate) determines is otherwise required under applicable law.
(c) To the extent required by applicable law or at Enhabit’s reasonable request, Encompass shall, or shall cause its designee to determine the portion, if any, of any Tax Attribute that must (absent a Final Determination to the contrary) be apportioned to Enhabit or any member of the Enhabit Group in accordance with this Section 4.08 and applicable law and the amount of Tax basis and earnings and profits to be apportioned to Enhabit or any member of the Enhabit Group in accordance with this Section 4.08 and applicable law, and shall provide written notice of a proposed calculation thereof to Enhabit as soon as reasonably practicable after Encompass or its designee prepares such calculation. As soon as reasonably practicable following the delivery of such calculation, Enhabit shall provide written comments on such calculation to Encompass, which comments Encompass shall consider in good faith. For the absence of doubt, Encompass shall not be liable to Enhabit or any member of the Enhabit Group for any failure of any determination under this Section 4.08 to be accurate or sustained under applicable law, including as the result of any Final Determination. The costs of any earnings and profits, Tax basis or similar study necessary or appropriate to determine the apportionment of Tax Attributes hereunder shall be borne equally by Encompass and Enhabit.
(d) Any written notice delivered by Encompass pursuant to Section 4.08(c) shall be binding on Enhabit and each member of the Enhabit Group and shall not be subject to dispute resolution. Except to the extent otherwise required by a change in applicable law or pursuant to a Final Determination, Enhabit shall not take any position (whether on a Tax Return or otherwise) that is inconsistent with the information contained in any such written notice.
Section 5. Tax Payments.
Section 5.01 Payment of Taxes with Respect to Tax Returns. Subject to Section 5.02, (a) the Responsible Company with respect to any Tax Return shall pay any Tax required to be paid to the applicable Tax Authority on or before the relevant Payment Date, and (b) in the case of any adjustment pursuant to a Final Determination with respect to any Tax Return, the Responsible Company shall pay to the applicable Tax Authority when due (taking into account any automatic or validly elected extensions, deferrals or postponements) any additional Tax due with respect to such Tax Return required to be paid as a result of such adjustment pursuant to a Final Determination.
Section 5.02 Indemnification Payments.
(a) If any Company (the “Payor”) is required pursuant to Section 5.01 (or otherwise under applicable Tax Law) to pay to a Tax Authority a Tax for which another Company (the “Required Party”) is liable, in whole or in part, under this Agreement (including for the avoidance of doubt, any administrative or judicial deposit required to be paid by the Payor to a Tax Authority or other Governmental Authority to pursue any Tax Contest, to the extent the Required Party would be liable under this Agreement for any Tax resulting from such Tax Contest), the Required Party shall reimburse the Payor within 15 days of delivery by the Payor to the Required Party of an invoice for the amount due from the Required Party, accompanied by evidence of payment and a statement detailing the Taxes paid and describing in reasonable detail the particulars relating thereto. If the amount to be paid by the Required Party pursuant to this Section 5.02 is in excess of $1 million, then the Required Party shall pay such amount to the Payor no later than the later of (i) seven business days after delivery by the Payor to the Required Party of an invoice for the amount due, accompanied by a statement detailing the Taxes required to be paid and describing in reasonable detail the particulars relating thereto, and (ii) three business days prior to the due date for the payment of such Tax (taking into account any automatic or validly elected extensions, deferrals or postponements).
(b) All indemnification payments under this Agreement shall be made by Encompass directly to Enhabit and by Enhabit directly to Encompass; provided, however, that if the Companies mutually agree with respect to any such indemnification payment, (i) any member of the Encompass Group may make such indemnification payment to any member of the Enhabit Group and (ii) any member of the Enhabit Group may make such indemnification payment to any member of the Encompass Group.
Section 6. Tax Benefits.
Section 6.01 Tax Benefits.
(a) Except as set forth below, (i) Encompass shall be entitled to any refund (and any interest thereon received from the applicable Tax Authority) of Income Taxes and Other Taxes for which Encompass is liable hereunder, (ii) Enhabit shall be entitled to any refund (and any interest thereon received from the applicable Tax Authority) of Income Taxes and Other Taxes for which Enhabit is liable hereunder, and (iii) a Company receiving a refund to which the other Company is entitled hereunder in whole or in part shall pay over such refund (or portion thereof), net of cost (including Taxes) resulting therefrom, to such other Company within 30 days after such refund is received; it being understood that, with respect to any refund (or interest thereon received from the applicable Tax Authority) of Taxes for which both Companies are liable under Section 7.05(c)(i), each Company shall be entitled to the portion of such refund (or interest thereon) that reflects its proportionate liability for such Taxes.
(b) Notwithstanding anything in this Section 6.01 to the contrary and except as provided in Section 6.01(c), with respect to any Encompass Federal Consolidated Income Tax Return or Encompass State Combined Income Tax Return, to the extent any Tax Attribute arising in the Pre-Distribution Period and allocated to any member of the Enhabit Group is utilized on such Tax Return, Encompass shall pay to Enhabit in the year in which the Tax Attribute is utilized an amount equal to the actual Tax savings realized by the Encompass Affiliated Group, in accordance with Section 5 of the Existing Tax Allocation Agreement (without giving effect to the termination thereof pursuant to Section 13 thereof or Section 11 hereof).
(c) If (i) a member of the Enhabit Group actually realizes in cash any Tax Benefit as a result of an adjustment pursuant to a Final Determination or reporting required by clause (x) or clause (y) of Section 4.04(b), in each case, that increases Taxes for which a member of the Encompass Group is liable hereunder (or reduces any Tax Attribute of a member of the Encompass Group) and such Tax Benefit would not have arisen but for such adjustment or reporting (determined on a “with and without” basis) or (ii) a member of the Encompass Group actually realizes in cash any Tax Benefit as a result of an adjustment pursuant to a Final Determination or reporting required by clause (x) or clause (y) of Section 4.04(b), in each case, that increases Taxes for which a member of the Enhabit Group is liable hereunder (or reduces any Tax Attribute of a member of the Enhabit Group) and such Tax Benefit would not have arisen but for such adjustment or reporting (determined on a “with and without” basis), then Enhabit or Encompass, as the case may be, shall make a payment to Encompass or Enhabit, as appropriate, within 30 days following such actual realization of the Tax Benefit, in an amount equal to such Tax Benefit actually realized in cash (including any Tax Benefit actually realized as a result of the payment); provided, however, that no Company (or any Affiliates of any Company) shall be obligated to make a payment otherwise required pursuant to this Section 6.01(c) to the extent making such payment would place such Company (or any of its Affiliates) in a less favorable net after-Tax position than such Company (or such Affiliate) would have been in if the relevant Tax Benefit had not been realized. If a Company or one of its Affiliates pays over any amount pursuant to the preceding sentence and such Tax Benefit is subsequently disallowed or adjusted, the Parties shall promptly make appropriate payments (including in respect of any interest paid or imposed by any Tax Authority) to reflect such disallowance or adjustment.
(d) No later than 30 days after a Tax Benefit described in Section 6.01(c) is actually realized in cash by a member of the Encompass Group or a member of the Enhabit Group, Encompass (if a member of the Encompass Group actually realizes such Tax Benefit) or Enhabit (if a member of the Enhabit Group actually realizes such Tax Benefit) shall provide the other Company with a written calculation of the amount payable to such other Company by Encompass or Enhabit pursuant to this Section 6. In the event that Encompass or Enhabit disagrees with any such calculation described in this Section 6.01(d), Encompass or Enhabit shall so notify the other Company in writing within 30 days of receiving such written calculation. Encompass and Enhabit shall endeavor in good faith to resolve such disagreement, and, failing that, the amount payable under this Section 6 shall be determined in accordance with the provisions of Section 14 as promptly as practicable.
(e) Enhabit shall be entitled to any refund that is attributable to, and would not have arisen but for, an Enhabit Carryback pursuant to the proviso set forth in Section 4.07; provided, however, that Enhabit shall indemnify and hold the members of the Encompass Group harmless from and against any and all collateral Tax consequences resulting from or caused by any such Enhabit Carryback, including (but not limited to) the loss or postponement of any benefit from the use of Tax Attributes generated by a member of the Encompass Group or an Affiliate thereof if (x) such Tax Attributes expire unutilized, but would have been utilized but for such Enhabit Carryback, or (y) the use of such Tax Attributes is postponed to a later Tax Period than the Tax Period in which such Tax Attributes would have been utilized but for such Enhabit Carryback. Any such payment of such refund made by Encompass to Enhabit pursuant to this Section 6.01(e) shall be recalculated in light of any Final Determination (or any other facts that may arise or come to light after such payment is made, such as a carryback of an Encompass Group Tax Attribute to a Tax Period in respect of which such refund is received) that would affect the amount to which Enhabit is entitled, and an appropriate adjusting payment shall be made by Enhabit to Encompass such that the aggregate amount paid pursuant to this Section 6.01(e) equals such recalculated amount.
Section 6.02 Encompass and Enhabit Income Tax Deductions in Respect of Certain Equity Awards and Incentive Compensation.
(a) Allocation of Deductions. To the extent permitted by applicable law, Income Tax deductions arising by reason of exercises of options or vesting or settlement of restricted stock units, restricted stock, or performance share units, in each case, following the Distribution, with respect to Encompass stock or Enhabit stock (such options, restricted stock units, restricted stock, and performance share units, collectively, “Compensatory Equity Interests”) held by any Person shall be claimed (i) in the case of an Encompass Group Employee or Former Encompass Group Employee, solely by the Encompass Group, (ii) in the case of an Enhabit Group Employee or Former Enhabit Group Employee, solely by the Enhabit Group, and (iii) in the case of a non-employee director (solely with respect to Compensatory Equity Interests received in his or her capacity as a director), by the Company that issued such Compensatory Equity Interests.
(b) Withholding and Reporting. Each Company entitled to claim the Tax deductions described in Section 6.02(a) with respect to Compensatory Equity Interests shall be responsible for all applicable Taxes (including, but not limited to, withholding and excise Taxes) and shall satisfy, or shall cause to be satisfied, all applicable Tax reporting obligations with respect to such Compensatory Equity Interests; provided, however, that such Company shall be entitled to receive, within 10 days following the event giving rise to the relevant deduction, any amounts collected (or deemed collected) by the issuing corporation or any of its Affiliates or agents from or on behalf of a holder of the applicable Compensatory Equity Interests in respect of Taxes required to be paid by such holder in connection with the exercise, vesting or settlement thereof (including any payments made by such holder to the issuing corporation, any proceeds from the sale of underlying equity securities on behalf of such holder, or the fair market value of any equity securities withheld by the issuing corporation in respect of such holder’s Taxes by way of “net” settlement).
Section 7. Tax-Free Status.
Section 7.01 Representations.
(a) Each of Encompass and Enhabit hereby represents and warrants that (i) it has reviewed the Representation Letters and the Tax Opinions/Rulings and (ii) subject to any qualifications therein, all information, representations and covenants contained therein that relate to such Company or any member of its Group are true, correct and complete.
(b) Enhabit hereby represents and warrants that it has no plan or intention of taking any action, or failing to take any action (or causing or permitting any member of its Group to take or fail to take any action), and does not know of any circumstance, that could reasonably be expected to (i) adversely affect the Tax-Free Status or (ii) cause any representation, covenant or factual statement made in this Agreement, the Separation Agreement, the Representation Letters, the Tax Opinions/Rulings, or any of the Ancillary Agreements to be untrue.
(c) Enhabit hereby represents and warrants that, during the two-year period ending on the date hereof, there was no “agreement, understanding, arrangement, substantial negotiations or discussions” (as such terms are defined in Treasury Regulations Section 1.355-7(h)) by any one or more officers or directors of any member of the Enhabit Group or by any other Person or Persons with the implicit or explicit permission of one or more of such officers or directors regarding an acquisition of all or a significant portion of the Enhabit Capital Stock (or the Capital Stock of any Enhabit predecessor); provided, however, that no representation is made regarding any “agreement, understanding, arrangement, substantial negotiations or discussions” (as such terms are defined in Treasury Regulations Section 1.355-7(h)) by any one or more officers or directors of Encompass (or by any other Person or Persons with the implicit or explicit permission of one or more of such officers or directors).
Section 7.02 Restrictions on Enhabit. Enhabit agrees that:
(a) Enhabit will not take or fail to take, and will not cause or permit any of its Affiliates to take or fail to take, any action where such action or failure to act would be inconsistent with or cause to be untrue any material, information, covenant or representation in this Agreement, the Separation Agreement, any of the Ancillary Agreements, any Representation Letter or any Tax Opinion/Ruling. Enhabit will not take or fail to take, and will not cause or permit any of its Affiliates to take or fail to take, any action where such action or failure to act would, or could reasonably be expected to, adversely affect the Tax-Free Status.
(b) From the date hereof until the first day after the Restriction Period, Enhabit will (and will cause its “separate affiliated group” (as defined in Section 355(b)(3)(B) of the Code) to) (i) maintain the active conduct (as defined in Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder) of the Enhabit Active Business and (ii) not engage in any transaction that would or reasonably could result in it ceasing to be engaged in such Enhabit Active Business for purposes of Section 355(b)(2) of the Code. Enhabit further agrees that, from the date hereof until the first day after the Restriction Period, it will cause HHH NewCo (and its “separate affiliated group” (as defined in Section 355(b)(3)(B) of the Code)) to (x) maintain the active conduct (as defined in Section 355(b)(2) of the Code and the Treasury Regulations promulgated thereunder) of the Enhabit Active Business and (y) not engage in any transaction that would or reasonably could result in HHH NewCo ceasing to be engaged in such Enhabit Active Business for purposes of Section 355(b)(2) of the Code.
(c) From the date hereof until the first day after the Restriction Period, Enhabit will not:
(i) enter into any Proposed Acquisition Transaction or, to the extent Enhabit has the right to prohibit any Proposed Acquisition Transaction, permit any Proposed Acquisition Transaction to occur (whether by (A) redeeming rights under a shareholder rights plan, (B) finding a tender offer to be a “permitted offer” under any such plan or otherwise causing any such plan to be inapplicable or neutralized with respect to any Proposed Acquisition Transaction, or (C) approving any Proposed Acquisition Transaction, whether for purposes of Section 203 of the DGCL or any similar corporate statute, any “fair price” or other provision of Enhabit’s charter or bylaws or otherwise),
(ii) merge or consolidate with any other Person or liquidate or partially liquidate,
(iii) in a single transaction or series of transactions, (A) sell or transfer to any Person that is not a member of Enhabit’s “separate affiliated group” (as defined in Section 355(b)(3)(B) of the Code) 30% or more of the gross assets of the Enhabit Active Business, or (B) sell or transfer 30% or more of the consolidated gross assets of Enhabit and its Affiliates (in each case, such percentages to be measured based on fair market value as of the Distribution Date),
(iv) redeem or otherwise repurchase (directly or through an Enhabit Affiliate) any Enhabit Capital Stock or rights to acquire Enhabit Capital Stock, except to the extent such repurchases satisfy Section 4.05(1)(b) of Revenue Procedure 96-30 (as in effect prior to the amendment by Revenue Procedure 2003-48),
(v) amend its certificate of incorporation (or other organizational documents), or take any other action, whether through a stockholder vote or otherwise, affecting the voting rights of Enhabit Capital Stock (including, without limitation, through the conversion of one class of Enhabit Capital Stock into another class of Enhabit Capital Stock),
(vi) take any other action or actions (including any action or transaction that would be reasonably likely to be inconsistent with any representation or covenant made or to be made in any Representation Letter or any Tax Opinion/Ruling) that, in the aggregate (and taking into account any other transactions described in this Section 7.02(c)), would be reasonably likely to have the effect of causing or permitting one or more Persons to acquire, directly or indirectly, Enhabit Capital Stock representing a Fifty-Percent or Greater Interest in Enhabit or otherwise jeopardize the Tax-Free Status, or
(vii) cause or permit HHH NewCo to (A) take any action or enter into any transaction described in the preceding clauses (i), (ii), (iii), (iv), (v), or (vi) (substituting
references therein to “Enhabit” and “Enhabit Capital Stock” with references to HHH NewCo and the Capital Stock of HHH NewCo), or (B) in a single transaction or series of transactions, sell or transfer or cause or permit any of its Affiliates to sell or transfer (other than sales or transfers of inventory in the ordinary course of business) all or substantially all of the assets that were transferred to HHH NewCo pursuant to the Contribution,
unless, in each case, prior to taking any such action set forth in the foregoing clauses (i) through (vii), (x) Enhabit shall have requested that Encompass obtain a private letter ruling (or, if applicable, a supplemental private letter ruling) from the IRS and/or any other applicable Tax Authority in accordance with Section 7.04(b) and (d) to the effect that such transaction will not affect the Tax-Free Status, and Encompass shall have received such a private letter ruling in form and substance satisfactory to Encompass in its sole and absolute discretion (and in determining whether a private letter ruling is satisfactory, Encompass may consider, among other factors, the appropriateness of any underlying assumptions and management’s representations made in connection with such private letter ruling), (y) Enhabit shall have provided Encompass with an Unqualified Tax Opinion in form and substance satisfactory to Encompass in its sole and absolute discretion (and in determining whether an opinion is satisfactory, Encompass may consider, among other factors, the appropriateness of any underlying assumptions and management’s representations if used as a basis for the opinion and Encompass may determine that no opinion would be acceptable to Encompass), or (z) Encompass shall have waived in writing (which waiver may be withheld or granted by Encompass, in its sole and absolute discretion) the requirement to obtain such private letter ruling or Unqualified Tax Opinion.
