SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from:
to
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Commission File Number
001-33761
PZENA INVESTMENT MANAGEMENT,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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20-8999751
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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120 West 45th Street,
New York, New York
(Address of principal
executive offices)
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10036
(Zip Code)
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(212)
355-1600
(Registrants
telephone number including area code)
Not Applicable
(Former name, former address,
and former fiscal year; if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
o
No
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer
o
Accelerated
filer
o
Non-accelerated
filer
þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
o
No
þ
At December 5, 2007, 6,111,118 shares of the
Class A Common Stock ($.01 par value per share) of the
Registrant were outstanding. At December 5, 2007,
57,937,910 shares of the Class B Common Stock
($0.000001 par value per share) of the Registrant were
outstanding.
PZENA
INVESTMENT MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
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Consolidated Financial Statements of Pzena Investment
Management, LLC and Subsidiaries
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2
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Consolidated Statements of Financial Condition at
December 31, 2006 and September 30, 2007 (unaudited)
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2
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Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended September 30, 2006 and
2007
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3
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Consolidated Statements of Cash Flows (unaudited)
for the Three and Nine Months Ended September 30, 2006 and
2007.
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4
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Consolidated Statements of Changes in
Members Equity (unaudited) for the Nine Months Ended
September 30, 2006..
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5
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Consolidated Statements of Changes in
Members Equity (unaudited) for the Nine Months Ended
September 30, 2007
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5
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Notes to Consolidated Financial Statements
(unaudited)
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6
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Financial Statements of Pzena Investment
Management, Inc.
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21
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Statements of Financial Condition at May 10,
2007 and September 30, 2007 (unaudited)
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21
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Statement of Operations (unaudited) for the
Period May 10, 2007 (capitalization) through
September 30, 2007
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22
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Statement of Cash Flows (unaudited) for the
Period May 10, 2007 (capitalization) through
September 30, 2007
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23
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Statement of Changes in Stockholders Equity
(unaudited) for the Period May 10, 2007 (capitalization)
through September 30, 2007
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24
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Notes to Financial Statements (unaudited)
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25
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Managements Discussion and Analysis of
Financial Condition and Results of Operations of Pzena
Investment Management, LLC and Subsidiaries
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26
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Quantitative and Qualitative Disclosures About
Market Risk
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38
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Controls and Procedures
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39
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Item 4T.
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Controls and Procedures
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40
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PART II OTHER INFORMATION
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Legal Proceedings
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40
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Risk Factors
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41
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Unregistered Sales of Equity Securities and Use
of Proceeds
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52
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Defaults Upon Senior Securities
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52
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Submission of Matters to a Vote of Security
Holders
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52
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Other Information
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52
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Exhibits
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53
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54
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EX-3.1: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
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EX-3.2: AMENDED AND RESTATED BYLAWS
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EX-4.3: RESALE AND REGISTRATION RIGHTS AGREEMENT
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EX-4.4: CLASS B STOCKHOLDERS' AGREEMENT
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EX-10.1: AMENDED AND RESTATED OPERATING AGREEMENT
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EX-10.2: TAX RECEIVABLE AGREEMENT
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EX-10.3: PZENA INVESTMENT MANAGEMENT, LLC AMENDED AND RESTATED 2006 EQUITY INCENTIVE PLAN
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EX-10.4: PZENA INVESTMENT MANAGEMENT, LLC AMENDED AND RESTATED BONUS PLAN
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EX-10.5: PZENA INVESTMENT MANAGEMENT, INC. 2007 EQUITY INCENTIVE PLAN
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EX-10.8: EXECUTIVE EMPLOYMENT AGREEMENT: PZENA
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EX-10.9: EXECUTIVE EMPLOYMENT AGREEMENT: GOETZ
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EX-10.10: AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT: KRISHNA
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EX-10.11: AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT: LIPSEY
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EX-10.12: INDEMNIFICATION AGREEMENT: PZENA
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EX-10.13: INDEMNIFICATION AGREEMENT: GALBRAITH
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EX-10.14: INDEMNIFICATION AGREEMENT: GREENBLATT
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EX-10.15: INDEMNIFICATION AGREEMENT: MEYEROWICH
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EX-10.16: INDEMNIFICATION AGREEMENT: ULLMAN
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EX-21.1: LIST OF SUBSIDIARIES
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EX-31.1: CERTIFICATION
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EX-31.2: CERTIFICATION
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EX-32.1: CERTIFICATION
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i
EXPLANATORY
NOTE
On October 30, 2007, Pzena Investment Management, Inc.
consummated an initial public offering of 6,100,000 shares
of its Class A common stock in which it received net
proceeds of approximately $99.1 million that it used to
purchase 6,100,000 membership units of Pzena Investment
Management, LLC, representing 9.5% of the then outstanding
membership units of Pzena Investment Management, LLC.
Concurrently with the consummation of this initial public
offering, (i) the operating agreement of Pzena Investment
Management, LLC was amended and restated such that, among other
things, Pzena Investment Management, Inc. became the sole
managing member of Pzena Investment Management, LLC and
(ii) related reorganization transactions were consummated.
Accordingly, as of and subsequent to October 30, 2007,
(i) Pzena Investment Management, Inc. will consolidate the
financial results of Pzena Investment Management, LLC with its
own and reflect the remaining 90.5% membership interest in Pzena
Investment Management, LLC as a non-controlling interest in its
consolidated financial statements, and (ii) Pzena
Investment Management, Inc.s income will be generated by
its 9.5% economic interest in Pzena Investment Management,
LLCs net income. Therefore, this Quarterly Report on
Form 10-Q
presents the following financial statements:
(1) the consolidated financial statements of Pzena
Investment Management, LLC as of December 31, 2006 and
September 30, 2007 and for the three and nine months ended
September 30, 2006 and 2007; and
(2) the financial statements of Pzena Investment
Management, Inc. as of May 10, 2007 (capitalization) and
September 30, 2007 and for the period May 10, 2007
(capitalization) through September 30, 2007.
We, us, our, and the
company refer to: (i) Pzena Investment
Management, Inc. and its subsidiaries, including Pzena
Investment Management, LLC and all of its subsidiaries,
following the consummation of the above-referenced initial
public offering, amendment and restatement of the operating
agreement of Pzena Investment Management, LLC and related
reorganization transactions on October 30, 2007, and
(ii) to Pzena Investment Management, LLC and all of its
subsidiaries prior to the consummation of these transactions.
Our operating company refers to Pzena Investment
Management, LLC.
ii
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking
statements. Forward-looking statements provide our current
expectations, or forecasts, of future events. Forward-looking
statements include statements about our expectations, beliefs,
plans, objectives, intentions, assumptions and other statements
that are not historical facts. Words or phrases such as
anticipate, believe,
continue, ongoing, estimate,
expect, intend, may,
plan, potential, predict,
project or similar words or phrases, or the
negatives of those words or phrases, may identify
forward-looking statements, but the absence of these words does
not necessarily mean that a statement is not forward-looking.
Forward-looking statements are subject to known and unknown
risks and uncertainties and are based on potentially inaccurate
assumptions that could cause actual results to differ materially
from those expected or implied by the forward-looking
statements. Our actual results could differ materially from
those anticipated in forward-looking statements for many
reasons, including the factors described in Item 1A, Risk
Factors in Part II of this Quarterly Report on Form 10-Q.
Accordingly, you should not unduly rely on these forward-looking
statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We undertake no obligation to publicly
revise any forward-looking statements to reflect circumstances
or events after the date of this Quarterly Report on
Form 10-Q,
or to reflect the occurrence of unanticipated events. You
should, however, review the factors and risks we describe in the
reports we will file from time to time with the SEC after the
date of this Quarterly Report on Form 10-Q.
Forward-looking statements include, but are not limited to,
statements about:
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our anticipated future results of operations and operating cash
flows;
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our business strategies and investment policies;
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our financing plans and the availability of short-term borrowing;
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our competitive position and the effects of competition on our
business;
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potential growth opportunities available to us;
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the recruitment and retention of our employees;
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our expected levels of compensation for our employees;
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our potential operating performance, achievements, efficiency
and cost reduction efforts;
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our expected tax rate;
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changes in interest rates;
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our expectation with respect to the economy, capital markets,
the market for asset management services and other industry
trends;
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the benefits to our business resulting from the effects of the
reorganization we consummated on October 30, 2007; and
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the impact of future legislation and regulation, and changes in
existing legislation and regulation, on our business.
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Our Registration Statement on
Form S-1
(File
No. 333-143660)
and the subsequent reports that we file with the SEC, accessible
on the SECs website at www.sec.gov, identify additional
factors that can affect forward-looking statements.
iii
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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Pzena
Investment Management, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
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December 31,
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September 30,
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2006
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2007
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(unaudited)
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ASSETS
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Cash and Cash Equivalents
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$
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30,920
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$
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30,091
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Restricted Cash
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2,014
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2,074
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Due from Broker
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882
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30
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Advisory Fees Receivable
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25,216
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26,430
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Investments In Marketable Securities, at Fair Value
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23,247
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30,224
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Receivable From Related Parties
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602
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349
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Other Receivables
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1,016
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1,179
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Investments In Affiliates
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3,613
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3,610
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Prepaid Expenses and Other Assets
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360
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2,604
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Property and Equipment, Net of Accumulated Depreciation of
$1,044 and $1,302, Respectively
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1,876
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3,144
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TOTAL ASSETS
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$
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89,746
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$
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99,735
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LIABILITIES AND MEMBERS EQUITY
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Liabilities:
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Accounts Payable and Accrued Expenses
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$
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4,082
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$
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19,190
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Securities Sold Short, at Fair Value
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876
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944
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Due to Broker
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2,774
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34
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Compensatory Units Subject to Mandatory Redemption
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263,980
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Long Term Debt
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60,000
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Other Liabilities
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1,048
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1,198
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Subtotal
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272,760
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81,366
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Capital Units Subject to Mandatory Redemption
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533,553
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TOTAL LIABILITIES
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806,313
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81,366
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Commitments and Contingencies
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Minority and Non-controlling Interests
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13,399
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17,617
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Excess of Liabilities over Assets
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(729,966
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)
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Members Equity:
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Members Capital (64,037,910 units issued and
outstanding at September 30, 2007)
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765,299
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Retained Deficit
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(764,547
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)
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TOTAL MEMBERS EQUITY
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(729,966
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)
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752
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TOTAL LIABILITIES AND MEMBERS EQUITY
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$
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89,746
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$
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99,735
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See accompanying notes to financial statements
2
Pzena
Investment Management, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, unaudited)
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For the Three Months Ended September 30,
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For the Nine Months Ended September 30,
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2006
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2007
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2006
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2007
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REVENUE
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$
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29,388
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$
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40,217
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$
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81,198
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$
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112,355
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EXPENSES
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Compensation and Benefits Expense
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18,490
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8,807
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56,868
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121,213
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General and Administrative Expenses
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1,723
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2,958
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5,291
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7,587
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TOTAL OPERATING EXPENSES
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20,213
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11,765
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62,159
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128,800
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Operating Income/(Loss)
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9,175
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28,452
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19,039
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(16,445
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)
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Interest Income/(Expense), Net
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136
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(409
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)
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451
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156
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Dividend Income, Net
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183
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187
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413
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458
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Realized and Unrealized Gain/(Loss), Net on Marketable
Securities and Securities Sold Short
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1,455
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(1,218
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)
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2,250
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(263
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)
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Equity in Earnings/(Loss) of Affiliates
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553
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(148
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)
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374
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(3
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)
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Other
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(57
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)
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(33
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)
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|
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(196
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)
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(8
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)
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Total Other Income/(Loss)
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2,270
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(1,621
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)
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3,292
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|
|
340
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|
|
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INCOME/(LOSS) BEFORE INCOME TAXES AND MINORITY AND
NON-CONTROLLING INTERESTS
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11,445
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26,831
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22,331
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(16,105
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)
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Provision for Income Taxes
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|
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1,058
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1,269
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3,072
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|
|
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3,876
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Minority and Non-Controlling Interests
|
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720
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|
|
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(711
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)
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1,323
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(74
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)
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Income/(Loss) Before Interest on Mandatorily Redeemable Units
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9,667
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26,273
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17,936
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(19,907
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)
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Less: Interest on Mandatorily Redeemable Units
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|
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11,314
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|
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|
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|
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46,751
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|
|
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16,575
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|
|
|
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NET INCOME/(LOSS)
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$
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(1,647
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)
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$
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26,273
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|
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$
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(28,815
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)
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|
$
|
(36,482
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)
|
|
|
|
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|
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|
|
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See accompanying notes to financial statements
3
Pzena
Investment Management, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands, unaudited)
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
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For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
$
|
(1,647
|
)
|
|
$
|
26,273
|
|
|
$
|
(28,815
|
)
|
|
$
|
(36,482
|
)
|
Adjustments to Reconcile Net Income/(Loss) to Cash Provided by
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
76
|
|
|
|
109
|
|
|
|
212
|
|
|
|
267
|
|
Non-Cash Compensation
|
|
|
6,396
|
|
|
|
|
|
|
|
12,990
|
|
|
|
82,887
|
|
Non-Cash Interest on Mandatorily Redeemable Units
|
|
|
6,218
|
|
|
|
|
|
|
|
13,868
|
|
|
|
(2,420
|
)
|
Realized and Unrealized (Gain)/Loss, Net on Marketable
Securities and Securities Sold Short
|
|
|
(1,455
|
)
|
|
|
1,219
|
|
|
|
(2,250
|
)
|
|
|
264
|
|
Minority and
Non-Controlling
Interests
|
|
|
720
|
|
|
|
(711
|
)
|
|
|
1,323
|
|
|
|
(74
|
)
|
Equity in (Earnings)/Loss of Affiliates and Investment
Partnerships
|
|
|
(553
|
)
|
|
|
148
|
|
|
|
(374
|
)
|
|
|
3
|
|
Deferred Income Taxes
|
|
|
108
|
|
|
|
(48
|
)
|
|
|
213
|
|
|
|
(42
|
)
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory Fees Receivable
|
|
|
(2,721
|
)
|
|
|
(377
|
)
|
|
|
(3,971
|
)
|
|
|
(1,214
|
)
|
Due From Broker
|
|
|
(421
|
)
|
|
|
114
|
|
|
|
519
|
|
|
|
852
|
|
Restricted Cash
|
|
|
116
|
|
|
|
(23
|
)
|
|
|
95
|
|
|
|
(60
|
)
|
Prepaid Expenses and Other Assets
|
|
|
(56
|
)
|
|
|
(1,086
|
)
|
|
|
1,201
|
|
|
|
(2,238
|
)
|
Due to Broker
|
|
|
153
|
|
|
|
(42
|
)
|
|
|
153
|
|
|
|
(2,740
|
)
|
Accrued Expenses and Other Liabilities
|
|
|
2,995
|
|
|
|
6,082
|
|
|
|
13,338
|
|
|
|
14,332
|
|
Purchases of Marketable Securities and Securities Sold Short
|
|
|
(4,858
|
)
|
|
|
(10,704
|
)
|
|
|
(12,318
|
)
|
|
|
(20,209
|
)
|
Proceeds From Sale of Marketable Securities and Securities Sold
Short
|
|
|
3,254
|
|
|
|
3,608
|
|
|
|
10,467
|
|
|
|
13,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
8,325
|
|
|
|
24,562
|
|
|
|
6,651
|
|
|
|
46,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Affiliates
|
|
|
|
|
|
|
|
|
|
|
(5,625
|
)
|
|
|
|
|
Investments in Investment Partnerships
|
|
|
|
|
|
|
|
|
|
|
5,460
|
|
|
|
|
|
Receivable from Related Parties
|
|
|
66
|
|
|
|
7
|
|
|
|
171
|
|
|
|
83
|
|
Purchases of Property and Equipment
|
|
|
(73
|
)
|
|
|
(81
|
)
|
|
|
(164
|
)
|
|
|
(1,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(7
|
)
|
|
|
(74
|
)
|
|
|
(158
|
)
|
|
|
(1,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions From Members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,609
|
|
Distributions to Members
|
|
|
|
|
|
|
(68,546
|
)
|
|
|
|
|
|
|
(113,455
|
)
|
Debt Proceeds
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
60,000
|
|
Contributions From Affiliates
|
|
|
1,101
|
|
|
|
9,750
|
|
|
|
2,368
|
|
|
|
11,971
|
|
Distributions to Affiliates
|
|
|
|
|
|
|
(5,612
|
)
|
|
|
(1,036
|
)
|
|
|
(7,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By/(Used in) Financing Activities
|
|
|
1,101
|
|
|
|
(4,408
|
)
|
|
|
1,332
|
|
|
|
(45,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
$
|
9,419
|
|
|
$
|
20,080
|
|
|
$
|
7,825
|
|
|
$
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS Beginning of Period
|
|
$
|
3,817
|
|
|
$
|
10,011
|
|
|
$
|
4,969
|
|
|
$
|
30,920
|
|
Effect of Initial Consolidation of Affiliates
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents Beginning of Period
(Adjusted)
|
|
|
3,817
|
|
|
|
10,011
|
|
|
|
5,411
|
|
|
|
30,920
|
|
Net Increase/(Decrease) in Cash and Cash Equivalents
|
|
|
9,419
|
|
|
|
20,080
|
|
|
|
7,825
|
|
|
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of Period
|
|
$
|
13,236
|
|
|
$
|
30,091
|
|
|
$
|
13,236
|
|
|
$
|
30,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
5,111
|
|
|
$
|
61
|
|
|
$
|
32,899
|
|
|
$
|
19,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes Paid
|
|
$
|
620
|
|
|
$
|
1,388
|
|
|
$
|
2,060
|
|
|
$
|
4,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
4
Pzena
Investment Management, LLC and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2007
(in thousands, except for unit amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of
|
|
|
|
|
|
|
Capital
|
|
|
Members
|
|
|
Retained
|
|
|
Liabilities
|
|
|
|
|
|
|
Units
|
|
|
Capital
|
|
|
Deficit
|
|
|
Over Assets
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(19,669
|
)
|
|
$
|
(19,669
|
)
|
Net Income Before Interest on Mandatorily Redeemable Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,936
|
|
|
|
17,936
|
|
Interest on Mandatorily Redeemable Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,751
|
)
|
|
|
(46,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(48,484
|
)
|
|
$
|
(48,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of
|
|
|
|
|
|
|
Capital
|
|
|
Members
|
|
|
Retained
|
|
|
Liabilities
|
|
|
|
|
|
|
Units
|
|
|
Capital
|
|
|
Deficit
|
|
|
Over Assets
|
|
|
Total
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(729,966
|
)
|
|
$
|
(729,966
|
)
|
Net Income Prior to Amendment of Operating Agreement on
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,075
|
)
|
|
|
(88,075
|
)
|
Amortization of Deferred Compensation Prior to Amendment of
Operating Agreement on March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,901
|
|
|
|
1,901
|
|
Reclassification of Liabilities to Capital Units
|
|
|
63,778,720
|
|
|
|
875,096
|
|
|
|
(816,140
|
)
|
|
|
816,140
|
|
|
|
875,096
|
|
Net Income Subsequent to Amendment of Operating Agreement on
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
51,593
|
|
|
|
|
|
|
|
51,593
|
|
Amortization of Deferred Compensation Subsequent to Amendment of
Operating Agreement on March 31, 2007
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Unit forfeiture
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Exercise
|
|
|
266,690
|
|
|
|
3,609
|
|
|
|
|
|
|
|
|
|
|
|
3,609
|
|
Distributions to Members
|
|
|
|
|
|
|
(113,455
|
)
|
|
|
|
|
|
|
|
|
|
|
(113,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
64,037,910
|
|
|
$
|
765,299
|
|
|
$
|
(764,547
|
)
|
|
$
|
|
|
|
$
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
5
Pzena
Investment Management, LLC and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
Pzena Investment Management, LLC, together with its subsidiaries
(the Company), is an investment adviser which is
registered under the Investment Advisers Act of 1940 and is
headquartered in New York, New York. The Company currently
manages assets in ten value-oriented investment strategies
across a wide range of market capitalizations in both
U.S. and international capital markets.
The Company has consolidated the results of operations and
financial condition of the following private investment
partnerships as of and for the three and nine-months ended
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
Ownership at
|
|
Entity
|
|
Type of Entity (Date of Formation)
|
|
September 30, 2007
|
|
|
Pzena Large Cap Value Fund
|
|
Massachusetts Trust (11/1/02)
|
|
|
99.6
|
%
|
Pzena Large Cap Value Fund II
|
|
Massachusetts Trust (8/1/2006)
|
|
|
99.9
|
%
|
Pzena International Value Service
|
|
Delaware Limited Liability Company (12/22/2003)
|
|
|
0.0
|
%
|
Pzena Global Value Service
|
|
Delaware Limited Liability Company (12/22/2003)
|
|
|
0.0
|
%
|
Pzena Emerging Markets Value Service
|
|
Delaware Limited Liability Company (12/28/2006)
|
|
|
89.9
|
%
|
Pzena Mega Cap Value Fund
|
|
Massachusetts Trust (2/23/2007)
|
|
|
99.9
|
%
|
Pursuant to its Operating Agreement, the Company will continue
until December 31, 2026, unless a terminating event, as
defined in the Operating Agreement, occurs prior to this date.
Members are not liable for repayment, satisfaction or discharge
of any debts, liabilities or obligations of the Company, except
to the extent of their capital accounts.
Concurrent with the initial public offering of Pzena Investment
Management, Inc. on October 30, 2007, the Companys
operating agreement was amended and restated such that, among
other things, Pzena Investment Management, Inc. became the sole
managing member of the Company as of that date. These
transactions are described in Note 13.
|
|
Note 2
|
Significant
Accounting Policies
|
Basis
of Presentation:
The consolidated financial statements are prepared in conformity
with U.S. generally accepted accounting principles and
related SEC rules and regulations. The Companys policy is
to consolidate all majority-owned subsidiaries in which it has a
controlling financial interest and variable interest entities
where the Company is deemed to be the primary beneficiary. The
Company also consolidates non-variable-interest entities in
which it acts as the general partner or managing member. All
significant intercompany transactions and balances have been
eliminated.
The consolidated financial statements of the Company include the
results of operations and financial condition of the Pzena Large
Cap Value Fund, the Pzena Large Cap Value Fund II, the
Pzena Emerging Markets Value Service, the Pzena Investment
Management Select Fund, LP and the Pzena Mega Cap Value Fund as
of, and from, the dates of their formation. Pzena Investment
Management Select Fund, LP was consolidated through
January 23, 2007, the date of its liquidation. Pursuant to
the guidance of Emerging Issues Task Force Issue
04-5,
Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights
(EITF 04-5),
the results of operations of the Pzena International Value
Service and the Pzena Global Value Service have been
consolidated effective January 1, 2006. All of these
entities represent private investment partnerships over which
the Company exercises control. Minority and non-
6
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
controlling interests recorded on the consolidated financial
statements of the Company includes the non-controlling interests
of the outside investors in each of these entities.
The Company acts as the investment manager for four trusts and
one offshore investment company, each of which are considered
variable-interest entities. Each of these entities are vehicles
through which the Company offers its Global Value and/or
International Value strategies and each commenced operations in
2006. The Company is not considered the primary beneficiary of
any of these entities. Correspondingly, their results of
operations and financial condition are not consolidated by the
Company. The total net assets of these variable-interest
entities were approximately $1,031.0 million at
September 30, 2007. The Company is not exposed to losses as
a result of its involvement with these entities because it has
no direct investment in them.
Investments in private investment partnerships in which the
Company has a minority interest and exercises significant
influence are accounted for using the equity method. Such
investments are reflected on the consolidated statements of
financial condition as investments in affiliates and are
recorded at the amount of capital reported by the respective
private investment partnerships. Such capital accounts reflect
the contributions paid to, distributions received from, and the
equity earnings of, the private investment partnerships. The
earnings of these private investment partnerships are included
in equity in earnings of affiliates in the consolidated
statements of operations.
Prior to March 31, 2007, the Companys membership
units were categorized as either Compensatory or Capital.
Because both types of units had features of both debt and
equity, the Company accounted for them pursuant to Statement of
Financial Accounting Standards No. 123(R), Share-Based
Payment (FAS 123(R)), and Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity
(FAS 150), as described further below.
Compensatory Units consisted of a series of annual Profits Only
Interest and Class C Profits Interest awards made between
2002 and 2006 that were granted to employees and members for
services rendered. Through March 31, 2007, the
distributions associated with these units, and the subsequent
incremental increase or decrease in their redemption value, were
accounted for as part of compensation expense on the
consolidated statement of operations, as further discussed
below. The cumulative liability for redeeming these units at
December 31, 2006 is shown in the consolidated statement of
financial condition as compensatory units subject to mandatory
redemption.
Capital Units included units issued to founders and those
purchased by certain employees. Through March 31, 2007, the
distributions associated with these units, and the subsequent
incremental increase or decrease in their redemption value, were
accounted for as part of interest in mandatorily redeemable
units on the consolidated statements of operations. The
cumulative liability for redeeming these units at
December 31, 2006 is shown in the consolidated statements
of financial condition as capital units subject to mandatory
redemption.
Effective March 31, 2007, the Company amended its Operating
Agreement to remove all mandatory redemption provisions. As all
of its membership units thereafter had only equity
characteristics, neither distributions nor subsequent
incremental changes to their value were charged against income
from the effective date of the amendment.
Managements
Use of Estimates:
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
for the period. Actual results could differ from those estimates.
Fair
Values of Financial Instruments:
The carrying amount of all financial instruments in the
consolidated statements of financial condition, including
marketable securities, approximate their fair values.
7
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
Revenue
Recognition:
Revenue, comprised of advisory fee income, is recognized over
the period in which investment management services are provided.
Advisory fee income includes management fees that are calculated
based on percentages of assets under management, generally
billed quarterly, either in arrears or advance, depending on
their contractual terms. Advisory fee income also includes
incentive fees that may be earned by the Company depending on
the investment return of the assets under management. Incentive
fee arrangements generally entitle the Company to participate,
on a fixed-percentage basis, in any returns generated in excess
of an
agreed-upon
benchmark. The Companys participation percentage in such
return differentials is then multiplied by assets under
management to determine incentive fees. Returns are calculated
on an annualized basis over the contracts measurement
period, which may extend up to three years. Incentive fees are
generally payable annually. Pursuant to the preferred accounting
method under Emerging Issues Task Force Issue D-96, Accounting
for Management Fees Based on a Formula (EITF D-96), such
incentive fee income is recorded at the conclusion of the
contractual performance period when all contingencies are
resolved.
Unit-based
Compensation:
Prior to January 1, 2006, the Company accounted for its
unit-based compensation in accordance with the provisions of APB
25, and related interpretations. On January 1, 2006, the
Company adopted FAS 123(R), using the modified prospective
method, which requires the recognition of the cost of
equity-based compensation based on the grant-date fair value of
the award. The adoption of FAS 123(R) did not have a
material effect on the results of operations or financial
condition of the Company.
Until March 31, 2007, compensation expense included the
distributions made on Compensatory Units outstanding, as well as
the incremental increases or decreases in the redemption values
of these units subsequent to their grant date over their vesting
period. Distributions are generally paid on the Companys
income before non-cash compensation charges. Prior to
December 31, 2006, Compensatory Unit redemption values were
determined using a formula-based price, based on the
members pro rata share of net fee revenue (as defined in
the Operating Agreement) for the four completed fiscal quarters
immediately preceding redemption. This portion of the redemption
amount was exclusive of any associated accumulated undistributed
earnings, which was also required to be paid to members upon
redemption. Effective December 31, 2006, these units
redemption features were changed from a formula-based plan to a
fair-value based plan. As such, the Company recorded a one-time
increase in compensation expense related to that modification.
The Operating Agreement was amended as of March 31, 2007 to
eliminate the Companys obligation to redeem units under
any circumstance. Since all Compensatory Units thereafter had
only equity characteristics, neither distributions, nor
subsequent incremental changes to these units value, were
charged against income subsequent to March 31, 2007. In
addition, as of March 31, 2007 the Company accelerated the
vesting of all Compensatory Units then subject to vesting. The
Company recorded a one-time charge which was associated with
this acceleration as of March 31, 2007.
Interest
on Mandatorily Redeemable Units:
Until March 31, 2007, interest on mandatorily redeemable
units included distributions made on Capital Units outstanding,
as well as the incremental increases or decreases in the
redemption values of these units. Distributions are generally
paid on the Companys income before non-cash compensation
charges. Prior to January 1, 2005, Capital Units were
redeemable at book value. Accordingly, incremental increases or
decreases to book value in those periods were included as a
component of interest on mandatorily redeemable units.
8
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
Effective January 1, 2005, the Operating Agreement was
amended to require that Capital Units be redeemed on the death
of a member at a formula-based price based on the members
pro rata share of net fee revenue (as defined in the Operating
Agreement) for the four completed fiscal quarters immediately
preceding the members death. This portion of the
redemption amount was exclusive of any accumulated undistributed
earnings associated with such units, which were also required to
be paid to the members estate. Accordingly, as of this
date, any subsequent incremental increases or decreases to this
formula-based price, as well as any change in undistributed
earnings, were included as a component of interest on
mandatorily redeemable units.
Effective December 31, 2006, these units redemption
features were changed from a formula-based plan to a fair-value
based plan. As such, the Company recorded a one-time increase in
interest on mandatorily redeemable units related to that
modification.