(d) Certain Acquisitions of Enhabit Capital Stock. If Enhabit proposes to enter into any Section 7.02(d) Acquisition Transaction or, to the extent Enhabit has the right to prohibit any Section 7.02(d) Acquisition Transaction, proposes to permit any Section 7.02(d) Acquisition Transaction to occur, in each case, during the period from the date hereof until the first day after the Restriction Period, then Enhabit shall provide Encompass, no later than 10 days following the signing of any written agreement with respect to the Section 7.02(d) Acquisition Transaction, with a written description of such transaction (including the type and amount of Enhabit Capital Stock to be issued in such transaction) and a certificate of the chief financial officer of Enhabit to the effect that the Section 7.02(d) Acquisition Transaction is not a Proposed Acquisition Transaction or any other transaction to which the requirements of Section 7.02(c) apply (an “Enhabit CFO Certificate”).
Section 7.03 Restrictions on Encompass. Encompass agrees that (a) it will not take or fail to take, or cause or permit any member of the Encompass Group to take or fail to take, any action where such action or failure to act would be inconsistent with or cause to be untrue any material, information, covenant or representation in this Agreement, the Separation Agreement, any of the Ancillary Agreements, any Representation Letter, or any Tax Opinion/Ruling, and (b) it will not take or fail to take, or cause or permit any member of the Encompass Group to take or fail to take, any action where such action or failure to act would reasonably be expected to adversely affect the Tax-Free Status.
Section 7.04 Procedures Regarding Opinions and Rulings.
(a) Following the Distribution Date, if Enhabit notifies Encompass that it desires to take one of the actions described in clauses (i) through (vii) of Section 7.02(c), as applicable (a “Notified Action”), Encompass and Enhabit shall reasonably cooperate to attempt to obtain the private letter ruling or Unqualified Tax Opinion referred to in Section 7.02(c), unless Encompass shall have waived the requirement to obtain such private letter ruling or Unqualified Tax Opinion.
(b) Rulings or Unqualified Tax Opinions at Enhabit’s Request. At the reasonable request of Enhabit pursuant to Section 7.02(c), Encompass shall cooperate with Enhabit and use commercially reasonable efforts to seek to obtain, as expeditiously as reasonably practicable, a private letter ruling from the IRS (and/or any other applicable Tax Authority, or if applicable, a supplemental private letter ruling) or an Unqualified Tax Opinion for the purpose of permitting Enhabit to take the Notified Action. In no event shall Encompass be required to file any request for a private letter ruling under this Section 7.04(b) unless Enhabit represents that (i) it has reviewed the request for such private letter ruling, and (ii) all statements, information and representations, if any, relating to any member of the Enhabit Group, contained in the related documents are (subject to any qualifications therein) true, correct and complete. Enhabit shall reimburse Encompass for all reasonable costs and expenses incurred by the Encompass Group, including out-of-pocket expenses and expenses relating to the utilization of Encompass personnel, in obtaining a private letter ruling or Unqualified Tax Opinion requested by Enhabit within 10 business days after receiving an invoice from Encompass therefor.
(c) Rulings or Unqualified Tax Opinions at Encompass’s Request. Encompass shall have the right to seek a private letter ruling (or other ruling) from the IRS (and/or any other applicable Tax Authority, or if applicable, a supplemental private letter ruling or other ruling) concerning any Separation Transaction (including the impact of any subsequent transaction thereon) or an Unqualified Tax Opinion (or other opinion of a Tax Advisor) with respect to any of the Separation Transactions at any time in its sole and absolute discretion. If Encompass determines to seek such a private letter ruling (or other ruling) or an Unqualified Tax Opinion (or other opinion), Enhabit shall (and shall cause each of its Affiliates to) cooperate with Encompass and take any and all actions reasonably requested by Encompass in connection with obtaining the private letter ruling (or other ruling) or Unqualified Tax Opinion (or other opinion) (including, without limitation, by making any representation or covenant or providing any materials or information requested by the IRS (and/or any other applicable Tax Authority) or any Tax Advisor; provided, that Enhabit shall not be required to make (or cause any of its Affiliates to make) any representation or covenant that is inconsistent with historical facts or as to future matters or events over which it has no control). Encompass and Enhabit shall each bear its own costs and expenses in obtaining such a private letter ruling (or other ruling) or an Unqualified Tax Opinion (or other opinion) requested by Encompass.
(d) Ruling Process Control. Enhabit hereby agrees that Encompass shall have sole and exclusive control over the process of obtaining any private letter ruling (or other ruling) regarding any Separation Transaction, and that only Encompass shall be permitted to apply for such a private letter ruling (or other ruling). In connection with obtaining a private letter ruling pursuant to Section 7.04(b), Encompass shall (i) keep Enhabit informed in a timely manner of all material actions taken or proposed to be taken by Encompass in connection therewith; (ii) (A) reasonably in advance of the submission of any related private letter ruling documents, provide Enhabit with a draft copy thereof, (B) reasonably consider Enhabit’s comments on such draft copy, and (C) provide Enhabit with a final copy of such documents; and (iii) provide Enhabit with notice reasonably in advance of, and Enhabit shall have the right to attend, any formally scheduled meetings with the IRS (or other applicable Tax Authority) (subject to the approval of the IRS (or other applicable Tax Authority)) that relate to such private letter ruling
request. Neither Enhabit nor any of its directly or indirectly controlled Affiliates shall seek any guidance from the IRS or any other Tax Authority (whether written, oral or otherwise) at any time concerning any Separation Transaction (including the impact of any subsequent transaction thereon).
Section 7.05 Liability for Tax-Related Losses.
(a) Notwithstanding anything in this Agreement or the Separation Agreement to the contrary, subject to Section 7.05(c), Enhabit shall be responsible for, and shall indemnify and hold harmless Encompass and its Affiliates and each of their respective officers, directors and employees from and against, 100% of any Tax-Related Losses that are attributable to or result from any one or more of the following: (i) the acquisition after the Distribution of all or a portion of Enhabit’s Capital Stock and/or its or its Subsidiaries’ stock or assets by any means whatsoever by any Person, (ii) any action or failure to act by Enhabit or any Enhabit Affiliate after the Distribution (including, without limitation, any amendment to Enhabit’s certificate of incorporation (or other organizational documents), whether through a stockholder vote or otherwise) affecting the voting rights of Enhabit Capital Stock (including, without limitation, through the conversion of one class of Enhabit Capital Stock into another class of Enhabit Capital Stock), or (iii) any act or failure to act or breach of any covenant by Enhabit or any Enhabit Affiliate described in Section 7.02 (regardless of whether such act or failure to act is covered by a private letter ruling, Unqualified Tax Opinion or waiver described in clause (x), (y) or (z) of Section 7.02(c) or an Enhabit CFO Certificate described in Section 7.02(d)).
(b) Notwithstanding anything in this Agreement or the Separation Agreement to the contrary, subject to Section 7.05(c), Encompass shall be responsible for, and shall indemnify and hold harmless Enhabit, its Affiliates and its officers, directors and employees from and against, 100% of any Tax-Related Losses that are attributable to or result from any one or more of the following: (i) the acquisition after the Distribution of all or a portion of Encompass’s Capital Stock and/or its or its Subsidiaries’ stock or assets by any means whatsoever by any Person, or (ii) any act or failure to act or breach of any covenant by Encompass or a member of the Encompass Group described in Section 7.03.
(c)
(i) To the extent that any Tax-Related Loss is subject to indemnification under both of Section 7.05(a) and Section 7.05(b), responsibility for such Tax-Related Loss shall be shared by Enhabit and Encompass according to relative fault.
(ii) Notwithstanding anything in Section 7.05(b), Section 7.05(c)(i) or any other provision of this Agreement or the Separation Agreement to the contrary:
(A) with respect to any Tax-Related Loss resulting, in whole or in part, from an acquisition after the Distribution of any Capital Stock or assets of Enhabit or any Enhabit Affiliate by any means whatsoever by any Person or any action or failure to act by Enhabit after the Distribution affecting the voting rights of Enhabit, Enhabit shall be responsible for, and shall indemnify and hold harmless Encompass and its Affiliates and each of their officers, directors and employees from and against, 100% of such Tax-Related Loss; and
(B) for purposes of calculating the amount and timing of any Tax-Related Loss for which Enhabit is responsible under this Section 7.05, Tax-Related Losses shall be calculated by assuming that Encompass, the Encompass Group, and each member of the Encompass Group (1) pay Tax at the highest marginal corporate Tax rates in effect in each relevant Tax Period and (2) have no Tax Attributes in any relevant Tax Period.
(iii) Notwithstanding anything in Section 7.05(a), Section 7.05(c)(i) or any other provision of this Agreement or the Separation Agreement to the contrary, with respect to any Tax-Related Loss resulting, in whole or in part, from an acquisition after the Distribution of any stock or assets of Encompass or any Encompass Affiliate by any means whatsoever by any Person, Encompass shall be responsible for, and shall indemnify and hold harmless Enhabit, its Affiliates and its officers, directors and employees from and against, 100% of such Tax-Related Loss.
(d) Notwithstanding any other provision of this Agreement or the Separation Agreement to the contrary:
(i) Enhabit shall pay Encompass the amount for which Enhabit has an indemnification obligation under this Section 7.05: (A) in the case of Tax-Related Losses described in clause (a) of the definition of Tax-Related Losses, no later than the later of (x) seven business days after delivery by Encompass to Enhabit of an invoice for the amount of such Tax-Related Losses or (y) three business days prior to the date Encompass files, or causes to be filed, the applicable Tax Return for the year of the relevant transaction, as applicable (provided, that if such Tax-Related Losses arise pursuant to a Final Determination described in clause (a), (b) or (c) of the definition of Final Determination, then Enhabit shall pay Encompass no later than the later of (x) seven business days after delivery by Encompass to Enhabit of an invoice for the amount of such Tax-Related Losses or (y) three business days prior to the date for making payment with respect to such Final Determination); and (B) in the case of Tax-Related Losses described in clause (b) or (c) of the definition of Tax-Related Losses, no later than the later of (x) seven business days after delivery by Encompass to Enhabit of an invoice for the amount of such Tax-Related Losses or (y) two business days after the date Encompass pays such Tax-Related Losses.
(ii) Encompass shall pay Enhabit the amount for which Encompass has an indemnification obligation under this Section 7.05: (A) in the case of Tax-Related Losses described in clause (a) of the definition of Tax-Related Losses, no later than the later of (x) seven business days after delivery by Enhabit to Encompass of an invoice for the amount of such Tax-Related Losses or (y) three business days prior to the date Enhabit files, or causes to be filed, the applicable Tax Return for the year of the relevant transaction, as applicable (provided, that if such Tax-Related Losses arise pursuant to a Final Determination described in clause (a), (b) or (c) of the definition of Final Determination, then Encompass shall pay Enhabit no later than the later of (x) seven business days after delivery by Enhabit to Encompass of an invoice for the amount of such Tax-Related Losses or (y) three business days prior to the date for making payment with respect to such Final Determination); and (B) in the case of Tax-Related Losses described in clause (b) or (c) of the definition of Tax-Related Losses, no later than the later of (x) seven business days after delivery by Enhabit to Encompass of an invoice for the amount of such Tax-Related Losses or (y) two business days after the date Enhabit pays such Tax-Related Losses.
Section 7.06 Section 336(e) Election. If Encompass determines, in its sole discretion, that a protective election under Section 336(e) of the Code (a “Section 336(e) Election”) shall be made with respect to the Distribution, Enhabit shall (and shall cause any relevant member of the Enhabit Group to) join with Encompass and/or any relevant member of the Encompass Group in the making of such election and shall take any action reasonably requested by Encompass or that is otherwise necessary to give effect to such election (including making any other related election). If a Section 336(e) Election is made with respect to the Distribution, then this Agreement shall be amended in such a manner as is determined by Encompass in good faith to take into account such Section 336(e) Election, including by requiring that, in the event (i) the Distribution fails to have Tax-Free Status, (ii) Enhabit does not have exclusive responsibility pursuant to this Agreement for the Tax-Related Losses arising from such failure, and (iii) Enhabit actually realizes in cash a Tax Benefit from the step-up in Tax basis resulting from the Section 336(e) Election, Enhabit shall pay over to Encompass any such Tax Benefits realized (provided, that if such Tax-Related Losses are Taxes for which more than one Company is liable under Section 7.05(c)(i), Enhabit shall pay over to Encompass the percentage of any such Tax Benefits realized that corresponds to Encompass’s percentage share of such Taxes).
Section 8. Assistance and Cooperation.
Section 8.01 Assistance and Cooperation.
(a) Each of the Companies shall provide (and shall cause its Affiliates to provide) the other Company and its agents, including accounting firms and legal counsel, with such cooperation or information as such other Company may reasonably request in connection with (i) preparing and filing Tax Returns, (ii) determining the liability for and amount of any Taxes due (including estimated Taxes) or the right to and amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or judicial proceeding in respect of Taxes assessed or proposed to be assessed. Such cooperation shall include making available, upon reasonable notice, all information and documents in their possession relating to the other Company and its Affiliates as provided in Section 9. Each of the Companies shall also make available to the other Company, as reasonably requested and available, personnel (including employees and agents of the Companies or their respective Affiliates) responsible for preparing, maintaining and interpreting information and documents relevant to Taxes.
(b) Any information or documents provided under this Section 8 or Section 9 shall be kept confidential by the Company receiving the information or documents, except as may otherwise be necessary in connection with the filing of Tax Returns or in connection with any administrative or judicial proceedings relating to Taxes. Notwithstanding any other provision of this Agreement or any other agreement, (i) neither Encompass nor any Encompass Affiliate shall be required to provide Enhabit or its Affiliates or any other Person access to or copies of any information, documents or procedures other than information, documents or procedures that relate solely to Enhabit, the business or assets of Enhabit or any Affiliate of Enhabit and (ii) in no event shall Encompass or any Encompass Affiliate be required to provide Enhabit, its Affiliates or any other Person access to or copies of any information or documents if such action could reasonably be expected to result in the waiver of any Privilege. In addition, in the event that Encompass determines that the provision of any information to Enhabit or its Affiliates could be commercially detrimental, violate any law or agreement or waive any Privilege, the Parties shall use reasonable best efforts to permit compliance with their obligations under this Section 8 or Section 9 in a manner that avoids any such harm or consequence.
Section 8.02 Income Tax Return Information. Encompass and Enhabit acknowledge that time is of the essence in relation to any request for information, assistance or cooperation made by Enhabit or Encompass pursuant to Section 8.01 or this Section 8.02. Encompass and Enhabit acknowledge that failure to comply with the deadlines set forth herein or reasonable deadlines otherwise set by Enhabit or Encompass could cause irreparable harm. Each Company shall provide to the other Company information and documents relating to its Group required by the other Company to prepare its Tax Returns. Any information or documents required by the Responsible Company shall be provided in such form as the Responsible Company reasonably requests and in sufficient time for such Tax Returns to be filed on a timely basis; provided, that this Section 8.02 shall not apply to information governed by Section 4.08.
Section 8.03 Reliance by Encompass. If any member of the Enhabit Group supplies information to a member of the Encompass Group in connection with a Tax liability and an officer of a member of the Encompass Group signs a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then, upon the written request of such member of the Encompass Group identifying the information being so relied upon, the chief financial officer of Enhabit (or any officer of Enhabit as designated by the chief financial officer of Enhabit) shall certify in writing that to his or her knowledge (based upon consultation with appropriate employees), the information so supplied is accurate and complete. Enhabit agrees to indemnify and hold harmless each member of the Encompass Group and its directors, officers and employees from and against any fine, penalty or other cost or expense of any kind attributable to a member of the Enhabit Group having supplied, pursuant to this Section 8, a member of the Encompass Group with inaccurate or incomplete information (regardless of whether the written certification contemplated by this Section was requested or received).
Section 8.04 Reliance by Enhabit. If any member of the Encompass Group supplies information to a member of the Enhabit Group in connection with a Tax liability and an officer of a member of the Enhabit Group signs a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then, upon the written request of such member of the Enhabit Group identifying the information being so relied upon, the chief financial officer of Encompass (or any officer of Encompass as designated by the chief financial officer of Encompass) shall certify in writing that to his or her knowledge (based upon consultation with appropriate employees), the information so supplied is accurate and complete. Encompass agrees to indemnify and hold harmless each member of the Enhabit Group and its directors, officers and employees from and against any fine, penalty or other cost or expense of any kind attributable to a member of the Encompass Group having supplied, pursuant to this Section 8, a member of the Enhabit Group with inaccurate or incomplete information (regardless of whether the written certification contemplated by this Section was requested or received); provided, that this Section 8.04 shall not apply to information governed by Section 4.08.
Section 9. Tax Records.
Section 9.01 Retention of Tax Records. Each Company shall preserve and keep all Tax Records exclusively relating to the assets and activities of its Group for Pre-Distribution Periods, and Encompass shall preserve and keep all other Tax Records relating to Taxes of the Groups for Pre-Distribution Periods, for so long as the contents thereof may become material in the administration of any matter under the Code or other applicable Tax Law, but in any event until the later of (a) the expiration of any applicable statutes of limitations (taking into account extensions), or (b) seven years after the Distribution Date (such later date, the “Retention Date”). After the Retention Date, each Company may dispose of such Tax Records upon 90 days’ prior written notice to the other Company. If, prior to the Retention Date, a Company reasonably determines that any Tax Records that it would otherwise be required to preserve and keep under this Section 9 are no longer material in the administration of any matter under the Code or other applicable Tax Law and the other Company agrees, then such first Company may dispose of such Tax Records upon 90 days’ prior notice to the other Company. Any notice of an intent to dispose given pursuant to this Section 9.01 shall include a list of the Tax Records to be disposed of describing in reasonable detail the files, books or other records being disposed. The notified Company shall have the opportunity, at its cost and expense, to copy or remove, within such 90-day period, all or any part of such Tax Records.
Section 9.02 Access to Tax Records. The Companies and their respective Affiliates shall make available to each other for inspection and copying/scanning during normal business hours upon reasonable notice all Tax Records for Pre-Distribution Periods or Straddle Periods to the extent reasonably required by the other Company in connection with the preparation of financial accounting statements, audits, litigation or the resolution of items under this Agreement.
Section 10. Tax Contests.
Section 10.01 Notice. Each of the Companies shall provide prompt notice to the other of any written communication from a Tax Authority regarding any pending or threatened Tax audit, assessment or proceeding or other Tax Contest of which it becomes aware for which it may be entitled to indemnification by the other Company hereunder. Such notice shall include copies of the pertinent portion of any written communication from the relevant Tax Authority and contain factual information (to the extent known) describing any asserted Tax liability and/or other relevant Tax matters in reasonable detail. The failure of one Company to notify the other of such communication in accordance with the immediately preceding sentences shall not relieve such other Company of any liability or obligation to pay such Tax or make indemnification payments under this Agreement, except to the extent that the failure timely to provide such notification
actually prejudices the ability of such other Company to contest such Tax liability (or contest any determination in respect of any Tax Benefit) or increases the amount of such Tax liability (or reduces the amount of such Tax Benefit).
Section 10.02 Control of Tax Contests.
(a) Separate Company Taxes. In the case of any Tax Contest with respect to any Separate Return, the Company having liability for the Tax pursuant to Section 2 shall have exclusive control over such Tax Contest, including exclusive authority with respect to any settlement of such Tax liability, subject to Section 10.02(d).
(b) Encompass Federal Consolidated Income Tax Return, Encompass State Combined Income Tax Return and Encompass Foreign Combined Income Tax Return. In the case of any Tax Contest with respect to any Encompass Federal Consolidated Income Tax Return, Encompass State Combined Income Tax Return or Encompass Foreign Combined Income Tax Return, Encompass shall have exclusive control over the Tax Contest, including exclusive authority with respect to any settlement of such Tax liability, subject to Section 10.02(d)(i).
(c) Other Joint Returns and Certain Other Tax Returns. In the case of any Tax Contest with respect to any Joint Return (other than any Encompass Federal Consolidated Income Tax Return, Encompass State Combined Income Tax Return or Encompass Foreign Combined Income Tax Return) or any Taxes allocated pursuant to Section 2.02(c) or Section 2.03(c) hereof, (i) Encompass shall control the defense or prosecution of the portion of the Tax Contest, if any, directly and exclusively related to any Encompass Adjustment, including settlement of any such Encompass Adjustment, (ii) Enhabit shall control the defense or prosecution of the portion of the Tax Contest, if any, directly and exclusively related to any Enhabit Adjustment, including settlement of any such Enhabit Adjustment, and (iii) Encompass and Enhabit shall jointly control the defense or prosecution of Joint Adjustments and any and all administrative matters not directly and exclusively related to any Encompass Adjustment or Enhabit Adjustment. In the event of any disagreement regarding any matter described in clause (iii), the provisions of Section 14 shall apply.
(d) Distribution-Related Tax Contests.
(i) In the event of any:
(A) Distribution-Related Tax Contest as a result of which Enhabit could reasonably be expected to become liable for any Tax or Tax-Related Losses and which Encompass has the right to administer and control pursuant to
Section 10.02(b) above (other than any Distribution-Related Tax Contest described in Section 10.02(d)(i)(B)), (1) Encompass shall consult with Enhabit reasonably in advance of taking any significant action in connection with such Tax Contest, (2) Encompass shall offer Enhabit a reasonable opportunity to comment before submitting any written materials prepared or furnished in connection with such Tax Contest, (3) Encompass shall defend such Tax Contest diligently and in good faith as if it were the only party in interest in connection with such Tax Contest, and (4) Encompass shall provide Enhabit copies of any written materials relating to such Tax Contest received from the relevant Tax Authority. Notwithstanding anything in the preceding sentence to the contrary, the final determination of the positions taken, including with respect to settlement or other disposition, in any Distribution-Related Tax Contest described in the preceding sentence, shall be made in the sole discretion of Encompass and shall be final and not subject to the dispute resolution provisions of Section 14 or of Article VII of the Separation Agreement.
(B) Distribution-Related Tax Contest as a result of which Enhabit could reasonably be expected to become liable for any portion of any Tax or Tax-Related Losses pursuant to Section 7.05(c)(i) and which Encompass has the right to administer and control pursuant to Section 10.02(b), (1) Encompass shall keep Enhabit reasonably informed with respect to such Tax Contest, (2) Encompass shall defend such Tax Contest diligently and in good faith as if it were the only party in interest in connection with such Tax Contest, and (3) Encompass shall provide Enhabit copies of any written materials relating to such Tax Contest received from the relevant Tax Authority.
(ii) In the event of any Distribution-Related Tax Contest with respect to any Enhabit Separate Return as a result of which Encompass could reasonably be expected to become liable for any Tax or Tax-Related Losses, (A) Enhabit shall consult with Encompass reasonably in advance of taking any significant action in connection with such Tax Contest, (B) Enhabit shall consult with Encompass and offer Encompass a reasonable opportunity to comment before submitting any written materials prepared or furnished in connection with such Tax Contest, (C) Enhabit shall defend such Tax Contest diligently and in good faith as if it were the only party in interest in connection with such Tax Contest, (D) Encompass shall be entitled to participate in such Tax Contest and receive copies of any written materials relating to such Tax Contest received from the relevant Tax Authority, and (E) Enhabit shall not settle, compromise or abandon any such Tax Contest without obtaining the prior written consent of Encompass, which consent shall not be unreasonably withheld; provided, however, that in the case of any Distribution-Related Tax Contest as a result of which Encompass could reasonably be expected to become liable for any Tax or Tax-Related Losses pursuant to Section 7.05(b) or Section 7.05(c)(i) and which Enhabit has the right to administer and control pursuant to Section 10.02(a), Encompass shall have the right to elect to assume control of such Tax Contest, in which case the provisions of Section 10.02(d)(i)(B) shall apply.
(e) Power of Attorney. Enhabit shall (and shall cause each member of the Enhabit Group to) execute and deliver to Encompass (or such member of the Encompass Group as
Encompass shall designate) any power of attorney or other similar document reasonably requested by Encompass (or such designee) in connection with any Tax Contest controlled by Encompass described in this Section 10 within two business days of such request.
Section 11. Effective Date; Termination of Prior Intercompany Tax Allocation Agreements. This Agreement shall be effective as of the date hereof. As of the date hereof, (a) all prior intercompany Tax allocation agreements or arrangements solely between or among Encompass and/or any of its Subsidiaries, on the one hand, and Enhabit and/or any of its Subsidiaries, on the other hand, including the Existing Tax Allocation Agreement, shall be terminated, and (b) amounts due under such agreements or arrangements as of the date hereof shall be settled as promptly as practicable after the date hereof. Subject to clause (b) of the preceding sentence, upon such termination and settlement, no further payments by or to Encompass or any of its Subsidiaries or by or to Enhabit or any of its Subsidiaries with respect to such agreements or arrangements shall be made, and all other rights and obligations resulting from such agreements or arrangements shall cease at such time. Any payments pursuant to such agreements or arrangements shall be disregarded for purposes of computing amounts due under this Agreement; provided, that to the extent appropriate, as determined by Encompass, payments made pursuant to such agreements or arrangements shall be credited to Enhabit or Encompass, respectively, in computing their respective obligations pursuant to this Agreement, in the event that such payments relate to a Tax liability that is the subject matter of this Agreement for a Tax Period that is the subject matter of this Agreement.
Section 12. Survival of Obligations. The representations, warranties, covenants and agreements set forth in this Agreement shall be unconditional and absolute and shall remain in effect without limitation as to time.
Section 13. Treatment of Payments; Tax Gross-Up.
Section 13.01 Treatment of Tax Indemnity and Tax Benefit Payments. In the absence of any change in Tax treatment under the Code or other applicable Tax Law and except as otherwise agreed between the Companies or as otherwise required by applicable law, for all Income Tax purposes, the Companies agree to treat, and to cause their respective Affiliates to treat, (a) any indemnity payment required by this Agreement or by the Separation Agreement (other than payments of interest) to be made (i) by Encompass to Enhabit as a contribution by Encompass to Enhabit occurring immediately prior to the Distribution and (ii) by Enhabit to Encompass as reasonably determined by Encompass; and (b) any payment of interest or State Income Taxes by or to a Tax Authority, as taxable or deductible, as the case may be, to the Company entitled under this Agreement to retain such payment or required under this Agreement to make such payment. The Parties shall cooperate in good faith (including, where relevant, by using commercially reasonable efforts to establish local payment arrangements between each Party’s Subsidiaries) to minimize or eliminate, to the extent permissible under applicable law, any Tax that would otherwise be imposed with respect to any payment required by this Agreement or by the Separation Agreement (or maximize the ability to obtain a credit for, or refund of, any such Tax).
Section 13.02 Tax Gross-Up. If, notwithstanding the manner in which payments described in Section 13.01(a) were reported, there is a Tax liability or an adjustment to a Tax
liability of a Company as a result of its receipt of a payment pursuant to this Agreement or the Separation Agreement, such payment shall be appropriately adjusted so that the amount of such payment, reduced by the amount of all Income Taxes payable with respect to the receipt thereof (but taking into account all correlative Tax Benefits resulting from the payment of such Income Taxes), shall equal the amount of the payment that the Company receiving such payment would otherwise be entitled to receive.
Section 13.03 Interest. Anything herein to the contrary notwithstanding, to the extent one Company makes a payment of interest to another Company under this Agreement, with respect to the period from (a) the date that the payor was required to make a payment to the payee to (b) the date that the payor actually made such payment, the interest payment shall be treated as interest expense to the payor (deductible to the extent provided by law) and as interest income by the payee (includible in income to the extent provided by law). The amount of the payment shall not be adjusted to take into account any associated Tax Benefit to the payor or increase in Tax to the payee.
Section 14. Disagreements. The Companies desire that collaboration will continue between them. Accordingly, they will try, and they will cause their respective Group members to try, to resolve in good faith all disagreements regarding their respective rights and obligations under this Agreement, including any amendments hereto. In furtherance thereof, in the event of any dispute or disagreement (a “Tax Advisor Dispute”) between any member of the Encompass Group and any member of the Enhabit Group as to the interpretation of any provision of this Agreement or the performance of obligations hereunder, representatives of the Tax departments of the Companies shall negotiate in good faith to resolve the Tax Advisor Dispute. If such good-faith negotiations do not resolve the Tax Advisor Dispute, then such Tax Advisor Dispute shall be resolved pursuant to the procedures set forth in Section 7.3 of the Separation Agreement (treating thirty (30) days from the receipt of a CEO Negotiation Request as having expired); provided, that any arbitrator selected in accordance with Section 7.3 of the Separation Agreement must be a Tax Advisor. Nothing in this Section 14 will prevent either Company from seeking injunctive relief if any delay resulting from the efforts to resolve the Tax Advisor Dispute through the procedures set forth in Section 7.3 of the Separation Agreement could result in serious and irreparable injury to such Company. Notwithstanding anything to the contrary in this Agreement, the Separation Agreement or any Ancillary Agreement, Encompass and Enhabit are the only members of their respective Groups entitled to commence a dispute resolution procedure under this Agreement, and each of Encompass and Enhabit will cause its respective Group members not to commence any dispute resolution procedure other than through such Party as provided in this Section 14.
Section 15. Late Payments. Any amount owed by one Party to another Party under this Agreement that is not paid when due shall bear interest at the Prime Rate plus two percent from the due date of the payment to the date paid. To the extent interest required to be paid under this Section 15 duplicates interest required to be paid under any other provision of this Agreement, interest shall be computed at the higher of the interest rate provided under this Section 15 or the interest rate provided under such other provision.
Section 16. Expenses. Except as otherwise provided in this Agreement, each Party and its Affiliates shall bear their own expenses incurred in connection with the preparation of Tax Returns, Tax Contests, and other matters related to Taxes under the provisions of this Agreement.
Section 17. General Provisions.
Section 17.01 Notices. All notices and other communications given hereunder by one Party to the other Party shall, unless otherwise specified herein, be in writing and shall be deemed to have been duly given or made on the date of receipt by the recipient thereof if received prior to 5:00 p.m. Birmingham, Alabama time (or otherwise on the next succeeding Business Day) if (a) served by personal delivery or by nationally recognized overnight courier service upon the Party for whom it is intended, (b) delivered by registered or certified mail, return receipt requested or (c) sent by e-mail; provided, that the e-mail transmission is promptly confirmed by telephone, a responsive electronic communication by the recipient thereof or otherwise or clearly evidenced (excluding out-of-office replies or other automatically generated responses) or is followed up within one (1) Business Day after e-mail by dispatch pursuant to one of the methods described in the foregoing clauses (a) and (b) of this Section 17.01. Such communications must be sent to the respective Parties at the following street addresses or e-mail addresses or at such street address or e-mail address previously made available or at such other street address or e-mail address for a Party as shall be specified for such purpose in a notice given in accordance with this Section 17.01) (it being understood that rejection or other refusal to accept or the inability to deliver because of changed street address or e-mail address of which no notice was given shall be deemed to be receipt of such communication as of the date of such rejection, refusal or inability to deliver):
| | |
If to Encompass, to:
Encompass Health Corporation
9001 Liberty Parkway
Birmingham, AL 35242
Attention: Chief Tax Officer
Email: * * *
|
| | |
with copies to:
Encompass Health Corporation
9001 Liberty Parkway
Birmingham, AL 35242
Attention: General Counsel
Email: * * *
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Igor Kirman Elina Tetelbaum Zachary S. Podolsky E-mail: IKirman@wlrk.com ETetelbaum@wlrk.com ZSPodolsky@wlrk.com Facsimile: (212) 403-2000 |
If to Enhabit, to:
Enhabit, Inc. 6688 N. Central Expressway Suite 1300
Dallas, TX 75206
Attention: General Counsel
Email: * * * |
| | |
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Igor Kirman Elina Tetelbaum Zachary S. Podolsky E-mail: IKirman@wlrk.com ETetelbaum@wlrk.com ZSPodolsky@wlrk.com Facsimile: (212) 403-2000
and to:
Bradley Arant Boult Cummings LLP One Federal Place 1819 5th Avenue N. Birmingham, Alabama 35209 Attention: Charles Roberts Stephen Hinton Email: croberts@bradley.com shinton@bradley.com |
A Party may, by notice to the other Party, change the address to which such notices are to be given.