Effective March 31, 2007, the Operating Agreement was
amended to eliminate the Companys obligation to redeem
units under any circumstance. Since all Capital Units thereafter
had only equity characteristics, neither distributions, nor
subsequent incremental changes to these units value, were
charged against income subsequent to the effective date of the
amendment.
Compensatory
Units Subject to Mandatory Redemption:
Until the amendment of its Operating Agreement on March 31,
2007, the Company recorded a net liability for its Compensatory
Units equal to the accumulated redemption value as of the
balance sheet date of all such outstanding units. This liability
also included any undistributed earnings attributable to such
units.
Prior to December 31, 2006, vested Compensatory Units were
required to be redeemed on the death of a member at a
formula-based price based on the members pro rata share of
net fee revenue (as defined in the Operating Agreement) for the
four completed fiscal quarters immediately preceding the
members death. Effective December 31, 2006, these
units redemption provisions were changed from a
formula-based plan to a fair-value based plan. As such, the
Company recorded a one-time increase in the liability related to
that modification.
Effective March 31, 2007, the Company amended its Operating
Agreement to remove all mandatory redemption provisions. As of
that date, the liability associated with these units was
reclassified as equity. Further, as of March 31, 2007, the
Company accelerated the vesting of all compensatory units then
subject to vesting.
Capital
Units Subject to Mandatory Redemption:
Until the amendment of its Operating Agreement on March 31,
2007, the Company recorded a net liability for its Capital Units
equal to the accumulated redemption value as of the balance
sheet date of all such outstanding units. This liability also
included any undistributed earnings attributable to such units.
Prior to January 1, 2005, Capital Units were redeemable at
book value. Effective January 1, 2005, the terms of the
Companys Operating Agreement were amended to require that
Capital Units be redeemed on the death of a member at a
formula-based price determined based on the members pro
rata share of net fee revenue (as defined in the Operating
Agreement) for the four completed fiscal quarters immediately
preceding the members death. Effective December 31,
2006, these units redemption provisions were changed from
a formula-based plan to a fair-value based plan. As such, the
Company recorded a one-time increase in the liability related to
that modification.
Effective March 31, 2007, the Company amended its Operating
Agreement to remove all mandatory redemption provisions. As of
that date, the liability associated with these units was
reclassified as equity.
Cash
and Cash Equivalents and Restricted Cash:
The Company considers all highly-liquid debt instruments with a
maturity of three months or less at the time of purchase to be
cash equivalents.
9
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
Interest on cash and cash equivalents is recorded as interest
income on the consolidated statements of operations.
The Company was required to maintain compensating balances of
$2.0 million and $2.1 million at December 31,
2006 and September 30, 2007, respectively, as collateral
for letters of credit issued by a third party in lieu of a cash
security deposit, as required by the Companys lease for
its New York office space. Such amounts are included in
restricted cash on the consolidated statements of financial
condition.
Due
From Broker:
Due from broker consists primarily of cash balances and amounts
receivable for unsettled securities transactions held at the
clearing brokers of the Companys consolidated investment
partnerships.
Due To
Broker:
Due to broker consists primarily of amounts payable for
unsettled securities transactions initiated by the clearing
brokers of the Companys consolidated investment
partnerships.
Investments
in Securities:
Investments in marketable securities and securities sold short
represent primarily the securities held by the Companys
consolidated investment partnerships. All such securities are
classified as trading securities and are recorded at fair value,
with net realized and unrealized gains and losses reported in
earnings in the consolidated statements of operations.
Securities
Valuation:
Investments in marketable equity securities and securities sold
short which are traded on a national securities exchange (or
reported on the NASDAQ national market) are carried at fair
value based on the last reported sales price on the valuation
date. If no reported sales occurred on the valuation date,
investments in securities are valued at the bid price and
securities sold short are valued at the ask price. Securities
transactions are recorded on the trade date.
The net realized gain or loss on sales of securities is
determined on a specific identification basis and is included in
realized and unrealized gain (loss), net on marketable
securities and securities sold short in the consolidated
statements of operations.
Concentrations
of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, restricted cash and advisory fees receivable.
The Company maintains its cash, temporary cash and restricted
cash investments in bank deposit and other accounts whose
balances, at times, exceed Federally insured limits.
The concentration of credit risk with respect to advisory fees
receivable is generally limited, due to the short payment terms
extended to clients by the Company. On a periodic basis, the
Company evaluates its advisory fees receivable and establishes
an allowance for doubtful accounts, if necessary, based on a
history of past write-offs and collections and current credit
conditions. For the three months ended September 30, 2006
and 2007, approximately 20.7% and 19.3%, respectively, of the
Companys advisory fees were generated from an advisory
agreement with one client. For the nine months ended
September 30, 2006 and 2007, fees generated from this
agreement comprised 19.8% and 21.6%, respectively, of the
Companys total advisory fees. At December 31, 2006
and September 30, 2007, no allowance for doubtful accounts
has been deemed necessary.
10
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
Property
and Equipment:
Property and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is provided on a
straight-line basis over the estimated useful lives of the
respective assets, which range from three to seven years.
Leasehold improvements are amortized on a straight-line basis
over the shorter of the useful life of the improvements or the
remaining lease term.
Business
Segments:
The Company views its operations as comprising one operating
segment.
Income
Taxes:
The Company is a limited liability company that has elected to
be treated as a partnership for tax purposes. The Company has
not made provision for federal or state income taxes because it
is the personal responsibility of each of the Companys
members to separately report their proportionate share of the
Companys taxable income or loss. Similarly, the income of
the Companys consolidated investment partnerships is not
subject to income taxes, as it is allocated to each
partnerships individual partners. The Company has made
provision for New York City Unincorporated Business Tax. The
Company is a cash basis taxpayer.
The Company accounts for the New York City Unincorporated
Business Tax pursuant to the asset and liability method, which
requires deferred income tax assets and liabilities to be
recorded for temporary differences between the financial
statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future, based on
enacted tax laws and rates applicable to the periods in which
the temporary differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The
income tax provision, or credit, is the tax payable or
refundable for the period, plus or minus the change during the
period in deferred tax assets and liabilities.
Foreign
Currency:
Investment securities and other assets and liabilities
denominated in foreign currencies are translated into
U.S. dollar amounts at the date of valuation. Purchases and
sales of investment securities and income and expense items
denominated in foreign currencies are translated into
U.S. dollar amounts on the respective dates of such
transactions.
The Company does not isolate that portion of the results of its
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included in the
net realized and unrealized gain/(loss), net on marketable
securities and securities sold short.
Reported net realized foreign exchange gains or losses arise
from sales of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities
transactions, and the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on
the Companys books and the U.S. Dollar equivalent of
the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the fair values
of assets and liabilities, other than investments in securities
at fiscal period end, resulting from changes in exchange rates.
New
Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 prescribed the minimum
recognition threshold a tax position must meet in connection
with accounting for uncertainties in income tax positions taken,
or expected to be taken, by an entity before being measured and
recognized in the financial
11
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
statements. The Company adopted FIN 48 on January 1,
2007. The impact of the adoption of this standard was not
material.
In September 2006, the FASB released Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(FAS 157). FAS 157 establishes an authoritative
definition of fair value, sets out a framework for measuring
fair value, and requires additional disclosures about fair-value
measurements. The application of FAS 157 is required for
fiscal years beginning after November 15, 2007. Management
is in the process of assessing the impact of this standard on
the consolidated financial statements of the Company.
In June 2007, the American Institute of Certified Public
Accountants issued Statement of Position
No. 07-1,
Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and
Equity Method Investors for Investments in Investment Companies
(SOP 07-1).
SOP 07-1
clarifies the definition of an investment company and whether
the specialized accounting model of an investment company may be
retained by a parent company in consolidation or by an investor
in the application of the equity method of accounting.
SOP 07-1
will be effective for reporting periods beginning on or after
December 15, 2007. The Company is currently evaluating the
potential impact of the adoption of
SOP 07-1
on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits an entity to
elect to measure certain financial instruments and certain other
items at fair value with changes in fair value recognized in
earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently
evaluating the potential impact of the adoption of SFAS 159
on its consolidated financial statements.
|
|
Note 3
|
Property
and Equipment
|
Property and equipment, net, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Computer Hardware
|
|
$
|
682
|
|
|
$
|
789
|
|
Computer Software
|
|
|
141
|
|
|
|
144
|
|
Furniture and Fixtures
|
|
|
775
|
|
|
|
1,156
|
|
Office Equipment
|
|
|
189
|
|
|
|
243
|
|
Leasehold Improvements
|
|
|
1,133
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,920
|
|
|
|
4,446
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
(1,044
|
)
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,876
|
|
|
$
|
3,144
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense, included in general and
administrative expenses, totaled $0.1 million and
$0.1 million for the three months ended September 30,
2006 and 2007, respectively. Such expenses totaled
$0.2 million and $0.3 million for the nine months
ended September 30, 2006 and 2007, respectively.
|
|
Note 4
|
Related
Party Transactions
|
For the three and nine months ended September 30, 2007, the
Company earned $2.1 million and $5.6 million,
respectively, in investment advisory fees from unconsolidated
entities in which it has an ownership interest and for which it
acts as the investment manager. For the three and nine months
ended September 30, 2006, such advisory fees totaled
$0.8 million and $1.4 million, respectively.
12
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
At December 31, 2006 and September 30, 2007, the
Company had advanced $0.1 million to an international
investment company for organization and
start-up
costs, which are included in receivable from related parties on
the consolidated statements of financial condition. The Company
is the sponsor and investment manager of this entity.
At December 31, 2006 and September 30, 2007,
receivable from related parties included $0.5 million and
$0.2 million, respectively, of loans to employees. Certain
of these loans are in the form of forgivable promissory notes
which are amortized through compensation expense pursuant to
their terms.
Employees of the Company who are considered accredited investors
have the ability to open separately-managed accounts, or invest
in certain of the Companys consolidated investment
partnerships, without being assessed advisory fees. Investments
by employees in separately-managed accounts are permitted only
at the discretion of the Executive Committee, but are generally
not subject to the same minimum investment levels that are
required of outside investors. Some of the investment advisory
fees that are waived on separately managed accounts for
employees are for strategies that typically have account
minimums, which vary by strategy, but typically average
approximately $50,000 per account per year. The impact of this
benefit is not material to the Companys consolidated
financial statements for any period presented.
|
|
Note 5
|
Investments
in Affiliates
|
The Company holds investments in, and acts as manager of, an
unconsolidated investment partnership which is accounted for
under the equity method. Summary financial information related
to this entity is as follows:
|
|
|
|
|
|
|
|
|
|
|
PAI Hedged Value Fund, LLC
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Investments, at Fair Value
|
|
$
|
12,277
|
|
|
$
|
13,106
|
|
Total Liabilities
|
|
|
(12
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
12,265
|
|
|
$
|
13,088
|
|
|
|
|
|
|
|
|
|
|
Equity Held by the Company
|
|
$
|
3,613
|
|
|
$
|
3,610
|
|
|
|
|
|
|
|
|
|
|
Ownership Percentage
|
|
|
29%
|
|
|
|
28%
|
|
|
|
|
|
|
|
|
|
|
|
|
PAI Hedged Value Fund, LLC
|
|
|
|
The Three Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Net Investment Income
|
|
$
|
31
|
|
|
$
|
10
|
|
Net Realized and Unrealized Income (Loss)
|
|
|
991
|
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,022
|
|
|
$
|
(537
|
)
|
|
|
|
|
|
|
|
|
|
Companys Equity in Earnings/(Loss)
|
|
$
|
553
|
|
|
$
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
13
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
PAI Hedged Value Fund, LLC
|
|
|
|
The Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Net Investment Income
|
|
$
|
20
|
|
|
$
|
1
|
|
Net Realized and Unrealized Income (Loss)
|
|
|
673
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
693
|
|
|
$
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Companys Equity in Earnings/(Loss)
|
|
$
|
374
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
|
Commitments
and Contingencies
|
In the normal course of business, the Company enters into
agreements that include indemnities in favor of third parties,
such as engagement letters with advisors and consultants. In
certain cases, the Company may have recourse against third
parties with respect to these indemnities. The Company maintains
insurance policies that may provide coverage against certain
claims under these indemnities. FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), providing accounting and
disclosure requirements for certain guarantees. The Company has
had no claims or payments pursuant to these agreements, and it
believes the likelihood of a claim being made is remote.
Utilizing the methodology in FIN 45, the Companys
estimate of the value of such guarantees is de minimis, and,
therefore, an accrual has not been made in the consolidated
financial statements.
In the normal course of business, the Company may also be
subject to various legal proceedings from time to time.
Currently, there are no such proceedings pending against the
Company.
The Company leases office space under a non-cancelable operating
lease agreement which expires on October 31, 2015. The
Company reflects lease expense over the lease term on a
straight-line basis. In early 2007, the Company agreed to lease
additional office space at the Companys headquarters at
120 West 45th Street, New York, New York. The Company
took possession of this space on March 1, 2007. The new
lease is co-terminus with the Companys existing lease.
Lease expenses for the three months ended September 30,
2006 and 2007 were $0.3 million and $0.5 million,
respectively. Such expenses totaled $0.9 million and
$1.2 million for the nine months ended September 30,
2006 and 2007, respectively.
The Company maintains a defined contribution pension plan which
covers substantially all members and employees. The Company may
make contributions to the plan at the discretion of management.
Under the terms of the plan, all such contributions vest
immediately. Company contributions for the three months ended
September 30, 2006 and 2007 were $0.3 million and
$0.4 million, respectively. Such contributions totaled
$0.8 million and $1.1 million for the nine months
ended September 30, 2006 and 2007, respectively.
As discussed further in Note 12, the Company issued
Compensatory Units to employees and members which had redemption
features that required them to be classified as liabilities in
the consolidated statements of financial condition. Prior to
March 31, 2007, distributions on the Compensatory Units
outstanding, and changes in these units redemption values,
were recorded as compensation expense. Effective
December 31, 2006, the terms of these units
redemption features were changed from a formula-based plan to a
fair-value based plan.
14
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
As of March 31, 2007, the effective date of the amendment
to the Operating Agreement to eliminate the Companys
obligation to redeem units under any circumstance, the
unit-based compensation awards previously categorized as
liabilities were reclassified as equity. Further, as of
March 31, 2007, the Company accelerated the vesting of all
Compensatory Units then subject to vesting. Subsequent to this
date, distributions on these units are not considered a
component of compensation expense and are instead recorded as a
direct reduction of members capital.
Compensation and benefits expense to employees and members is
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Cash Compensation and Benefits
|
|
$
|
8,802
|
|
|
$
|
8,807
|
|
Distributions on Compensatory Units
|
|
|
3,292
|
|
|
|
|
|
Change in Redemption Value of Compensatory Units
|
|
|
6,396
|
|
|
|
|
|
Other Non-Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compensation and Benefits Expense
|
|
$
|
18,490
|
|
|
$
|
8,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Cash Compensation and Benefits
|
|
$
|
26,020
|
|
|
$
|
26,239
|
|
Distributions on Compensatory Units
|
|
|
17,858
|
|
|
|
12,087
|
|
Change in Redemption Value of Compensatory Units
|
|
|
12,990
|
|
|
|
15,969
|
|
Acceleration of Vesting of Compensatory Units
|
|
|
|
|
|
|
64,968
|
|
Other Non-Cash Compensation
|
|
|
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
Total Compensation and Benefits Expense
|
|
$
|
56,868
|
|
|
$
|
121,213
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
|
Long Term
Debt and Credit Facility
|
On July 23, 2007, the Company entered into a
$60.0 million, three-year term loan agreement, the proceeds
of which were used to finance a one-time distribution to current
members. The principal amount borrowed bears interest at a
variable rate based, at the Companys option, on
(1) the one, two, three, six, nine or twelve-month LIBOR
Market Index Rate plus 1.00%, or (2) the higher of the
lenders prime rate and the Federal Funds Rate. The
principal amount is payable in full at the end of the three-year
term, with no penalty for prepayment. For the year ended
July 23, 2008, the interest rate in effect will be 6.41%,
which is equal to the twelve-month LIBOR rate in effect at the
time of the closing of the agreement of 5.41% plus 1.00%.
Approximately $0.1 million in debt issuance costs were
incurred associated with this loan. Such costs have been
recorded in prepaid expenses and other assets and will be
amortized over the term of the loan as a component of other
income on the consolidated statements of operations.
Also on July 23, 2007, the Company obtained a
$20.0 million revolving credit facility, which will expire
on July 23, 2010, in order to finance its short term
working capital needs. This facility carries a commitment fee of
0.2% on any unused amounts. As of and for the period ended
September 30, 2007, no balance was outstanding against the
facility.
15
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
The provision for New York City Unincorporated Business Tax is
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
The Three Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Current
|
|
$
|
950
|
|
|
$
|
1,317
|
|
Deferred
|
|
|
108
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,058
|
|
|
$
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Nine Months
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Current
|
|
$
|
2,859
|
|
|
$
|
3,918
|
|
Deferred
|
|
|
213
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,072
|
|
|
$
|
3,876
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities of $1.0 million and
$0.9 million are included in other liabilities at
December 31, 2006 and September 30, 2007,
respectively. Deferred tax liabilities are primarily the result
of the Companys use of the cash basis of accounting for
income taxes.
The income tax provision differs from the expense that would
result from applying the New York City Unincorporated Business
Tax rate to income before income taxes. The primary difference
results from members compensation, which is not deductible
for tax purposes.
|
|
Note 11
|
Investments
in Marketable Securities
|
Marketable securities and securities sold short consisted of the
following at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gain/(Loss)
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
Equities
|
|
$
|
20,828
|
|
|
$
|
2,419
|
|
|
$
|
23,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Proceeds
|
|
|
(Gain)/Loss
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
Equity Securities Sold Short
|
|
$
|
681
|
|
|
$
|
195
|
|
|
$
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities consisted of the following at
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gain/(Loss)
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
Equities
|
|
$
|
29,186
|
|
|
$
|
1,038
|
|
|
$
|
30,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Proceeds
|
|
|
(Gain)/Loss
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
Equity Securities Sold Short
|
|
$
|
941
|
|
|
$
|
3
|
|
|
$
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12
|
Members
Equity Interests
|
Prior to December 31, 2006, ownership interests in the
Company were comprised of Capital Units (Class A Voting
Units and Class B Non-Voting Units), and various series of
Profits-Only Interests and Class C Profits Interests. With
the exception of the Class B Non-Voting Units, all units
were entitled to vote. All of the Profits-Only Interests and
Class C Profits Interests were granted to employees and
members as unit-based compensation. Profits-Only Interests
vested ratably over a three-year period, while the Class C
Profits Interests cliff vested at the conclusion of their
three-year term. Profits and losses were allocated on a pro rata
basis according to the terms of the Operating Agreement.
Effective January 1, 2005, the Operating Agreement was
amended to require that all Capital Units be repurchased in the
event of the holders death or, if applicable, termination
of employment, at a formula-based price, determined by the
holders pro rata share of net fee revenue (as defined in
the Operating Agreement) for the four completed fiscal quarters
immediately preceding the holders death or, if applicable,
the holders termination of employment. Profits-Only
Interests and Class C Profits Interests had similar
repurchase provisions effective from their respective dates of
grant. These redemption amounts were exclusive of any
accumulated undistributed earnings associated with such units,
which were also required to be paid to the holders estate.
Prior to this amendment, all Capital Units were required to be
repurchased at their book value at the time of the
unitholders death. These redemption features caused all of
the Companys units to be classified as liabilities as of
the effective date of FAS 150 with respect to the Company,
which was July 1, 2003.
Prior to March 31, 2007, distributions made with respect to
Compensatory Units were classified as compensation expense.
Incremental changes to these units redemption values
subsequent to the grant date were also included as a component
of compensation expense at each reporting period. For the
Companys non-compensatory units (Capital Units),
distributions and incremental changes in the net liability
associated with these units redemption values have been
recorded as components of interest on mandatorily redeemable
units in the consolidated statements of operations for all
periods prior to March 31, 2007.
Upon a sale of the Company, proceeds were to be allocated first
to the holders of Capital Units, and then to the holders of
Profits-Only Interests and Class C Profits Interests based
on their pro rata share of the incremental increase in assigned
value of the Company above the point at which the respective
units were issued.
On December 31, 2006, the Company initiated a capital
restructuring, wherein all of the outstanding Compensatory Units
and Capital Units were exchanged for new units on a percentage
basis determined by the outstanding units relative fair
values. These new units all retained the same earnings sharing
and voting rights, but participate in the potential liquidation
of the Company on a pro rata basis. The Company and unitholders
each had fair-value put and call provisions, subject to certain
restrictions, that allowed for redemption only for vested units
that have been held longer than six months. New units exchanged
for units previously issued retained their original liability
classification. Of the total $696.3 million increase in
value arising from the change from a formula-based redemption
plan to a fair-value plan, approximately $232.5 million was
associated with compensatory unit awards and charged to
compensation expense on December 31, 2006. The remaining
$463.8 million was recorded as a component of interest on
mandatorily redeemable units for the year ended
December 31, 2006.
The Operating Agreement was amended as of March 31, 2007 to
eliminate the Companys obligation to redeem units under
any circumstance. As a result, all units that were categorized
as liabilities in the Companys consolidated financial
statements were reclassified as equity as of March 31,
2007. Subsequent to this date, distributions paid on unit-based
compensation and incremental changes to these units value
are not considered a component of compensation expense and are
instead recorded as a direct reduction of undistributed
earnings. As of
17
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
March 31, 2007, the Company accelerated the vesting of all
Compensatory Units then subject to vesting. The one-time charge
associated with this acceleration, approximately
$65.0 million, was recorded on March 31, 2007.
Capital Units, all subject to mandatory redemption upon the
death of the holders, consisted of:
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Members Capital (39,891,000 units issued and outstanding at
December 31, 2006)
|
|
$
|
18,383
|
|
Undistributed Loss Attributable to Capital Units
|
|
|
(214,796
|
)
|
Excess of Redemption Amount Over Capital and Undistributed
Loss
|
|
|
729,966
|
|
|
|
|
|
|
Total
|
|
$
|
533,553
|
|
|
|
|
|
|
Compensation expense associated with the Companys
Compensatory Units, consisting of Profits-Only Interests and
Class C Profits Interests, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Distributions on Compensatory Units
|
|
$
|
3,292
|
|
|
$
|
|
|
Change in Redemption Value of Compensatory Units
|
|
|
6,396
|
|
|
|
|
|
Acceleration of Vesting of Compensatory Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unit-Based Compensation Expense
|
|
$
|
9,688
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Distributions on Compensatory Units
|
|
$
|
17,858
|
|
|
$
|
12,087
|
|
Change in Redemption Value of Compensatory Units
|
|
|
12,990
|
|
|
|
15,969
|
|
Acceleration of Vesting of Compensatory Units
|
|
|
|
|
|
|
64,968
|
|
|
|
|
|
|
|
|
|
|
Total Unit-Based Compensation Expense
|
|
$
|
30,848
|
|
|
$
|
93,024
|
|
|
|
|
|
|
|
|
|
|
In 2007, the Company granted 129,000 options to purchase
Capital Units to certain employees and members pursuant to the
Pzena Investment Management, LLC 2006 Equity Incentive Plan.
These options vest ratably over a four-year period and were
issued at a strike price of $13.53, which was equal to the
assessed fair market value per unit at the time of award
issuance. The Company determined that the total grant-date fair
value of these options was approximately $2.0 million,
using the Black-Scholes option pricing model with the following
assumptions:
|
|
|
|
|
Weighted-average Time Until Exercise:
|
|
|
7 years
|
|
Volatility:
|
|
|
30%
|
|
Risk Free Rate:
|
|
|
5.22%
|
|
Dividend Yield:
|
|
|
4.87%
|
|
For the nine months ended September 30, 2007, the Company
recognized approximately $2.0 million in other non-cash
compensation expense associated with the accelerated
amortization of the grant-date fair value of these options.
18
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
The following is a summary of the option activity for the nine
months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance at January 1, 2007
|
|
|
|
|
|
$
|
|
|
Options Granted
|
|
|
645,000
|
|
|
|
13.53
|
|
Options Cancelled
|
|
|
(20,000
|
)
|
|
|
(13.53
|
)
|
Options Exercised
|
|
|
(266,690
|
)
|
|
|
(13.53
|
)
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
358,310
|
|
|
|
13.53
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of options issued in
2007 was $13.53.
Except as otherwise provided by law, the liability of a member
of the Company is limited to the amount of its capital account.
A member may transfer or assign all, or any part of, its
membership interest to any other party (a
Transferee). A Transferee of such membership
interest shall not become a member unless its membership in the
Company is unanimously approved by the then existing member(s)
in writing. Any Transferee admitted as a member shall succeed to
the capital account or portion thereof transferred or assigned,
as if no such transfer or assignment had occurred.
On February 13, 2007, the Company accelerated the vesting
of 285,000 of the 315,500 Class A Voting Units that were
granted on January 1, 2007 pursuant to its 2006 Equity
Incentive Plan and repurchased them from a departing employee.
The charge associated with this acceleration was approximately
$3.8 million and has been included in compensation expense
for the nine months ended September 30, 2007.
In 2003, the Company issued immediately vested options to
purchase Capital Units to a member, exercisable at various
prices and expiring in September 2013. In each of January 2004,
2005 and 2006, the terms of the grant were amended to adjust for
the dilutive effect of the issuance of additional members
equity interests. The Company accounted for these options using
the intrinsic value method prescribed by APB 25. No compensation
cost associated with these grants and their subsequent
modifications has been reflected in net income, as all such
options had exercise prices in excess of fair market value on
the date of grant or modification. If the Company had recorded
compensation cost for these options based on the fair value of
the options on the date of grant consistent with
FAS 123(R), the impact on the Companys net income
would not have been material.
On January 1, 2006, the Company effected a
600-for-1 unit
split. On July 17, 2007, the Company effected an additional
5-for-1 unit
split. All unit and per unit amounts have been adjusted to
reflect these splits.
|
|
Note 13
|
Subsequent
Events
|
On October 30, 2007, Pzena Investment Management, Inc.
consummated an initial public offering of 6,100,000 shares
of its Class A common stock, par value $0.01 per share, for
net proceeds of approximately $99.1 million, after payment
of underwriting discounts and estimated offering expenses. These
net proceeds were used to purchase 6,100,000 membership units of
the Company, representing 9.5% of the then outstanding
membership units of the Company, from two outside investors and
one former employee of the Company. Concurrently with the
consummation of Pzena Investment Management, Inc.s initial
public offering, the operating agreement of the Company was
amended and restated such that, among other things, Pzena
Investment Management, Inc. became the sole managing member of
the Company. The acquisition of the Companys membership
interests by Pzena Investment Management, Inc. will be treated
as a reorganization of entities under common control pursuant to
the guidance set forth in Financial Accounting Standards Board
Technical Bulletin No. 85-5, Issues Relating to Accounting
for Business Combinations
(FTB 85-5).
Accordingly, the net assets assumed by Pzena Investment
Management, Inc. through the offering will be reported at the
Companys historical cost basis. As a result of these
transactions, as of and subsequent to October 30, 2007,
(i) Pzena Investment Management, Inc. will consolidate the
financial results of the Company with its own and reflect the
90.5% membership interest in the
19
Pzena
Investment Management, LLC and Subsidiaries
Notes to
Consolidated Financial Statements
(unaudited) (Continued)
Company it does not own as a non-controlling interest in its
consolidated financial statements, and (ii) Pzena
Investment Management, Inc.s income will be generated by
its 9.5% economic interest in the Companys net income.
In connection with the reorganization and initial public
offering, the Company made a distribution of approximately
$18.5 million on October 19, 2007, which represented
all of the remaining undistributed earnings generated through
the consummation of the transactions, less any amounts required
to fund working capital needs.
On November 21, 2007, a putative class action lawsuit was
commenced in the United States District Court for the Southern
District of New York against Pzena Investment Management, Inc.
and Richard S. Pzena, its chief executive officer, seeking
remedies under Section 11 of the Securities Act of 1933, as
amended. The complaint alleges that the registration statement
and prospectus relating to the initial public offering of the
Class A common stock of Pzena Investment Management, Inc.
contained materially misleading statements and otherwise failed
to disclose a pattern of net redemptions in the John Hancock
Classic Value Fund for which the Company acts as sub-investment
advisor (which is a portion of Pzena Investment Management,
Inc.s Large Cap Value investment strategy). The plaintiff
seeks to represent a class of all persons who purchased or
otherwise acquired Class A common stock in the initial
public offering and seeks damages in an unspecified amount.
Pzena Investment Management, Inc. believes that the allegations
and claims against it and its chief executive officer are
without merit and it intends to contest these claims vigorously.
20
Pzena
Investment Management, Inc.
STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
May 10,
|
|
|
|
|
|
|
2007
|
|
|
September 30,
|
|
|
|
(capitalization)
|
|
|
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
100
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
100
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common Stock ($0.01 par value, 1,000 shares
authorized, 6 shares issued and outstanding)
|
|
$
|
0
|
|
|
$
|
0
|
|
Additional Paid-in Capital
|
|
|
100
|
|
|
|
100
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
$
|
100
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
21
Pzena
Investment Management, Inc.
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Three Months
|
|
May 10, 2007 (capitalization)
|
|
|
Ended September 30, 2007
|
|
through September 30, 2007
|
|
REVENUE
|
|
$
|
|
|
|
$
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Income Per Share
|
|
$
|
|
|
|
$
|
|
|
Weighted Average Shares Used in Basic and Diluted Net Income Per
Share
|
|
|
6
|
|
|
|
6
|
|
See accompanying notes to financial statements
22
Pzena
Investment Management, Inc.