Section 17.02 Waiver of Default. Waiver by a Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the other Party. No failure or delay by a Party in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof prejudice any other or further exercise thereof or the exercise of any other right, power or privilege.
Section 17.03 Severability. If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.
Section 17.04 Corporate Power. Encompass represents on behalf of itself and each other member of the Encompass Group, and Enhabit represents on behalf of itself and each other member of the Enhabit Group, as follows:
(a) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement; and
(b) this Agreement has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms hereof.
Section 17.05 Performance. Encompass will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement to be performed by any member of the Encompass Group. Enhabit will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement to be performed by any member of the Enhabit Group. Each Party (including its permitted successors and assigns) further agrees that it will (a) give timely notice of the terms, conditions and continuing obligations contained in this Agreement to all of the other members of its Group and (b) cause all of the other members of its Group not to take any action or fail to take any such action inconsistent with such Party’s obligations under this Agreement.
Section 17.06 Entire Agreement. This Agreement, together with each of the exhibits, schedules and appendices hereto and the specific agreements contemplated hereby, contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties other than those set forth or referred to herein and in the Separation Agreement and the other Ancillary Agreements. This Agreement, the Separation Agreement, and the other Ancillary Agreements together govern the arrangements in connection with the Separation Transactions and would not have been entered into independently. In the event of any conflict or inconsistency between the terms of this Agreement and the terms of the Separation Agreement or any other Ancillary Agreement, the terms of this Agreement shall control with respect to the subject matter addressed herein to the extent of such conflict or inconsistency.
Section 17.07 Headings. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
Section 17.08 Interpretation. In this Agreement, (a) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other genders as the context requires; (b) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the schedules, exhibits and appendices hereto) and not to any particular provision of this Agreement; (c) Article, Section, Schedule, Exhibit and Appendix references are to the articles, sections, schedules, exhibits and appendices to this Agreement unless otherwise specified; (d) unless otherwise stated, all references to any agreement (including this Agreement) shall be deemed to include the exhibits, schedules and annexes to such agreement; (e) the word “including” and words of similar import when used in this Agreement shall mean “including, without limitation,” unless otherwise specified; (f) the word “or” shall not be exclusive; (g) unless otherwise specified in a particular case, the word “days” refers to calendar days; (h) references herein to this Agreement or any other agreement contemplated herein shall be deemed to refer to this Agreement or such other agreement as of the date on which it is executed
and as it may be amended, modified or supplemented thereafter, unless otherwise specified; and (i) unless expressly stated to the contrary in this Agreement, all references to “the date hereof,” “the date of this Agreement,” “hereby” and “hereupon” and words of similar import shall all be references to June 30, 2022.
Section 17.09 Counterparts. Each Party acknowledges that it and the other Party may execute this Agreement by facsimile, stamp, electronic (including DocuSign) or mechanical signature, and that delivery of an executed counterpart of a signature page to this Agreement (whether executed by manual, stamp, electronic (including DocuSign) or mechanical signature) by facsimile or by e-mail in portable document format (PDF) shall be effective as delivery of such executed counterpart of this Agreement. Each Party expressly adopts and confirms each such facsimile, stamp, electronic (including via DocuSign) or mechanical signature (regardless of whether delivered in person, by mail, by courier, by facsimile or by e-mail in portable document format (PDF)) made in its respective name as if it were a manual signature delivered in person, agrees that it will not assert that any such signature or delivery is not adequate to bind such Party to the same extent as if it were signed manually and delivered in person and agrees that, at the reasonable request of the other Party at any time, it will as promptly as reasonably practicable cause this Agreement to be manually executed (any such execution to be as of the date of the initial date hereof) and delivered in person, by mail or by courier. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party.
Section 17.10 Governing Law. This Agreement (and any claims or disputes arising out of or related hereto or to the transactions contemplated hereby or to the inducement of any party to enter herein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware irrespective of the choice-of-laws principles of the State of Delaware, including all matters of validity, construction, effect, enforceability, performance and remedies.
Section 17.11 Amendments. No provisions of this Agreement shall be deemed waived, amended, supplemented or modified by a Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom it is sought to enforce such waiver, amendment, supplement or modification.
Section 17.12 Enhabit Subsidiaries. If, at any time, Enhabit acquires or creates one or more Subsidiaries that are includable in the Enhabit Group, they shall be subject to this Agreement and all references to the Enhabit Group herein shall thereafter include a reference to such Subsidiaries.
Section 17.13 Assignability. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns (including but not limited to any successor of Encompass or Enhabit succeeding to the Tax Attributes of either under Section 381 of the Code); provided, however, that neither Party may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other Party. Notwithstanding the foregoing, no such consent shall be required for the assignment of a Party’s rights and obligations under this Agreement in whole (i.e., the assignment of a Party’s rights and obligations under this Agreement all at the same time) in connection with a Change of Control of a Party so long as the resulting, surviving or transferee Person assumes all the obligations of such Party by operation of Law or pursuant to an agreement in form and substance reasonably satisfactory to the other Party.
Section 17.14 Third-Party Beneficiaries. Except for the indemnification rights under this Agreement of any Encompass Affiliate or Enhabit Affiliate, and any officer, director or employee thereof, in their respective capacities as such, (a) the provisions of this Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person except the Parties any rights or remedies hereunder, and (b) there are no third-party beneficiaries of this Agreement, and this Agreement shall not provide any third person with any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement.
Section 17.15 Force Majeure. No Party shall be deemed in default of this Agreement for any delay or failure to fulfill any obligation (other than a payment obligation) hereunder so long as and to the extent to which any delay or failure in the fulfillment of such obligation is prevented, frustrated, hindered or delayed as a consequence of circumstances of Force Majeure. In the event of any such excused delay, the time for performance of such obligations (other than a payment obligation) shall be extended for a period equal to the time lost by reason of the delay. A Party claiming the benefit of this provision shall, as soon as reasonably practicable after the occurrence of any such event, (a) provide written notice to the other Party of the nature and extent of any such Force Majeure condition; and (b) use commercially reasonable efforts to remove any such causes and resume performance under this Agreement as soon as reasonably practicable.
Section 17.16 No Set-Off. Except as expressly set forth in this Agreement or as otherwise mutually agreed to in writing by the Parties, neither Party nor any member of such Party’s Group shall have any right of set-off or other similar rights with respect to (a) any amounts received pursuant to this Agreement; or (b) any other amounts claimed to be owed to the other Party or any member of its Group arising out of this Agreement.
Section 17.17 Expenses. Except as otherwise expressly set forth in this Agreement or as otherwise agreed to in writing by the Parties, all fees, costs and expenses incurred on or prior to the Effective Time in connection with the preparation, execution, delivery and implementation of this Agreement will be borne by the Party or its applicable Subsidiary incurring such fees, costs or expenses.
Section 17.18 Mutual Drafting. This Agreement shall be deemed to be the joint work product of the Parties and any rule of construction that a document shall be interpreted or construed against a drafter of such document shall not be applicable.
Section 17.19 Specific Performance. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the Party or Parties who are, or are to be, thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief in respect of its or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived by each of the Parties.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above.
Encompass Health Corporation
By: /s/ Douglas E. Coltharp
Name: Douglas E. Coltharp
Title: Executive Vice President and Chief Financial Officer
Enhabit, Inc.
By: /s/ Crissy Carlisle
Name: Crissy Carlisle
Title: Chief Financial Officer
EMPLOYEE MATTERS AGREEMENT
BY AND BETWEEN
ENCOMPASS HEALTH CORPORATION
AND
ENHABIT, INC.
DATED AS OF JUNE 30, 2022
TABLE OF CONTENTS
Page
EMPLOYEE MATTERS AGREEMENT
This EMPLOYEE MATTERS AGREEMENT, dated as of June 30, 2022 (this “Agreement”), is by and between Encompass Health Corporation, a Delaware corporation (“Encompass”), and Enhabit, Inc., a Delaware corporation (“Enhabit”).
R E C I T A L S:
WHEREAS, the board of directors of Encompass (the “Encompass Board”) has determined that it is in the best interests of Encompass and its stockholders for Enhabit to operate the Enhabit Business as a separate, publicly traded company;
WHEREAS, in furtherance of the foregoing, the Encompass Board has determined that it is appropriate and desirable to separate the Enhabit Business from the other businesses conducted by Encompass (the “Separation”) and, following the Separation, make a distribution, on a pro rata basis, to holders of Encompass Shares on the Record Date of all of the outstanding Enhabit Shares (the “Distribution”);
WHEREAS, Enhabit and Encompass have prepared, and Enhabit has filed with the SEC, the Form 10, which includes the Information Statement and which sets forth disclosures concerning Enhabit, the Separation and the Distribution;
WHEREAS, in order to effectuate the Separation and Distribution, Encompass and Enhabit have entered into a Separation and Distribution Agreement, dated as of the date hereof (the “Separation and Distribution Agreement”);
WHEREAS, in addition to the matters addressed by the Separation and Distribution Agreement, the Parties desire to enter into this Agreement to set forth the terms and conditions of certain employment, compensation and benefit matters; and
WHEREAS, the Parties acknowledge that this Agreement, the Separation and Distribution Agreement and the other Ancillary Agreements represent the integrated agreement of Encompass and Enhabit relating to the Separation and the Distribution, are being entered into together and would not have been entered into independently.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings, and capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Separation and Distribution Agreement.
“Affiliates” shall have the meaning set forth in the Separation and Distribution Agreement.
“Agreement” shall have the meaning set forth in the Preamble to this Agreement and shall include all Schedules hereto and all amendments, modifications, and changes hereto entered into pursuant to Section 10.14 of the Separation and Distribution Agreement (Amendments).
“Ancillary Agreements” shall have the meaning set forth in the Separation and Distribution Agreement.
“Assets” shall have the meaning set forth in the Separation and Distribution Agreement.
“Benefit Plan” shall mean any contract, agreement, policy, practice, program, plan, trust, commitment or arrangement providing for benefits, perquisites or compensation of any nature from an employer to any Employee or Former Employee, or to any family member, dependent, or beneficiary of any such Employee or Former Employee, including cash or deferred arrangement plans, profit-sharing plans, post-employment programs, pension plans, supplemental pension plans, welfare plans, stock purchase, and contracts, agreements, policies, practices, programs, plans, trusts, commitments and arrangements providing for terms of employment, fringe benefits, severance benefits, change-incontrol protections or benefits, life, accidental death and dismemberment, disability and accident insurance, tuition reimbursement, adoption assistance, travel reimbursement, vacation, sick, personal or bereavement days, leaves of absences and holidays; provided, however, that the term “Benefit Plan” does not include any government-sponsored benefits, such as workers’ compensation, unemployment or any similar plans, programs or policies or Individual Agreements.
“COBRA” shall mean the U.S. Consolidated Omnibus Budget Reconciliation Act of 1985, as codified at Section 601 et seq. of ERISA and at Section 4980B of the Code and including all regulations promulgated thereunder.
“Director Deferred Compensation Plan” shall mean the HealthSouth Corporation Directors’ Deferred Stock Investment Plan, as amended from time to time.
“Distribution” shall have the meaning set forth in the Recitals.
“Distribution Date” shall have the meaning set forth in the Separation and Distribution Agreement.
“Effective Time” shall have the meaning set forth in the Separation and Distribution Agreement.
“Employee” shall mean any Encompass Group Employee or Enhabit Group Employee.
“Encompass” shall have the meaning set forth in the Preamble.
“Encompass 401(k) Plan” shall mean the Encompass Health Retirement Investment Plan.
“Encompass Awards” shall mean Encompass Option Awards, Encompass Performance Share Unit Awards, Encompass Restricted Stock Awards and Encompass RSU Awards, collectively.
“Encompass Benefit Plan” shall mean any Benefit Plan established, sponsored or maintained by Encompass or any of its Subsidiaries immediately prior to the Effective Time, but excluding any Enhabit Benefit Plan.
“Encompass Board” shall have the meaning set forth in the Recitals.
“Encompass Compensation Committee” shall mean the Compensation and Human Capital Committee of the Encompass Board.
“Encompass Deferred Compensation Plans” shall mean: Encompass Health Corporation Nonqualified 401(k) Plan, as amended from time to time and the Director Deferred Compensation Plan.
“Encompass Group Employees” shall have the meaning set forth in Section 3.01(a)(ii).
“Encompass Non-Equity Incentive Practices” shall mean the corporate non-equity incentive practices of the Encompass Group.
“Encompass Omnibus Plan” shall mean any equity compensation plan sponsored or maintained by the Encompass immediately prior to the Effective Time, including the 2004 Amended and Restated Director Incentive Plan, 2008 Equity Incentive Plan and the HealthSouth Corporation 2016 Omnibus Performance Incentive Compensation Plan, as amended from time to time.
“Encompass Option Award” shall mean an award of options to purchase Encompass Shares granted pursuant to an Encompass Omnibus Plan that is outstanding as of immediately prior to the Effective Time.
“Encompass Performance Share Unit Award” shall mean a performance share unit award outstanding as of immediately prior to the Effective Time that is subject to performance-based vesting, granted pursuant to the Encompass Omnibus Plan.
“Encompass Ratio” shall mean the quotient obtained by dividing (a) the Pre-Separation Encompass Stock Value by (b) the Post-Separation Encompass Stock Value.
“Encompass Restricted Stock Award” shall mean a restricted stock award outstanding immediately prior to the Effective Time that is not subject to performance-based vesting conditions, granted pursuant to the Encompass Omnibus Plan.
“Encompass RSU Award” shall mean a restricted stock unit award outstanding as of immediately prior to the Effective Time that is not subject to performance-based vesting conditions, granted pursuant to the Encompass Omnibus Plan.
“Encompass Shares” shall have the meaning set forth in the Separation and Distribution Agreement.
“Encompass Welfare Plan” shall mean any Encompass Benefit Plan that is a Welfare Plan.
“Enhabit” shall have the meaning set forth in the Preamble.
“Enhabit 401(k) Plan” shall mean the Encompass Home Health Savings Plan.
“Enhabit Awards” shall mean Enhabit Option Awards and Enhabit Restricted Stock Awards, collectively.
“Enhabit Benefit Plan” shall mean any Benefit Plan established, sponsored, maintained or contributed to by a member of the Enhabit Group as of or after the Effective Time.
“Enhabit Business” shall have the meaning set forth in the Separation and Distribution Agreement.
“Enhabit Designees” shall have the meaning set forth in the Separation and Distribution Agreement.
“Enhabit Group Employees” shall have the meaning set forth in Section 3.01(a)(i).
“Enhabit Non-Equity Incentive Practices” shall mean the corporate non-equity incentive practices, as established by Enhabit as of the Effective Time pursuant to Section 4.03(a).
“Enhabit Omnibus Plan” shall mean the Enhabit 2022 Omnibus Performance Incentive Plan, as established by Enhabit as of the Effective Time pursuant to Section 4.01.
“Enhabit Option Award” shall mean an award of stock options assumed and granted by Enhabit pursuant to the Enhabit Omnibus Plan in accordance with Section 4.02(a).
“Enhabit Ratio” shall mean the quotient obtained by dividing (a) the Pre-Separation Encompass Stock Value by (b) the Enhabit Stock Value.
“Enhabit Restricted Stock Award” shall mean an award of restricted stock that is not subject to performance-based vesting conditions, assumed and granted pursuant to the Enhabit Omnibus Plan in accordance with Section 4.02(b) or Section 4.02(c), as applicable.