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Three Months
|
|
May 10, 2007 (capitalization)
|
|
|
Ended September 30, 2007
|
|
through September 30, 2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
|
|
|
$
|
|
|
Adjustments to Reconcile Net Income to Cash Flows Provided by
Operating Activities
|
|
|
|
|
|
|
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS Beginning of Period
|
|
$
|
100
|
|
|
$
|
100
|
|
Net Increase/(Decrease) in Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of Period
|
|
$
|
100
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
Supplementary Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes Paid
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
23
Pzena
Investment Management, Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE PERIOD FROM MAY 10, 2007 (CAPITALIZATION)
THROUGH SEPTEMBER 30, 2007
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance at May 10, 2007
|
|
|
6
|
|
|
$
|
0
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
100
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
6
|
|
|
$
|
0
|
|
|
$
|
100
|
|
|
|
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
24
Notes
to Financial Statements of Pzena Investment Management, Inc.
(unaudited)
|
|
1.
|
Organization
and Purpose
|
Pzena Investment Management, Inc. (the Company) was
incorporated in the State of Delaware on May 8, 2007. On
May 10, 2007, the Company issued 100 shares of its
common stock, par value $0.01 per share (the Old Common
Stock), for $100 to Richard S. Pzena, the sole director of
the Company as of that date.
The Company was formed for the purpose of completing a public
offering and related transactions in order to carry on the
business of Pzena Investment Management, LLC, a Delaware limited
liability company, as a publicly-traded company. For this
reason, the Company did not have any operations for the period
from May 10, 2007 through September 30, 2007.
On October 5, 2007, the Company effected a
100-for-6
reverse stock split of all shares of its Old Common Stock then
outstanding. All share amounts have been adjusted to reflect
this split. As of the effectiveness of the amendment and
restatement of the Companys certificate of incorporation
on October 30, 2007, each share of the Old Common Stock
outstanding immediately prior to effectiveness was reclassified
as one share of the Companys Class A common stock,
par value $0.01 per share (the Class A Common
Stock) and the Company was authorized to issue up to
750,000,000 shares of Class A Common Stock.
On October 30, 2007, the Company also consummated an
initial public offering of 6,100,000 shares of its
Class A Common Stock, for net proceeds of approximately
$99.1 million, after payment of underwriting discounts and
estimated offering expenses. These net proceeds were used to
purchase 6,100,000 membership units of Pzena Investment
Management, LLC, representing 9.5% of the then outstanding
membership units of Pzena Investment Management, LLC, from two
outside investors and one former employee of Pzena Investment
Management, LLC. Concurrently with the consummation of the
Companys initial public offering, the operating agreement
of Pzena Investment Management, LLC was amended and restated
such that, among other things, (i) the Company became the
sole managing member of Pzena Investment Management, LLC,
(ii) the 6,100,00 membership units of Pzena Investment
Management, LLC that the Company acquired were reclassified as
Class A Units of Pzena Investment Management, LLC,
(iii) an additional 11,118 Class A Units were issued
to the Company in respect of its issuance of 11,112 shares
of Class A Common Stock to certain directors of the Company
on October 30, 2007, and its contribution of the $100 the
Company received in exchange for its issuance of six shares of
Class A Common Stock on May 10, 2007, and
(iv) the holders of the remaining 90.5% of the outstanding
membership units of Pzena Investment Management, LLC were
reclassified as Class B Units of Pzena Investment
Management, LLC. The acquisition of the Pzena Investment
Management, LLC membership interests by the Company will be
treated as a reorganization of entities under common control
pursuant to the guidance set forth in Financial Accounting
Standards Board Technical
Bulletin No. 85-5,
Issues Relating to Accounting for Business Combinations
(FTB
85-5).
Accordingly, the net assets assumed by the Company through the
offering will be reported at Pzena Investment Management,
LLCs historical cost basis. As a result of these
transactions, as of and subsequent to October 30, 2007,
(i) the Company will consolidate the financial results of
Pzena Investment Management, LLC with its own and reflect the
90.5% membership interest in Pzena Investment Management, LLC it
does not own as a non-controlling interest in its consolidated
financial statements, and (ii) the Companys income
will be generated by its 9.5% economic interest in Pzena
Investment Management, LLCs net income.
On November 21, 2007, a putative class action lawsuit was
commenced in the United States District Court for the Southern
District of New York against the Company and Richard S. Pzena,
its chief executive officer, seeking remedies under
Section 11 of the Securities Act of 1933, as amended. The
complaint alleges that the registration statement and prospectus
relating to the initial public offering of the Class A
Common Stock contained materially misleading statements and
otherwise failed to disclose a pattern of net redemptions in the
John Hancock Classic Value Fund for which the Company acts as
sub-investment
advisor (which is a portion of the Companys Large Cap
Value investment strategy). The plaintiff seeks to represent a
class of all persons who purchased or otherwise acquired
Class A Common Stock in the initial public offering and
seeks damages in an unspecified amount. The Company believes
that the allegations and claims against it and its chief
executive officer are without merit. The Company intends to
contest these claims vigorously.
25
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations of Pzena Investment Management, LLC and
Subsidiaries
|
Overview
We are an investment management firm that utilizes a classic
value investment approach in each of our investment strategies.
We currently manage assets in ten value-oriented investment
strategies across a wide range of market capitalizations in both
U.S. and international capital markets. From
December 31, 2002 to September 30, 2007, our assets
under management, or AUM grew from $3.1 billion to
$28.9 billion, representing a compound annual growth rate
of 60%. As of September 30, 2007, we managed separate
accounts on behalf of over 375 institutions and high net worth
individuals and acted as sub-investment adviser for twelve
SEC-registered mutual funds and ten offshore funds.
The results of operations discussed in this Managements
Discussion and Analysis of Financial Condition and Results of
Operations are the historical consolidated results of operations
of Pzena Investment Management, LLC, our operating company as of
the consummation of the reorganization of Pzena Investment
Management, LLC and the concurrent initial public offering of
our Class A common stock on October 30, 2007. Pursuant
to this reorganization, we became the sole managing member of
Pzena Investment Management, LLC. As such, we now control its
business and affairs and, therefore, consolidate its financial
results with ours. In light of our employees and other
investors collective 90.5% membership interest in our
operating company, we reflect their interests as a
non-controlling interest in our consolidated financial
statements. As a result, subsequent to October 30, 2007,
our income will be generated by our 9.5% economic interest in
our operating companys net income, and similarly,
outstanding shares of our Class A common stock will
represent 9.5% of the outstanding membership units of our
operating company.
Revenue
We generate revenue from management fees and incentive fees,
which we collectively refer to as our advisory fees, by managing
assets on behalf of separate accounts and acting as a
sub-investment adviser for mutual funds and certain other
investment funds. Our advisory fee income is recognized over the
period in which investment management services are provided.
Pursuant to the preferred accounting method under Emerging
Issues Task Force Issue D-96, Accounting for Management Fees
Based on a Formula (EITF D-96), income from incentive fees is
recorded at the conclusion of the contractual performance period
when all contingencies are resolved.
Our advisory fees are primarily driven by the level of our AUM.
Our AUM increases or decreases with the net inflows or outflows
of funds into our various investment strategies and with the
investment performance thereon. In order to increase our AUM and
expand our business, we must develop and market investment
strategies that suit the investment needs of our target clients
and provide attractive returns over the long term. The value and
composition of our AUM, and our ability to continue to attract
clients, will depend on a variety of factors including, among
other things:
|
|
|
|
|
our ability to educate our target clients about our classic
value investment strategies and provide them with exceptional
client service;
|
|
|
|
the relative investment performance of our investment
strategies, as compared to competing products and market indices;
|
|
|
|
competitive conditions in the investment management and broader
financial services sectors;
|
|
|
|
investor sentiment and confidence; and
|
|
|
|
our decision to close strategies when we deem it to be in the
best interests of our clients.
|
For our separately-managed accounts, we are paid fees according
to a schedule which varies by investment strategy. The
substantial majority of these accounts pay us management fees
pursuant to a schedule in which the rate we earn on the AUM
declines as the amount of AUM increases, subject to a minimum
fee to manage each account. Certain of these clients pay us fees
according to the performance of their accounts relative to
certain
agreed-upon
26
benchmarks, which results in a slightly lower base fee, but
allows us to earn higher fees if the relevant investment
strategy outperforms the
agreed-upon
benchmark.
Pursuant to our sub-investment advisory agreements, we are
generally paid a management fee according to a schedule, in
which the rate we earn on the AUM declines as the amount of AUM
increases. Certain of these funds pay us fixed rate management
fees. Due to the substantially larger account size of certain of
these accounts, the average advisory fees we earn on them are
lower than the advisory fees we earn on our separately-managed
accounts.
The majority of advisory fees we earn on separately-managed
accounts are based on the value of AUM at a specific date on a
quarterly basis, either in arrears or advance. Advisory fees on
certain of our separately-managed accounts, and with respect to
most of the mutual funds that we sub-advise, are calculated
based on the average of the monthly or daily market value.
Advisory fees are also adjusted for any cash flows into or out
of a portfolio, where the cash flow represents greater than 10%
of the value of the portfolio. While a specific group of
accounts may use the same fee rate, the method used to calculate
the fee according to the fee rate schedule may differ as
described above.
Our advisory fees may fluctuate based on a number of factors,
including the following:
|
|
|
|
|
changes in AUM due to appreciation or depreciation of our
investment portfolios, and the levels of the contribution and
withdrawal of assets by new and existing clients;
|
|
|
|
distribution of AUM among our investment strategies, which have
different fee schedules;
|
|
|
|
distribution of AUM between separately-managed accounts and
sub-advised funds, for which we generally earn lower overall
advisory fees; and
|
|
|
|
the level of our performance with respect to accounts on which
we are paid incentive fees.
|
Expenses
Our expenses consist primarily of compensation and benefits
expenses, as well as general and administrative expenses. These
expenses may fluctuate due to a number of factors, including the
following:
|
|
|
|
|
variations in the level of total compensation expense due to,
among other things, bonuses, awards of equity to our employees
and members of our operating company, changes in our employee
count and mix, and competitive factors; and
|
|
|
|
expenses, such as rent, professional service fees and
data-related costs, incurred, as necessary, to run our business.
|
Compensation
and Benefits Expense
Our largest expense is compensation and benefits, which includes
the salaries, bonuses, equity-based compensation and related
benefits and payroll costs attributable to our members and
employees. All compensation and benefits packages, including
those of our executive officers, are benchmarked against
relevant industry and geographic peer groups in order to attract
and retain qualified personnel. We have experienced, and expect
to continue to experience, a general rise in compensation and
benefits expense commensurate with growth in headcount and with
the need to maintain competitive compensation levels.
27
The table included in the section below describes the components
of our compensation expense for the three and nine months ended
September 30, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
For The Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Cash Compensation and Benefits
|
|
$
|
8,802
|
|
|
$
|
8,807
|
|
|
$
|
26,020
|
|
|
$
|
26,239
|
|
Distributions on Compensatory Units
|
|
|
3,292
|
|
|
|
|
|
|
|
17,858
|
|
|
|
12,087
|
|
Change in Redemption Value of Compensatory Units
|
|
|
6,396
|
|
|
|
|
|
|
|
12,990
|
|
|
|
15,969
|
|
Acceleration of Vesting of Compensatory Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,968
|
|
Other Non-Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compensation and Benefits Expense
|
|
$
|
18,490
|
|
|
$
|
8,807
|
|
|
$
|
56,868
|
|
|
$
|
121,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historically, we granted profits-only interests in our operating
company to selected employees. These profits-only interests
entitled the holder to a share of the future distributions of
our operating company. Pursuant to the terms of the operating
agreement of our operating company prior to December 31,
2006, the holders of these profits-only interests had the right
to require us to redeem their profits-only interests upon their
termination of employment, or death, at a formula value equal to
their pro rata share of our net investment advisory fee revenues
for the four completed fiscal quarters preceding their
termination, or death, as applicable. We have accounted for the
distributions on profits-only interests, as well as the annual
increase in their redemption value, in our operating
companys financial statements as compensation expense. On
December 31, 2006, all then outstanding profits-only
interests in our operating company were exchanged for capital
units and our operating companys operating agreement was
amended to, among other things, change the formula pursuant to
which it would be required to redeem the previously granted
profits-only interests, subsequently exchanged for capital
units, to one based on the fair market value of our firm. The
change in the redemption value required us to a take a one-time
compensation charge of $232.5 million in the fourth quarter
of 2006, which was recorded as compensation expense, with
respect to the capital units deemed compensatory. Our operating
companys operating agreement was further amended as of
March 31, 2007 to eliminate its obligation to redeem units
under any circumstance. As all of its membership units
thereafter had only equity characteristics, neither
distributions nor subsequent incremental changes to their value
were charged against income from the date of the amendment. As
of March 31, 2007, we accelerated the vesting of all
compensatory units then subject to vesting. The one-time charge
associated with this acceleration, approximately
$65.0 million, was recorded on March 31, 2007.
On January 1, 2007, we adopted the PIM LLC 2006 Equity
Incentive Plan, pursuant to which we have issued restricted
capital units, and options to acquire capital units, in our
operating company, both of which were to vest ratably over a
four-year period. We used a fair-value method in recording the
compensation expense associated with the granting of these
restricted capital units, and options to acquire capital units,
to new and existing members under the PIM LLC 2006 Equity
Incentive Plan. Under this method, compensation expense is
measured at the grant date based on the estimated fair value of
the award and is recognized over the awards vesting
period. The fair value for the capital units will be determined
by reference to the market price of our Class A common
stock on the date of grant, since these units are exchangeable
for shares of our Class A common stock on a one-for-one
basis. The fair value for the options to acquire capital units
will be determined by using an appropriate option pricing model
on the grant date.
On January 1, 2007, we instituted a deferred compensation
plan, in which employees who earn in excess of $600,000 per year
are required to defer a portion of their compensation in excess
of this amount. These deferred amounts may be invested, at the
employees discretion, in certain of our investment
strategies, restricted capital units of our operating company,
or money market funds. All of these deferred amounts vest
ratably over a four-year period and, therefore, will be
reflected in our expenses over this period. Accordingly, our
2007 cash compensation expense will be lower than it would have
been had we not instituted a deferred compensation plan. For the
four-year period beginning in 2008, we expect the non-cash
portion of our compensation expense associated with this
28
deferred compensation plan to increase each successive year as
these and subsequently deferred amounts are amortized through
income.
General
and Administrative Expenses
General and administrative expenses include professional and
outside services fees, office expenses, depreciation and the
costs associated with operating and maintaining our research,
trading and portfolio accounting systems. Our occupancy-related
costs and professional services expenses, in particular,
generally increase or decrease in relative proportion to the
number of employees retained by us and the overall size and
scale of our business operations.
Following our offering on October 30, 2007, we expect that
we will incur additional expenses as a result of becoming a
public company for, among other things, director and officer
insurance, director fees, SEC reporting and compliance
(including Sarbanes-Oxley compliance), transfer agent fees,
professional fees and other similar expenses. These additional
expenses will reduce our net income.
Other
Income
Other income is derived primarily from interest income generated
on our excess cash balances and investment income arising from
our investments in various private investment vehicles that we
employ to incubate new strategies. We expect the interest and
investment components of other income, in the aggregate, to
fluctuate based on market conditions, the success of our
investment strategies and our dividend policy.
Minority
and Non-Controlling Interests
We have historically consolidated the results of operations of
the private investment partnerships over which we exercise a
controlling influence. After our reorganization, we are the sole
managing member of our operating company and now control its
business and affairs and, therefore, consolidate its financial
results with ours. In light of our employees and outside
investors 90.5% interest in our operating company
immediately after the consummation of our reorganization, we
will reflect their membership interests as a non-controlling
interest in our consolidated financial statements. As a result,
subsequent to October 30, 2007, our income will be
generated from our 9.5% economic interest in our operating
companys net income, and similarly, outstanding shares of
our Class A common stock will represent 9.5% of the
outstanding membership units of our operating company.
Provision
for Income Tax
While our operating company has historically not been subject to
U.S. federal and certain state income taxes, it has been
subject to the New York City Unincorporated Business Tax (UBT).
As a result of our reorganization, we are now subject to taxes
applicable to C-corporations. We expect our effective tax rate,
and the absolute dollar amount of our tax expense, to increase
as a result of our reorganization.
Interest
on Mandatorily Redeemable Units
Capital units in our operating company include capital units
issued to our founders and those purchased by certain of our
employees. These capital units entitle the holder to a share of
the distributions of our operating company.
We have adopted Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, or FAS 150.
FAS 150 establishes classification and measurement
standards for three types of free-standing financial instruments
that have characteristics of both liabilities and equity.
Instruments within the scope of FAS 150 must be classified
as liabilities in our consolidated financial statements and be
reported at settlement date value. FAS 150 was effective
for us as of July 1, 2003. Prior to January 1, 2005,
capital units in our operating company were mandatorily
redeemable at book value. Effective January 1, 2005, the
operating agreement of our operating company was amended to
require that capital units be mandatorily redeemed upon a
holders death based on such holders pro rata share
of our operating companys net fee revenue (as defined in
the operating agreement) for the four completed fiscal quarters
immediately preceding
29
the holders death. These redemption amounts were exclusive
of any accumulated undistributed earnings associated with these
capital units, which were required to be paid additionally to
the holders estate. Pursuant to FAS 150,
distributions on capital units, and incremental changes in the
net liability associated with their redemption value, were
recorded as a component of interest on mandatorily redeemable
units in our consolidated statements of operations beginning in
2003.
On December 31, 2006, the operating agreement of our
operating company was amended to, among other things, change the
formula pursuant to which we would be required to redeem the
capital units to one based on the fair market valuation of our
firm. The restated terms of redemption required us to a take a
charge of $463.8 million in the fourth quarter of 2006,
which was included in interest on mandatorily redeemable units.
The operating agreement of our operating company was further
amended as of March 31, 2007, such that our operating
company will no longer be required to redeem any capital units
for cash upon any members death or, if applicable, their
termination of employment. Accordingly, beginning with our
financial statements for the three months ended June 30,
2007, we no longer have any expense for interest on mandatorily
redeemable units.
Operating
Results
Revenues
Our revenues from advisory fees earned on our separately-managed
accounts and our sub-advised accounts for the three and nine
months ended September 30, 2006 and 2007 are described
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separately-
|
|
|
Sub-
|
|
|
|
|
|
|
Managed
|
|
|
Advised
|
|
|
|
|
Revenue
|
|
Accounts
(1)
|
|
|
Accounts
|
|
|
Total
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
For the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
$
|
20.2
|
|
|
$
|
9.2
|
|
|
$
|
29.4
|
|
September 30, 2007
|
|
|
26.6
|
|
|
|
13.6
|
|
|
|
40.2
|
|
For the Nine Months Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
$
|
57.2
|
|
|
$
|
24.0
|
|
|
$
|
81.2
|
|
September 30, 2007
|
|
|
75.6
|
|
|
|
36.8
|
|
|
|
112.4
|
|
The growth of our AUM in our separately-managed accounts and our
sub-advised accounts from December 31, 2006 to
September 30, 2007 is described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Separately-
|
|
|
Sub-
|
|
|
|
|
|
|
Managed
|
|
|
Advised
|
|
|
|
|
Assets Under Management
|
|
Accounts
(1)
|
|
|
Accounts
|
|
|
Total
|
|
|
|
|
|
|
(in billions)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
As of December 31, 2006
|
|
$
|
14.6
|
|
|
$
|
12.8
|
|
|
$
|
27.3
|
|
Net Inflows
|
|
|
1.5
|
|
|
|
0.2
|
|
|
|
1.7
|
|
Appreciation
|
|
|
(0.1
|
)
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
$
|
16.0
|
|
|
$
|
13.0
|
|
|
$
|
28.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During the periods presented, all
performance-based advisory fees were earned on our
separately-managed accounts.
|
30
As of September 30, 2007, our approximately $28.9 billion
of AUM were invested in ten value-oriented investment strategies
which represent distinct capitalization segments of the U.S. and
international markets. The following table describes the
allocation of our approximately $28.9 billion in AUM as of
September 30, 2007 among our seven largest investment
strategies and the aggregate of our other investment strategies:
|
|
|
|
|
Investment Strategy
|
|
AUM
|
|
|
|
(in billions)
|
|
|
|
(unaudited)
|
|
Large Cap Value
|
|
$
|
17.3
|
|
Value Service
|
|
|
5.8
|
|
Global Value
|
|
|
2.9
|
|
Small Cap Value
|
|
|
1.1
|
|
Mid Cap Value
|
|
|
0.6
|
|
International Value
|
|
|
0.6
|
|
All Cap Value
|
|
|
0.4
|
|
Other
|
|
|
0.2
|
|
|
|
|
|
|
Total
|
|
$
|
28.9
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007 versus Three Months Ended
September 30, 2006
Our total revenue increased $10.8 million, or 36.8%, to
$40.2 million for the three months ended September 30,
2007, from $29.4 million for the three months ended
September 30, 2006. This increase was driven primarily by
an increase in AUM, which increased $3.9 billion, or 15.8%,
to $28.9 billion at September 30, 2007 from
$24.9 billion at September 30, 2006. Contributing to
the growth in AUM was $2.6 billion in net inflows and
$1.4 billion in appreciation. Our weighted average fee
increased to 0.547% for the three months ended
September 30, 2007 from 0.514% for the three months ended
September 30, 2006. The weighted average fee increased in
large part due to a favorable shift in client mix in both
separately-managed and sub-advised assets. In particular, we
experienced an increase in the AUM of our
non-U.S. investment
strategies, which carry higher average fees than our U.S.
investment strategies. At September 30, 2007, our
non-U.S. investment
strategies accounted for 11.8% of our AUM, as compared to 4.3%
at September 30, 2006. Separately-managed assets grew 18.5%
year-over-year and had weighted average fees of 0.663% and
0.643% for the three months ended September 30, 2007 and
2006, respectively. Sub-advised AUM grew 12.5% year-over-year
and had weighted average fees of 0.408% and 0.357% for the three
months ended September 30, 2007 and 2006, respectively. At
September 30, 2007, separately-managed AUM accounted for
55.0% of our total AUM, as compared to 54.0% at
September 30, 2006.
Most of the year-over-year growth in our AUM was in our
International Value and Global Value investment strategies, in
which AUM increased by $2.3 billion, to $3.4 billion,
at September 30, 2007 from $1.1 billion at
September 30, 2006.
Nine
Months Ended September 30, 2007 versus Nine Months Ended
September 30, 2006
Our total revenue for the nine months ending September 30,
2007 was $112.4 million, an increase of $31.2 million,
or 38.4%, from $81.2 million for the nine months ending
September 30, 2006. This increase was driven primarily by
growth in our AUM, which increased by $3.9 billion, or
15.8%, to $28.9 billion at September 30, 2007 from
$24.9 billion at September 30, 2006. Contributing to
the growth in AUM was $2.6 billion of net inflows and
$1.4 billion of appreciation. Our weighted average fees
fell to 0.515% for the nine months ended September 30,
2007, from 0.522% for the nine months ended September 30,
2006, due in large part to the timing of the net cash flows into
our sub-advised assets. Since these sub-advised assets have
lower weighted average fees than our separately-managed assets,
these net cash flows more than overcame the favorable shift in
client mix noted above. Separately-managed assets grew 18.5%
year-over-year and had weighted average fees of 0.643% and
0.643% for the nine months ended September 30, 2007 and
2006, respectively. Sub-advised AUM grew 12.5% year-over-year
and had weighted average fees of 0.365% and 0.360% for the nine
months ended September 30, 2007 and 2006, respectively. At
September 30, 2007, separately-managed AUM accounted for
55.0% of our AUM, as compared to 54.0% at September 30,
2006.
31
Most of the year-over-year growth in our AUM was in our
International Value and Global Value investment strategies, in
which AUM increased by $2.3 billion, to $3.4 billion,
at September 30, 2007 from $1.1 billion at
September 30, 2006. During the nine months ended
September 30, 2007, our AUM increased by $1.6 billion,
or 5.9%, to $28.9 billion at September 30, 2007 from
$27.3 billion at December 31, 2006. The increase was
due to net inflows of $1.7 billion and market depreciation
of $0.1 billion for the nine months ended
September 30, 2007. Our
non-U.S. investment
strategies contributed $2.1 billion to AUM growth,
increasing to $3.4 billion at September 30, 2007 from
$1.3 billion at December 31, 2006. As of
September 30, 2007, our
non-U.S. investment
strategies accounted for 11.8% of our total AUM.
Operating
Expenses
Our operating expenses are driven primarily by our compensation
costs. The table included below describes the components of our
compensation expense for the three months ended
September 30, 2006 and 2007 and the nine months ended
September 30, 2006 and 2007. Much of the variability in our
compensation costs have been driven by distributions made on our
compensatory units outstanding and the incremental increases or
decreases in their redemption value subsequent to their grant
date. As of March 31, 2007, these items are no longer
reflected in compensation expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Cash Compensation and Benefits
|
|
$
|
8,802
|
|
|
$
|
8,807
|
|
|
$
|
26,020
|
|
|
$
|
26,239
|
|
Distributions on Compensatory Units
|
|
|
3,292
|
|
|
|
|
|
|
|
17,858
|
|
|
|
12,087
|
|
Change in Redemption Value of Compensatory Units
|
|
|
6,396
|
|
|
|
|
|
|
|
12,990
|
|
|
|
15,969
|
|
Acceleration of Vesting of Compensatory Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,968
|
|
Other Non-Cash Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compensation and Benefits Expense
|
|
$
|
18,490
|
|
|
$
|
8,807
|
|
|
$
|
56,868
|
|
|
$
|
121,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007 versus Three Months Ended
September 30, 2006
Total operating expenses decreased by $8.4 million, or
41.8%, to $11.8 million for the three months ended
September 30, 2007 from $20.2 million for the three
months ended September 30, 2006. This decrease was
primarily attributable to a decrease in compensation and
benefits expense resulting from the amendment of the operating
agreement, on March 31, 2007, that removed all mandatory
redemption provisions related to our membership units.
Compensation and benefits expense decreased by $9.7 million
to $8.8 million for the three months ended
September 30, 2007 from $18.5 million for the three
months ended September 30, 2006. This decrease was
primarily attributable to $9.7 million in unit-based
compensation charges incurred in the three months ended
September 30, 2006, while no such charges were recorded for
the three months ended September 30, 2007.
General and administrative expenses increased by
$1.3 million, or 76.5%, to $3.0 million for the three
months ended September 30, 2007 from $1.7 million for
the three months ended September 30, 2006. This increase
was mainly attributable to a $0.7 million increase in
professional and outside services fees associated with our
reorganization, and a $0.2 million increase associated with
more significant expenditures for information systems upgrades
and data system enhancements commensurate with our growth.
General office and facility related expenses also increased by
$0.3 million in the three months ended September 30,
2007 compared to the three months ended September 30, 2006,
primarily as a result of an increase in headcount and the lease
of additional office space in 2007.
32
Nine
Months Ended September 30, 2007 versus Nine Months Ended
September 30, 2006
Total operating expenses increased by $66.6 million to
$128.8 million for the nine months ended September 30,
2007 from $62.2 million for the nine months ended
September 30, 2006. This increase was primarily
attributable to increased compensation and benefits expense.
Compensation and benefits expense increased by
$64.3 million to $121.2 million for the nine months
ended September 30, 2007 from $56.9 million for the
nine months ended September 30, 2006. This increase was
primarily attributable to the $65.0 million one-time charge
associated with the acceleration, as of March 31, 2007, of
the vesting of all compensatory units then subject to vesting,
coupled with a $3.0 million increase in the redemption
value of compensatory membership units outstanding and a
$5.8 million decrease in the distributions made to
employees with respect to these units in the nine months ended
September 30, 2007 compared with the nine months ended
September 30, 2006. The balance of the increase was
primarily attributable to a $2.0 million increase in other
non-cash compensation associated with the acceleration of
vesting of all option grants as of March 31, 2007, as well
as costs associated with the hiring of additional employees
across all functional areas of the company during the twelve
months ended September 30, 2007. Our employee count
increased from 66 at September 30, 2006 to 78 at
September 30, 2007.
General and administrative expenses increased by
$2.3 million, or 43.4%, to $7.6 million for the nine
months ended September 30, 2007 from $5.3 million for
the nine months ended September 30, 2006. This increase was
mainly attributable to a $1.2 million increase in
professional and outside services fees associated with our
reorganization, and a $0.5 million increase associated with
more significant expenditures for information systems upgrades
and data system enhancements commensurate with our growth.
General office and facility related expenses also increased by
$0.4 million in the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006,
primarily as a result of an increase in headcount and the lease
of additional office space in 2007.
Other
Income (Loss)
Three
Months Ended September 30, 2007 versus Three Months Ended
September 30, 2006
Other income (loss) decreased by $3.9 million to a loss of
$1.6 million for the three months ended September 30,
2007 from income of $2.3 million for the three months ended
September 30, 2006. The primary reasons for this decrease
were the less favorable investment performance of the private
investment vehicles we manage and the increase in interest
expense associated with the $60.0 million, three-year term
loan agreement we entered into in the third quarter of 2007.
Nine
Months Ended September 30, 2007 versus Nine Months Ended
September 30, 2006
Other income decreased by $3.0 million to $0.3 million
for the nine months ended September 30, 2007 from
$3.3 million for the nine months ended September 30,
2006. The primary reason for this decrease was the less
favorable investment performance of the private investment
vehicles we manage and the increase in interest expense
associated with the $60.0 million, three-year term loan
agreement we entered into in the third quarter of 2007.