“Enhabit Shares” shall have the meaning set forth in the Separation and Distribution Agreement.
“Enhabit Stock Value” shall mean the closing per-share price of Enhabit Shares on the NYSE on the first regular trading session (9:30 a.m. to 4:00 p.m. EST) commencing after the Effective Time.
“Enhabit Welfare Plan” shall mean a Welfare Plan established, sponsored, maintained or contributed to by any member of the Enhabit Group for the benefit of Enhabit Group Employees and Former Enhabit Group Employees.
“ERISA” shall mean the U.S. Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.
“Former Employees” shall mean Former Encompass Group Employees and Former Enhabit Group Employees.
“Former Encompass Group Employee” shall mean any individual who is a former employee of the Encompass Group as of the Effective Time and who is not a Former Enhabit Group Employee.
“Former Enhabit Group Employee” shall mean any individual who is a former employee of a Subsidiary that is part of the Enhabit Group as of immediately prior to termination of employment and whose termination of employment occurred prior to the Effective Time.
“Group” shall mean either the Enhabit Group or the Encompass Group, as the context requires.
“Individual Agreement” shall mean any individual (a) employment contract, (b) retention, severance or change-in-control agreement, or (c) other agreement containing restrictive covenants (including confidentiality, noncompetition and nonsolicitation provisions) between a member of the Encompass Group and an Enhabit Group Employee or any Former Enhabit Group Employee, as in effect immediately prior to the Effective Time.
“Information Statement” shall have the meaning set forth in the Separation and Distribution Agreement.
“Labor Agreement” shall have the meaning set forth in Section 2.01.
“Law” shall have the meaning set forth in the Separation and Distribution Agreement.
“Liabilities” shall have the meaning set forth in the Separation and Distribution Agreement.
“Parties” shall mean the parties to this Agreement.
“Person” shall have the meaning set forth in the Separation and Distribution Agreement.
“Post-Separation Encompass Awards” shall mean Post-Separation Encompass Option Awards, Post-Separation Encompass Performance Share Unit Awards, Post-Separation Encompass Restricted Stock Awards and Post-Separation Encompass RSU Awards, collectively.
“Post-Separation Encompass Option Award” shall mean an Encompass Option Award, as adjusted as of the Effective Time in accordance with Section 4.02(a).
“Post-Separation Encompass Performance Share Unit Award” shall mean an Encompass Performance-Based Unit Award, as adjusted as of the Effective Time in accordance with Section 4.02(c), as applicable.
“Post-Separation Encompass Restricted Stock Award” shall mean an Encompass Restricted Stock Award, as adjusted as of the Effective Time in accordance with Section 4.02(d).
“Post-Separation Encompass RSU Award” shall mean an Encompass RSU Award, as adjusted as of the Effective Time in accordance with Section 4.02(d).
“Post-Separation Encompass Stock Value” shall mean the closing per-share price of Encompass Shares on the NYSE on the first regular trading session (9:30 a.m. to 4:00 p.m. EST) commencing after the Effective Time.
“Pre-Separation Encompass Stock Value” shall mean the closing per-share price of Encompass Shares trading “regular way with due bills” on the NYSE on the last regular trading session (9:30 am to 4:00 pm EST) ending prior to the Effective Time.
“Record Date” shall have the meaning set forth in the Separation and Distribution Agreement.
“Restricted Employees” shall have the meaning set forth in Section 3.04(a).
“Securities Act” shall mean the U.S. Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder.
“Separation” shall have the meaning set forth in the Recitals.
“Separation and Distribution Agreement” shall have the meaning set forth in the
Recitals.
“Subsidiary” shall have the meaning set forth in the Separation and Distribution Agreement.
“Tax” shall have the meaning set forth in the Separation and Distribution Agreement.
“Third Party” shall have the meaning set forth in the Separation and Distribution Agreement.
“Transferred Director” shall mean each Enhabit nonemployee director as of immediately after the Effective Time who last served on the Encompass Board on May 5, 2022.
“U.S.” shall mean the United States of America.
“Welfare Plan” shall mean any “welfare plan” (as defined in Section 3(1) of ERISA) or a “cafeteria plan” under Section 125 of the Code, and any benefits offered thereunder, and any other plan offering health benefits (including medical, prescription drug, dental, vision, mental health, substance abuse and retiree health), disability benefits, or life, accidental death and dismemberment, and business travel insurance, pre-Tax premium conversion benefits, dependent care assistance programs, employee assistance programs, paid time off programs, contribution funding toward a health savings account, flexible spending accounts or severance.
Section 1.02. Interpretation. Section 10.15 of the Separation and Distribution Agreement is hereby incorporated by reference.
ARTICLE II
GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES
Section 2.01. General Principles. All provisions herein shall be subject to the requirements of all applicable Law and any collective bargaining, works council or similar agreement or arrangement with any labor union, works council or other labor representative (each, a “Labor Agreement”). Notwithstanding anything in this Agreement to the contrary, if the terms of a Labor Agreement or applicable Law require that any Assets or Liabilities be retained or assumed by, or transferred to, a Party in a manner that is different than what is set forth in this Agreement, such retention, assumption or transfer shall be made in accordance with the terms of such Labor Agreement and applicable Law and shall not be made as otherwise set forth in this Agreement; provided that, in such case, the Parties shall take all necessary action to preserve the economic terms of the allocation of Assets and Liabilities contemplated by this Agreement. The provisions of this Agreement shall apply in respect of all jurisdictions.
(a) Acceptance and Assumption of Enhabit Liabilities. Except as otherwise provided by this Agreement, on or prior to the Effective Time, but in any case prior to the Distribution, Enhabit and the applicable Enhabit Designees shall accept, assume and agree faithfully to perform, discharge and fulfill all of the following Liabilities in accordance with their respective terms (each of which shall be considered an Enhabit Liability), regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to, at or subsequent to the Effective Time, regardless of where or against whom such Liabilities are asserted or determined (including any Liabilities arising out of claims made by Encompass’s or Enhabit’s respective directors, officers, Employees, Former Employees, agents, Subsidiaries or Affiliates against any member of the Encompass Group or the Enhabit Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the Encompass Group or the Enhabit Group, or any of their respective directors, officers, Employees, Former Employees, agents, Subsidiaries or Affiliates:
(i) any and all wages, salaries, incentive compensation, equity compensation, commissions, bonuses and any other employee compensation or benefits payable to or on behalf of any Enhabit Group Employees and Former Enhabit Group Employees after the Effective Time, without regard to when such wages, salaries, incentive compensation, equity compensation, commissions, bonuses or other employee compensation or benefits are or may have been awarded or earned;
(ii) any and all Liabilities whatsoever with respect to claims under an Enhabit Benefit Plan;
(iii) any and all Liabilities arising out of, relating to or resulting from the employment, or termination of employment of all Enhabit Group Employees and Former Enhabit Group Employees; and
(iv) any and all Liabilities expressly assumed or retained by any member of the Enhabit Group pursuant to this Agreement.
(b) Acceptance and Assumption of Encompass Liabilities. Except as otherwise provided by this Agreement, on or prior to the Effective Time, but in any case prior to the Distribution, Encompass and certain members of the Encompass Group designated by Encompass shall accept, assume and agree faithfully to perform, discharge and fulfill all of the following Liabilities in accordance with their respective terms (each of which shall be considered an Encompass Liability), regardless of when or where such Liabilities arose or arise, or whether the facts on which they are based occurred prior to, at or subsequent to the Effective Time, regardless of where or against whom such Liabilities are asserted or determined (including any Liabilities arising out of claims made by Encompass’s or Enhabit’s respective directors, officers, Employees, Former Employees, agents, Subsidiaries or Affiliates against any member of the Encompass Group or the Enhabit Group) or whether asserted or determined prior to the date hereof, and regardless of whether arising from or alleged to arise from negligence, recklessness, violation of Law, fraud or misrepresentation by any member of the Encompass Group or the Enhabit Group, or any of their respective directors, officers, Employees, Former Employees, agents, Subsidiaries or Affiliates:
(i) any and all wages, salaries, incentive compensation, equity compensation, commissions, bonuses and any other employee compensation or benefits payable to or on behalf of any Encompass Group Employees and Former Encompass Group Employees after the Effective Time, without regard to when such wages, salaries, incentive compensation, equity compensation, commissions, bonuses or other employee compensation or benefits are or may have been awarded or earned;
(ii) any and all Liabilities whatsoever with respect to claims under an Encompass Benefit Plan;
(iii) any and all Liabilities arising out of, relating to or resulting from the employment, or termination of employment of all Encompass Group Employees and Former Encompass Group Employees; and
(iv) any and all Liabilities expressly assumed or retained by any member of the Encompass Group pursuant to this Agreement.
(c) Unaddressed Liabilities. To the extent that this Agreement does not address particular Liabilities under any Benefit Plan and the Parties later determine that they should be allocated in connection with the Distribution, the Parties shall agree in good faith on the allocation, taking into account the handling of comparable Liabilities under this Agreement.
(d) Employment Litigation. Notwithstanding anything contained herein to the contrary, Liabilities arising out of litigation involving Employees and Former Employee with respect to the termination of employment or violation of restrictive covenants shall be governed by the Separation and Distribution Agreement.
Section 2.02. Service Credit Recognized by Enhabit and Enhabit Benefit Plans.
(a) Service Credit Generally. As of the Effective Time, the Enhabit Benefit Plans shall, and Enhabit shall cause each member of the Enhabit Group to, recognize each Enhabit Group Employee’s and each Former Enhabit Group Employee’s full service with Encompass or any of its Subsidiaries or predecessor entities at or prior to the Effective Time, to the same extent that such service was recognized by Encompass for similar purposes prior to the Effective Time as if such full service had been performed for a member of the Enhabit Group, for purposes of eligibility, vesting and determination of level of benefits under any Enhabit Benefit Plans.
(b) No Duplication or Acceleration of Benefits. Notwithstanding anything to the contrary in this Agreement, the Separation and Distribution Agreement or any Ancillary Agreement, no participant in any Benefit Plan shall receive service credit or benefits or recognition of compensation or other factors to the extent that receipt of such service credit or benefits or recognition of compensation or other factors would result in duplication of benefits provided to such participant by the corresponding Benefit Plan or any other plan, program or arrangement sponsored or maintained by a member of the Group that sponsors the corresponding Benefit Plan. Furthermore, unless expressly provided for in this Agreement, the Separation and Distribution Agreement or in any Ancillary Agreement or required by applicable Law, no provision in this Agreement shall be construed to (i) create any right to accelerate vesting distributions or entitlements under any Benefit Plan sponsored or maintained by a member of the Encompass Group or member of the Enhabit Group on the part of any Employee or Former Employee or (ii) limit the ability of a member of the Encompass Group or Enhabit Group to amend, merge, modify, eliminate, reduce or otherwise alter in any respect any benefit under any Benefit Plan sponsored or maintained by a member of the Encompass Group or Enhabit Group, respectively, or any trust, insurance policy or funding vehicle related thereto.
(c) Beneficiaries. References to Encompass Group Employees, Former Encompass Group Employees, Enhabit Group Employees, Former Enhabit Group Employees, and current and former nonemployee directors of either Encompass or Enhabit shall be deemed to refer to their beneficiaries, dependents, survivors and alternate payees, as applicable.
ARTICLE III
ASSIGNMENT OF EMPLOYEES
Section 3.01. Active Employees.
(a) Assignment and Transfer of Employees. Effective as of no later than the Effective Time and except as otherwise agreed to by the Parties, (i) the applicable member of the Encompass Group shall have taken such actions as are necessary to ensure that each individual who is intended to be an employee of the Enhabit Group as of immediately after the Effective Time (including any such individual who is not actively working as of the Effective Time as a result of an illness, injury or an approved leave of absence) (collectively, the “Enhabit Group Employees”) is employed by a member of the Enhabit Group as of immediately after the Effective Time, and (ii) the applicable member of the Encompass Group shall have taken such actions as are necessary to ensure that each individual who is intended to be an employee of the Encompass Group as of immediately after the Effective Time (including any such individual who is not actively working as of the Effective Time as a result of an illness, injury or an approved leave of absence) and any other individual employed by the Encompass Group as of the Effective Time who is not an Enhabit Group Employee (collectively, the “Encompass Group Employees”) is employed by a member of the Encompass Group as of immediately after the Effective Time. Each of the Parties agrees to execute, and to seek to have the applicable Employees execute, such documentation, if any, as may be necessary to reflect such assignment and/or transfer.
(b) At-Will Status. Nothing in this Agreement shall create any obligation on the part of any member of the Encompass Group or any member of the Enhabit Group to (i) continue the employment of any Employee or permit the return from a leave of absence for any period after the date of this Agreement (except as required by applicable Law) or (ii) change the employment status of any Employee from “at-will,” to the extent that such Employee is an “at-will” employee under applicable Law. Except as provided in this Agreement, this Agreement shall not limit the ability of the Encompass Group or the Enhabit Group to change the position, compensation or benefits of any Employees for performance-related, business or any other reason.
(c) Non-compete, Severance, Change in Control, or Other Payments. The Parties acknowledge and agree that the Separation, Distribution and the assignment, transfer or continuation of the employment of Employees as contemplated by this Section 3.01 shall not be deemed an involuntary termination of employment entitling any Enhabit Group Employee or Encompass Group Employee to non-compete, severance, change in control, or other payments or benefits.
(d) Not a Change in Control. The Parties acknowledge and agree that neither the consummation of the Separation, Distribution nor any transaction contemplated by this Agreement, the Separation and Distribution Agreement or any other Ancillary Agreement shall be deemed a “change in control,” “change of control,” or term of similar import for purposes of any Benefit Plan sponsored or maintained by any member of the Encompass Group or member of the Enhabit Group and except as provided in this Agreement or as otherwise required by applicable Law or Individual Agreement, no provision of this Agreement shall be construed to accelerate any vesting or create an right or entitlement to any compensation or benefits on the part of any Employee.
Section 3.02. Individual Agreements.
(a) Assignment by Encompass. To the extent necessary, Encompass shall assign, or cause an applicable member of the Encompass Group to assign, to Enhabit or another member of the Enhabit Group, as designated by Enhabit, all Individual Agreements (other than any provision relating to restrictive covenants), with such assignment to be effective as of no later than the Effective Time; provided, however, that to the extent that assignment of any such Individual Agreement is not permitted by the terms of such agreement or by applicable Law, effective as of the Effective Time, each member of the Enhabit Group shall be considered to be a successor to each member of the Encompass Group for purposes of, and a third-party beneficiary with respect to, such Individual Agreement, such that each member of the Enhabit Group shall enjoy all the rights and benefits under such agreement (including rights and benefits as a third-party beneficiary); provided, further, that in no event shall Encompass be permitted to enforce any Individual Agreement (including any agreement containing noncompetition or nonsolicitation covenants) against an Enhabit Group Employee or Former Enhabit Group Employee for action taken in such individual’s capacity as an Enhabit Group Employee or Former Enhabit Group Employee.
(b) Assumption by Enhabit. Effective as of the Effective Time, Enhabit shall, or shall cause the members of the Enhabit Group to, assume and honor any Individual Agreement to the extent assigned, including any obligations thereunder to which any Enhabit Group Employee or Former Enhabit Group Employee is a party with any member of the Encompass Group.
Section 3.03. Consultation with Labor Representatives; Labor Agreements. The Parties shall cooperate to notify, inform and/or consult with any labor union, works council or other labor representative regarding the Separation and Distributions to the extent required by Law or a Labor Agreement. No later than as of immediately before the Effective Time, Enhabit shall have taken, or caused another member of the Enhabit Group to take, all actions that are necessary (if any) for Enhabit or another member of the Enhabit Group to (a) assume any Labor Agreements in effect with respect to Enhabit Group Employees and Former Enhabit Group Employees (excluding obligations thereunder with respect to any Encompass Group Employees or Former Encompass Group Employees, to the extent applicable) and (b) unless otherwise provided in this Agreement, assume and honor any obligations of the Encompass Group under any Labor Agreements as such obligations relate to Enhabit Group Employees and Former Enhabit Group Employees. No later than as of immediately before the Effective Time, Encompass shall have taken, or caused another member of the Encompass Group to take, all actions that are necessary (if any) for Encompass or another member of the Encompass Group to (a) assume any Labor Agreements in effect with respect to Encompass Group Employees and Former Encompass Group Employees (excluding obligations thereunder with respect to any Enhabit Group Employees, or Former Enhabit Group Employees, the extent applicable) and (b) assume and honor any obligations of the Enhabit Group under any Labor Agreements as such obligations relate to Encompass Group Employees and Former Encompass Group Employees.