Provision
for Income Taxes
Three
Months Ended September 30, 2007 versus Three Months Ended
September 30, 2006
The provision for income taxes increased by $0.2 million,
or 18.1%, to $1.3 million for the three months ended
September 30, 2007 from $1.1 million for the three
months ended September 30, 2006, due to an increase in
taxable income. Our effective tax rate for the three months
ending September 30, 2007 was approximately 4.6%. A
comparison of this effective tax rate to the effective tax rate
for the three months ending September 30, 2006 is not
meaningful due to expenses related to our units, which are not
deductible for tax purposes.
33
Nine
Months Ended September 30, 2007 versus Nine Months Ended
September 30, 2006
The provision for income taxes increased by $0.8 million,
or 25.8%, to $3.9 million for the nine months ended
September 30, 2007 from $3.1 million for the nine
months ended September 30, 2006, due to an increase in
taxable income. Our effective tax rate for the nine months
ending September 30, 2007 was not meaningful, nor is a
comparison of it to our effective tax rate for the nine months
ending September 30, 2006, due to expenses related to our units,
which are not deductible for tax purposes.
Minority
and Non-Controlling Interests
Three
Months Ended September 30, 2007 versus Three Months Ended
September 30, 2006
Minority and non-controlling interests decreased from
$0.7 million for the three months ended September 30,
2006 to $(0.7) million for the three months ended
September 30, 2007. This decrease was almost entirely
attributable to less favorable investment performance of the
private investment vehicles we manage.
Nine
Months Ended September 30, 2007 versus Nine Months Ended
September 30, 2006
Minority and non-controlling interests decreased from
$1.3 million for the nine months ended September 30,
2006 to $0.0 million for the nine months ended
September 30, 2007 due to less favorable investment
performance of the private investment vehicles we manage, as
noted above.
Interest
on Mandatorily Redeemable Units
Three
Months Ended September 30, 2007 versus Three Months Ended
September 30, 2006
Interest on mandatorily redeemable units decreased by
$11.3 million to zero for the three months ended
September 30, 2007 from $11.3 million for the three
months ended September 30, 2006. This decrease was entirely
attributable to the accounting consequences of the amendment of
the operating agreement of our operating company, on
March 31, 2007, to remove all mandatory redemption
provisions related to our membership units. The removal of these
provisions caused our membership units to be classified as
equity, and neither distributions nor subsequent changes to
these units value were charged to income following the
amendment.
Nine
Months Ended September 30, 2007 versus Nine Months Ended
September 30, 2006
Interest on mandatorily redeemable units decreased by
$30.2 million to $16.6 million for the nine months
ended September 30, 2007 from $46.8 million for the
nine months ended September 30, 2006. The decrease was due
primarily to the amendment of the operating agreement of our
operating company as of March 31, 2007, as noted above.
Liquidity
and Capital Resources
Historically, the working capital needs of our business have
primarily been met through cash generated by our operations. We
expect that our cash and liquidity requirements in the next
twelve months, and over the long term, will be met primarily
through cash generated by our operations and, to a lesser
extent, from borrowings under our current revolving credit
facility described below. On July 23, 2007, our operating
company borrowed $60.0 million pursuant to a three-year
term loan facility, the proceeds of which were used to finance a
special one-time distribution to the members of our operating
company as of that date. Concurrently, our operating company
also obtained a $20.0 million revolving credit facility,
which will expire on July 23, 2010, to finance our
short-term working capital needs.
Pursuant to the terms of the credit agreement providing for the
three-year term loan and revolving credit facility described
above, our operating company is required to maintain AUM (as
defined in the credit agreement) of at least $20 billion at
all times during the term thereof. In addition, one of the
lenders conditions to the execution of the credit
agreement, and a covenant of us during the term of the credit
agreement, is that our consolidated EBITDA (as defined in the
credit agreement) for the four fiscal quarter period ended
March 31, 2007, and as of the end of any subsequent
consecutive four fiscal quarter period during the term of the
credit agreement, may not be less than
34
$60 million. As of September 30, 2007, our AUM and our
consolidated EBITDA were each in excess of the required minimum
amounts for these AUM and consolidated EBITDA covenants.
We expect to fund the working capital needs of our business in
the next twelve months, and over the long term, primarily
through cash generated from operations, as well as from
potential borrowings under the revolving credit facility
described above. We currently expect that the development of new
investment strategies will continue to require significant
funding, but not in excess of $25 million per year. We
expect to fund this development from cash generated from
operations.
Prior to its reorganization on October 30, 2007, Pzena
Investment Management, LLC made a distribution to its existing
members representing all of the remaining undistributed earnings
generated through the date of our reorganization, less any
amounts required to fund its working capital needs.
We anticipate that distributions to the members of our operating
company, which consists of 23 of our current employees, two
outside investors and us, will continue to be a material use of
our cash resources and will vary in amount and timing based on
our operating results and dividend policy. We are a holding
company and have no material assets other than our ownership of
membership interests in our operating company. As a result, we
depend upon distributions from our operating company to pay any
dividends to our Class A stockholders. We expect to cause
our operating company to make distributions to us in an amount
sufficient to cover dividends, if any, declared by us. Our
dividend policy has certain risks and limitations, particularly
with respect to liquidity. Although we expect to pay dividends
according to our dividend policy, we may not pay dividends
according to our policy, or at all, if, among other things, we
do not have the cash necessary to pay our intended dividends. To
the extent we do not have cash on hand sufficient to pay
dividends, we may decide not to pay dividends. By paying cash
dividends rather than investing that cash in our future growth,
we risk slowing that pace of our growth, or not having a
sufficient amount of cash to fund our operations or
unanticipated capital expenditures, should the need arise.
Our purchase of membership units of our operating company
concurrently with our initial public offering, and the future
exchanges by holders of Class B units of our operating
company for shares of our Class A common stock (pursuant to
the exchange rights provided for in our operating companys
operating agreement), are expected to result in increases in our
share of the tax basis of the tangible and intangible assets of
our operating company at the time of our acquisition and these
future exchanges, which will increase the tax depreciation and
amortization deductions that otherwise would not have been
available to us. These increases in tax basis and tax
depreciation and amortization deductions are expected to reduce
the amount of tax that we would otherwise be required to pay in
the future. We have entered into a tax receivable agreement with
the current members of our operating company, the one member of
our company immediately prior to our initial public offering who
sold all of their membership units to us in connection with our
initial public offering and any future holders of Class B
units, that will require us to pay them 85% of the amount of
cash savings, if any, in U.S. federal, state and local
income tax that we actually realize (or are deemed to realize in
the case of an early termination payment by us, or a change in
control, as described in the tax receivable agreement) as a
result of the increases in tax basis described above and certain
other tax benefits related to entering into the tax receivable
agreement, including tax benefits attributable to payments under
the tax receivable agreement. Assuming that there are no
material changes in the relevant tax law, and that we earn
sufficient taxable income to realize the full tax benefit of the
increased depreciation and amortization of our assets, we expect
that future payments under the tax receivable agreement in
respect of our initial purchase of membership units of Pzena
Investment Management, LLC will aggregate $57.7 million and
range from approximately $2.6 million to $6.5 million
per year over the next 15 years. Future payments under the
tax receivable agreement in respect of subsequent exchanges will
be in addition to these amounts and are expected to be
substantial.
Cash
Flows
For the three months ended September 30, 2006 and 2007,
operating activities provided $8.3 million and
$24.6 million, respectively. Operating activities provided
$6.7 million for the nine months ended September 30,
2006, and provided $46.2 million for the nine months ended
September 30, 2007. In both comparative periods, this
change is due primarily to the fact that beginning on
March 31, 2007, the effective date of an amendment to the
operating agreement of our operating company to eliminate its
obligation to redeem a members units therein under any
circumstance, as well as the acceleration of the vesting of all
compensatory units then subject to vesting,
35
distributions on all membership units are classified as
financing activities in our consolidated statements of cash
flows. As a result of this reclassification, net cash provided
by operating activities has increased, and net cash provided by
financing activities has decreased, beginning on March 31,
2007. Beginning on March 31, 2007, the effective date of an
amendment to the operating agreement of our operating company to
eliminate its obligation to redeem a members units therein
under any circumstance, as well as the acceleration of the
vesting of all compensatory units then subject to vesting, we
expect distributions on all membership units to be classified as
financing activities in our consolidated statements of cash
flows. As a result, we expect net cash provided by operating
activities to increase, and net cash provided by financing
activities to decrease, as a result of this reclassification
beginning on March 31, 2007.
Investing activities consist primarily of investments in
affiliates and other investment partnerships, as well as capital
expenditures. For the three months ended September 30, 2006
and 2007, investing activities used $0.0 million and
$0.0 million, respectively. For the nine months ended
September 30, 2006 and 2007, investing activities used
$0.2 million and $1.5 million, respectively. This
change was driven primarily by capital expenditures associated
with the build out of additional space in our New York office.
We anticipate that the funding requirements necessary to develop
new strategies will continue to be a significant use of our cash
resources as we grow and expand our product offerings.
Financing activities consist primarily of contributions from
members and contributions from, and distributions to, minority
and non-controlling interests. For the three months ended
September 30, 2006 and 2007, financing activities provided
$1.1 million and used $4.4 million, respectively.
Financing activities provided $1.3 million for the nine
months ended September 30, 2006 and used $45.6 million
for the nine months ended September 30, 2007. For both
comparative periods, the increase in cash used in financing
activities is due primarily to the fact that the amendment to
the operating agreement of our operating company, as explained
above, reclassifies distributions on all membership units as
financing activities in our consolidated statements of cash
flows. In addition, a decrease of net cash provided by financing
activities arose as a result of a decrease in net cash flows
from minority and non-controlling interests in the nine months
ended September 30, 2007, primarily due to the liquidation
of the Pzena Investment Management Select Fund, L.P. during the
three months ended March 31, 2007. We anticipate that
distributions to the members of our operating company will
continue to be a material use of our cash resources, and will
vary in amount and timing based on our operating results and
dividend policy.
Critical
Accounting Policies and Estimates
The preparation of our consolidated financial statements in
accordance with U.S. generally accepted accounting
principles requires management to make estimates and judgments
that affect our reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent
assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under current circumstances, our results of which
form the basis for making judgments about the carrying value of
assets and liabilities that are not readily available from other
sources. We evaluate our estimates on an ongoing basis. Actual
results may differ from these estimates under different
assumptions or conditions.
Accounting policies are an integral part of our financial
statements. A thorough understanding of these accounting
policies is essential when reviewing our reported results of
operations and our financial condition. Management believes that
the critical accounting policies and estimates discussed below
involve additional management judgment due to the sensitivity of
the methods and assumptions used.
Unit-based
Compensation
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment
(FAS 123(R)), which requires the recognition of the cost of
equity-based compensation based on the fair value of the award
as of its grant date. Prior to the adoption of FAS 123(R),
we accounted for our unit-based compensation in accordance with
the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25),
and related interpretations. The adoption of FAS 123(R) did
not have a material effect on the results of operations or
financial condition of the Company.
36
Pursuant to FAS 123(R), we recognize compensation expense
associated with the granting of equity-based compensation based
on the fair value of the award as of its grant date if it is
classified as an equity instrument, and on the changes in
settlement amount for awards that are classified as liabilities.
Prior to March 31, 2007, our compensatory membership
unit-based awards had repurchase features that required us to
classify them as liabilities. Accordingly, distributions paid on
these membership units are classified as compensation expense.
In addition, changes to their redemption values subsequent to
their grant dates have been included in compensation expense. On
December 31, 2006, we exchanged all then outstanding
profits-only interests into new units and amended the operating
agreement of our operating company to, among other things,
change the formula pursuant to which we would be required to
redeem the previously granted profits-only interests,
subsequently exchanged for membership units, to one based on the
fair market valuation of our firm. The restated terms of
redemption required us to a take a one-time compensation charge
of $232.5 million in the three months ended
December 31, 2006, which was recorded as compensation
expense, with respect to the membership units deemed
compensatory. As of March 31, 2007, we accelerated the
vesting of all compensatory units then subject to vesting. The
one-time charge associated with this acceleration, approximately
$65.0 million, was recorded on March 31, 2007. Our
operating agreement was further amended as of March 31,
2007, such that our operating company will no longer be required
to redeem any membership units for cash upon a members
termination or death. Accordingly, beginning with our interim
financial statements for the three months ended June 30,
2007, we are no longer be required to include in compensation
expense the distributions in respect of these membership units
or the change in their redemption value.
Consolidation
Our policy is to consolidate all majority-owned subsidiaries in
which we have a controlling financial interest and
variable-interest entities where we are deemed to be the primary
beneficiary. We also consolidate non-variable-interest entities
in which we act as the general partner or managing member. All
significant intercompany transactions and balances have been
eliminated.
Investments in private investment partnerships in which we have
a minority interest and exercise significant influence are
accounted for using the equity method. Such investments are
reflected on the consolidated statements of financial condition
as investments in affiliates and are recorded at the amount of
capital reported by the respective private investment
partnerships. Such capital accounts reflect the contributions
paid to, distributions received from, and the equity earnings
of, the private investment partnerships. The earnings of these
private investment partnerships are included in equity in
earnings of affiliates in the consolidated statements of
operations.
Income
Taxes
Historically, and for all periods presented in the consolidated
financial statements, we have operated as a limited liability
company and have elected to be treated as a partnership for tax
purposes. No provision has been made for federal or state income
taxes because it is the personal responsibility of the
individual members to separately report their proportionate
share of our taxable income or loss. A provision has been made
for the UBT. Prior to October 30, 2007, we were a cash
basis taxpayer.
We account for the UBT pursuant to the asset and liability
method, which requires deferred income tax assets and
liabilities to be recorded for temporary differences between the
financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in
which the temporary differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be
realized. The income tax provision or credit is the tax payable
or refundable for the period, plus or minus the change during
the period in deferred tax assets and liabilities.
Management judgment is required in determining our provision for
income taxes, evaluating our tax positions and establishing
deferred tax assets and liabilities. The calculation of our tax
liabilities involves dealing with uncertainties in the
application of complex tax regulations. If our estimate of tax
liabilities proves to be less than the ultimate assessment, a
further charge to earnings would result.
37
Recently
Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes An Interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 prescribed the minimum
recognition threshold a tax position must meet in connection
with accounting for uncertainties in income tax positions taken
or expected to be taken by an entity before being measured and
recognized in the financial statements. We adopted FIN 48
on January 1, 2007. The impact of the adoption of this
standard was not material.
In September 2006, the FASB released Statement of Financial
Accounting Standards No. 157, Fair Value Measurements, or
FAS 157. FAS 157 establishes an authoritative
definition of fair value, sets out a framework for measuring
fair value and requires additional disclosures about fair-value
measurements. The application of FAS 157 is required for
fiscal years beginning after November 15, 2007. Management
is in the process of assessing the impact of this standard on
our consolidated financial statements.
In June 2007, the American Institute of Certified Public
Accountants issued Statement of Position
No. 07-1,
Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and
Equity Method Investors for Investments in Investment Companies,
or
SOP 07-1.
SOP 07-1
clarifies the definition of an investment company and whether
the specialized accounting model of an investment company may be
retained by a parent company in consolidation or by an investor
in the application of the equity method of accounting.
SOP 07-1
will be effective for reporting periods beginning on or after
December 15, 2007. We are currently evaluating the
potential impact of the adoption of
SOP 07-1
on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, or SFAS 159.
SFAS 159 permits an entity to elect to measure certain
financial instruments and certain other items at fair value with
changes in fair value recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. We are currently evaluating the potential impact of the
adoption of SFAS 159 on our consolidated financial
statements.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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Market
Risk
Our exposure to market risk is directly related to our role as
investment adviser for the separate accounts we manage and the
funds for which we act as sub-investment adviser. All of our
revenue for the three and nine months ended September 30,
2007 was derived from advisory fees, which are typically based
on the market value of AUM. Accordingly, a decline in the prices
of securities would cause our revenue and income to decline due
to a decrease in the value of the assets we manage. In addition,
such a decline could cause our clients to withdraw their funds
in favor of investments offering higher returns or lower risk,
which would cause our revenue and income to decline further.
We are also subject to market risk due to a decline in the
prices of our investments in affiliates and the value of the
holdings of our consolidated subsidiaries, both of which consist
primarily of marketable securities. At September 30, 2007,
the fair value of these assets was $29.3 million. Assuming a 10%
increase or decrease, the fair value would increase or decrease
by $2.9 million at September 30, 2007.
Interest
Rate Risk
The $60.0 million that our operating company borrowed
pursuant to a three-year term loan on July 23, 2007, and
any amounts that our operating company borrows under the
$20.0 million revolving credit facility it also obtained on
that date, will accrue interest at variable rates. Interest rate
changes may therefore affect the amount of our interest
payments, future earnings and cash flows. Based on the
consolidated debt obligations that we have, we estimate that the
related interest expense payable would increase by
$0.6 million on an annual basis, in the event interest
rates were to increase by one percentage point.
38
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Item 4.
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Controls
and Procedures
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During the course of their review of our consolidated financial
statements as of September 30, 2007, our management,
including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls
and procedures pursuant to
Rule 13a-15
under the Exchange Act as of September 30, 2007. Based on
that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of September 30, 2007, our
disclosure controls and procedures (as defined in
Rule 13a-15(e)
under the Exchange Act) were effective to ensure that
information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
The changes in our internal control over financial reporting
during the period covered by this Quarterly Report on
Form 10-Q
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting
are described below.
We are not yet required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002, or to make an assessment of the
effectiveness of our internal control over financial reporting.
Further, our independent auditors have not been engaged to
express, nor have they expressed, an opinion on the
effectiveness of our internal control over financial reporting.
However, in May 2007, in connection with their audits of our
consolidated financial statements as of and for the year ended
December 31, 2006 for the purpose of including such
financial statements in our Registration Statement on
Form S-1
(No. 333-1436660),
and related prospectus, for our initial public offering, they
informed us that they identified material weaknesses in our
internal control over financial reporting for complex and
non-routine transactions, as well as inadequate internal review.
The material weaknesses relate to errors in our accounting for
stock-based compensation, liabilities associated with our
existing membership units, and the consolidation of investment
partnerships in our consolidated financial statements. The
errors occurred as a result of not having sufficient access to
accounting resources with technical accounting expertise to
analyze complex and non-routine transactions, as well as
inadequate internal review. We corrected these errors and
believe that the audited and the unaudited interim consolidated
financial statements included in the registration statement, and
related prospectus, for our initial public offering, and the
unaudited interim consolidated financial statements presented in
this Quarterly Report on
Form 10-Q,
reflect the proper treatment for the complex and non-routine
transactions identified by our independent auditors.
In order to improve the effectiveness of our internal control
over financial reporting in general, and to remedy the material
weaknesses identified by our management and our independent
auditors, we have undertaken the measures described below.
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We have increased the staffing in our accounting and finance
department in order to enhance its technical expertise,
oversight ability, and review and analytical procedures. We
appointed Wayne A. Palladino as our Chief Financial Officer, who
has 12 years of public company reporting experience, in May
2007. In the third quarter of 2007, we also hired a Director of
Internal Controls and Compliance with over eight years of
relevant experience at a major accounting firm and a major
diversified financial institution combined. We are continuing to
strengthen the staffing in our accounting and finance department.
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We engaged a consulting firm to assist us in strengthening our
period-end internal controls over financial reporting, including
the design of additional reviews for our accounting department
to utilize in preparing the information presented in this
Quarterly Report on Form
10-Q.
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We engaged a major public accounting firm to advise us on
complex and non-routine accounting transactions.
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In the third quarter, we also enhanced monitoring controls in
our accounting and finance department, including additional
reviews by finance staff, implementation of review and approval
procedures for complex and non-routine transactions, and
independent review by our Director of Internal Controls and
Compliance.
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In the third quarter, we also updated our policies and
procedures regarding accounting for stock-based compensation in
order to ensure that they are consistently accounted for in
accordance with U.S. generally accepted accounting principles on
a going forward basis.
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We have established procedures to evaluate whether investment
partnerships should be consolidated in our financial statements.
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As a result of the additional review procedures we implemented,
we detected errors in the recording of stock-based compensation
for the three months ended June 30, 2006 that affected the
presentation of our consolidated financial statements for the
three and six months ended June 30, 2006 in our preliminary
prospectus, dated October 9, 2007, for our initial public
offering. Upon identification of these errors, we restated our
financial statements for this period to correct these errors and
included them in a free writing prospectus dated
October 22, 2007 and the final prospectus dated
October 24, 2007, for our initial public offering.
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Item 4T.
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Controls
and Procedures
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Not applicable.
40
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PART II.
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OTHER
INFORMATION
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Item 1.
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Legal
Proceedings
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In the normal course of business, we may be subject to various
legal and administrative proceedings. Throughout the period
covered by this Quarterly Report on
Form 10-Q,
there were no legal proceedings pending or threatened against us.
On November 21, 2007, a putative class action lawsuit was
commenced in the United States District Court for the Southern
District of New York against us and Richard S. Pzena, our chief
executive officer, seeking remedies under Section 11 of the
Securities Act of 1933, as amended. The complaint alleges that
the registration statement and prospectus relating to the
initial public offering of our Class A common stock
contained materially misleading statements and otherwise failed
to disclose a pattern of net redemptions in the John Hancock
Classic Value Fund for which we act as sub-investment advisor
(which is a portion of our Large Cap Value investment strategy).
The plaintiff seeks to represent a class of all persons who
purchased or otherwise acquired Class A common stock in our
initial public offering and seeks damages in an unspecified
amount. We believe that the allegations and claims against us
and our chief executive officer are without merit and we intend
to contest these claims vigorously.
41
We face a variety of significant and diverse risks, many of
which are inherent in our business. Described below are certain
risks that we currently believe could materially affect us.
Other risks and uncertainties that we do not presently consider
to be material or of which we are not presently aware may become
important factors that affect us in the future. The occurrence
of any of the risks discussed below could materially and
adversely affect our business, prospects, financial condition,
results of operations or cash flow.
Risks
Related to Our Business
We
depend on Richard S. Pzena, John P. Goetz, A. Rama Krishna and
William L. Lipsey and the loss of the services of any of them
could have a material adverse effect on us.
The success of our business depends on the participation of
Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L.
Lipsey, whom we collectively refer to as our managing
principals. Their professional reputations, expertise in
investing and relationships with our clients and within the
investing community in the U.S. and abroad, are critical
elements to executing our business strategy and attracting and
retaining clients. Accordingly, the retention of our managing
principals is crucial to our future success. There is no
guarantee that they will not resign, join our competitors or
form a competing company. The terms of the amended and restated
operating agreement of Pzena Investment Management, LLC restrict
each of Messrs. Pzena, Goetz and Lipsey from competing with
us or soliciting our clients or other employees during the term
of their employment with us and for three years thereafter.
Under the terms of his current employment agreement,
Mr. Krishna has agreed not to compete with us for a period
of 18 months following (i) his notice of resignation,
which must be given six months prior to the termination of his
employment with us pursuant to this agreement, or (ii) the
date of any other termination of his employment with us. The
penalty for their breach of these restrictive covenants will be
the forfeiture of a number of Class B units held by the
managing principal that is equal to 50% of the number of
membership units collectively held by the managing principal and
his permitted transferees as of the earlier of the date of his
breach or the termination of his employment, unless our board of
directors, in its sole discretion, determines otherwise.
Although we would also seek specific performance of these
restrictive covenants, there can be no assurance that we would
be successful in obtaining this relief. Further, after this
post-employment restrictive period, we will not be able to
prohibit them from competing with us or soliciting our clients
or employees. If any of our managing principals were to join a
competitor or form a competing company, some of our current
clients or other prominent members of the investing community
could choose to invest with that competitor rather than us.
Furthermore, we do not intend to carry any key man
insurance that would provide us with proceeds in the event of
the death or disability of any of our managing principals. The
loss of the services of any of our managing principals could
have a material adverse effect on our business and could impact
our future performance.
If our
investment strategies perform poorly, we could lose clients or
suffer a decline in asset under management which would impair
our earnings.
The performance of our investment strategies is one of the most
important factors in retaining clients and AUM and competing for
new business. If our investment strategies perform poorly, it
could impair our earnings because:
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our existing clients might withdraw their funds from our
investment strategies, which would cause the level of our
advisory fees to decline;
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the level of the performance-based fees paid by certain of our
clients, which provides us with a percentage of returns if our
investment strategies outperform certain agreed upon benchmarks,
would decline;
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third-party financial intermediaries, advisers or consultants
may rate our investment products poorly, which may lead our
existing clients to withdraw funds from our investment
strategies or to the reduction of asset inflows from these third
parties or their clients; or
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the mutual funds and other investment funds that we
sub-advise
may decide not to renew or to terminate the agreements pursuant
to which we
sub-advise
them and we may not be able to replace these relationships.
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42
Our
sub-investment
advisory relationships with mutual funds advised by John Hancock
Advisers represent a significant source of our revenues, and the
termination of these relationships would impair our revenues and
earnings.
We currently act as a
sub-investment
adviser to the John Hancock Classic Value Fund, the John Hancock
Classic Value Fund II, the John Hancock International
Classic Value Fund and the John Hancock Classic Value Mega Cap
Fund, each of which are SEC-registered mutual funds advised by
John Hancock Advisers. Our sub-investment advisory relationships
with these four mutual funds represented, in the aggregate,
29.9% of our AUM at September 30, 2007. For the years ended
December 31, 2004, 2005 and 2006 and the nine months ended
September 30, 2006 and 2007, approximately, 8%, 14%, 20%,
20% and 22%, respectively, of our total revenue was generated
from these relationships. Our sub-investment advisory agreement
with the John Hancock Classic Value Fund represented all, or
substantially all, of this revenue during these periods. There
can be no assurance that our agreements with respect to any of
these four mutual funds will remain in place. In addition, these
agreements would terminate automatically in the event that the
investment management agreement between John Hancock Advisers
and each individual fund is assigned or terminated. Such a
termination of our
sub-investment
advisory agreements would significantly reduce our revenues and
we may not be able to establish relationships with other mutual
funds investment advisers
and/or
significant institutional separate accounts in order to replace
the lost revenues.
Because
our clients can reduce the amount of assets we manage for them,
or terminate our agreements with them, on short notice, we may
experience unexpected declines in revenue and
profitability.
Our investment advisory and
sub-investment
advisory agreements are generally terminable upon short notice.
Our
sub-investment
advisory agreements with twelve SEC-registered mutual funds,
such as the four mutual funds advised by John Hancock Advisers,
each have an initial two-year term and are subject to annual
renewal by the funds board of directors pursuant to the
Investment Company Act of 1940, as amended, which we refer to as
the Investment Company Act. Five of these twelve
sub-investment
advisory agreements are beyond their initial two-year term,
including the agreement for the John Hancock Classic Value Fund.
Institutional and individual clients, and the funds with which
we have
sub-investment
advisory agreements, can terminate their relationships with us,
or reduce the aggregate amount of AUM, for a number of reasons,
including investment performance, changes in prevailing interest
rates, and financial market performance, or to shift their funds
to competitors who may charge lower advisory fee rates, or for
no stated reason. Poor performance relative to that of other
investment management firms tends to result in decreased
investments in our investment strategies, increased withdrawals
from our investment strategies and the loss of institutional or
individual accounts or
sub-investment
advisory relationships. In addition, the ability to terminate
relationships may allow clients to renegotiate for lower fees
paid for asset management services. If our investment advisory
agreements are terminated, or our clients reduce the amount of
assets under our management, either of which may occur on short
notice, we may experience unexpected declines in revenue and
profitability.
Difficult
market conditions can adversely affect our business by reducing
the market value of the assets we manage or causing our clients
to withdraw funds.
Our business would be expected to generate lower revenue in a
declining stock market or general economic downturn. Under our
advisory fee arrangements, the fees we receive typically are
based on the market value of our AUM. Accordingly, a decline in
the prices of securities held in our clients portfolios
would be expected to cause our revenue and net income to decline
by:
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causing the value of our AUM to decline, which would result in
lower advisory fees, or
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causing some of our clients to withdraw funds from our
investment strategies in favor of investments they perceive as
offering greater opportunity or lower risk, which also would
result in lower advisory fees.
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If our revenue declines without a commensurate reduction in our
expenses, our net income will be reduced. Accordingly, difficult
market conditions could materially adversely affect our results
of operations.
43
Our
ability to retain our senior investment professionals and
attract additional qualified investment professionals is
critical to our success.
Our success depends on our ability to retain the senior members
of our investment team and to recruit additional qualified
investment professionals. However, we may not be successful in
our efforts to retain them, as the market for investment
professionals is extremely competitive. Our portfolio managers
possess substantial experience and expertise in investing and,
in particular, our classic value investment approach, which
requires significant qualitative judgments as to the future
earnings power of currently underperforming businesses. Our
portfolio managers also have significant relationships with our
clients. Accordingly, the loss of any one of our senior
investment professionals could limit our ability to successfully
execute our classic value investment approach and, therefore,
sustain the performance of our investment strategies, which, in
turn, could have a material adverse effect on our results of
operations.
The
substantial growth of our business in the past five years may be
difficult to sustain as it may place significant demands on our
resources and employees and may increase our
expenses.