Section 3.04. Non-Solicitation; Non-Hire
(a) Non-Solicitation, Non-Hire. Each Party agrees that, for the period of one (1) year immediately following the Effective Time, such Party shall, and shall cause each
member in its Group, to not solicit for employment or hire any individual who is an employee at the level of director (eligible to participate in the Party’s senior management bonus plan) or above of a member of the other Group as of immediately prior to the Effective Time (“Restricted Employees”); provided that the foregoing restrictions shall not apply to: (i) any Restricted Employee who terminates employment at least six (6) months prior to the applicable solicitation and/or hiring, (ii) the solicitation of a Restricted Employee whose employment was involuntarily terminated by the employing Party in a severance qualifying termination before the employment discussions with the soliciting Party commenced, and (iii) any Restricted Employee whose prospective employment is agreed to in writing by the soliciting Party and the employing Party, or in the case of a Restricted Employee who is not currently employed, the Party who last employed Restricted Employee; and provided, further, that it shall not be deemed to be a violation of the non-solicitation covenant of this Section 3.04 for either Party, or the members of its Group, to post a general solicitation that is not targeted at Restricted Employees of the other Party and the members of its Group.
(b) Remedies; Enforcement. Each Party acknowledges and agrees that (i) injury to the employing Party from any breach by the other Party of the obligations set forth in this Section 3.04 would be irreparable and impossible to measure and (ii) the remedies at Law for any breach or threatened breach of this Section 3.04, including monetary damages, would therefore be inadequate compensation for any loss and the employing Party shall have the right to specific performance and injunctive or other equitable relief in accordance with this Section 3.04, in addition to any and all other rights and remedies at Law or in equity, and all such rights and remedies shall be cumulative. Each Party understands and acknowledges that the restrictive covenants and other agreements contained in this Section 3.04 are an essential part of this Agreement and the transactions contemplated hereby. It is the intent of the Parties that the provisions of this Section 3.04 shall be enforced to the fullest extent permissible under applicable Law applied in each jurisdiction in which enforcement is sought. If any particular provision or portion of this Section 3.04 shall be adjudicated to be invalid or unenforceable, such provision or portion thereof shall be deemed amended to the minimum extent necessary to render such provision or portion valid and enforceable, such amendment to apply only with respect to the operation of such provision or portion thereof in the particular jurisdiction in which such adjudication is made.
ARTICLE IV
EQUITY, INCENTIVE AND EXECUTIVE COMPENSATION
Section 4.01. Generally. Each Encompass Award that is outstanding as of immediately prior to the Effective Time shall be adjusted as described below; provided, however, that, prior to the Effective Time, the Encompass Compensation Committee may provide for different adjustments with respect to some or all Encompass Awards to the extent that the Encompass Compensation Committee deems such adjustments necessary and appropriate. Any adjustments made by the Encompass Compensation Committee pursuant to the foregoing sentence shall be deemed incorporated by reference herein as if fully set forth below and shall be binding on the Parties and their respective Affiliates. Before the Effective Time, the Enhabit Omnibus Plan shall be established, with such terms as are necessary to permit the implementation of the provisions of Section 4.02.
Section 4.02. Equity Incentive Awards.
(a) Option Awards. Each Encompass Option Award that is outstanding immediately prior to the Effective Time shall be converted as of the Effective Time into either a Post-Separation Encompass Option Award or an Enhabit Option Award as described below:
(i) Each Encompass Option Award held by an Encompass Group Employee and Former Employee shall be converted as of the Effective Time, through an adjustment thereto, into a Post-Separation Encompass Option Award and shall, except as otherwise provided in this Section 4.02(a), be subject to the same terms and conditions (including with respect to vesting and expiration) after the Effective Time as applicable to such Encompass Option Award immediately prior to the Effective Time. From and after the Effective Time:
(A) the number of Encompass Shares subject to such Post-Separation Encompass Option Award, shall be equal to the sum of all the Encompass Shares subject to all tranches of the Award where the number of Encompass Shares of each tranche is equal to the product, rounded down to the nearest whole number of shares for each tranche, obtained by multiplying (1) the number of Encompass Shares subject to the corresponding tranche of the Encompass Option Award immediately prior to the Effective Time, by (2) the Encompass Ratio; and
(B) the per share exercise price of such Post-Separation Encompass Option Award, rounded up to the nearest cent, shall be equal to the quotient obtained by dividing (1) the per share exercise price of the corresponding Encompass Option Award as of immediately prior to the Effective Time, by (2) the Encompass Ratio.
(ii) Each Encompass Option Award held by an Enhabit Group Employee shall be converted as of the Effective Time into an Enhabit Option Award outstanding under the Enhabit Omnibus Plan and shall, except as otherwise provided in this Section 4.02(a), be subject to the same terms and conditions (including with respect to vesting and expiration) after the Effective Time as applicable to such Encompass Option Award immediately prior to the Effective Time. From and after the Effective Time:
(A) the number of Enhabit Shares subject to such Enhabit Option Award, shall be equal to the sum of all the Enhabit Shares subject to all tranches of the Award where the number of Enhabit Shares of each tranche is equal to the product, rounded down to the nearest whole number of shares for each tranche, obtained by multiplying (1) the number of Encompass Shares subject to the corresponding tranche of the Encompass Option Award immediately prior to the Effective Time, by (2) the Enhabit Ratio; and
(B) the per share exercise price of such Enhabit Option Award, rounded up to the nearest cent, shall be equal to the quotient obtained by dividing (1) the per share exercise price of the corresponding Encompass Option Award as of immediately prior to the Effective Time, by (2) the Enhabit Ratio.
Notwithstanding anything to the contrary in this Section 4.02(a), the exercise price, the number of Encompass Shares and Enhabit Shares subject to each Post-Separation Encompass Option Award and Enhabit Option Award, and the terms and conditions of exercise
of such options, shall be determined in a manner consistent with the requirements of Section 409A of the Code.
(b) Restricted Stock Awards. Each Encompass Restricted Stock Award that is outstanding as of immediately prior to the Effective Time shall be treated as follows:
(i) If the holder is an Encompass Group Employee, such award shall be converted, as of the Effective Time, into a Post-Separation Encompass Restricted Stock Award, and shall, except as otherwise provided in this Section 4.02, be subject to the same terms and conditions (including with respect to vesting) after the Effective Time as were applicable to such Encompass Restricted Stock Award immediately prior to the Effective Time; provided, however, that from and after the Effective Time, the number of Encompass Shares subject to such Post-Separation Encompass Restricted Stock Award shall be equal to the sum of all the Encompass Shares subject to all tranches of the Award where the number of Encompass Shares subject to each tranche is equal to the product, rounded up to the nearest whole number of shares for each such tranche, obtained by multiplying (A) the number of Encompass Shares subject to such tranche of the corresponding Encompass Restricted Stock Award immediately prior to the Effective Time, by (B) the Encompass Ratio.
(ii) If the holder is an Enhabit Group Employee, such award shall be converted, as of the Effective Time, into an Enhabit Restricted Stock Award, and shall, except as otherwise provided in this Section 4.02, be subject to the same terms and conditions (including with respect to vesting) after the Effective Time as were applicable to such Encompass Restricted Stock Award immediately prior to the Effective Time; provided, however, that from and after the Effective Time, the number of Enhabit Shares subject to such Enhabit Restricted Stock Award shall be equal to the sum of all the Enhabit Shares subject to all tranches of the Award where the number of Enhabit Shares subject to each tranche is equal to the product, rounded up to the nearest whole number of shares for each such tranche, obtained by multiplying (A) the number of Encompass Shares subject to such tranche of the corresponding Encompass Restricted Stock Award immediately prior to the Effective Time, by (B) the Enhabit Ratio.
(c) Performance Stock Unit Awards. Each Encompass Performance Stock Unit Award that is outstanding as of immediately prior to the Effective Time shall be treated as follows:
(i) If the holder is an Encompass Group Employee or Former Employee, such award shall be converted, as of the Effective Time, into a Post-Separation Encompass Performance Stock Unit Award, and shall, except as otherwise provided in this Section 4.02(c), be subject to the same terms and conditions (including with respect to time-based vesting) after the Effective Time as were applicable to such Encompass Performance Stock Unit Award immediately prior to the Effective Time; provided, however, that from and after the Effective Time, the number of Encompass Shares subject to such Post-Separation Encompass Performance Share Unit Award shall be equal to the sum of all the Encompass Shares subject to all tranches of the Award where the number of Encompass Shares subject to each tranche is equal to the product, rounded up to the nearest whole number of shares for each such tranche, obtained by multiplying (A) the number of Encompass Shares subject to such tranche of the corresponding Encompass Performance-Based RSU Award immediately prior to the Effective Time, by (B) the Encompass Ratio. The applicable performance-based vesting conditions may be modified in a manner determined by the Encompass Compensation Committee prior to the Effective Time.
(ii) If the holder is an Enhabit Group Employee, such award shall be converted, as of the Effective Time, into an Enhabit Restricted Stock Award, and shall, except as otherwise provided in this Section 4.02(c), be subject to the same terms and conditions
(including with respect to time-based vesting) after the Effective Time as were applicable to such Encompass Performance Stock Unit Award immediately prior to the Effective Time; provided, however, that the Encompass Compensation Committee shall determine the number of Encompass Shares earned under such award as of immediately prior to the Effective Time based on the Encompass Compensation Committee’s determination of the level of achievement of the applicable performance objectives; and provided, further, that the number of Enhabit Shares subject to such Enhabit Restricted Stock Award shall be equal to the sum of all the Enhabit Shares subject to each tranche of the Award where the number of Shares subject to each tranche is equal to the product, rounded up to the nearest whole number of shares for each such tranche, obtained by multiplying (A) the number of Encompass Shares subject to such tranche of the corresponding Encompass Performance Share Unit Award immediately prior to the Effective Time, by (B) the Enhabit Ratio.
(d) RSU Awards. Each Encompass RSU Award that is outstanding as of immediately prior to the Effective Time and held by a Director or Transferred Director shall be converted in the same manner as described in Section 4.02(b)(i) into a Post-Separation Encompass RSU Award; provided that, for each Director or Transferred Director, the conversion shall be calculated for rounding purposes by treating all Encompass RSU Awards granted to such Director or Transferred Director prior to 2014 as one single award and all Encompass RSU Awards granted to such Director or Transferred Director after 2013 as another single award, in both cases without regard to any tranches.
(e) Miscellaneous Award Terms. None of the Separation, the Distribution or any employment transfer described in Section 3.01(a) shall constitute a termination of employment for any Employee or termination of service for any nonemployee director for purposes of any Post-Separation Encompass Award or any Enhabit Award. After the Effective Time, for any award adjusted under this Section 4.02, any reference to a “change in control,” “change of control” or similar definition in an award agreement, employment agreement or Encompass Omnibus Plan applicable to such award (x) with respect to Post-Separation Encompass Awards shall be deemed to refer to a “change in control,” “change of control” or similar definition as set forth in the applicable award agreement, employment agreement or Encompass Omnibus Plan, and (y) with respect to Enhabit Awards, shall be deemed to refer to a “Change in Control” as defined in the Enhabit Omnibus Plan.
(f) Registration and Other Regulatory Requirements. Enhabit agrees to file the appropriate registration statements with respect to, and to cause to be registered pursuant to the Securities Act, the Enhabit Shares authorized for issuance under the Enhabit Omnibus Plan, as required pursuant to the Securities Act, on or promptly following the Effective Time and in any event before the date of issuance of any Enhabit Shares pursuant to the Enhabit Omnibus Plan. The Parties shall take such additional actions as are deemed necessary or advisable to effectuate the foregoing provisions of this Section 4.02(f), including, to the extent applicable, compliance with securities Laws and other legal requirements associated with equity compensation awards in affected non-U.S. jurisdictions.
Section 4.03. Non-Equity Incentive Practices and Plans.
(a) Corporate Bonus Practices.
(i) The Enhabit Group shall be responsible for determining all bonus awards that would otherwise be payable under the Enhabit Non-Equity Incentive Practices to Enhabit Group Employees or Former Enhabit Group Employees for any performance periods that are open when the Effective Time occurs. The Enhabit Group shall also determine for Enhabit Group Employees or Former Enhabit Group Employees (A) the extent to which established performance criteria (as interpreted by the Enhabit Group, in its sole discretion) have been met, and (B) the payment level for each Enhabit Group Employee or Former Enhabit Group Employee. The Enhabit Group shall assume all Liabilities with respect to any such bonus awards payable to Enhabit Group Employees or Former Enhabit Group Employees for any performance periods that are open when the Effective Time occurs and thereafter, and no member of the Encompass Group shall have any obligations with respect thereto.
(ii) The Encompass Group shall be responsible for determining all bonus awards that would otherwise be payable under the Encompass Non-Equity Incentive Practices to Encompass Group Employees or Former Encompass Group Employees for any performance periods that are open when the Effective Time occurs. The Encompass Group shall also determine for Encompass Group Employees or Former Encompass Group Employees (A) the extent to which established performance criteria (as interpreted by the Encompass Group, in its sole discretion) have been met, and (B) the payment level for each Encompass Group Employee or Former Encompass Group Employee. The Encompass Group shall retain (or assume as necessary) all Liabilities with respect to any such bonus awards payable to Encompass Group Employees or Former Encompass Group Employees for any performance periods that are open when the Effective Time occurs and thereafter, and no member of the Enhabit Group shall have any obligations with respect thereto.
(b) Other Cash Incentive Plans.
(i) No later than the Effective Time, the Encompass Group shall continue to retain (or assume as necessary) any cash incentive plan for the exclusive benefit of Encompass Group Employees and Former Encompass Group Employees, whether or not sponsored by the Encompass Group, and, from and after the Effective Time, shall be solely responsible for all Liabilities thereunder.
(ii) No later than the Effective Time, the Enhabit Group shall continue to retain (or assume as necessary) any cash incentive plan for the exclusive benefit of Enhabit Group Employees and Former Enhabit Group Employees, whether or not sponsored by the Enhabit Group, and, from and after the Effective Time, shall be solely responsible for all Liabilities thereunder.
ARTICLE V
QUALIFIED RETIREMENT PLANS
Section 5.01. Encompass 401(k) Plan. At the Effective Time, Encompass shall retain, and no member of the Enhabit Group shall assume or retain sponsorship of, or any Assets and Liabilities with respect to, the Encompass 401(k) Plan.
Section 5.02. Enhabit 401(k) Plan. Each Enhabit Group Employee employed by a member of the Enhabit Group on the Distribution Date who immediately prior to the Distribution Date was an active participant in the Encompass 401(k) Plan shall be eligible to participate in the Enhabit 401(k) Plan as of the Separation Date to the extent that such Enhabit Group Employee was eligible to participate in the Encompass 401(k) Plan, as of immediately prior to the Separation Date.
Section 5.03. Rollover of Account Balances. As soon as practical after the Effective Time, Encompass and Enhabit shall take any and all actions as may be required to permit each Enhabit Group Employee who has an account balance in the Encompass 401(k) Plan to elect to make rollover contributions of “eligible rollover distributions” (within the meaning of Section 402(c)(4) of the Code if applicable) in an amount equal to the entire eligible rollover distribution distributable to such Enhabit Group Employee from the Encompass 401(k) Plan to the Enhabit 401(k) Plan. Such transfer shall be made in cash.
ARTICLE VI
NONQUALIFIED DEFERRED COMPENSATION PLANS
Section 6.01. Encompass Deferred Compensation Plans. Encompass shall, or shall cause a member of the Encompass Group to, assume and retain all Liabilities and Assets with respect to the Encompass Deferred Compensation Plans and any related rabbi trusts with respect to Employees, Former Employees, Directors and Transferred Directors whether arising before, on or after the Distribution Date and no member of the Enhabit Group shall assume or retain any Liabilities and Assets with respect to the Encompass Deferred Compensation Plans and any related rabbi trusts. Following the Effective Time, no Enhabit Group Employee, Former Enhabit Group Employee or Transferred Director shall be credited with any additional service under the Encompass Deferred Compensation Plans; provided that, any Enhabit Group Employee who is a participant in the Encompass Health Corporation Nonqualified 401(k) Plan immediately prior to the Effective Time and has made an irrevocable salary or bonus deferral election for the 2022 calendar year with respect to such plan shall be credited under such plan with any salary or bonus deferral amounts made pursuant to such election. In connection with the forgoing, promptly following, but in no event later than 30 days following, each Enhabit payroll period pertaining to any such salary or bonus deferral amount, Enhabit shall remit to Encompass such deferral amount.