Our AUM have grown from approximately $3.1 billion as of
December 31, 2002 to $28.9 billion as of
September 30, 2007. This substantial growth in our business
has placed, and if it continues, will continue to place,
significant demands on our infrastructure, our investment team
and other employees, and may increase our expenses. In addition,
we are required to continuously develop our infrastructure in
response to the increasing sophistication of the investment
management market, as well as due to legal and regulatory
developments.
The future growth of our business will depend, among other
things, on our ability to maintain an infrastructure and
staffing levels sufficient to address its growth and may require
us to incur significant additional expenses and commit
additional senior management and operational resources. We may
face significant challenges in maintaining adequate financial
and operational controls, implementing new or updated
information and financial systems and procedures and training,
managing and appropriately sizing our work force and other
components of our business on a timely and cost-effective basis.
In addition, our efforts to retain or attract qualified
investment professionals may result in significant additional
expenses. There can be no assurance that we will be able to
manage our growing business effectively or that we will be able
to continue to grow, and any failure to do so could adversely
affect our ability to generate revenue and control our expenses.
The
investment management business is intensely
competitive.
Competition in the investment management business is based on a
variety of factors, including:
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investment performance;
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investor perception of an investment managers drive, focus
and alignment of interest with them;
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quality of service provided to, and duration of relationships
with, clients;
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business reputation; and
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level of fees charged for services.
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We compete in all aspects of our business with a large number of
investment management firms, commercial banks, broker-dealers,
insurance companies and other financial institutions. Our
competitive risks are heightened by the fact that some of our
competitors may invest according to different investment styles
or in alternative asset classes which the markets may perceive
as more attractive than our investment approach in the public
equity markets. If we are unable to compete effectively, our
earnings and revenues could be reduced, and our business could
be materially adversely affected.
Reductions
in business sourced through
third-party
distribution channels, or their poor reviews of us or our
products, could materially reduce our revenue and ability to
attract new clients.
New accounts sourced through consultant-led searches have been a
large driver of the growth of our AUM in each of the past five
years and are expected to be a major component of our future
growth. In addition, we have established relationships with
certain mutual fund providers, most significantly John Hancock
Advisers, who have offered us opportunities to access new market
segments through
sub-investment
advisory roles. We have also accessed the
high-net-worth
segment of the investing community through relationships with
well respected wealth
44
advisers who utilize our investment strategies in investment
programs they construct for their clients. If we fail to
successfully maintain these
third-party
distribution and
sub-investment
advisory relationships, our business could be materially
adversely affected. In addition, many of these parties review
and evaluate our products and our organization. Poor reviews or
evaluations of either the particular product or of us may result
in client withdrawals or may impact our ability to attract new
assets through such intermediaries.
A
change of control of us could result in termination of our
sub-investment
advisory and investment advisory agreements.
Pursuant to the Investment Company Act, each of the
sub-investment
advisory agreements for the SEC-registered mutual funds that we
sub-advise
automatically terminates upon its deemed assignment
and a funds board and shareholders must approve a new
agreement in order for us to continue to act as its
sub-investment
adviser. In addition, pursuant to the Investment Advisers Act of
1940, as amended, which we refer to as the Investment Advisers
Act, each of our investment advisory agreements for the separate
accounts we manage may not be assigned without the
consent of the client. A sale of a controlling block of our
voting securities and certain other transactions would be deemed
an assignment pursuant to both the Investment
Company Act and the Investment Advisers Act. Such an assignment
may be deemed to occur in the event that the holders of the
Class B units of Pzena Investment Management, LLC exchange
enough of their Class B units for shares of our
Class A common stock such that they no longer own a
controlling interest in us. If such a deemed assignment occurs,
there can be no assurance that we will be able to obtain the
necessary consents from clients whose funds are managed pursuant
to separate accounts or the necessary approvals from the boards
and shareholders of the SEC-registered funds that we
sub-advise.
An assignment, actual or constructive, would trigger these
termination and consent provisions and, unless the necessary
approvals and consents are obtained, could adversely affect our
ability to continue managing client accounts, resulting in the
loss of AUM and a corresponding loss of revenue.
Our
failure to comply with guidelines set by our clients could
result in damage awards against us and a loss of AUM, either of
which would cause our earnings to decline or affect our ability
to remain in business.
As an investment adviser, we have a fiduciary duty to our
clients. When clients retain us to manage assets on their
behalf, they may specify certain guidelines regarding investment
allocation and strategy that we are required to observe in the
management of their portfolios. Our failure to comply with these
guidelines and other limitations could result in losses to a
client account that the client could seek to recover from us and
could result in the client withdrawing its assets from our
management or terminating our investment advisory agreement with
them. Any of these events could cause our earnings to decline or
affect our ability to remain in business.
Extensive
regulation of our business limits our activities and exposes us
to the potential for significant penalties, including fines or
limitations on our ability to conduct our
business.
We are subject to extensive regulation of our investment
management business and operations. As a registered investment
adviser, the SEC oversees our activities pursuant to its
regulatory authority under the Investment Advisers Act. In
addition, we must comply with certain requirements under the
Investment Company Act with respect to the SEC-registered funds
for which we act as
sub-investment
adviser. We are also subject to regulation by the Department of
Labor under the Employee Retirement Income Security Act of 1974,
or ERISA. Each of the regulatory bodies with jurisdiction over
us has regulatory powers dealing with many aspects of financial
services, including the authority to grant, and in specific
circumstances to cancel, permissions to carry on particular
businesses. A failure to comply with the obligations imposed by
the Investment Advisers Act on investment advisers, including
record-keeping, advertising and operating requirements,
disclosure obligations and prohibitions on fraudulent
activities, could result in investigations, sanctions and
reputational damage. Our failure to comply with applicable laws
or regulations could result in fines, censure, suspensions of
personnel or other sanctions, including revocation of our
registration as an investment adviser. Even if a sanction
imposed against us or our personnel is small in monetary amount,
the adverse publicity arising from the imposition of sanctions
against us by regulators could harm our reputation, result in
withdrawal by our clients from our investment strategies and
impede our ability to retain clients and develop new client
relationships, which may reduce our revenues.
45
We face the risk of significant intervention by regulatory
authorities, including extended investigation and surveillance
activity, adoption of costly or restrictive new regulations and
judicial or administrative proceedings that may result in
substantial penalties. Among other things, we could be fined or
be prohibited from engaging in some of our business activities.
The requirements imposed by our regulators are designed to
ensure the integrity of the financial markets and to protect
customers and other third parties who deal with us, and are not
designed to protect our stockholders. Consequently, these
regulations often serve to limit our activities, including
through net capital, customer protection and market conduct
requirements.
In addition, the regulatory environment in which we operate is
subject to modifications and further regulation. New laws or
regulations, or changes in the enforcement of existing laws or
regulations, applicable to us and our clients also may adversely
affect our business, and our ability to function in this
environment will depend on our ability to constantly monitor and
react to these changes. For investment management firms in
general, there have been a number of highly publicized
regulatory inquiries that focus on the mutual fund industry.
These inquiries already have resulted in increased scrutiny in
the industry and new rules and regulations for mutual funds and
their investment managers. This regulatory scrutiny may limit
our ability to engage in certain activities.
Specific regulatory changes also may have a direct impact on our
revenue. In addition to regulatory scrutiny and potential fines
and sanctions, regulators continue to examine different aspects
of the asset management industry. New regulation regarding the
annual approval process for mutual fund
sub-investment
advisory agreements may result in the reduction of fees or
possible terminations of these agreements. These regulatory
changes and other proposed or potential changes may result in a
reduction of revenue associated with these activities.
Operational
risks may disrupt our business, result in losses or limit our
growth.
We rely heavily on our financial, accounting, trading,
compliance and other data processing systems. Any failure or
interruption of these systems, whether caused by fire, other
natural disaster, power or telecommunications failure, act of
terrorism or war or otherwise, could result in a disruption of
our business, liability to clients, regulatory intervention or
reputational damage, and thus materially adversely affect our
business. Although we have
back-up
systems in place, our
back-up
procedures and capabilities in the event of a failure or
interruption may not be adequate. The inability of our systems
to accommodate an increasing volume of transactions also could
constrain our ability to expand our businesses. In recent years,
we have substantially upgraded and expanded the capabilities of
our data processing systems and other operating technology, and
we expect that we will need to continue to upgrade and expand
these capabilities in the future to avoid disruption of, or
constraints on, our operations.
Furthermore, we depend on our headquarters in New York City for
the continued operation of our business. A disaster or a
disruption in the infrastructure that supports our business, or
directly affecting our headquarters, may have a material adverse
impact on our ability to continue to operate our business
without interruption. Although we have disaster recovery
programs in place, there can be no assurance that these will be
sufficient to mitigate the harm that may result from such a
disaster or disruption. In addition, insurance and other
safeguards might only partially reimburse us for our losses.
The
investment management industry faces substantial litigation
risks which could materially adversely affect our business,
financial condition or results of operations or cause
significant reputational harm to us.
We depend to a large extent on our relationships with our
clients and our reputation for integrity and high-caliber
professional services to attract and retain clients. As a
result, if a client is not satisfied with our services, such
dissatisfaction may be more damaging to our business than to
other types of businesses. We make investment decisions on
behalf of our clients which could result in substantial losses
to them. In order for our classic value investment strategies to
yield attractive returns, we expect to have to hold securities
for multi-year periods and, therefore, our investment strategies
may not perform well in the short term. If our clients suffer
significant losses, or are otherwise dissatisfied with our
services, we could be subject to the risk of legal liabilities
or actions alleging negligent misconduct, breach of fiduciary
duty or breach of contract. These risks are often difficult to
assess or quantify and their existence and magnitude often
remain unknown for substantial periods of time. We may incur
significant legal expenses in defending against litigation.
Substantial legal liability or significant regulatory action
against us could materially adversely affect our business,
financial condition or results of operations or cause
significant reputational harm to us.
46
In May
2007, our management and our independent auditors identified
material weaknesses in our internal control over financial
reporting that, if not properly remediated, could result in a
material misstatement of our financial statements and our
managements inability to report that our internal controls
are effective for 2008 and thereafter, as required by the
Sarbanes-Oxley Act of 2002, either of which could cause
investors to lose confidence in our reported financial
information or our Class A common stock to lose
value.
We are not yet required to comply with Section 404 of the
Sarbanes-Oxley Act of 2002, or to make an assessment of the
effectiveness of our internal control over financial reporting.
Further, our independent auditors have not been engaged to
express, nor have they expressed, an opinion on the
effectiveness of our internal control over financial reporting.
However, in May 2007, in connection with their audits of our
consolidated financial statements as of and for the year ended
December 31, 2006 for the purpose of including such
financial statements in our Registration Statement on
Form S-1
(No. 333-1436660),
and related prospectus, for our initial public offering, they
informed us that they identified material weaknesses in our
internal control over financial reporting for complex and
non-routine transactions, as well as inadequate internal review.
The material weaknesses relate to errors in our accounting for
stock-based compensation, liabilities associated with our
existing membership units, and the consolidation of investment
partnerships in our consolidated financial statements. The
errors occurred as a result of not having sufficient access to
accounting resources with technical accounting expertise to
analyze complex and non-routine transactions, as well as
inadequate internal review. We corrected these errors and
believe that the audited and the unaudited interim consolidated
financial statements included in the registration statement, and
related prospectus, for our initial public offering, and the
unaudited interim consolidated financial statements presented in
this Quarterly Report on
Form 10-Q,
reflect the proper treatment for the complex and non-routine
transactions identified by our independent auditors.
In order to improve the effectiveness of our internal control
over financial reporting for complex and non-routine
transactions, we have taken the following remedial measures:
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We appointed Wayne A. Palladino, who has twelve years of public
company reporting experience, as our chief financial officer.
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We engaged a major public accounting firm to advise us on the
accounting for complex and non-routine transactions.
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We engaged an external compliance consulting firm to advise us
on improving our internal controls and systems in general, and
in order to become compliant with Section 404 of the
Sarbanes-Oxley Act of 2002.
|
In addition, we have strengthened, and continue to strengthen,
our internal accounting and finance staff to satisfy our
financial reporting obligations as a public company.
The existence of material weaknesses in internal control over
financing reporting is an indication that there is a reasonable
possibility that a material misstatement of our financial
statements will not be prevented or detected in a future period.
The process of designing and implementing effective internal
controls requires us to continually expend significant resources
in order to establish and maintain a system of internal controls
that satisfies our financial reporting obligations as a public
company. In addition, we cannot assure you that we will have
effective internal control over our financial reporting, or that
additional material weaknesses or significant deficiencies in
our internal control over financial reporting will not be
discovered, in the future. If we fail to maintain effective
controls and procedures, we may be unable to provide required
financial information in a timely and reliable manner, or
otherwise comply with the standards applicable to us as a public
company, and our management may not be able to report that our
internal control over financial reporting is effective for the
year ending December 31, 2008, as would be required by
Section 404 of the Sarbanes-Oxley Act of 2002, or
thereafter. If our management is not able to do so, our
independent auditors would not be able to certify that our
internal control over financial reporting is effective. Matters
impacting our internal control over financial reporting may
cause us to be unable to report our financial information on a
timely basis and thereby subject us to adverse regulatory
consequences, including sanctions by the SEC, or violations of
the NYSE listing rules. There could also be a negative reaction
in the financial markets due to a loss of investor confidence in
us and the reliability of our consolidated financial statements.
Confidence in the reliability of our consolidated financial
statements is also likely to suffer if our independent auditors
report any
47
additional material weakness in our internal control over
financial reporting. This could lead to a decline in the price
of our Class A common stock.
Fulfilling
our public company financial reporting and other regulatory
obligations will be expensive and time consuming.
As a public company, we are required to implement specific
corporate governance practices and adhere to a variety of
reporting requirements and complex accounting rules under the
Sarbanes-Oxley Act of 2002 and the related rules and regulations
of the SEC, as well as the rules of the NYSE. Compliance with
these requirements will increase our legal and accounting
compliance costs and place significant additional demands on our
accounting and finance staff and on our accounting, financial
and information systems. As described above, we will need to
hire additional accounting and finance staff with appropriate
public company financial reporting experience and technical
accounting knowledge, which will increase our compensation
expense.
As described above, our management will be required to conduct
an annual assessment of the effectiveness of our internal
controls over financial reporting and include a report on our
internal controls in our annual reports on
Form 10-K
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
In addition, we will be required to have our independent
registered public accounting firm attest to and report on
managements assessment of the effectiveness of our
internal controls over financial reporting. Under current rules,
we will be subject to these requirements beginning with our
annual report on
Form 10-K
for our fiscal year ending December 31, 2008. We will incur
incremental costs in order to improve our internal control over
financial reporting and comply with Section 404 of the
Sarbanes-Oxley Act of 2002, including increased auditing and
legal fees and costs associated with hiring additional
accounting, internal audit, information technology, compliance
and administrative staff.
The
historical consolidated financial information included in this
report is not necessarily indicative of our future financial
results after the reorganization consummated on October 30,
2007 and as a public company.
The historical consolidated financial information included in
this report may not be indicative of our future financial
results after the reorganization consummated on October 30,
2007 and as a public company. Our AUM have increased almost
tenfold in the past five years. However, a number of the
investment strategies which resulted in this significant growth,
including our Large Cap Value strategy, had been closed both to
new investors and to additional funds. Although we have recently
re-opened the Large Cap Value, Value Service, Small Cap Value,
Mid Cap Value and All Cap Value strategies, we may close these
strategies again at any time. We do not expect our AUM or
revenue to grow at the same rate as they have grown in the past
five years. In addition, the historical consolidated financial
information included in this report does not reflect the added
costs that we expect to incur as a public company or the changes
that will occur in our capital structure and operations in
connection with our reorganization. For example, because we
operated through a limited liability company prior to the
consummation of our initial public offering on October 30,
2007 and paid little or no taxes on our profits, our historical
consolidated financial information does not reflect the tax
impact of our adoption of a corporate holding company structure.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations of Pzena Investment
Management, LLC and Subsidiaries and the historical
financial statements included elsewhere in this report.
An
increase in our borrowing costs may adversely affect our
earnings and liquidity.
On July 23, 2007, our operating company borrowed
$60.0 million pursuant to a three-year term loan facility,
the proceeds of which were used to finance a special one-time
distribution to the members of our operating company as of that
date. Concurrently, our operating company also obtained a
$20.0 million revolving credit facility, which will expire
on July 23, 2010, to finance our short-term working capital
needs. As these facilities mature, we will be required to either
refinance them by entering into new facilities, which could
result in higher borrowing costs, or issuing equity, which would
dilute existing shareholders. Our operating company could also
repay them by using cash on hand or cash from the sale of our
assets. No assurance can be given that we or our operating
company will be able to enter into new facilities, or issue
equity in the future, on attractive terms, or at all.
These facilities consist of floating-rate obligations based on
the London Interbank Offering Rate, or LIBOR, and the interest
expense we incur will vary with changes in the applicable LIBOR
reference rate. As a result, an increase in short-term interest
rates will increase our interest costs, which may adversely
affect our earnings and liquidity.
48
Risks
Related to Our Investment Strategies
Our results of operations depend on the performance of our
investment strategies. Poor performance of our investment
strategies will reduce or minimize the value of our assets under
management on which our advisory fees are based. As advisory
fees comprise all of our operating revenues, poor performance of
our investment strategies will have a material adverse impact on
our results of operations. In addition, poor performance will
make it difficult for us to retain or attract clients and to
grow our business. The performance of our strategies is subject
to some or all of the following risks.
Our
classic value investments in concentrated portfolios subjects
the performance of our investment strategies to the risk that
the companies in which we invest may not achieve the level of
earnings recovery that we initially expect, or at
all.
We generally invest in companies after they have experienced a
shortfall in their historic earnings, due to an adverse business
development, management error, accounting scandal or other
disruption, and before there is clear evidence of earnings
recovery or business momentum. While very few investors are
willing to invest when companies lack earnings visibility, our
classic value investment approach seeks to capture the return
that can be obtained by investing in a company before the market
has a level of confidence in its ability to achieve earnings
recovery. However, our investment approach entails the risk that
the companies included in our portfolios are not able to execute
the turnaround that we had expected when we originally invested
in them, thereby reducing the performance of our strategies. Our
strategy of constructing concentrated portfolios, generally
ranging from 30 to 60 holdings, of companies underperforming
their historical earnings power, is subject to a higher risk of
underperformance relative to benchmarks than the investment
approaches of some of our competitors. Further, since our
positions in these investments are often substantial, there is
the risk that we may be unable to find willing purchasers for
our investments when we decide to sell them.
Our
investment strategies may not obtain attractive returns in the
short term or during certain market periods.
Our products are best suited for investors with long-term
investment horizons. In order for our classic value investment
approach to yield attractive returns, we must typically hold
securities for an average of over three years. Therefore, our
investment strategies may not perform well during short periods
of time. In addition, our strategies may not perform well during
points in the economic cycle when value-oriented stocks are
relatively less attractive. For instance, during the late stages
of an economic cycle, investors may purchase relatively
expensive stocks in order to obtain access to above average
growth, as was the case in the late 1990s. Value-oriented
strategies may also experience weakness during periods when the
markets are focused on one investment thesis or sector. For
example, in the past two years, the markets have deemed many
businesses producing commodities and basic materials to be sound
investments, regardless of their prices, based on the thesis
that the rapid growth of such large economies as China and India
means that there will be constant shortfalls in the supply of
the goods produced by these companies. We would not invest in
these companies if their stocks were not inexpensively priced,
thus foregoing potentially attractive returns during the periods
when these companies stock prices are continuing to
advance.
Our
investment approach may underperform other investment
approaches, which may result in significant withdrawals of
client assets or client departures or a reduction in our
AUM.
Even when securities prices are rising generally, portfolio
performance can be affected by our investment approach. We
employ a classic value investment approach in all of our
investment strategies. This investment approach has outperformed
the market in some economic and market environments and
underperformed it in others. In particular, a prolonged period
in which the growth style of investing outperforms the value
style may cause our investment strategy to go out of favor with
some clients, consultants or third-party intermediaries. Poor
performance relative to peers, coupled with changes in
personnel, extensive periods in particular market environments
or other difficulties may result in significant withdrawals of
client assets, client departures or a reduction in our AUM.
49
Our
investment process requires us to conduct extensive fundamental
research on any company before investing in it, which may result
in missed investment opportunities and reduce the performance of
our investment strategies.
We take a considerable amount of time to complete the in-depth
research projects that our investment process requires before
adding any security to our portfolio. Our process requires that
we take this time in order to understand the company and the
business well enough to make an informed decision as to whether
we are willing to own a significant position in a company whose
current earnings are below its historic norms and that does not
yet have earnings visibility. However, the time we take to make
this judgment may cause us to miss the opportunity to invest in
a company that has a sharp and rapid earnings recovery. Any such
missed investment opportunities could adversely impact the
performance of our investment strategies.
Our
Global Value and International Value investment strategies
consist primarily of investments in the securities of issuers
located outside of the United States, which may involve foreign
currency exchange, political, social and economic uncertainties
and risks.
Our Global Value and International Value investment strategies,
which together represented $2.3 billion of our AUM as of
September 30, 2007, and are expected to comprise a larger
portion of our AUM in the future, are primarily invested in
securities of companies located outside the United States.
Fluctuations in foreign currency exchange rates could negatively
impact the portfolios of our clients who are invested in these
strategies. In addition, foreign currency fluctuations may
affect the levels of our AUM from one reporting period to
another. An increase in the value of the U.S. dollar
relative to
non-U.S. currencies
may result in a decrease in the dollar value of our AUM, which,
in turn, would result in lower
U.S.-dollar
denominated revenue. We do not currently engage in any hedging
activities for these portfolios and continue to market these
products as unhedged.
Investments in non-U.S. issuers may also be affected by
political, social and economic uncertainty affecting a country
or region in which we are invested. Many non-U.S. financial
markets are not as developed, or as efficient, as the
U.S. financial market, and, as a result, liquidity may be
reduced and price volatility may be higher. The legal and
regulatory environments, including financial accounting
standards and practices, may also be different, and there may be
less publicly available information in respect of such
companies. These risks could adversely impact the performance of
our strategies that are invested in securities of non-U.S.
issuers.
The
historical returns of our existing investment strategies may not
be indicative of their future results or of our investment
strategies under incubation.
The returns of our existing investment strategies for the one-,
three- and five-year periods ended June 30, 2007 and
September 30, 2007 and since the inception of each through
June 30, 2007 and September 30, 2007, all as
previously reported in our prospectus, dated October 24,
2007 for our initial public offering, should not be considered
indicative of the future results that should be expected from
these strategies or from any other strategies that we may be
incubating or developing. Our products returns have
benefited from investment opportunities and general economic and
market conditions that may not repeat themselves, and there can
be no assurance that our current or future strategies will be
able to avail themselves to profitable investment opportunities.
50
Risks
Related to Our Structure
Our
only material asset after completion of the reorganization and
our initial public offering on October 30, 2007 is our
interest in Pzena Investment Management, LLC, and we are
accordingly dependent upon distributions from Pzena Investment
Management, LLC to pay taxes and other expenses.
We are a holding company and have no material assets other than
our ownership of membership units of Pzena Investment
Management, LLC. We have no independent means of generating
revenue. Pzena Investment Management, LLC is treated as a
partnership for U.S. federal income tax purposes and, as
such, is not itself subject to U.S. federal income tax.
Instead, its taxable income is allocated to its members,
including us, pro rata according to the number of membership
units each owns. Accordingly, we incur income taxes on our
proportionate share of any net taxable income of Pzena
Investment Management, LLC and also incur expenses related to
our operations. We intend to cause Pzena Investment Management,
LLC to distribute cash to its members in an amount at least
equal to that necessary to cover their tax liabilities, if any,
with respect to the earnings of Pzena Investment Management,
LLC. To the extent that we need funds to pay our tax or other
liabilities or to fund our operations, and Pzena Investment
Management, LLC is restricted from making distributions to us
under applicable laws or regulations or does not have sufficient
earnings to make these distributions, we may have to borrow
funds to meet these obligations and run our business and, thus,
our liquidity and financial condition could be materially
adversely affected.
We are
required to pay holders of Class B units of Pzena
Investment Management, LLC most of the tax benefit of any
depreciation or amortization deductions we may claim as a result
of the tax basis step up we receive in connection with the
reorganization and future exchanges of Class B
units.
We used the net proceeds of our initial public offering on
October 30, 2007 to purchase membership units of Pzena
Investment Management, LLC from three of its members. This
purchase and any subsequent exchanges of Class B units for
shares of our Class A common stock are expected to result
in increases in our share of the tax basis in the tangible and
intangible assets of Pzena Investment Management, LLC that
otherwise would not have been available. These increases in tax
basis are expected to reduce the amount of tax that we would
otherwise be required to pay in the future, although the
Internal Revenue Service, or IRS, might challenge all or part of
this tax basis increase, and a court might sustain such a
challenge.
We have entered into a tax receivable agreement with the one
member of Pzena Investment Management, LLC immediately prior to
the initial public offering who sold all of their membership
units to us in connection with the offering, each of the current
members of Pzena Investment Management, LLC and any future
holder of Class B units, pursuant to which we will pay them
85% of the amount of the cash savings, if any, in
U.S. federal, state and local income tax that we realize as
a result of these increases in tax basis. The actual increase in
tax basis, as well as the amount and timing of any payments
under this agreement, will vary depending upon a number of
factors, including the timing of exchanges, the price of our
Class A common stock at the time of the exchange, the
extent to which such exchanges are taxable, the amount and
timing of our income and the tax rates then applicable. We
expect that, as a result of the size and increases in our share
of the tax basis in the tangible and intangible assets of Pzena
Investment Management, LLC attributable to our interest therein,
the payments that we may make to these members likely will be
substantial.
Were the IRS to successfully challenge the tax basis increases
described above, we would not be reimbursed for any payments
made under the tax receivable agreement. As a result, in certain
circumstances, we could make payments under the tax receivable
agreement in excess of our cash tax savings.
If we
are deemed an investment company under the Investment Company
Act, our business would be subject to applicable restrictions
under that Act, which could make it impracticable for us to
continue our business as contemplated.
We believe our company is not an investment company under
Section 3(b)(1) of the Investment Company Act because we
are primarily engaged in a non-investment company business. We
intend to conduct our operations so that we will not be deemed
an investment company. However, if we were to be deemed an
investment company, restrictions imposed by the Investment
Company Act, including limitations on our capital structure and
our ability to transact with affiliates, could make it
impractical for us to continue our business as contemplated.
51
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Not applicable
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Item 3.
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Defaults
Upon Senior Securities
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None.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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Not applicable
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Item 5.
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Other
Information
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(a)
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On December 5, 2007, we published updated performance data
for our seven largest investment strategies, Large Cap Value,
Value Service, Global Value, Small Cap Value, Mid Cap Value, All
Cap Value and International Value, from their inception through
October 31, 2007, and for the five-year, three-year and
one-year periods ended October 31, 2007, on our corporate
website at
www.pzena.com.
We intend to publish updated
performance data for our largest investment strategies on our
website on a monthly basis.
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52
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Exhibit No.
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Description of Exhibit
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3
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.1
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Amended and Restated Certificate of Incorporation of Pzena
Investment Management, Inc., effective as of October 30,
2007
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3
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.2
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Amended and Restated Bylaws of Pzena Investment Management,
Inc., effective as of October 30, 2007
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4
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.1
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Certificate of Pzena Investment Management, Inc. Class A
Common Stock*
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4
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.2
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Rights of Class B Members of Pzena Investment Management,
LLC to exchange Class B Units of Pzena Investment
Management, LLC for Class A Common Stock of Pzena
Investment Management, Inc. (Exhibit B to the Amended and
Restated Operating Agreement of Pzena Investment Management, LLC)
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4
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.3
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Resale and Registration Rights Agreement, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and the Holders named on the signature pages thereto
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4
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.4
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Class B Stockholders Agreement, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and the Class B Stockholders named on the signature
pages thereto
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10
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.1
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Amended and Restated Operating Agreement of Pzena Investment
Management, LLC, dated as of October 30, 2007, by and among
Pzena Investment Management, Inc. and the Class B Members
named on the signature pages thereto
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10
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.2
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Tax Receivable Agreement, dated as of October 30, 2007, by
and among Pzena Investment Management, Inc., Pzena Investment
Management, LLC and the Continuing Members and Exiting Members
named on the signature pages thereto
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10
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.3
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Pzena Investment Management, LLC Amended and Restated 2006
Equity Incentive Plan
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10
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.4
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Pzena Investment Management, LLC Amended and Restated Bonus Plan
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10
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.5
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Pzena Investment Management, Inc. 2007 Equity Incentive Plan
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10
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.6
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Credit Agreement, dated as of July 23, 2007 among Pzena
Investment Management, LLC, as the Borrower, Bank of America,
N.A., as Administrative Agent and as a Lender and L/C Issuer*
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10
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.7
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Lease, dated as of February 4, 2003, between Magnolia
Associates, Ltd. and Pzena Investment Management, LLC and the
amendments thereto dated as of March 31, 2005 and
October 31, 2006*
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10
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.8
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Executive Employment Agreement for Richard S. Pzena, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc., Pzena Investment Management, LLC and Richard S. Pzena
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10
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.9
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Executive Employment Agreement for John P. Goetz, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc., Pzena Investment Management, LLC and John P. Goetz
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10
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.10
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Amended and Restated Executive Employment Agreement for A. Rama
Krishna, dated as of October 30, 2007, by and among Pzena
Investment Management, Inc., Pzena Investment Management, LLC
and A. Rama Krishna
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10
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.11
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Amended and Restated Executive Employment Agreement for William
L. Lipsey, dated as of October 30, 2007, by and among Pzena
Investment Management, Inc., Pzena Investment Management, LLC
and William L. Lipsey
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10
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.12
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Indemnification Agreement for Richard S. Pzena, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and Richard S. Pzena
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10
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.13
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Indemnification Agreement for Steven M. Galbraith, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and Steven M. Galbraith
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10
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.14
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Indemnification Agreement for Joel M. Greenblatt, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and Joel M. Greenblatt
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10
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.15
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Indemnification Agreement for Richard P. Meyerowich, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and Richard P. Meyerowich
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10
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.16
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Indemnification Agreement for Myron E. Ullman, III, dated as of
October 30, 2007, by and among Pzena Investment Management,
Inc. and Myron E. Ullman, III
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21
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.1
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List of Subsidiaries of Pzena Investment Management, Inc.
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31
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.1
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Certification of Chief Executive Officer pursuant to Exchange
Act Rule
13a-14
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31
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.2
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Certification of Chief Financial Officer pursuant to Exchange
Act Rule
13a-14
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32
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.1
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Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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99
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.1
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Letter of J.H. Cohn LLP to the Securities and Exchange
Commission re: Pzena Investment Management, LLCs change in
independent accountants*
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*
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Previously filed as an exhibit to the Registration Statement on
Form S-1
(No. 333-143660)
of Pzena Investment Management, Inc, which was originally filed
on June 11, 2007.
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53
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 thereunto duly authorized.
PZENA INVESTMENT MANAGEMENT, INC.
Name: Richard S. Pzena
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Title:
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Chief Executive Officer
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Dated: December 5, 2007
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By:
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/s/ Wayne
A. Palladino
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Name: Wayne A. Palladino
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Title:
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Chief Financial Officer
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Dated: December 5, 2007
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
PZENA INVESTMENT MANAGEMENT, INC.
A Delaware Corporation
Effective October 30, 2007
TABLE OF CONTENTS
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Page
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ARTICLE I
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OFFICES
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Section 1.
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Registered Office
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1
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Section 2.
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Other Offices
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1
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ARTICLE II
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MEETINGS OF STOCKHOLDERS
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Section 1.
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Place of Meetings
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1
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Section 2.
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Annual Meetings
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2
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Section 3.
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Special Meetings
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2
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Section 4.
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Nature of Business at Meetings of Stockholders
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2
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Section 5.
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Nomination of Directors
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5
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Section 6.
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Notice
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8
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Section 7.
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Adjournments
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8
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Section 8.
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Quorum
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9
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Section 9.
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Voting
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9
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Section 10.
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Proxies
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10
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Section 11.
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List of Stockholders Entitled to Vote
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12
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Section 12.
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Record Date
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13
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Section 13.
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Stock Ledger
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14
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Section 14.
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Conduct of Meetings
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14
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Section 15.
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Inspectors of Election
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15
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ARTICLE III
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DIRECTORS
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Section 1.
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Number and Election of Directors
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15
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Section 2.
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Vacancies
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16
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Section 3.
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Duties and Powers
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16
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Section 4.
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Meetings
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17
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Section 5.
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Organization
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17
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Section 6.
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Resignations and Removals of Directors
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18
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Section 7.
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Quorum
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19
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Section 8.
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Actions of the Board by Written Consent
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19
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Section 9.
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Meetings by Means of Conference Telephone
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20
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Section 10.
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Committees
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20
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Section 11.
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Compensation
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21
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Section 12.
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Interested Directors
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22
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i
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Page
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ARTICLE IV
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OFFICERS
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Section 1.
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General
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23
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Section 2.
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Election
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23
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Section 3.
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Voting Securities Owned by the Corporation
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24
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Section 4.
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Chairman of the Board of Directors
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24
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Section 5.
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Chief Executive Officer
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25
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Section 6.
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Chief Financial Officer
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26
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Section 7.
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Presidents
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26
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Section 8.
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Vice Presidents
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27
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Section 9.
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Secretary
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27
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Section 10.
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Treasurer
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28
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Section 11.
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Assistant Secretaries
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29
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Section 12.
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Assistant Treasurers
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29
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Section 13.
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Other Officers
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30
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ARTICLE V
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STOCK
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Section 1.
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Shares of Stock
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30
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Section 2.
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Signatures
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31
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Section 3.
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Lost Certificates
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31
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Section 4.
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Transfers
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31
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Section 5.
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Dividend Record Date
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32
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Section 6.
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Record Owners
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33
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Section 7.
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Transfer and Registry Agents
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33
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ARTICLE VI
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NOTICES
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Section 1.
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Notices
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34
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Section 2.
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Waivers of Notice
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35
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ARTICLE VII
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GENERAL PROVISIONS
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Section 1.
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Dividends
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36
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Section 2.
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Disbursements
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36
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Section 3.
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Fiscal Year
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37
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Section 4.
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Corporate Seal
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37
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ii
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Page
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ARTICLE VIII
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INDEMNIFICATION
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Section 1.
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Power to Indemnify in Actions,
Suits or Proceedings other than Those by or in the Right of the Corporation
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37
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Section 2.
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Power to Indemnify in Actions,
Suits or Proceedings by or in the Right of the Corporation
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38
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Section 3.
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Authorization of Indemnification
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39
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Section 4.
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Good Faith Defined
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40
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Section 5.
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Indemnification by a Court
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41
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Section 6.
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Expenses Payable in Advance
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41
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Section 7.
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Nonexclusivity of Indemnification and Advancement of Expenses
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42
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Section 8.
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Insurance
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42
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Section 9.
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Certain Definitions
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43
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Section 10.
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Survival of Indemnification and Advancement of Expenses
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44
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Section 11.
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Limitation on Indemnification
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44
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Section 12.
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Indemnification of Employees and Agents
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45
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ARTICLE IX
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AMENDMENTS
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Section 1.
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Amendments
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45
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Section 2.
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Entire Board of Directors
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46
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iii
AMENDED AND RESTATED BY-LAWS
OF
PZENA INVESTMENT MANAGEMENT, INC.
(hereinafter called the Corporation)
ARTICLE I
OFFICES
Section 1.
Registered Office
. The registered office of the Corporation shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2.
Other Offices
. The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors may from time to time
determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1.
Place of Meetings
. Meetings of the stockholders for the election of directors
or for any other purpose shall be held at such time and place, either within or without the State
of Delaware, as shall be designated from time to time by the Board of Directors. The Board of
Directors may, in its sole discretion, determine that a meeting of the stockholders shall not be
held at any place, but may instead be held solely by means of remote communication in the manner
authorized by the General Corporation Law of the State of Delaware (the DGCL).
Section 2.
Annual Meetings
. The Annual Meeting of Stockholders for the election of
directors shall be held on such date and at such time as shall be designated from time to time by
the Board of Directors. Any other proper business may be transacted at the Annual Meeting of
Stockholders.
Section 3.
Special Meetings
. Unless otherwise required by law or by the certificate of
incorporation of the Corporation, as may be amended from time to time (the Certificate of
Incorporation), Special Meetings of Stockholders, for any purpose or purposes, may only be called
by (i) the Board of Directors pursuant to a resolution adopted by a majority of the members of the
Board of Directors, (ii) a committee of the Board of Directors that has been duly designated by the
Board of Directors and whose powers and authority include the power to call such a Special Meeting
of Stockholders, or (iii) the Chairman of the Board of Directors (the Chairman). Such call shall
state the purpose or purposes of the proposed Special Meeting of Stockholders. At a Special
Meeting of Stockholders, only such business shall be conducted as shall be specified in the notice
of such meeting (or any supplement thereto). Stockholders are not permitted to call a Special
Meeting of Stockholders or to require the Board of Directors, any committee thereof or the Chairman
to call a Special Meeting of Stockholders.
Section 4.
Nature of Business at Meetings of Stockholders
. No business may be transacted
at an Annual Meeting of Stockholders, other than business that is either (a) specified in the
notice of such meeting (or any
2
supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the Annual Meeting of Stockholders by or
at the direction of the Board of Directors (or any duly authorized committee thereof), or (c)
otherwise properly brought before the Annual Meeting of Stockholders by any stockholder of the
Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for
in this Section 4 and on the record date for the determination of stockholders entitled to notice
of and to vote at such Annual Meeting of Stockholders and (ii) who complies with the notice
procedures set forth in this Section 4.
In addition to any other applicable requirements, for business to be properly brought before
an Annual Meeting of Stockholders by a stockholder, such stockholder must have given timely notice
thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholders
notice to the Secretary must be delivered to or mailed and received at the principal executive
offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120)
days prior to the anniversary date of the immediately preceding Annual Meeting of Stockholders;
provided
,
however
, that in the event that the Annual Meeting of Stockholders is
called for a date that is not within thirty (30) days before or after such anniversary date, notice
by the stockholder in order to be timely must be so received not later than the close of business
on the tenth (10th) day following the day on which such notice of the date of the Annual
3
Meeting of Stockholders was mailed or such public disclosure of the date of the Annual Meeting
of Stockholders was made, whichever first occurs.
To be in proper written form, a stockholders notice to the Secretary must set forth as to
each matter such stockholder proposes to bring before the Annual Meeting of Stockholders (i) a
brief description of the business desired to be brought before the Annual Meeting of Stockholders
and the reasons for conducting such business at the Annual Meeting of Stockholders, (ii) the name
and record address of such stockholder, (iii) the class or series and number of shares of capital
stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a
description of all arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business and (v) a representation
that such stockholder intends to appear in person or by proxy at the Annual Meeting of Stockholders
to bring such business before the meeting.
No business shall be conducted at the Annual Meeting of Stockholders except business brought
before the Annual Meeting in accordance with the procedures set forth in this Section 4;
provided
,
however
, that, once business has been properly brought before the Annual
Meeting of Stockholders in accordance with such procedures, nothing in this Section 4 shall be
deemed to preclude discussion by any stockholder of any such business. If the Chairman of an
Annual Meeting of Stockholders determines that business was not properly
4
brought before the Annual Meeting of Stockholders in accordance with the foregoing procedures,
the Chairman shall declare to the meeting that the business was not properly brought before the
meeting and such business shall not be transacted.
Section 5.
Nomination of Directors
. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors of the Corporation, except as may
be otherwise provided in the Certificate of Incorporation with respect to the right of holders of
preferred stock of the Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors may be made at any
Annual Meeting of Stockholders, or at any Special Meeting of Stockholders called for the purpose of
electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized
committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record
on the date of the giving of the notice provided for in this Section 5 and on the record date for
the determination of stockholders entitled to notice of and to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 5.
In addition to any other applicable requirements, for a nomination to be made by a
stockholder, such stockholder must have given timely notice thereof in proper written form to the
Secretary of the Corporation. To be timely, a stockholders notice to the Secretary must be
delivered to or mailed and received
5
at the principal executive offices of the Corporation (a) in the case of an Annual Meeting of
Stockholders, not less than ninety (90) days nor more than one hundred twenty (120) days prior to
the anniversary date of the immediately preceding Annual Meeting of Stockholders;
provided
,
however
, that in the event that the Annual Meeting of Stockholders is called for a date
that is not within thirty (30) days before or after such anniversary date, notice by the
stockholder in order to be timely must be so received not later than the close of business on the
tenth (10th) day following the day on which such notice of the date of the Annual Meeting of
Stockholders was mailed or such public disclosure of the date of the Annual Meeting of Stockholders
was made, whichever first occurs; and (b) in the case of a Special Meeting of Stockholders called
for the purpose of electing directors, not later than the close of business on the tenth (10th) day
following the day on which notice of the date of the Special Meeting of Stockholders was mailed or
public disclosure of the date of the Special Meeting of Stockholders was made, whichever first
occurs.
To be in proper written form, a stockholders notice to the Secretary must set forth (a) as to
each person whom the stockholder proposes to nominate for election as a director (i) the name, age,
business address and residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class or series and number of shares of capital stock of the Corporation
which are owned beneficially or of record by the person, and (iv) any other information relating to
the person that would be required to be disclosed in a
6
proxy statement or other filings required to be made in connection with solicitations of
proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and the rules and regulations promulgated thereunder; and (b) as to
the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the
class or series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by such stockholder,
(iv) a representation that such stockholder intends to appear in person or by proxy at the meeting
to nominate the persons named in its notice and (v) any other information relating to such
stockholder that would be required to be disclosed in a proxy statement or other filings required
to be made in connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named as a nominee and
to serve as a director if elected.
No person shall be eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 5. If the Chairman of the stockholders
meeting determines that a nomination was not made in accordance with the foregoing procedures, the
7
Chairman shall declare to the stockholders meeting that the nomination was defective and such
defective nomination shall be disregarded.
Section 6.
Notice
. Whenever stockholders are required or permitted to take any action at a
meeting, a written notice of the meeting shall be given which shall state the place, if any, date
and hour of the meeting, the means of remote communications, if any, by which stockholders and
proxyholders may be deemed to be present in person and vote at such meeting, and, in the case of a
Special Meeting of Stockholders, the purpose or purposes for which the meeting is called. Unless
otherwise required by law, written notice of any meeting shall be given not less than ten (10) nor
more than sixty (60) days before the date of the meeting to each stockholder entitled to notice of
and to vote at such meeting.
Section 7.
Adjournments
. Any meeting of the stockholders may be adjourned from time to
time to reconvene at the same or some other place, and notice need not be given of any such
adjourned meeting if the time and place, if any, thereof and the means of remote communications, if
any, by which stockholders and proxyholders may be deemed to be present in person and vote at such
adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have been transacted at the original
meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned meeting in accordance
8
with the requirements of Section 6 hereof shall be given to each stockholder of record entitled to
notice of and to vote at the meeting.
Section 8.
Quorum
. Unless otherwise required by applicable law or the Certificate of
Incorporation, the holders of a majority of the Corporations capital stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum
at all meetings of the stockholders for the transaction of business. A quorum, once established,
shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however,
such quorum shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, in the manner provided in Section 7 hereof, until a
quorum shall be present or represented.
Section 9.
Voting
. Unless otherwise required by law, the Certificate of Incorporation or
these By-Laws, or permitted by the rules of any stock exchange on which a class of the
Corporations shares of capital stock are listed and traded, any question brought before any
meeting of the stockholders, other than the election of directors, shall be decided by the vote of
the holders of a majority of the total number of votes of the Corporations capital stock
represented at the meeting and entitled to vote on such question, voting as a single class. Unless
otherwise provided in the Certificate of Incorporation, and subject to Section 12 of this Article
II, each holder of the Corporations Class A common
9
stock, par value $0.01 per share (the Class A Common Stock) represented at a meeting of the
stockholders shall be entitled to cast one (1) vote for each share of Class A Common Stock entitled
to vote thereat held by such stockholder. Unless otherwise provided in the Certificate of
Incorporation, and subject to Section 12 of this Article II, (a) until the first time that the
number of shares of the Corporations Class B common stock, par value $0.000001 per share (the
Class B Common Stock) outstanding constitutes less than 20% of the number of all shares of Class
A Common Stock and Class B Common Stock outstanding, each holder of Class B Common Stock
represented at a meeting of the stockholders shall be entitled to cast five (5) votes for each
share of Class B Common Stock entitled to vote thereat held by such stockholder, and (b)
immediately at and after the first time that the number of shares of Class B Common Stock
outstanding constitutes less than 20% of the number of all shares of Class A Common Stock and Class
B Common Stock outstanding, each holder of Class B Common Stock represented at a meeting of the
stockholders shall be entitled to cast one (1) vote for each share of Class B Common Stock entitled
to vote thereat held by such stockholder. Such votes may be cast in person or by proxy as provided
in Section 10 of this Article II. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of the stockholders, in such officers discretion, may require
that any votes cast at such meeting shall be cast by written ballot.
Section 10.
Proxies
. Each stockholder entitled to vote at a meeting of the stockholders
may authorize another person or persons to act for
10
such stockholder as proxy, but no such proxy shall be voted upon after three years from its date,
unless such proxy provides for a longer period. Without limiting the manner in which a stockholder
may authorize another person or persons to act for such stockholder as proxy, the following shall
constitute a valid means by which a stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing another person or persons to act
for such stockholder as proxy. Execution may be accomplished by the stockholder or such
stockholders authorized officer, director, employee or agent signing such writing or
causing such persons signature to be affixed to such writing by any reasonable means,
including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or persons to act for such
stockholder as proxy by transmitting or authorizing the transmission of a telegram,
cablegram or other means of electronic transmission to the person who will be the holder
of the proxy or to a proxy solicitation firm, proxy support service organization or like
agent duly authorized by the person who will be the holder of the proxy to receive such
transmission,
provided
that any such telegram, cablegram or other means of
electronic transmission must either set forth or be submitted with information from which
it can be determined that the telegram, cablegram or other electronic transmission was
authorized by the stockholder. If it is determined that such telegrams, cablegrams or
11
other electronic transmissions are valid, the inspectors or, if there are no
inspectors, such other persons making that determination shall specify the information on
which they relied.
Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission
authorizing another person or persons to act as proxy for a stockholder may be substituted or used
in lieu of the original writing or transmission for any and all purposes for which the original
writing or transmission could be used;
provided
,
however
, that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
Section 11.
List of Stockholders Entitled to Vote
. The officer of the Corporation who has
charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of the stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to the examination
of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting (i) on a reasonably accessible electronic
network,
provided
that the information required to gain access to such list is provided
with the notice of the meeting, or (ii) during ordinary business hours, at the principal place of
business of the Corporation. In the event that the Corporation determines to make the list
12
available on an electronic network, the Corporation may take reasonable steps to ensure that such
information is available only to stockholders of the Corporation. If the meeting is to be held at
a place, then the list shall be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to
be held solely by means of remote communication, then the list shall also be open to the
examination of any stockholder during the whole time of the meeting on a reasonably accessible
electronic network, and the information required to access such list shall be provided with the
notice of the meeting.
Section 12.
Record Date
. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, the
Board of Directors may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If
no record date is fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of the stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice is waived, at the close
of business on the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of the
13
stockholders shall apply to any adjournment of the meeting;
provided
,
however
, that
the Board of Directors may fix a new record date for the adjourned meeting.
Section 13.
Stock Ledger
. The stock ledger of the Corporation shall be the only evidence
as to who are the stockholders entitled to examine the stock ledger, the list required by Section
11 of this Article II or the books of the Corporation, or to vote in person or by proxy at any
meeting of the stockholders.
Section 14.
Conduct of Meetings
. The Board of Directors of the Corporation may adopt by
resolution such rules and regulations for the conduct of any meeting of the stockholders as it
shall deem appropriate. Except to the extent inconsistent with such rules and regulations as
adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the
right and authority to prescribe such rules, regulations and procedures and to do all such acts as,
in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such
rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the
chairman of the meeting, may include, without limitation, the following: (i) the establishment of
an agenda or order of business for the meeting; (ii) the determination of when the polls shall open
and close for any given matter to be voted on at the meeting; (iii) rules and procedures for
maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at
or participation in the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting shall determine; (v)
restrictions on
14
entry to the meeting after the time fixed for the commencement thereof; and (vi) limitations on the
time allotted to questions or comments by participants.
Section 15.
Inspectors of Election
. In advance of any meeting of the stockholders, the
Board of Directors, by resolution, the Chairman or the Chief Executive Officer shall appoint one or
more inspectors to act at the meeting and make a written report thereof. One or more other persons
may be designated as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of the stockholders, the chairman of the meeting
shall appoint one or more inspectors to act at the meeting. Unless otherwise required by
applicable law, inspectors may be officers, employees or agents of the Corporation. Each
inspector, before entering upon the discharge of the duties of inspector, shall take and sign an
oath faithfully to execute the duties of inspector with strict impartiality and according to the
best of such inspectors ability. The inspector shall have the duties prescribed by law and shall
take charge of the polls and, when the vote is completed, shall make a certificate of the result of
the vote taken and of such other facts as may be required by applicable law.
ARTICLE III
DIRECTORS
Section 1.
Number and Election of Directors
. The Board of Directors shall consist of not
less than five (5) or more than fifteen (15) members, the exact number of which shall be fixed from
time to time by resolution adopted
15
by the affirmative vote of a majority of the entire Board of Directors. Except as provided in
Section 2 of this Article III, directors shall be elected by a plurality of the votes cast at each
Annual Meeting of Stockholders and each director so elected shall hold office until the next Annual
Meeting of Stockholders and until such directors successor is duly elected and qualified, or until
such directors earlier death, resignation or removal. Directors need not be stockholders.
Section 2.
Vacancies
. Unless otherwise required by law or the Certificate of
Incorporation, any vacancy on the Board of Directors that results from an increase in the number of
directors may be filled by a majority of the Board of Directors then in office, provided that a
quorum is present, and any other vacancy occurring on the Board of Directors may be filled by a
majority of the Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Any director of any class elected to fill a vacancy resulting from an increase
in the number of directors of such class shall hold office for a term that shall coincide with the
remaining term of that class. Any director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same remaining term as that of his predecessor.
Section 3.
Duties and Powers
. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the stockholders.
16
Section 4.
Meetings
. The Board of Directors and any committee thereof may hold meetings,
both regular and special, either within or without the State of Delaware. Regular meetings of the
Board of Directors or any committee thereof may be held without notice at such time and at such
place as may from time to time be determined by the Board of Directors or such committee,
respectively. Special meetings of the Board of Directors may be called by the Chairman, if there be
one, the Chief Executive Officer or any director. Special meetings of any committee of the Board
of Directors may be called by the chairman of such committee, if there be one, the Chief Executive
Officer or any director serving on such committee. Notice thereof stating the place, date and hour
of the meeting shall be given to each director (or, in the case of a committee, to each member of
such committee) either by mail not less than forty-eight (48) hours before the date of the meeting,
by telephone, telegram or electronic means on twenty-four (24) hours notice, or on such shorter
notice as the person or persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 5.
Organization
. At each meeting of the Board of Directors or any committee
thereof, the Chairman or the chairman of such committee, as the case may be, or, in his or her
absence or if there be none, a director chosen by a majority of the directors present, shall act as
chairman. Except as provided below, the Secretary of the Corporation shall act as secretary at
each meeting of the Board of Directors and of each committee thereof. In case
17
the Secretary shall be absent from any meeting of the Board of Directors or of any committee
thereof, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the
absence from any such meeting of the Secretary and all the Assistant Secretaries, the chairman of
the meeting may appoint any person to act as secretary of the meeting. Notwithstanding the
foregoing, the members of each committee of the Board of Directors may appoint any person to act as
secretary of any meeting of such committee and the Secretary or any Assistant Secretary of the
Corporation may, but need not if such committee so elects, serve in such capacity.
Section 6.
Resignations and Removals of Directors
. Any director of the Corporation may
resign from the Board of Directors or any committee thereof at any time, by giving notice in
writing or by electronic transmission to the Chairman, if there be one, the Chief Executive Officer
or the Secretary of the Corporation and, in the case of a committee, to the chairman of such
committee, if there be one. Such resignation shall take effect at the time therein specified or,
if no time is specified, immediately; and, unless otherwise specified in such notice, the
acceptance of such resignation shall not be necessary to make it effective. Except as otherwise
required by applicable law and subject to the rights, if any, of the holders of shares of preferred
stock then outstanding, any director or the entire Board of Directors may be removed from office at
any time, but only for cause and only by the affirmative vote of the holders of at least a majority
in voting power of the issued and outstanding capital stock of the
18
Corporation entitled to vote in the election of directors. Any director serving on a committee of
the Board of Directors may be removed from such committee at any time by the Board of Directors.
Section 7.
Quorum
. Except as otherwise required by law, or the Certificate of
Incorporation or the rules and regulations of any securities exchange or quotation system on which
the Corporations securities are listed or quoted for trading, at all meetings of the Board of
Directors or any committee thereof, a majority of the entire Board of Directors or a majority of
the directors constituting such committee, as the case may be, shall constitute a quorum for the
transaction of business and the act of a majority of the directors or committee members present at
any meeting at which there is a quorum shall be the act of the Board of Directors or such
committee, as applicable. If a quorum shall not be present at any meeting of the Board of
Directors or any committee thereof, the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting of the time and place of the
adjourned meeting, until a quorum shall be present.
Section 8.
Actions of the Board by Written Consent
. Unless otherwise provided in the
Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if
all the members of the Board of Directors or such committee, as the case may be, consent thereto in
writing or by electronic transmission, and the writing or writings or electronic
19
transmission or transmissions are filed with the minutes of proceedings of the Board of Directors
or such committee. Such filing shall be in paper form if the minutes are maintained in paper form
and shall be in electronic form if the minutes are maintained in electronic form.
Section 9.
Meetings by Means of Conference Telephone
. Unless otherwise provided in the
Certificate of Incorporation or these By-Laws, members of the Board of Directors of the
Corporation, or any committee thereof, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or other communications equipment by means of
which all persons participating in the meeting can hear each other, and participation in a meeting
pursuant to this Section 9 shall constitute presence in person at such meeting.
Section 10.
Committees
. The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. Each member of a
committee must meet the requirements for membership, if any, imposed by applicable law and the
rules and regulations of any securities exchange or quotation system on which the securities of the
Corporation are listed or quoted for trading. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or disqualified member
at any meeting of any such committee. Subject to the rules and regulations of any securities
exchange or quotation system on which the securities of the Corporation are listed or quoted for
trading,
20
in the absence or disqualification of a member of a committee, and in the absence of a designation
by the Board of Directors of an alternate member to replace the absent or disqualified member, the
member or members thereof present at any meeting and not disqualified from voting, whether or not
such member or members constitute a quorum, may unanimously appoint another qualified member of the
Board of Directors to act at the meeting in the place of any absent or disqualified member. Any
committee, to the extent permitted by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Each committee shall keep regular
minutes and report to the Board of Directors when required. Notwithstanding anything to the
contrary contained in this Article III, the resolution of the Board of Directors establishing any
committee of the Board of Directors and/or the charter of any such committee may establish
requirements or procedures relating to the governance and/or operation of such committee that are
different from, or in addition to, those set forth in these By-Laws and, to the extent that there
is any inconsistency between these By-Laws and any such resolution or charter, the terms of such
resolution or charter shall be controlling.
Section 11.
Compensation
. The directors may be paid their expenses, if any, of attendance
at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a
21
stated salary for service as director, payable in cash or securities of the Corporation. No such
payment shall preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may be allowed like
compensation for service as committee members.
Section 12.
Interested Directors
. No contract or transaction between the Corporation and
one or more of its directors or officers, or between the Corporation and any other corporation,
partnership, association or other organization in which one or more of its directors or officers
are directors or officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or transaction, or solely
because any such directors or officers vote is counted for such purpose if: (i) the material
facts as to the directors or officers relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the committee, and the Board of
Directors or committee in good faith authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to the directors or officers relationship or
interest and as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically approved in good faith by
vote of the stockholders; or (iii) the
22
contract or transaction is fair as to the Corporation as of the time it is authorized, approved or
ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1.
General
. The officers of the Corporation shall be chosen by the Board of
Directors and shall be a Chief Executive Officer, one or more Presidents, a Chief Financial
Officer, a Secretary and a Treasurer. The Board of Directors, in its discretion, also may choose a
Chairman (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The officers of
the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman
of the Board of Directors, need such officers be directors of the Corporation.
Section 2.
Election
. The Board of Directors, at its first meeting held after each Annual
Meeting of Stockholders, shall elect the officers of the Corporation who shall hold their offices
for such terms and shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors; and each officer of the Corporation shall hold office until
23
such officers successor is elected and qualified, or until such officers earlier death,
resignation or removal. Any officer elected by the Board of Directors may be removed at any time
by the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the
Board of Directors.
Section 3.
Voting Securities Owned by the Corporation
. Powers of attorney, proxies,
waivers of notice of meeting, consents and other instruments relating to securities owned by the
Corporation may be executed in the name of and on behalf of the Corporation by the Chief Executive
Officer, any President or any Vice President or any other officer authorized to do so by the Board
of Directors and any such officer may, in the name of and on behalf of the Corporation, take all
such action as any such officer may deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident to the ownership of
such securities and which, as the owner thereof, the Corporation might have exercised and possessed
if present. The Board of Directors may, by resolution, from time to time confer like powers upon
any other person or persons.
Section 4.
Chairman of the Board of Directors
. The Chairman of the Board of Directors, if
there be one, shall preside at all meetings of the stockholders and of the Board of Directors. The
Chairman of the Board of Directors may also be the Chief Executive Officer of the Corporation, and,
except
24
where by law the signature of the Chief Executive Officer or a President is required, the Chairman
of the Board of Directors shall possess the same power as the Chief Executive Officer or a
President to sign all contracts, certificates and other instruments of the Corporation which may be
authorized by the Board of Directors. During the absence or disability of the Chief Executive
Officer, the Chairman of the Board of Directors shall exercise all the powers and discharge all the
duties of the Chief Executive Officer. The Chairman of the Board of Directors shall also perform
such other duties and may exercise such other powers as may from time to time be assigned by these
By-Laws or by the Board of Directors.
Section 5.