Section 6.02. Adjustment of Encompass Shares under the Director Deferred Compensation Plan. All Encompass Shares notionally credited to a participant’s account under the Director Deferred Compensation Plan immediately prior to the Effective Time shall be adjusted from and after the Effective Time so that with respect to a participant in the Director Deferred Compensation Plan immediately following the Effective Time, the number of Encompass Shares notionally credited as of the Effective Time under the Director Deferred Compensation Plan shall be equal to the product, rounded up to the nearest whole number of
shares, obtained by multiplying (A) the number of Encompass Shares notionally credited under such Director Deferred Compensation Plan immediately prior to the Effective Time by (B) the Encompass Ratio.
Section 6.03. Participation; Distributions. The Parties acknowledge that none of the transactions contemplated by this Agreement, the Separation and Distribution Agreement or any Ancillary Agreement shall trigger a payment or distribution of compensation under any of the Encompass Deferred Compensation Plans for any participant and, consequently, that the payment or distribution of any compensation to which such participant is entitled under any such plan shall occur upon such participant’s separation from service from the Encompass Group or Enhabit Group or at such other time as provided in the applicable deferred compensation plan or participant’s deferral election.
Section 6.04. Deferred Compensation Notice Requirements Regarding Transferred Directors. In the event that any Enhabit Group Employee or Transferred Director who is participant in an Enhabit Deferred Compensation Plan terminates employment or service with the Enhabit Group, written notice of such termination shall be provided by Enhabit to Encompass within thirty (30) days following such termination of employment or service.
ARTICLE VII
WELFARE BENEFIT PLANS
Section 7.01. Welfare Plans.
(a) Coverage under Enhabit Welfare Plans. Each Enhabit Group Employee employed by a member of the Enhabit Group on the Separation Date who immediately prior to the Separation Date was an active participant in an Encompass Welfare Plan shall be eligible to participate in the analogous Enhabit Welfare Plan as of the Separation Date to the extent that such Enhabit Group Employee was eligible to participate in each such Encompass Welfare Plan as of immediately prior to the Separation Date.
(b) Allocation of Welfare Plan Liabilities. All outstanding Liabilities relating to, arising out of, or resulting from health and welfare claims incurred by or on behalf of Enhabit Group Employees and Former Enhabit Group Employees under the Encompass Welfare Plans before the Distribution Date including claims incurred by not reported, shall be retained by the Encompass Welfare Plans.
Section 7.02. COBRA. The Encompass Group shall continue to be responsible for complying with, and providing coverage pursuant to, the health care continuation requirements of COBRA, and the corresponding provisions of the Encompass Welfare Plans with respect to any Encompass Group Employees and any Former Encompass Group Employees (and their covered dependents) who experience a qualifying event under COBRA before, as of, or after the Effective Time, including, where applicable, administration of the COBRA premium assistance subsidy under the American Rescue Plan Act of 2021. Effective as of the Effective Time, the Enhabit Group shall assume responsibility for complying with, and providing coverage pursuant to, the health care continuation requirements of COBRA, and the corresponding provisions of the Enhabit Welfare Plans with respect to any Enhabit Group Employees or Former Enhabit Group
Employees (and their covered dependents) who experience a qualifying event under the Enhabit Welfare Plans and/or the Encompass Welfare Plans before, as of, or after the Effective Time. The Parties agree that the consummation of the transactions contemplated by the Separation and Distribution Agreement shall not constitute a COBRA qualifying event for any purpose of COBRA.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Preservation of Rights to Amend. Except as set forth in this Agreement, the rights of each member of the Encompass Group and each member of the Enhabit Group to amend, waive, or terminate any plan, arrangement, agreement, program, or policy referred to herein shall not be limited in any way by this Agreement.
Section 8.02. Fiduciary Matters. Encompass and Enhabit each acknowledge that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable Law, and no Party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good faith determination (as supported by advice from counsel experienced in such matters) that to do so would violate such a fiduciary duty or standard. Each Party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own fiduciary responsibilities and shall fully release and indemnify the other Party for any Liabilities caused by the failure to satisfy any such responsibility.
Section 8.03. Information Sharing and Access.
(a) Sharing of Information. Subject to any limitations imposed by applicable Law, each of Encompass and Enhabit (acting directly or through members of the Encompass Group or the Enhabit Group, respectively) shall provide to the other Party and its authorized agents and vendors all information necessary (including information for purposes of determining benefit eligibility, participation, vesting, calculation of benefits) on a timely basis under the circumstances for the Party to perform its duties under this Agreement. Such information shall include information relating to equity awards under stock plans. To the extent that such information is maintained by a third-party vendor, each Party shall use its commercially reasonable efforts to require the third-party vendor to provide the necessary information and assist in resolving discrepancies or obtaining missing data.
(b) Access to Records. To the extent not inconsistent with this Agreement, the Separation and Distribution Agreement or any applicable privacy protection Laws or regulations, reasonable access to Employee-related and benefit plan related records after the Effective Time shall be provided to members of the Encompass Group and members of the Enhabit pursuant to the terms and conditions of Article VI of the Separation and Distribution Agreement.
(c) Maintenance of Records. With respect to retaining and destroying, all Employee-related information, Encompass and Enhabit shall comply with Section 6.4 of the Separation and Distribution Agreement (Record Retention) and the requirements of applicable Law.
(d) Cooperation. Each Party shall use commercially reasonable efforts to cooperate and work together to unify, consolidate and share (to the extent permissible under
applicable privacy/data protection Laws) all relevant documents, resolutions, government filings, data, payroll, employment and benefit plan information on regular timetables and cooperate as needed with respect to (i) any claims under or audit of or litigation with respect to any employee benefit plan, policy or arrangement contemplated by this Agreement, (ii) efforts to seek a determination letter, private letter ruling or advisory opinion from the Internal Revenue Service or U.S. Department of Labor on behalf of any employee benefit plan, policy or arrangement contemplated by this Agreement, (iii) any filings that are required to be made or supplemented to the Internal Revenue Service, U.S. Department of Labor or any other Governmental Authority, and (iv) any audits by a Governmental Authority or corrective actions, relating to any Benefit Plan, labor or payroll practices; provided, however, that requests for cooperation must be reasonable and not interfere with daily business operations.
(e) Confidentiality. Notwithstanding anything in this Agreement to the contrary, all confidential records and data relating to Employees to be shared or transferred pursuant to this Agreement shall be subject to Section 6.9 of the Separation and Distribution Agreement (Confidentiality) and the requirements of applicable Law.
Section 8.04. Third-Party Beneficiaries. The provisions of this Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person except the Parties any rights or remedies hereunder. There are no third-party beneficiaries of this Agreement, and this Agreement shall not provide any Third Party with any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. Nothing in this Agreement is intended to amend any employee benefit plan or affect the applicable plan sponsor’s right to amend or terminate any employee benefit plan pursuant to the terms of such plan. The provisions of this Agreement are solely for the benefit of the Parties, and no current or former Employee, officer, director, or independent contractor or any other individual associated therewith shall be regarded for any purpose as a third-party beneficiary of this Agreement.
Section 8.05. Further Assurances. Each Party hereto shall take, or cause to be taken, any and all reasonable actions, including the execution, acknowledgment, filing and delivery of any and all documents and instruments that any other Party hereto may reasonably request to effect the intent and purpose of this Agreement and the transactions contemplated hereby.
Section 8.06. Dispute Resolution. The dispute resolution procedures set forth in Article VII of the Separation and Distribution Agreement shall apply to any dispute, controversy or claim arising out of or relating to this Agreement.
Section 8.07. Incorporation of Separation and Distribution Agreement Provisions. Article X of the Separation and Distribution Agreement (other than Section 10.4 (Third-Party Beneficiaries) and Section 10.19 (Ancillary Agreements)) is incorporated herein by reference and shall apply to this Agreement as if set forth herein mutatis mutandis.
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IN WITNESS WHEREOF, the Parties have caused this Employee Matters Agreement to be executed by their duly authorized representatives as of the date first written above.
ENCOMPASS HEALTH CORPORATION
By: /s/ Patrick Darby
Name: Patrick Darby
Title: Executive Vice President, General Counsel and Secretary
ENHABIT, INC.
By: /s/ Barbara A. Jacobsmeyer
Name: Barbara A. Jacobsmeyer
Title: President and Chief Executive Officer
[Signature Page to Employee Matters Agreement]
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On July 1, 2022, Encompass Health Corporation (the “Company”, “Encompass Health”, “we”, “our” and “us”) completed the previously announced separation of its home health and hospice business, into a separate, independent publicly traded company, Enhabit, Inc. (“Enhabit”). The separation was structured as a spin off (the “Spin Off”), which occurred by way of a pro rata distribution of one share of Enhabit common stock for every two shares of Encompass common stock held of record as of 5:00 p.m. Eastern Time on June 24, 2022. Enhabit is now an independent public company under the symbol “EHAB” on the New York Stock Exchange. After the distribution, Encompass Health will no longer consolidate Enhabit into its financial results (the entire transaction being referred to as the “Separation”).
The unaudited pro forma condensed consolidated financial statements have been derived from the Company’s historical consolidated financial statements and give effect to the Separation. The following unaudited Pro Forma Condensed Consolidated Income Statements for the three months ended March 31, 2022 and for each of the years ended December 31, 2021, 2020 and 2019 reflect the Company’s results as if the Separation had occurred as of January 1, 2019 in that they reflect the reclassification of Enhabit as discontinued operations for all periods presented. The adjustments in the “Transaction Accounting Adjustments” column in the unaudited Pro Forma Condensed Consolidated Income Statements for the three months ended March 31, 2022 and for the year ended December 31, 2021 give effect to the Separation and related transactions as if they had occurred as of January 1, 2021. The following unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2022 reflects the Company’s financial position as if the Separation had occurred on March 31, 2022. After the date of the Separation, the historical financial results of Enhabit will be reflected in our consolidated financial statements as discontinued operations under U.S. generally accepted accounting principles (“GAAP”) for all periods.
The unaudited pro forma condensed consolidated financial statements have been prepared based upon the best available information and management estimates and are subject to assumptions and adjustments described below and in the accompanying notes to those financial statements. They are not intended to be a complete presentation of the Company’s financial position or results of operations had the Separation occurred as of and for the periods indicated. In addition, the unaudited pro forma condensed consolidated financial statements are provided for illustrative and informational purposes only and are not necessarily indicative of the Company’s future results of operations or financial condition had the Separation and related transactions been completed on the dates assumed. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. Management believes these assumptions and adjustments are reasonable, given the information available at the filing date. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with our historical consolidated financial statements and accompanying notes.
The unaudited pro forma condensed consolidated financial statements have been prepared to include transaction accounting adjustments to reflect the financial condition and results of operations as if the Separation occurred on January 1, 2021. The pro forma adjustments are based on currently available information and assumptions management believes are, under the circumstances and given the information available at this time, reasonable, and best reflect the Separation on Encompass Health’s financial condition and results of operations. The adjustments included within the “Enhabit Discontinued Operations” column of the unaudited pro forma condensed consolidated financial statements are consistent with the guidance for discontinued operations under GAAP. The Company's current estimates on a discontinued operations basis are preliminary and could change as the Company finalizes discontinued operations accounting to be reported in the Company's Form 10-Q for the quarter ended September 30, 2022 and its 2022 Annual Report on Form 10-K.
The unaudited pro forma condensed consolidated financial statements have been prepared in accordance with Regulation S-X Article 11, Pro Forma Financial Information, as amended by the final rule, Amendments to Financial Disclosures About Acquired and Disposed Businesses, as adopted by the SEC on May 20, 2020.