Chief Executive Officer
. The Chief Executive Officer shall, subject to the
control of the Board of Directors and, if there be one, the Chairman of the Board of Directors,
have general supervision of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall
execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal,
under the seal of the Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and execute documents
when so authorized by these By-Laws, the Board of Directors or the Chief Executive Officer. In the
absence or disability of the Chairman of the Board of Directors, or if there be none, the Chief
Executive Officer shall preside at all meetings of the stockholders and, provided
25
the Chief Executive Officer is also a director, the Board of Directors. The Chief Executive Officer
shall also perform such other duties and may exercise such other powers as may from time to time be
assigned to such officer by these By-Laws or by the Board of Directors.
Section 6.
Chief Financial Officer
.
The Chief Financial Officer shall have general supervision, direction and control of the financial
affairs of the Corporation and shall perform such other duties and exercise such other powers which
are or from time to time may be delegated to him or her by the Board of Directors or these By-laws,
all in accordance with basic policies as established by and subject to the oversight of the Board
of Directors. In the absence of a named Treasurer, the Chief Financial Officer shall also have the
powers and duties of the Treasurer as hereinafter set forth and shall be authorized and empowered
to sign as Treasurer in any case where such officers signature is required.
Section 7.
Presidents
. At the request of Chief Executive Officer or in the
absence of the Chief Executive Officer or in the event of the refusal of the Chief Executive
Officer to act (and if there be no Chairman), the President, or Presidents if there are more than
one (in the order designated by the Board of Directors), may perform the duties of the Chief
Executive Officer, and when so acting, shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer. Each President shall perform such other duties
and have such other powers as the Board of Directors from time to time may prescribe.
26
Section 8.
Vice Presidents
. At the request of any President or in the absence of all
Presidents or in the event of the refusal of all Presidents to act (and if there be no Chairman),
the Vice President, or the Vice Presidents if there are more than one (in the order designated by
the Board of Directors), shall perform the duties of any President, and when so acting, may have
all the powers of and be subject to all the restrictions upon any President. Each Vice President
shall perform such other duties and have such other powers as the Board of Directors from time to
time may prescribe. If there be no Chairman, Chief Executive Officer, President or Vice President,
the Board of Directors shall designate the officer of the Corporation who, in their absence or in
the event of the refusal of the Chief Executive Officer and all Presidents to act, shall perform
the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Chief Executive Officer.
Section 9.
Secretary
. The Secretary shall attend all meetings of the Board of Directors
and all meetings of the stockholders and record all the proceedings thereat in a book or books to
be kept for that purpose; the Secretary shall also perform like duties for committees of the Board
of Directors when required. The Secretary shall give, or cause to be given, notice of all meetings
of
the stockholders and special meetings of the Board of Directors, and shall perform such other
duties as may be prescribed by the Board of Directors, the Chairman, the Chief Executive Officer or
any President, under whose supervision the Secretary shall be. If the Secretary shall be unable or
shall refuse to cause to be
27
given notice of all meetings of the stockholders and special meetings
of the Board of Directors, and if there be no Assistant Secretary, then either the Board of
Directors, the Chief Executive Officer or any President may choose another officer to cause such
notice to be given. The Secretary shall have custody of the seal of the Corporation and the
Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to
any instrument requiring it and when so affixed, it may be attested by the signature of the
Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and to attest to the
affixing by such officers signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or filed are properly kept
or filed, as the case may be.
Section 10.
Treasurer
. The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall render to Chief
Executive Officer and the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all transactions as Treasurer and of the financial condition
of the Corporation. If
28
required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the
Board of Directors for the faithful performance of the duties of the office of the Treasurer and
for the restoration to the Corporation, in case of the Treasurers death, resignation, retirement
or removal from office, of all books, papers, vouchers, money and other property of whatever kind
in the Treasurers possession or under the Treasurers control belonging to the Corporation.
Section 11.
Assistant Secretaries
. Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by the Board of
Directors, the Chief Executive Officer, any President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of the Secretarys inability or
refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Secretary.
Section 12.
Assistant Treasurers
. Assistant Treasurers, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by the Board of
Directors, the Chief Executive Officer, any President, any Vice President, if there be one, or the
Treasurer, and in the absence
of the Treasurer or in the event of the Treasurers inability or refusal to act, shall perform the
duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the
restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer
shall give the Corporation a bond in
29
such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the duties of the office of
Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant
Treasurers death, resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the Assistant Treasurers possession or under the
Assistant Treasurers control belonging to the Corporation.
Section 13.
Other Officers
. Such other officers as the Board of Directors may choose shall
perform such duties and have such powers as from time to time may be assigned to them by the Board
of Directors. The Board of Directors may delegate to any other officer of the Corporation the
power to choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1.
Shares of Stock
. The shares of capital stock of the Corporation shall be
represented by a certificate, unless and until the Board of Directors of the Corporation adopts a
resolution permitting shares to be uncertificated. Notwithstanding the adoption of any such
resolution providing for
uncertificated shares, every holder of capital stock of the Corporation theretofore represented by
certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a
certificate for shares of capital stock of the Corporation signed by, or in the name of the
Corporation by, (a) the Chairman of the Board,
30
the Chief Executive Officer or any President, and
(b) the Chief Financial Officer, the Treasurer or the Secretary, certifying the number of shares
owned by such stockholder in the Corporation.
Section 2.
Signatures
. Any or all of the signatures on a certificate may be a facsimile.
In case any officer, transfer agent or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the same effect as if
such person were such officer, transfer agent or registrar at the date of issue.
Section 3.
Lost Certificates
. The Board of Directors may direct a new certificate or
uncertificated shares be issued in place of any certificate theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such
issuance of a new certificate or uncertificated shares, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or such owners legal
representative, to advertise the same in such manner as the Board of Directors shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may
be made against the Corporation on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate or uncertificated shares.
Section 4.
Transfers
. Stock of
31
the Corporation shall be transferable in the manner
prescribed by applicable law and in these By-Laws. Transfers of stock shall be made on the books
of the Corporation, and in the case of certificated shares of stock, only by the person named in
the certificate or by such persons attorney lawfully constituted in writing and upon the surrender
of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer
taxes; or, in the case of uncertificated shares of stock, upon receipt of proper transfer
instructions from the registered holder of the shares or by such persons attorney lawfully
constituted in writing, and upon payment of all necessary transfer taxes and compliance with
appropriate procedures for transferring shares in uncertificated form; provided, however, that such
surrender and endorsement, compliance or payment of taxes shall not be required in any case in
which the officers of the Corporation shall determine to waive such requirement. With respect to
certificated shares of stock, every certificate exchanged, returned or surrendered to the
Corporation shall be marked Cancelled, with the date of cancellation, by the Secretary of the
Corporation or the transfer agent thereof. No transfer of stock shall be valid as against the
Corporation for any purpose until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
Section 5.
Dividend Record Date
. In order that the Corporation may determine (i) the
stockholders of the Corporation entitled to receive payment of any dividend or other distribution
or allotment of any rights or (ii) the stockholders of the Corporation entitled to exercise any
rights in respect of any change, conversion or
32
exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted, and which record date shall
be not more than sixty (60) days prior to such action. If no record date is fixed, the record date
for determining stockholders for any such purpose shall be at the close of business on the day on
which the Board of Directors adopts the resolution relating thereto.
Section 6.
Record Owners
. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares of capital stock to receive
dividends, and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares of capital stock, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on the part of any
other person, whether or not it shall have express or other notice thereof, except as otherwise
required by law.
Section 7.
Transfer and Registry Agents
. The Corporation may from time to time maintain
one or more transfer offices or agencies and registry offices or agencies at such place or places
as may be determined from time to time by the Board of Directors.
33
ARTICLE VI
NOTICES
Section 1.
Notices
. Whenever written notice is required by law, the Certificate of
Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder,
such notice may be given by mail, addressed to such director, member of a committee or stockholder,
at such persons address as it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited
in the United States mail. Without limiting the manner by which notice otherwise may be given
effectively to stockholders, any notice to stockholders given by the Corporation under applicable
law, the Certificate of Incorporation or these By-Laws shall be effective if given by a form of
electronic transmission if consented to by the stockholder to whom the notice is given. Any such
consent shall be revocable by the stockholder by written notice to the Corporation. Any such
consent shall be deemed to be revoked if (i) the Corporation is unable to deliver by electronic
transmission two (2) consecutive notices by the Corporation in accordance with such consent and
(ii) such inability becomes known to the Secretary or Assistant Secretary of the Corporation or to
the transfer agent, or other person responsible for the giving of notice;
provided
,
however
, that the inadvertent failure to treat such inability as a revocation shall not
invalidate any meeting or other action. Notice given by electronic transmission, as described
above, shall be deemed given: (i) if by facsimile
34
telecommunication, when directed to a number at
which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to
an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a
posting on an electronic network, together with separate notice to the stockholder of such specific
posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if
by any other form of electronic transmission, when directed to the stockholder. Notice to
directors or committee members may be given personally or by telegram, telex, cable or by means of
electronic transmission.
Section 2.
Waivers of Notice
. Whenever any notice is required by applicable law, the
Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee
or stockholder, a waiver thereof in writing, signed by the person or persons entitled to notice, or
a waiver by electronic transmission by the person or persons entitled to notice, whether before or
after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a
meeting, present in person or represented by proxy, shall constitute a waiver of notice of such
meeting, except where the person attends the meeting for the express purpose of objecting at the
beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any Annual or Special Meeting of Stockholders or any regular or
special meeting of the directors or members of a committee of directors need be specified in any
written waiver of
35
notice unless so required by law, the Certificate of Incorporation or these
By-Laws.
ARTICLE VII
GENERAL PROVISIONS
Section 1.
Dividends
. Dividends upon the capital stock of the Corporation, subject to the
requirements of the DGCL and the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting of the Board of Directors (or
any action by written consent in lieu thereof in accordance with Section 8 of Article III hereof),
and may be paid in cash, in property, or in shares of the Corporations capital stock. Before
payment of any dividend, there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve or reserves to meet contingencies, or for purchasing any of the shares of
capital stock, warrants, rights, options, bonds, debentures, notes, scrip or other securities or
evidences of indebtedness of the Corporation, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors
may modify or abolish any such reserve.
Section 2.
Disbursements
. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as the Board of
Directors may from time to time designate.
36
Section 3.
Fiscal Year
. The fiscal year of the Corporation shall be fixed by resolution of
the Board of Directors.
Section 4.
Corporate Seal
. The corporate seal shall have inscribed thereon the name of the
Corporation and the words Corporate Seal, Delaware. The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1.
Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the
Right of the Corporation
. Subject to Section 3 of this Article VIII, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by reason of the fact
that such person is or was a director or officer of the Corporation, or is or was a director or
officer of the Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys fees), judgments, fines and amounts paid in settlement
actually and
reasonably incurred by such person in connection with such action, suit or proceeding if such
person acted in good faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the Corporation,
37
and, with respect to any criminal action or proceeding,
had no reasonable cause to believe such persons conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo
contendere
or its equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such persons conduct was unlawful.
Section 2.
Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the
Corporation
. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director or officer of the Corporation, or is or
was a director or officer of the Corporation serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which
38
such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 3.
Authorization of Indemnification
. Any indemnification under this Article VIII
(unless ordered by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the present or former director or officer is
proper in the circumstances because such person has met the applicable standard of conduct set
forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall
be made, with respect to a person who is a director or officer at the time of such determination,
(i) by a majority vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, or (ii) by a committee of such directors designated by a majority
vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or
if such directors so direct, by independent legal counsel in a written opinion or (iv) by the
stockholders. Such determination shall be made, with respect to former
directors and officers, by any person or persons having the authority to act on the matter on
behalf of the Corporation. To the extent, however, that a present or former director or officer of
the Corporation has been successful on the merits or
39
otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys fees) actually and reasonably incurred by
such person in connection therewith, without the necessity of authorization in the specific case.
Section 4.
Good Faith Defined
. For purposes of any determination under Section 3 of this
Article VIII, a person shall be deemed to have acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Corporation, or, with
respect to any criminal action or proceeding, to have had no reasonable cause to believe such
persons conduct was unlawful, if such persons action is based on the records or books of account
of the Corporation or another enterprise, or on information supplied to such person by the officers
of the Corporation or another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records given or reports
made to the Corporation or another enterprise by an independent certified public accountant or by
an appraiser or other expert selected with reasonable care by the Corporation or another
enterprise. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Section 1 or Section 2 of this
Article VIII, as the case may be.
40
Section 5.
Indemnification by a Court
. Notwithstanding any contrary determination in the
specific case under Section 3 of this Article VIII, and notwithstanding the absence of any
determination thereunder, any director or officer may apply to the Court of Chancery of the State
of Delaware or any other court of competent jurisdiction in the State of Delaware for
indemnification to the extent otherwise permissible under Section 1 or Section 2 of this Article
VIII. The basis of such indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances because such person has
met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as
the case may be. Neither a contrary determination in the specific case under Section 3 of this
Article VIII nor the absence of any determination thereunder shall be a defense to such application
or create a presumption that the director or officer seeking indemnification has not met any
applicable standard of conduct. Notice of any application for indemnification pursuant to this
Section 5 shall be given to the Corporation promptly upon the filing of such application. If
successful, in whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
Section 6.
Expenses Payable in Advance
. Expenses (including attorneys fees) incurred by a
director or officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding
41
upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the Corporation as authorized in
this Article VIII. Such expenses (including attorneys fees) incurred by former directors and
officers or other employees and agents may be so paid upon such terms and conditions, if any, as
the Corporation deems appropriate.
Section 7.
Nonexclusivity of Indemnification and Advancement of Expenses
. The
indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII
shall not be deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Certificate of Incorporation, these By-Laws,
agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such
persons official capacity and as to action in another capacity while holding such office, it being
the policy of the Corporation that indemnification of the persons specified in Section 1 and
Section 2 of this Article VIII shall be made to the fullest extent permitted by law. The
provisions of this Article VIII shall not be deemed to preclude the indemnification of any person
who is not specified in Section 1 or Section 2 of this Article VIII but whom the Corporation has
the power or obligation to indemnify under the provisions of the DGCL, or otherwise.
Section 8.
Insurance
. The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director or officer of
42
the Corporation, or is or was a director or officer
of the Corporation serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against such person and incurred by such person in any such capacity, or arising
out of such persons status as such, whether or not the Corporation would have the power or the
obligation to indemnify such person against such liability under the provisions of this Article
VIII.
Section 9.
Certain Definitions
. For purposes of this Article VIII, references to the
Corporation shall include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to indemnify its directors or
officers, so that any person who is or was a director or officer of such constituent corporation,
or is or was a director or officer of such constituent corporation serving at the request of such
constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same position under the
provisions of this Article VIII with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate existence had
continued. The term another enterprise as used in this Article VIII shall mean
any other corporation or any partnership, joint venture, trust, employee benefit plan or other
enterprise of which such person is or was serving at the request of the Corporation as a director,
officer, employee or agent. For purposes of this Article VIII, references to fines shall include
any excise taxes assessed on a person with respect to an employee benefit plan; and references to
serving at the request of
43
the Corporation shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves services by, such
director or officer with respect to an employee benefit plan, its participants or beneficiaries;
and a person who acted in good faith and in a manner such person reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner not opposed to the best interests of the Corporation as referred to in this
Article VIII.
Section 10.
Survival of Indemnification and Advancement of Expenses
. The indemnification
and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless
otherwise provided when authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and administrators of
such a person.
Section 11.
Limitation on Indemnification
. Notwithstanding anything contained in this
Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which
shall be governed by Section 5 of this
Article VIII), the Corporation shall not be obligated to indemnify any director or officer (or his
or her heirs, executors or personal or legal representatives) or
44
advance expenses in connection
with a proceeding (or part thereof) initiated by such person unless such proceeding (or part
thereof) was authorized or consented to by the Board of Directors of the Corporation.
Section 12.
Indemnification of Employees and Agents
. The Corporation may, to the extent
authorized from time to time by the Board of Directors, provide rights to indemnification and to
the advancement of expenses to employees and agents of the Corporation similar to those conferred
in this Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1.
Amendments
. In furtherance and not in limitation of the powers conferred upon
it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt,
amend, alter or repeal these By-Laws; provided, however, that notice of such proposed adoption,
amendment, alteration or repeal be contained in the notice of the meeting of the Board of Directors
at which such action is proposed to be taken. The affirmative vote of at least a majority of the
entire Board of Directors shall be required to adopt, amend, alter or repeal these By-Laws. These
By-Laws also may be adopted, amended, altered or repealed by the affirmative vote of the holders of
at least 66.67% of the voting power of the shares of the Corporations capital stock entitled to
vote in
connection with the election of directors of the Corporation; provided, however, that notice of
such adoption, amendment, alteration or repeal be contained in
the
45
notice of the meeting of the
stockholders at which such action is proposed to be taken.
Section 2.
Entire Board of Directors
. As used in this Article IX and in these By-Laws
generally, the term entire Board of Directors means the total number of directors which the
Corporation would have if there were no vacancies.
* * *
46
EXHIBIT 4.3
RESALE AND REGISTRATION RIGHTS AGREEMENT
dated as of
October 30, 2007
among
PZENA INVESTMENT MANAGEMENT, INC.
and
THE HOLDERS SET FORTH
ON THE SIGNATURE PAGES HERETO
TABLE OF CONTENTS
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Page
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ARTICLE I
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DEFINITIONS
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SECTION 1.1
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DEFINITIONS
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1
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SECTION 1.2
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GENDER
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5
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ARTICLE II
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RESALE RIGHTS
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SECTION 2.1
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RESALE RIGHTS
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5
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ARTICLE III
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REGISTRATION RIGHTS
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SECTION 3.1
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SHELF REGISTRATION
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SECTION 3.2
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WITHDRAWAL RIGHTS
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SECTION 3.3
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HOLDBACK AGREEMENTS
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SECTION 3.4
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REGISTRATION PROCEDURES
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SECTION 3.5
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REGISTRATION EXPENSES
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SECTION 3.6
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REGISTRATION INDEMNIFICATION
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ARTICLE IV
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TERMINATION
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SECTION 4.1
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TERM
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SECTION 4.2
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SURVIVAL
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ARTICLE V
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MISCELLANEOUS
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SECTION 5.1
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NOTICES
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SECTION 5.2
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INTERPRETATION
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SECTION 5.3
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SEVERABILITY
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SECTION 5.4
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COUNTERPARTS
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SECTION 5.5
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ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES
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SECTION 5.6
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FURTHER ASSURANCES
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SECTION 5.7
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GOVERNING LAW; EQUITABLE REMEDIES
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SECTION 5.8
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CONSENT TO JURISDICTION
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SECTION 5.9
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AMENDMENTS; WAIVERS
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SECTION 5.10
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ASSIGNMENT
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ii
This RESALE AND REGISTRATION RIGHTS AGREEMENT (the Agreement), dated as of October 30, 2007,
is by and among Pzena Investment Management, Inc., a Delaware corporation (Pzena Inc.) and each
of the holders of Class B Units (the Class B Units) of Pzena Investment Management, LLC (Pzena
LLC) listed on the signature pages to this Agreement or to the Additional Party Signature Page in
the form attached hereto as Annex A (the Holders).
WHEREAS, the operating agreement of Pzena LLC, amended and restated as of the date hereof (the
Operating Agreement) allows each holder of Class B Units to exchange each Class B Unit for one
share of Class A common stock, par value $0.01 per share, of Pzena Inc. (the Class A Shares) at
certain times and under certain circumstances as described therein; and
WHEREAS, Pzena Inc. and the Holders desire to enter into an agreement relating to any and all
Class A Shares that Pzena Inc. may issue to the Holders upon exchange of their Class B Units in
accordance with the terms of the Operating Agreement, providing for (i) restrictions on the
Transfer (as defined below) of such Class A Shares, which restrictions are intended to provide for
the maintenance of an orderly market for the Class A Shares and the alignment of the interests of
Pzena Inc. with its stockholders who are affiliated with it, and (ii) the Holders rights to have
such Class A Shares registered for resale at certain times and under certain circumstances
described herein;
NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein and
for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following
meanings:
An AFFILIATE of any Person means any other Person that directly or indirectly, through one
or more intermediaries, Controls, is Controlled by, or is under common Control with, such first
Person. CONTROL means the possession, direct
1
or indirect, 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.
AGREEMENT shall have the meaning set forth in the preamble to this Agreement.
APPLICABLE REGISTRABLE SECURITIES shall have the meaning set forth in Section 2.1(a) of this
Agreement.
BOARD means the board of directors of Pzena Inc.
CLASS A SHARES shall have the meaning ascribed to such term in the recitals to this
Agreement.
CLASS B SHARES means the shares of Class B common stock, par value $0.000001 per share, of
Pzena Inc.
CLASS B UNITS shall have the meaning ascribed to such term in the preamble to this
Agreement.
CODE shall mean the Internal Revenue Code of 1986, as amended and in effect from time to
time.
ELIGIBLE UNDERWRITTEN OFFERING shall have the meaning set forth in Section 2.1(a)(i) of this
Agreement.
EXCHANGE shall have the meaning assigned to it in Exhibit B to the Operating Agreement.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, supplemented or restated
from time to time and any successor to such statute, and the rules and regulations promulgated
thereunder.
A reference to an EXCHANGE ACT RULE shall mean such rule or regulation of the SEC under the
Exchange Act, as in effect from time to time or as replaced by a successor rule thereto.
2
EXCHANGE CLOSING DATE shall have the meaning assigned to Closing Date in Exhibit B to the
Operating Agreement.
FINRA shall mean the Financial Industry Regulatory Authority, Inc.
FREE WRITING PROSPECTUS shall have the meaning set forth in Section 3.4(a)(iii).
FORM S-3 REGISTRATION STATEMENT shall mean a registration statement on Form S-3 (or any
successor form) under the Securities Act.
GOVERNMENTAL ENTITY means any court, administrative agency, regulatory body, commission or
other governmental authority, board, bureau or instrumentality, domestic or foreign and any
subdivision thereof.
HOLDERS shall have the meaning set forth in the preamble to this Agreement.
INSPECTORS shall have the meaning set forth in Section 3.4(a)(vii).
IPO means the initial offering of Class A Shares to the public, as described in the IPO
Registration Statement.
IPO REGISTRATION STATEMENT means Pzena Inc.s Registration Statement on Form S-1 (No.
333-143660), as amended to the date hereof.
LOSSES shall have the meaning set forth in Section 3.6(a).
OPERATING AGREEMENT shall have the meaning set forth in the recitals to this Agreement.
PERSON means any individual, corporation, firm, partnership, joint venture, limited
liability company, estate, trust, business association, organization, Governmental Entity or other
entity.
PROCEEDING shall have the meaning set forth in Section 5.8.
3
PZENA INC. shall have the meaning set forth in the preamble to this Agreement.
PZENA LLC shall have the meaning set forth in the preamble to this Agreement.
RECORDS shall have the meaning set forth in Section 3.4(a)(viii).
REGISTRABLE SECURITIES shall mean any and all Class A Shares that Pzena Inc. may issue to
Holders upon Exchange of any and all Class B Units currently owned or hereafter acquired by any
Holder in accordance with the terms of the Operating Agreement. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when (a) a registration
statement registering such securities under the Securities Act has been declared effective and such
securities have been sold or otherwise transferred by the holder thereof pursuant to such effective
registration statement or (b) such securities are sold in accordance with Rule 144 (or any
successor provision) promulgated under the Securities Act.
REPRESENTATIVE means with respect to a particular Person, any director, officer, manager,
employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other
representative of that Person.
REQUESTED INFORMATION shall have the meaning set forth in Section 3.1(d).
SEC means the United States Securities and Exchange Commission or any similar agency then
having jurisdiction to enforce the Securities Act.
SECURITIES ACT means the Securities Act of 1933, as amended, supplemented or restated from
time to time and any successor to such statute, and the rules and regulations promulgated
thereunder.
SELLING HOLDER shall have the meaning set forth in Section 3.4(a)(i).
SHELF REGISTRATION STATEMENT means each Form S-3 Registration Statement filed by Pzena Inc.
pursuant to subsection (a) or (b) of Section 3.1 hereof.
4
SUSPENSION PERIOD shall have the meaning set forth in Section 3.1(c).
A TRANSFER shall mean any sale, assignment, transfer or other disposal, directly or
indirectly.
To TRANSFER shall mean to sell, assign, transfer or otherwise dispose, directly or
indirectly.
UNDERWRITTEN OFFERING shall mean a sale of any Class A Shares of Pzena Inc. to an
underwriter or underwriters for reoffering to the public.
SECTION 1.2 GENDER. For the purposes of this Agreement, the words he, his or himself shall be
interpreted to include the masculine, feminine and corporate, other entity or trust form.
ARTICLE II
RESALE RIGHTS
SECTION 2.1 RESALE RIGHTS
(a) Each Holder may only Transfer Registrable Securities in accordance with the following
timing and manner of resale limitations:
(i) Prior to the fourth anniversary of the IPO, each Holder may only Transfer the number of
Registrable Securities that the Company is obligated to issue to such Holder on each Exchange
Closing Date that occurs prior to such anniversary (A) on the date(s), and (B) in accordance with
the method of distribution, which method may be an Underwritten Offering or a block trade, in each
case designated by Pzena Inc., in its sole discretion, in a written notice provided to each Holder
at least 30 days prior to the applicable Exchange Closing Date; provided, however, that each Holder
may transfer such Registrable Securities in accordance with the timing and method of distribution
proposed by such Holder and communicated in writing to Pzena Inc. at least 30 days prior to such
proposed date of Transfer if Pzena Inc. does not designate at least one date for the Transfer of
such Registrable Securities in each twelve-month period that occurs prior to such anniversary. If
any Holders exercising their right to distribute Registrable Securities in accordance with the
proviso of the preceding sentence propose to distribute Registrable Securities in an Underwritten
Offering on or about the same date that
5
would result in gross proceeds of at least $50 million (an Eligible Underwritten Offering), Pzena
Inc. hereby agrees to cooperate with such Holders and the underwriters of such Underwritten
Offering in order to consummate such Underwritten Offering.
(ii) Subsequent to the fourth anniversary of the IPO, each Holder may only Transfer the number
of Registrable Securities that the Company is obligated to issue to such Holder on each Exchange
Closing Date that occurs subsequent to such anniversary in accordance with the timing and method of
distribution proposed by such Holder in a written notice provided to Pzena Inc. at least 30 days
prior to the applicable Exchange Closing Date; provided, however, that any Holder who proposes to
distribute Registrable Securities by means of an Underwritten Offering must provide such notice at
least 60 days prior to the applicable Exchange Closing Date. If any Holders propose to distribute
Registrable Securities in an Eligible Underwritten Offering, Pzena Inc. hereby agrees to cooperate
with such Holders and the underwriters of such Underwritten Offering in order to consummate such
Underwritten Offering.
(b) To the extent that a Holder is subject to any trading policies of Pzena Inc., such Holder
shall be prohibited from Transferring any Registrable Securities pursuant to this Agreement, except
in accordance with such policies.
ARTICLE III
REGISTRATION RIGHTS
SECTION 3.1 SHELF REGISTRATION.
(a)
Initial Shelf Registration Statement
. As soon as practicable after Pzena Inc.
becomes eligible to file a Form S-3 Registration Statement under the Securities Act, Pzena Inc.
shall use its best efforts to file with the SEC a Form S-3 Registration Statement providing for an
offering of all Registrable Securities then eligible to be Transferred pursuant to Section
2.1(a)(i) hereof (i) on the date(s) and in accordance with the method(s) of distribution designated
by Pzena Inc. pursuant to Section 2.1(a)(i) hereof, or (ii) if Pzena Inc. does not designate any
such date or method of distribution, on the date(s) and in accordance with the method(s) of
distribution proposed by the Holders. Pzena shall use its best efforts to cause the SEC to declare
such Form S-3 Registration Statement
6
effective by such date(s). Pzena Inc. shall use its best efforts to keep such Form S-3
Registration Statement continuously effective until the earlier of (i) two years after such Form
S-3 Registration Statement has been declared effective; and (ii) the date on which all Registrable
Securities included in such Form S-3 Registration Statement have been sold in accordance with the
plan and method of distribution disclosed in the prospectus included in such Form S-3 Registration
Statement, or otherwise.
(b)
Subsequent Shelf Registration Statements
.
(i) On or before each Exchange Closing Date occurring after the initial Exchange Closing Date
and prior to the fourth anniversary of the IPO, Pzena Inc. shall use its best efforts to file with
the SEC a Form S-3 Registration Statement providing for an offering of all Registrable Securities
then eligible to be Transferred pursuant to Section 2.1(a)(i) hereof (i) on the date(s) and in
accordance with the method(s) of distribution designated by Pzena Inc. pursuant to Section
2.1(a)(i) hereof, or (ii) if Pzena Inc. does not designate any such date or method of distribution,
on the date(s) and in accordance with the method(s) of distribution proposed by the Holders. Pzena
shall use its best efforts to cause the SEC to declare such Form S-3 Registration Statement
effective by such date(s). Pzena Inc. shall use its best efforts to keep such Form S-3
Registration Statement continuously effective until the earlier of (i) two years after such Form
S-3 Registration Statement has been declared effective; and (ii) the date on which all Registrable
Securities included in such Form S-3 Registration Statement have been sold in accordance with the
plan and method of distribution disclosed in the prospectus included in such Form S-3 Registration
Statement, or otherwise.