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Three Months Ended March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Historical | | | | Enhabit Discontinued Operations (Note a) | | Transaction Accounting Adjustments | | Pro Forma |
| (In Millions, Except Per Share Data) |
| Net operating revenues | $ | 1,333.6 | | | | | $ | (274.3) | | | $ | — | | | $ | 1,059.3 | |
| Operating expenses: | | | | | | | | | |
| Salaries and benefits | 776.0 | | | | | (188.6) | | | — | | | 587.4 | |
| Other operating expenses | 182.1 | | | | | (23.2) | | | — | | | 158.9 | |
| Occupancy costs | 20.9 | | | | | (5.5) | | | — | | | 15.4 | |
| Supplies | 56.1 | | | | | (6.3) | | | — | | | 49.8 | |
| General and administrative expenses | 48.4 | | | | | (11.0) | | | (0.1) | | (g) | 37.3 | |
| Depreciation and amortization | 66.2 | | | | | (8.5) | | | — | | | 57.7 | |
| | | | | | | | | |
| | | | | | | | | |
| Total operating expenses | 1,149.7 | | | | | (243.1) | | | (0.1) | | | 906.5 | |
| Loss on early extinguishment of debt | 0.3 | | | | | — | | | — | | | 0.3 | |
| Interest expense and amortization of debt discounts and fees | 39.6 | | | | | — | | | (2.1) | | (h) | 37.5 | |
| Other expense | 3.6 | | | | | — | | | — | | | 3.6 | |
| Equity in net income of nonconsolidated affiliates | (0.9) | | | | | — | | | — | | | (0.9) | |
| Income from continuing operations before income tax expense | 141.3 | | | | | (31.2) | | | 2.2 | | | 112.3 | |
| Provision for income tax expense | 31.2 | | | | | (7.6) | | | 0.6 | | (i) | 24.2 | |
| Income from continuing operations | 110.1 | | | | | (23.6) | | | 1.6 | | | 88.1 | |
| Loss from discontinued operations, net of tax | — | | | | | — | | | — | | | — | |
| Net and comprehensive income | 110.1 | | | | | (23.6) | | | 1.6 | | | 88.1 | |
| Less: Net and comprehensive income attributable to noncontrolling interests | (22.6) | | | | | 0.6 | | | — | | | (22.0) | |
| Net and comprehensive income attributable to Encompass Health | $ | 87.5 | | | | | $ | (23.0) | | | $ | 1.6 | | | $ | 66.1 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Basic | 99.2 | | | | | | | | | 99.2 | |
| Diluted | 100.2 | | | | | | | | | 100.2 | |
| Earnings per common share: | | | | | | | | | |
| Basic earnings per share attributable to Encompass Health common shareholders: | | | | | | | | | |
| Continuing operations | $ | 0.88 | | | | | | | | | $ | 0.66 | |
| Discontinued operations | — | | | | | | | | | — | |
| Net income | $ | 0.88 | | | | | | | | | $ | 0.66 | |
| Diluted earnings per share attributable to Encompass Health common shareholders: | | | | | | | | | |
| Continuing operations | $ | 0.87 | | | | | | | | | $ | 0.66 | |
| Discontinued operations | — | | | | | | | | | — | |
| Net income | $ | 0.87 | | | | | | | | | $ | 0.66 | |
| | | | | | | | | |
| Amounts attributable to Encompass Health common shareholders: | | | | | | | | | |
| Income from continuing operations | $ | 87.5 | | | | | | | | | $ | 66.1 | |
| Loss from discontinued operations, net of tax | — | | | | | | | | | — | |
| Net income attributable to Encompass Health | $ | 87.5 | | | | | | | | | $ | 66.1 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| | Historical | | Enhabit Discontinued Operations (Note a) | | Transaction Accounting Adjustments | | Pro Forma |
| | (In Millions, Except Per Share Data) |
| Net operating revenues | $ | 5,121.6 | | | $ | (1,106.6) | | | $ | — | | | $ | 4,015.0 | |
| Operating expenses: | | | | | | | |
| Salaries and benefits | 2,886.5 | | | (759.2) | | | — | | | 2,127.3 | |
| Other operating expenses | 685.2 | | | (89.3) | | | — | | | 595.9 | |
| Occupancy costs | 80.2 | | | (21.2) | | | — | | | 59.0 | |
| Supplies | 209.3 | | | (25.1) | | | — | | | 184.2 | |
| General and administrative expenses | 197.3 | | | (27.9) | | | (4.7) | | (g) | 164.7 | |
| Depreciation and amortization | 256.6 | | | (36.9) | | | — | | | 219.7 | |
| | | | | | | |
| | | | | | | |
| Total operating expenses | 4,315.1 | | | (959.6) | | | (4.7) | | | 3,350.8 | |
| Loss on early extinguishment of debt | 1.0 | | | — | | | — | | | 1.0 | |
| Interest expense and amortization of debt discounts and fees | 164.6 | | | (0.3) | | | (8.5) | | (h) | 155.8 | |
| Other income | (12.3) | | | 4.8 | | | — | | | (7.5) | |
| Equity in net income of nonconsolidated affiliates | (4.0) | | | 0.6 | | | — | | | (3.4) | |
| Income from continuing operations before income tax expense | 657.2 | | | (152.1) | | | 13.2 | | | 518.3 | |
| Provision for income tax expense | 139.6 | | | (36.0) | | | 3.3 | | (i) | 106.9 | |
| Income from continuing operations | 517.6 | | | (116.1) | | | 9.9 | | | 411.4 | |
| Loss from discontinued operations, net of tax | (0.4) | | | — | | | — | | | (0.4) | |
| Net and comprehensive income | 517.2 | | | (116.1) | | | 9.9 | | | 411.0 | |
| Less: Net and comprehensive income attributable to noncontrolling interests | (105.0) | | | 1.8 | | | — | | | (103.2) | |
| Net and comprehensive income attributable to Encompass Health | $ | 412.2 | | | $ | (114.3) | | | $ | 9.9 | | | $ | 307.8 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 99.0 | | | | | | | 99.0 | |
| Diluted | 100.2 | | | | | | | 100.2 | |
| Earnings per common share: | | | | | | | |
| Basic earnings per share attributable to Encompass Health common shareholders: | | | | | | | |
| Continuing operations | $ | 4.15 | | | | | | | $ | 3.09 | |
| Discontinued operations | — | | | | | | | — | |
| Net income | $ | 4.15 | | | | | | | $ | 3.09 | |
| Diluted earnings per share attributable to Encompass Health common shareholders: | | | | | | | |
| Continuing operations | $ | 4.11 | | | | | | | $ | 3.07 | |
| Discontinued operations | — | | | | | | | — | |
| Net income | $ | 4.11 | | | | | | | $ | 3.07 | |
| | | | | | | |
| Amounts attributable to Encompass Health: | | | | | | | |
| Income from continuing operations | $ | 412.6 | | | | | | | $ | 308.2 | |
| Loss from discontinued operations, net of tax | (0.4) | | | | | | | (0.4) | |
| Net income attributable to Encompass Health | $ | 412.2 | | | | | | | $ | 307.8 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Year Ended December 31, 2020
| | | | | | | | | | | | | | | | | |
| | Historical | | Enhabit Discontinued Operations (Note a) | | Pro Forma |
| | (In Millions, Except Per Share Data) |
| Net operating revenues | $ | 4,644.4 | | | $ | (1,078.2) | | | $ | 3,566.2 | |
| Operating expenses: | | | | | |
| Salaries and benefits | 2,682.0 | | | (778.2) | | | 1,903.8 | |
| Other operating expenses | 634.4 | | | (89.3) | | | 545.1 | |
| Occupancy costs | 81.2 | | | (19.8) | | | 61.4 | |
| Supplies | 200.5 | | | (29.5) | | | 171.0 | |
| General and administrative expenses | 155.5 | | | (3.9) | | | 151.6 | |
| Depreciation and amortization | 243.0 | | | (40.0) | | | 203.0 | |
| Government, class action, and related settlements | 2.8 | | | — | | | 2.8 | |
| | | | | |
| Total operating expenses | 3,999.4 | | | (960.7) | | | 3,038.7 | |
| Loss on early extinguishment of debt | 2.3 | | | — | | | 2.3 | |
| Interest expense and amortization of debt discounts and fees | 184.2 | | | (0.5) | | | 183.7 | |
| Other income | (10.6) | | | 2.2 | | | (8.4) | |
| Equity in net income of nonconsolidated affiliates | (3.5) | | | 0.5 | | | (3.0) | |
| Income from continuing operations before income tax expense | 472.6 | | | (119.7) | | | 352.9 | |
| Provision for income tax expense | 103.8 | | | (29.1) | | | 74.7 | |
| Income from continuing operations | 368.8 | | | (90.6) | | | 278.2 | |
| Loss from discontinued operations, net of tax | — | | | — | | | — | |
| Net and comprehensive income | 368.8 | | | (90.6) | | | 278.2 | |
Less: Net and comprehensive income attributable to noncontrolling interests | (84.6) | | | 1.3 | | | (83.3) | |
Net and comprehensive income attributable to Encompass Health | $ | 284.2 | | | $ | (89.3) | | | $ | 194.9 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 98.6 | | | | | 98.6 | |
| Diluted | 99.8 | | | | | 99.8 | |
| Earnings per common share: | | | | | |
| Basic earnings per share attributable to Encompass Health common shareholders: | | | | | |
| Continuing operations | $ | 2.87 | | | | | $ | 1.97 | |
| Discontinued operations | — | | | | | — | |
| Net income | $ | 2.87 | | | | | $ | 1.97 | |
| Diluted earnings per share attributable to Encompass Health common shareholders: | | | | | |
| Continuing operations | $ | 2.85 | | | | | $ | 1.95 | |
| Discontinued operations | — | | | | | — | |
| Net income | $ | 2.85 | | | | | $ | 1.95 | |
| | | | | |
| Amounts attributable to Encompass Health: | | | | | |
| Income from continuing operations | $ | 284.2 | | | | | $ | 194.9 | |
| Loss from discontinued operations, net of tax | — | | | | | — | |
| Net income attributable to Encompass Health | $ | 284.2 | | | | | $ | 194.9 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
Unaudited Pro Forma Condensed Consolidated Income Statement
For the Year Ended December 31, 2019
| | | | | | | | | | | | | | | | | |
| | Historical | | Enhabit Discontinued Operations (Note a) | | Pro Forma |
| | (In Millions, Except Per Share Data) |
| Net operating revenues | $ | 4,605.0 | | | $ | (1,092.0) | | | $ | 3,513.0 | |
| Operating expenses: | | | | | |
| Salaries and benefits | 2,573.0 | | | (760.0) | | | 1,813.0 | |
| Other operating expenses | 623.6 | | | (90.5) | | | 533.1 | |
| Occupancy costs | 82.3 | | | (17.5) | | | 64.8 | |
| Supplies | 167.9 | | | (20.9) | | | 147.0 | |
| General and administrative expenses | 247.0 | | | (87.0) | | | 160.0 | |
| Depreciation and amortization | 218.7 | | | (37.7) | | | 181.0 | |
| | | | | |
| | | | | |
| Total operating expenses | 3,912.5 | | | (1,013.6) | | | 2,898.9 | |
| Loss on early extinguishment of debt | 7.7 | | | — | | | 7.7 | |
| Interest expense and amortization of debt discounts and fees | 159.7 | | | (0.6) | | | 159.1 | |
| Other income | (30.5) | | | — | | | (30.5) | |
| Equity in net income of nonconsolidated affiliates | (6.7) | | | 1.2 | | | (5.5) | |
| Income from continuing operations before income tax expense | 562.3 | | | (79.0) | | | 483.3 | |
| Provision for income tax expense | 115.9 | | | (21.1) | | | 94.8 | |
| Income from continuing operations | 446.4 | | | (57.9) | | | 388.5 | |
| Loss from discontinued operations, net of tax | (0.6) | | | — | | | (0.6) | |
| Net and comprehensive income | 445.8 | | | (57.9) | | | 387.9 | |
Less: Net and comprehensive income attributable to noncontrolling interests | (87.1) | | | 4.6 | | | (82.5) | |
Net and comprehensive income attributable to Encompass Health | $ | 358.7 | | | $ | (53.3) | | | $ | 305.4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 98.0 | | | | | 98.0 | |
| Diluted | 99.4 | | | | | 99.4 | |
| Earnings per common share: | | | | | |
| Basic earnings per share attributable to Encompass Health common shareholders: | | | | | |
| Continuing operations | $ | 3.66 | | | | | $ | 3.11 | |
| Discontinued operations | (0.01) | | | | | (0.01) | |
| Net income | $ | 3.65 | | | | | $ | 3.10 | |
| Diluted earnings per share attributable to Encompass Health common shareholders: | | | | | |
| Continuing operations | $ | 3.62 | | | | | $ | 3.08 | |
| Discontinued operations | (0.01) | | | | | (0.01) | |
| Net income | $ | 3.61 | | | | | $ | 3.07 | |
| | | | | |
| Amounts attributable to Encompass Health: | | | | | |
| Income from continuing operations | $ | 359.3 | | | | | $ | 306.0 | |
| Loss from discontinued operations, net of tax | (0.6) | | | | | (0.6) | |
| Net income attributable to Encompass Health | $ | 358.7 | | | | | $ | 305.4 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Historical | | Enhabit Discontinued Operations (Note a) | | Transaction Accounting Adjustments | | Pro Forma |
| | (In Millions) |
| Assets | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 94.2 | | | $ | (17.5) | | | $ | 80.3 | | (b) | $ | 157.0 | |
| Restricted cash | 61.0 | | | (3.7) | | | — | | | 57.3 | |
| Accounts receivable | 683.5 | | | (168.1) | | | — | | | 515.4 | |
| Other current assets | 111.0 | | | (8.1) | | | — | | | 102.9 | |
| Total current assets | 949.7 | | | (197.4) | | | 80.3 | | | 832.6 | |
| Property and equipment, net | 2,667.1 | | | (20.7) | | | — | | | 2,646.4 | |
| Operating lease right-of-use assets | 236.8 | | | (46.9) | | | — | | | 189.9 | |
| Goodwill | 2,456.5 | | | (1,219.5) | | | — | | | 1,237.0 | |
| Intangible assets, net | 410.6 | | | (254.1) | | | 135.2 | | (c) | 291.7 | |
| | | | | | | |
| Other long-term assets | 223.3 | | | (6.4) | | | — | | | 216.9 | |
| Total assets | $ | 6,944.0 | | | $ | (1,745.0) | | | $ | 215.5 | | | $ | 5,414.5 | |
| Liabilities and Shareholders’ Equity | | | | | | | |
| Current liabilities: | | | | | | | |
| Current portion of long-term debt | $ | 42.8 | | | $ | (4.4) | | | $ | (13.5) | | (d) | $ | 24.9 | |
| Current operating lease liabilities | 38.4 | | | (14.9) | | | — | | | 23.5 | |
| Accounts payable | 147.3 | | | (3.0) | | | — | | | 144.3 | |
| Accrued expenses and other current liabilities | 526.0 | | | (107.0) | | | 65.4 | | (e) | 484.4 | |
| Total current liabilities | 754.5 | | | (129.3) | | | 51.9 | | | 677.1 | |
| Long-term debt, net of current portion | 3,221.3 | | | (2.9) | | | (472.8) | | (d) | 2,745.6 | |
| Long-term operating lease liabilities | 208.3 | | | (32.1) | | | — | | | 176.2 | |
| Deferred income tax liabilities | 89.7 | | | (64.1) | | | 31.0 | | (c) | 56.6 | |
| Other long-term liabilities | 178.6 | | | — | | | — | | | 178.6 | |
| | 4,452.4 | | | (228.4) | | | (389.9) | | | 3,834.1 | |
| Commitments and contingencies | | | | | | | |
| | | | | | | |
| Redeemable noncontrolling interests | 43.2 | | | (5.1) | | | — | | | 38.1 | |
| Shareholders’ equity: | | | | | | | |
| Encompass Health shareholders’ equity: | | | | | | | |
| Common stock | 1.1 | | | — | | | — | | | 1.1 | |
| Capital in excess of par value | 2,301.1 | | | (1,282.4) | | | 605.4 | | (f) | 1,624.1 | |
| Accumulated income | 201.2 | | | (201.2) | | | — | | | — | |
| Treasury stock | (529.9) | | | — | | | | | (529.9) | |
| Total Encompass Health shareholders’ equity | 1,973.5 | | | (1,483.6) | | | 605.4 | | | 1,095.3 | |
| Noncontrolling interests | 474.9 | | | (27.9) | | | — | | | 447.0 | |
| Total shareholders’ equity | 2,448.4 | | | (1,511.5) | | | 605.4 | | | 1,542.3 | |
Total liabilities and shareholders’ equity | $ | 6,944.0 | | | $ | (1,745.0) | | | $ | 215.5 | | | $ | 5,414.5 | |
See accompanying notes to the unaudited pro forma condensed consolidated financial statements.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
Enhabit Discontinued Operations:
(a)Reflect the discontinued operations, including associated assets, liabilities, redeemable noncontrolling interests and equity and results of operations attributable to Enhabit, which were included in the Company’s historical financial statements. In accordance with ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the amounts exclude the following:
i.General corporate overhead costs allocated to Enhabit that do not meet the requirements to be presented in discontinued operations. Such allocations included labor and non-labor expenses related to Encompass’ corporate support functions (i.e., financial reporting, accounting, information technology, tax, internal audit, human resources among others) that historically provided support to Enhabit.
ii.Intercompany interest expense of $4.8 million and $27.7 million to Enhabit for the years ended December 31, 2020 and December 31, 2019, respectively, under a term loan between Encompass and Enhabit which was fully retired in 2020.
Additionally, income tax expense adjustment has been determined using the “with-and-without method”.
Transaction Accounting Adjustments:
(b)Adjustments to cash.
| | | | | | | | |
| (In millions) | | |
| Cash received from distribution of Enhabit Financing | | $ | 566.6 | |
| Cash paid for pay down of Revolving Credit Facility and Term Loan Facilities under the Encompass Senior Secured Credit Agreement | | (486.3) | |
| Total Pro Forma Adjustments to Cash | | $ | 80.3 | |
(c)Trade name transfer. The pro forma adjustments reflect the transferring of the ‘Encompass’ trade name to Encompass upon consummation of the Spin Off as Encompass will continue operating under the Encompass brand. The pro forma adjustments reflect the carrying value of the Encompass trade name and associated deferred tax liability.
(d)Enhabit Financing and repayment of debt. On June 30, 2022, Enhabit distributed $566.6 million to us from draws on their new term loan facility and revolving credit facility (the “Enhabit Financing”). We used a portion of the distribution proceeds to repay the outstanding term loan facility balances and a portion of the outstanding net draws of the revolving credit facility. The pro forma adjustments are based on the March 31, 2022 term loan facility balance of $236.3 million and a pay down of $250.0 million of the March 31, 2022 revolving credit facility balance of $305.0 million.
(e)Costs to complete spin transaction. The pro forma adjustment reflects $65.4 million of additional estimated non-recurring costs to complete the Spin Off. These costs primarily relate to investment banker fees, legal fees, third-party consulting fees, senior debt consent payments and other costs directly related to the Spin Off.
(f)Effect on total shareholders’ equity. The pro forma adjustment reflects the effect on total shareholders’ equity of the adjustments described in notes (b) through (e) above.
(g)Transition Services Agreement. In connection with the Spin Off, we will enter into the Transition Services Agreement pursuant to which we will provide services to Enhabit. Some of the general services we will provide to Enhabit will include financial reporting, accounting, information technology, tax, internal audit, human resources and other services for initial periods ranging from three to eighteen months. Charges will be based on our estimated current costs.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(h)Enhabit Financing and Repayment of Debt. On June 30, 2022, Enhabit distributed $566.6 million to us from the Enhabit Financing. We used a portion of the distribution proceeds to repay the outstanding term loan facility balances and a portion of the outstanding net draws of the revolving credit facility. The pro forma adjustment assumes the following:
| | | | | | | | | | | | | | | | | | | | |
| | Principal Repayment
(in millions) | | Interest Rate as of March 31, 2022 | | Revolver Commitment Fee |
| Term loan facility | | $236.3 | | 1.8% | | N/A |
| Revolving credit facility | | $250.0 | | 1.9% | | 0.4% |
(i)Resulting Tax Effects. The pro forma income tax expense adjustment reflect an estimated effective tax rate of 24.9% and 25.3% for the year ended December 31, 2021 and the three months ended March 31, 2022, respectively.