(ii) On or before each Exchange Closing Date occurring after the fourth anniversary of the
IPO, Pzena Inc. shall use its best efforts to file with the SEC, and cause the SEC to declare
effective, a Form S-3 Registration Statement providing for an offering of all Registrable
Securities then eligible to be Transferred pursuant to Section 2.1(a)(ii) hereof in accordance with
the method(s) of distribution proposed by the Holders. Pzena Inc. shall use its best efforts to
keep each such Form S-3 Registration Statement continuously effective in order to effect the
Transfer on or after each Exchange Closing Date of all Registrable Securities then eligible to be
transferred pursuant to Section 2.1(a)(ii) hereof.
(c)
Suspensions
. Notwithstanding anything to the contrary contained in this Agreement,
Pzena Inc. shall be entitled, from time to time, by providing written notice to the Holders, to
require such Holders to suspend the use of
7
the prospectus for sales of Registrable Securities under any Shelf Registration Statement for
a reasonable period of time not to exceed 90 days in succession or 180 days in the aggregate in any
12 month period (a Suspension Period) if Pzena Inc. shall determine that it is required to
disclose in any such Shelf Registration Statement a financing, acquisition, corporate
reorganization or other similar transaction or other material event or circumstance affecting Pzena
Inc. or its securities, and that the disclosure of such information at such time would be
detrimental to Pzena Inc. or the holders of its equity securities. Immediately upon receipt of
such notice, the Holders shall suspend the use of the prospectus until the requisite changes to the
prospectus have been made as required below. Any Suspension Period shall terminate at such time as
the public disclosure of such information is made. After the expiration of any Suspension Period
and without any further request from a Holder, Pzena Inc. shall as promptly as reasonably
practicable prepare a post-effective amendment or supplement to the applicable Shelf Registration
Statement or the prospectus, or any document incorporated therein by reference, or file any other
required document so that, as thereafter delivered to purchasers of the Registrable Securities
included therein, the prospectus will not include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d)
Information Requested from Holders
. Not less than ten business days before the
expected filing date of each Shelf Registration Statement pursuant to this Agreement, Pzena Inc.
shall notify each Holder of the information, documents and instruments from such Holder that Pzena
Inc. or any underwriter reasonably requests in order to include its Registrable Securities in such
Shelf Registration Statement, including, but not limited to a questionnaire, custody agreement,
power of attorney and, if applicable, a lock-up letter and underwriting agreement (collectively,
the Requested Information). If Pzena Inc. has not received, on or before the second day before
the expected filing date, the Requested Information from such Holder, Pzena Inc. may file such
Shelf Registration Statement without including the Registrable Securities of such Holder. The
failure to include such Registrable Securities in such Shelf Registration Statement shall not in
and of itself result in any liability on the part of Pzena Inc. to such Holder.
(e)
No Grant of Future Registration Rights
. Pzena Inc. shall not grant any shelf,
demand, piggyback or incidental registration rights that are senior to the rights granted to the
Holders hereunder to any other Person without the prior written consent of Holders of at least a
majority of the number of Registrable
8
Securities as of the date that Pzena Inc. requests such consent and such consent may be given
in the sole discretion of each of the Holders.
SECTION 3.2 WITHDRAWAL RIGHTS.
Any Holder having notified or directed Pzena Inc. to include any or all of its Registrable
Securities in a registration statement under the Securities Act shall have the right to withdraw
any such notice or direction with respect to any or all of the Registrable Securities designated by
it for registration by giving written notice to such effect to Pzena Inc. prior to the effective
date of such Shelf Registration Statement. In the event of any such withdrawal, Pzena Inc. shall
not include such Registrable Securities in the applicable registration and such Registrable
Securities shall continue to be Registrable Securities for all purposes of this Agreement. No such
withdrawal shall affect the obligations of Pzena Inc. with respect to the Registrable Securities
not so withdrawn. If a Holder withdraws its notification or direction to Pzena Inc. to include any
of its Registrable Securities in a registration statement in accordance with this Section 3.2, such
Holder shall be required to promptly reimburse Pzena Inc. for incremental expenses incurred by
Pzena Inc. in connection with preparing for the registration of the Registrable Securities so
withdrawn.
SECTION 3.3 HOLDBACK AGREEMENTS.
Each Holder agrees not to effect any public sale or distribution (including sales pursuant to
Rule 144) of equity securities of Pzena Inc., or any securities convertible into or exchangeable or
exercisable for such equity securities, (a) during any time period reasonably requested by Pzena
Inc. (which shall not exceed 90 days) in connection with distributions of Registrable Securities
designated by Pzena Inc. pursuant to Section 2.1(a)(i) or any Eligible Underwritten Offering,
except as part of such distribution or offering, or (b) during any time period (which shall not
exceed 180 days) required by any underwriting agreement with respect thereto distributions of
Registrable Securities pursuant to Section 2.1(a)(i) or any Eligible Underwritten Offering.
SECTION 3.4 REGISTRATION PROCEDURES.
(a) In connection with Pzena Inc.s obligations to use its best efforts to effect the
registration under the Securities Act of the Transfer of
9
Registrable Securities pursuant to Section 3.1 hereof, Pzena Inc. shall as expeditiously as
reasonably possible:
(i) before filing of any Shelf Registration Statement, and any amendment to
any such Shelf Registration Statement, Pzena Inc. will furnish to the Holders
electing to include Registrable Securities in such Shelf Registration Statement
(the Selling Holders), or counsel selected by the Selling Holders, a copy of
such document for review, which review shall be conducted with reasonable
promptness;
(ii) prepare and file with the SEC such amendments and supplements to each
Shelf Registration Statement required to be filed pursuant to subsection (a) or
(b) Section 3.1 hereof, and the prospectus(es) used in connection therewith, as
may be necessary to (A) keep each such Shelf Registration Statement effective as
required pursuant to such subsections hereof, and (B) comply with the provisions
of the Securities Act with respect to the disposition of all Registrable
Securities covered by such Shelf Registration Statement;
(iii) furnish each Selling Holder and any underwriter of the Registrable
Securities being sold by such Selling Holder (A) a conformed copy of such Shelf
Registration Statement and each amendment and supplement thereto (in each case
including all exhibits), (B) such number of copies of the prospectus contained in
such Shelf Registration Statement (including each preliminary prospectus and any
summary prospectus), each free writing prospectus (as defined in Rule 405 of the
Securities Act, a Free Writing Prospectus) utilized in connection therewith, and
any other prospectus filed under Rule 424 under the Securities Act, in conformity
with the requirements of the Securities Act, and (C) such other documents as such
Selling Holder and underwriter, if any, may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities
being sold by such Selling Holder;
(iv) use reasonable best efforts to register or qualify the Registrable
Securities being sold pursuant to such Shelf
10
Registration Statement under such other securities laws or blue sky laws of
such jurisdictions as any Selling Holder or underwriter of the Registrable
Securities being sold by such Selling Holder shall reasonably request, and take
any other action which may be reasonably necessary or advisable to enable any such
Selling Holder and underwriter to consummate the disposition in such jurisdictions
of such Registrable Securities, except that Pzena Inc. shall not for any such
purpose be required to (A) qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the requirements of
this clause (iv) be obligated to be so qualified, (B) subject itself to taxation
in any such jurisdiction or (C) file a general consent to service of process in
any such jurisdiction;
(v) use reasonable best efforts to cause the Registrable Securities being
sold pursuant to each such Shelf Registration Statement to be listed on each
securities exchange on which similar securities issued by Pzena Inc. are then
listed and, if no such securities are so listed, use commercially reasonable
efforts to cause such Registrable Securities to be listed on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ Stock Market;
(vi) use reasonable best efforts to cause the Registrable Securities being
sold pursuant to each such Shelf Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary to
enable the Selling Holder(s) thereof to consummate the disposition of such
Registrable Securities;
(vii) in connection with distributions of Registrable Securities designated
by Pzena Inc. pursuant to Section 2.1(a)(i) and each Eligible Underwritten
Offering:
(A) obtain for each Selling Holder and underwriter thereof, an opinion of
counsel of Pzena Inc., covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be reasonably
requested by each such Selling Holder and underwriter;
11
(B) obtain for each Selling Holder and underwriter thereof, a comfort
letter (or, in the case of any such Person which does not satisfy the conditions
for receipt of a comfort letter specified in Statement on Auditing Standards No.
72, an agreed upon procedures letter) signed by the independent public
accountants who have certified Pzena Inc.s financial statements included in such
Shelf Registration Statement;
(C) have appropriate officers of Pzena Inc. prepare and make presentations at
any road shows and before analysts and rating agencies, as the case may be, and
other information meetings organized by the underwriters thereof, take other
actions to obtain ratings for any Registrable Securities (if they are eligible to
be rated) and otherwise use its reasonable best efforts to cooperate as reasonably
requested by the Selling Holders and such underwriters in the offering, marketing
or selling of the Registrable Securities; and
(D) if requested by the underwriter thereof, enter into an underwriting
agreement with a managing underwriter or underwriters thereof containing
representations, warranties, indemnities and agreements customarily included (but
not inconsistent with the covenants and agreements of Pzena Inc. contained in this
Agreement) by an issuer of common stock in underwriting agreements with respect to
offerings of common stock for the account of, or on behalf of, such an issuer.
(viii) promptly make available for inspection by any Selling Holder, any
underwriter participating in any disposition pursuant to any Shelf Registration
Statement, and any attorney, accountant or other agent or representative retained
by any such Selling Holder or underwriter (collectively, the Inspectors), all
financial and other records, pertinent corporate documents and properties of Pzena
Inc. (collectively, the Records), as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause Pzena Inc.s
officers, directors and employees to supply all information requested by any such
Inspector in connection with such Shelf Registration Statement;
provided
,
however
, that, unless the disclosure of such Records is necessary to
12
avoid or correct a misstatement or omission in the registration statement or
the release of such Records is ordered pursuant to a subpoena or other order from
a court of competent jurisdiction, Pzena Inc. shall not be required to provide any
information under this subparagraph (viii) if (A) Pzena Inc. believes, after
consultation with counsel for Pzena Inc., that to do so would cause Pzena Inc. to
forfeit an attorney-client privilege that was applicable to such information or
(B) if either (1) Pzena Inc. has requested and been granted from the SEC
confidential treatment of such information contained in any filing with the SEC or
documents provided supplementally or otherwise or (2) Pzena Inc. reasonably
determines in good faith that such Records are confidential and so notifies the
Inspectors in writing unless prior to furnishing any such information with respect
to (A) or (B) such Selling Holder requesting such information agrees, and causes
each of its Inspectors, to enter into a confidentiality agreement on terms
reasonably acceptable to Pzena Inc.; and
provided
,
further
, that
each Selling Holder agrees that it will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction, give notice to Pzena Inc.
and allow Pzena Inc., at its expense, to undertake appropriate action and to
prevent disclosure of the Records deemed confidential;
(ix) promptly notify in writing each applicable Selling Holder and
underwriter, if any, of the following events:
(A) the filing of the applicable Shelf Registration Statement, the prospectus
or any prospectus supplement related thereto or post-effective amendment to such
Shelf Registration Statement or any Free Writing Prospectus utilized in connection
therewith, and, with respect to such Shelf Registration Statement or any
post-effective amendment thereto, when the same has become effective;
(B) any request by the SEC or any other Government Entity for amendments or
supplements to such Shelf Registration Statement or the prospectus or for
additional information;
13
(C) the issuance by the SEC or any other Government Entity of any stop order
suspending the effectiveness of such Shelf Registration Statement or the
initiation of any proceedings by any Person for that purpose; and
(D) the receipt by Pzena Inc. of any notification with respect to the
suspension of the qualification of applicable Registrable Securities for sale
under the securities or blue sky laws of any jurisdiction or the initiation or
threat of any proceeding for such purpose;
(x) notify each Selling Holder, at any time when a prospectus relating to the
sale of its Registrable Securities is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event as a
result of which, such prospectus, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and, at the
request of any Selling Holder, promptly prepare and furnish to each such Selling
Holder a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
(xi) use reasonable best efforts to obtain the withdrawal of any order
suspending the effectiveness of any Shelf Registration Statement then required to
be effective pursuant to Section subsection (a) or (b) of 3.1 hereof;
(xii) otherwise use reasonable best efforts to comply with all applicable
rules and regulations of the SEC, and make available to all Selling Holders, as
soon as reasonably practicable, an earnings statement of Pzena Inc. covering the
period of at least 12 months, but not more than 18 months, beginning with the
first day of Pzena Inc.s first full quarter after the effective date of each
Shelf Registration Statement, which earnings statement shall
14
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder;
(xiii) use its reasonable best efforts to assist Selling Holders who made a
request to Pzena Inc. to provide for a third party market maker for the Class A
Shares;
provided
,
however
, that Pzena Inc. shall not be required
to serve as such market maker;
(xiv) cooperate with the Selling Holders and any underwriter of Registrable
Securities to facilitate the timely preparation and delivery of certificates
(which shall not bear any restrictive legends unless required under applicable
law) representing the Registrable Securities being sold under each Shelf
Registration Statement, and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriter or such
Selling Holders may request and keep available and make available to Pzena Inc.s
transfer agent prior to the effectiveness of each such Shelf Registration
Statement a supply of such certificates; and
(xv) Pzena Inc. may require each Selling Holder and underwriter of
Registrable Securities, if any, to furnish Pzena Inc. in writing such information
regarding each Selling Holder or underwriter and the distribution of such
Registrable Securities as Pzena Inc. may from time to time reasonably request to
complete or amend the information required by the applicable Shelf Registration
Statement.
(b) Each Selling Holder agrees that upon receipt of any notice from Pzena Inc. of the
happening of any event of the kind described in clauses (ix) or (x) of Section 3.4(a), such Selling
Holder shall forthwith discontinue such Selling Holders disposition of Registrable Securities
pursuant to the applicable Shelf Registration Statement and prospectus relating thereto until such
Selling Holders receipt of the copies of the supplemented or amended prospectus contemplated by
Section 3.4(a)(x) and, if so directed by Pzena Inc., deliver to Pzena Inc., at Pzena Inc.s
expense, all copies, other than permanent file copies, then in such Selling Holders possession of
the prospectus current at the time of receipt of such notice relating to such Registrable
Securities. In the event Pzena Inc. shall give such notice,
15
any applicable period during which such Shelf Registration Statement must remain effective
pursuant to this Agreement shall be extended by the number of days during the period from the date
of giving of a notice regarding the happening of an event of the kind described in clauses (ix) or
(x) of Section 3.4(a), as applicable, to the date when all such Selling Holders shall receive such
a supplemented or amended prospectus and such prospectus shall have been filed with the SEC.
SECTION 3.5 REGISTRATION EXPENSES.
All expenses incident to Pzena Inc.s performance of, or compliance with, its obligations
under this Agreement including, without limitation, all registration and filing fees, all fees and
expenses of compliance with securities and blue sky laws, all fees and expenses associated with
filings required to be made with the FINRA (including, if applicable, the fees and expenses of any
qualified independent underwriter as such term is defined in Schedule E of the By-Laws of the
FINRA), all fees and expenses of compliance with securities and blue sky laws, all printing
(including, without limitation, expenses of printing certificates for the Registrable Securities in
a form eligible for deposit with the Depository Trust Company and of printing prospectuses if the
printing of prospectuses is requested by a holder of Registrable Securities) and copying expenses,
all messenger and delivery expenses and all fees and expenses of Pzena Inc.s independent certified
public accountants and counsel (including, without limitation, with respect to comfort letters
and opinions) (collectively, the Registration Expenses) shall be borne by the each of Holders in
proportion to the number of Registrable Securities that they choose to include in any Shelf
Registration Statement, regardless of whether a Transfer is effected, except in the case of an
Underwritten Offering for which each Selling Holder shall bear all such expenses in proportion to
the number of Registrable Securities that each chooses to Transfer in such Underwritten Offering.
Pzena Inc. will pay its internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties, the expense of any annual
audit and the expense of any liability insurance) and the expenses and fees for listing the
Registrable Securities on each securities exchange and included in each established
over-the-counter market on which similar securities issued by Pzena Inc. are then listed or traded.
Each Selling Holder shall pay its portion of all underwriting discounts and commissions and
transfer taxes, if any, relating to the sale of such Selling Holders Registrable Securities
pursuant to any Shelf Registration Statement.
16
SECTION 3.6 REGISTRATION INDEMNIFICATION.
(a)
By Pzena Inc.
Pzena Inc. agrees to indemnify and hold harmless, to the fullest
extent permitted by law, each Selling Holder and its Affiliates and their respective officers,
directors, employees, managers, partners and agents and each Person who controls (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act) such Selling Holder
or such other indemnified Person from and against all losses, claims, damages, liabilities and
expenses (including reasonable expenses of investigation and reasonable attorneys fees and
expenses) (collectively, the Losses) caused by, resulting from or relating to any untrue
statement (or alleged untrue statement) of a material fact contained in any Shelf Registration
Statement, prospectus or preliminary prospectus or Free Writing Prospectus or any amendment or
supplement thereto or any omission (or alleged omission) of a material fact required to be stated
therein or necessary to make the statements therein, in light of the circumstances under which they
were made, not misleading, except insofar as the same are caused by any information furnished in
writing to Pzena Inc. by such Selling Holder expressly for use therein. In connection with an
Underwritten Offering and without limiting any of Pzena Inc.s other obligations under this
Agreement, Pzena Inc. shall also indemnify such underwriters, their officers, directors, employees
and agents and each Person who controls (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act) such underwriters or such other indemnified Person to the same
extent as provided above with respect to the indemnification (and exceptions thereto) of Selling
Holders. Reimbursements payable pursuant to the indemnification contemplated by this Section
3.6(a) will be made by periodic payments during the course of any investigation or defense, as and
when bills are received or expenses incurred.
(b)
By the Selling Holders
. In connection with any Shelf Registration Statement in
which a Holder is participating, each such Selling Holder will furnish to Pzena Inc., in writing,
information regarding such Selling Holders ownership of Registrable Securities and its intended
method of distribution thereof and, to the extent permitted by law, shall, severally and not
jointly, indemnify Pzena Inc., its Affiliates and their respective directors, officers, employees
and agents and each Person who controls (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act) Pzena Inc. or such other indemnified Person against all Losses
caused by any untrue statement of material fact contained in the applicable Shelf Registration
Statement, prospectus or preliminary prospectus or Free Writing Prospectus or any amendment or
supplement thereto or any omission of a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were made, not
misleading,
17
but only to the extent that such untrue statement or omission is caused by and contained in
such information so furnished in writing by such Selling Holder expressly for use therein;
provided, however, that each Selling Holders obligation to indemnify Pzena Inc. hereunder shall,
to the extent more than one Selling Holder is subject to the same indemnification obligation, be
apportioned between each Selling Holder based upon the net amount received by each Selling Holder
from the sale of Registrable Securities, as compared to the total net amount received by all of the
Selling Holders of Registrable Securities sold pursuant to such Shelf Registration Statement.
Notwithstanding the foregoing, no Selling Holder shall be liable to Pzena Inc. for amounts in
excess of the lesser of (i) such apportionment and (ii) the amount received by such holder in the
offering giving rise to such liability.
(c)
Notice
. Any Person entitled to indemnification hereunder shall give prompt written
notice to the indemnifying party of any claim with respect to which it seeks indemnification;
provided
,
however
, the failure to give such notice shall not release the
indemnifying party from its obligation, except to the extent that the indemnifying party has been
materially prejudiced by such failure to provide such notice on a timely basis.
(d)
Defense of Actions
. In any case in which any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof, the indemnifying
party will not (so long as it shall continue to have the right to defend, contest, litigate and
settle the matter in question in accordance with this paragraph) be liable to such indemnified
party hereunder for any legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of investigation, supervision and
monitoring (unless (i) such indemnified party reasonably objects to such assumption on the grounds
that there may be defenses available to it which are different from or in addition to the defenses
available to such indemnifying party or (ii) the indemnifying party shall have failed within a
reasonable period of time to assume such defense and the indemnified party is or is reasonably
likely to be prejudiced by such delay, in either event the indemnified party shall be promptly
reimbursed by the indemnifying party for the expenses incurred in connection with retaining
separate legal counsel). An indemnifying party shall not be liable for any settlement of an action
or claim
18
effected without its consent (such consent not to be unreasonably withheld). The indemnifying
party shall lose its right to defend, contest, litigate and settle a matter if it shall fail to
diligently contest such matter (except to the extent settled in accordance with the next following
sentence). No matter shall be settled by an indemnifying party without the consent of the
indemnified party (which consent shall not be unreasonably withheld, it being understood that the
indemnified party shall not be deemed to be unreasonable in withholding its consent if the proposed
settlement imposes any obligation on the indemnified party).
(e)
Survival
. The indemnification provided for under this Agreement shall remain in
full force and effect regardless of any investigation made by or on behalf of the indemnified
Person and will survive the transfer of the Registrable Securities and the termination of this
Agreement.
(f)
Contribution
. If recovery is not available under the foregoing indemnification
provisions for any reason or reasons other than as specified therein, any Person who would
otherwise be entitled to indemnification by the terms thereof shall nevertheless be entitled to
contribution with respect to any Losses with respect to which such Person would be entitled to such
indemnification but for such reason or reasons. In determining the amount of contribution to which
the respective Persons are entitled, there shall be considered the Persons relative knowledge and
access to information concerning the matter with respect to which the claim was asserted, the
opportunity to correct and prevent any statement or omission, and other equitable considerations
appropriate under the circumstances. It is hereby agreed that it would not necessarily be
equitable if the amount of such contribution were determined by pro rata or per capita allocation.
No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not found guilty of such
fraudulent misrepresentation. Notwithstanding the foregoing, no Selling Holder or transferee
thereof shall be required to make a contribution in excess of the net amount received by such
holder from its sale of Registrable Securities in connection with the offering that gave rise to
the contribution obligation.
19
ARTICLE IV
TERMINATION
SECTION 4.1 TERM. This Agreement shall automatically terminate upon the earlier of (a)
January 1, 2032, or (b) the date that no Holder owns any Class B Units that are entitled to be
exchanged for Class A Shares.
SECTION 4.2 SURVIVAL. If this Agreement is terminated pursuant to Section 4.1, this Agreement
shall become void and of no further force and effect, except for the provisions set forth in
Section 3.6 and Article V.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 NOTICES. All notices, requests, consents and other communications hereunder to
any party shall be deemed to be sufficient if contained in a written instrument delivered in person
or sent by facsimile (provided a copy is thereafter promptly delivered as provided in this Section
5.1) or nationally recognized overnight courier, addressed to such party at the address or
facsimile number set forth below or such other address or facsimile number as may hereafter be
designated in writing by such party to the other parties:
(a) if to Pzena Inc., to:
Pzena Investment Management, Inc.
120 West Forty Fifth Street,
20
th
Floor
New York, NY 10036
(T) (212) 355-1600
(F) (212) 308-0010
Attention: General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
(T) (212) 735-3000
(F) (212) 735-2000
Attention: Richard B. Aftanas, Esq.
20
(b) if to any of the Holders, to:
the address and facsimile number set forth in the records of Pzena Inc.
SECTION 5.2 INTERPRETATION. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words included, includes or including are used in this Agreement, they shall be
deemed to be followed by the words without limitation.
SECTION 5.3 SEVERABILITY. The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or enforceability of
the other provisions hereof. If any provision of this Agreement, or the application thereof to any
person or entity or any circumstance, is found to be invalid or unenforceable in any jurisdiction,
(a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far
as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision
and (b) the remainder of this Agreement and the application of such provision to other Persons or
circumstances shall not be affected by such invalidity or unenforceability, nor shall such
invalidity or unenforceability affect the validity or enforceability of such provision, or the
application thereof, in any other jurisdiction.
SECTION 5.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original and all of which shall, taken together, be considered one and the
same agreement, it being understood that both parties need not sign the same counterpart.
SECTION 5.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement (a) constitutes
the entire agreement and supersedes all other prior agreements, both written and oral, among the
parties with respect to the subject matter hereof and (b) is not intended to confer upon any
Person, other than the parties hereto, except as provided in Section 3.6(a) and Section 3.6(b), any
rights or remedies hereunder.
SECTION 5.6 FURTHER ASSURANCES. Each party shall execute, deliver, acknowledge and file such
other documents and take such further actions as
21
may be reasonably requested from time to time by the other party hereto to give effect to and
carry out the transactions contemplated herein.
SECTION 5.7 GOVERNING LAW; EQUITABLE REMEDIES.
THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO CONFLICT
OF LAWS PRINCIPLES THEREOF)
. The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in accordance with its
specific terms or was otherwise breached. It is accordingly agreed that the parties hereto shall
be entitled to an injunction or injunctions and other equitable remedies to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in the United States
District Court for the Southern District of New York, this being in addition to any other remedy to
which they are entitled at law or in equity. Any requirements for the securing or posting of any
bond with respect to such remedy are hereby waived by each of the parties hereto. Each party
further agrees that, in the event of any action for an injunction or other equitable remedy in
respect of such breach or enforcement of specific performance, it will not assert the defense that
a remedy at law would be adequate.
SECTION 5.8 CONSENT TO JURISDICTION. With respect to any suit, action or proceeding
(Proceeding) arising out of or relating to this Agreement or any transaction contemplated hereby
each of the parties hereto hereby irrevocably (i) submits to the exclusive jurisdiction of the
United States District Court for the Southern District of New York and waives any objection to
venue being laid in such Court whether based on the grounds of forum non conveniens or otherwise
and hereby agrees not to commence any such Proceeding other than before such Court;
provided
,
however
, that a party may commence any Proceeding in a court other than
such Court solely for the purpose of enforcing an order or judgment issued by such Court; (ii)
consents to service of process in any Proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, or by recognized international express carrier or delivery
service, to Pzena Inc. or the Holders at their respective addresses referred to in Section 5.1
hereof;
provided
,
however
, that nothing herein shall affect the right of any party
hereto to serve process in any other manner permitted by law; and (iii)
TO THE EXTENT NOT
PROHIBITED BY APPLICABLE LAW THAT CANNOT BE WAIVED, WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT
(WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING IN
WHOLE OR IN PART UNDER OR IN
22
CONNECTION WITH THIS AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR
OTHERWISE, AND AGREES THAT ANY OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN
EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE PARTIES IRREVOCABLY TO
WAIVE ITS RIGHT TO TRIAL BY JURY IN ANY PROCEEDING WHATSOEVER BETWEEN THEM RELATING TO THIS
AGREEMENT OR ANY OF THE CONTEMPLATED TRANSACTIONS WILL INSTEAD BE TRIED IN A COURT OF COMPETENT
JURISDICTION BY A JUDGE SITTING WITHOUT A JURY
.
SECTION 5.9 AMENDMENTS; WAIVERS.
(a) No provision of this Agreement may be amended or waived unless such amendment or waiver is
in writing and signed, in the case of an amendment, by the parties hereto, or in the case of a
waiver, by the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or privilege hereunder
shall operate as waiver thereof nor shall any single or partial exercise thereof preclude any other
or further exercise thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided
by law.
SECTION 5.10 ASSIGNMENT. Neither this Agreement nor any of the rights or obligations hereunder
shall be assigned by any of the parties hereto without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the
benefit of and be enforceable by the parties and their respective successors and assigns.
23
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered,
all as of the date first set forth above.
PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
Name: Richard S. Pzena
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Title: Chief Executive Officer
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HOLDERS:
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/s/ Richard S. Pzena
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/s/ Wayne A. Palladino
Wayne A. Palladino
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/s/ Spencer Chen
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Spencer Chen
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HOLDERS (continued):
JOHN P. GOETZ
WILLIAM L. LIPSEY
A. RAMA KRISHNA
MICHAEL D. PETERSON
KEITH KOMAR
LAWRENCE KOHN
LISA ROTH
EVAN FIRE
JOAN BERGER
CAROLINE CAI
ALLISON FISCH
BRIAN MANN
WILLIAM C. CONNOLLY
COURTNEY HEHRE
MANOJ TANDON
GREGORY MARTIN
TOPALLI MURTI
JAMES M. KREBS
THE RICHARD PZENA DESCENDANTS TRUST, THE AARON PZENA FAMILY TRUST
THE MICHELE PZENA FAMILY TRUST
THE DANIEL PZENA FAMILY TRUST
THE ERIC PZENA FAMILY TRUST
THE RACHEL THERESA GOETZ TRUST
THE CARRIE ESTHER GOETZ TRUST
THE KRISHNA FAMILY TRUST
THE WILLIAM LIPSEY DYNASTY TRUST
THE WILLIAM LIPSEY GRANTOR RETAINED ANNUITY TRUST
THE MICHAEL D. PETERSON GRANTOR RETAINED ANNUITY TRUST
THE SARAH M. PETERSON GRANTOR RETAINED ANNUITY TRUST
CC GRANTOR RETAINED ANNUITY TRUST I
ANTONIO DESPIRITO
ADS III 2007 GRANTOR RETAINED ANNUITY TRUST
BENJAMIN SILVER
BSS GRANTOR RETAINED ANNUITY TRUST
LJK TRUST I
LJK TRUST IV
MILESTONE ASSOCIATES, L.L.C.
PIPING BROOK, LLC
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By:
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/s/ Richard S. Pzena
Name: Richard S. Pzena
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Title: Attorney-in-Fact for each of the above-listed Class B Holders
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By:
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/s/ Wayne A. Palladino
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Name: Wayne A. Palladino
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Title: Attorney-in-Fact for each of the above-listed Holders
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ANNEX A
FORM OF ADDITIONAL PARTY SIGNATURE PAGE
THE UNDERSIGNED has caused this Additional Party Signature Page to be duly executed as of the
date written below intending to become a party to, and be bound by, the Resale and Registration
Rights Agreement, dated as of October 30, 2007, as amended to date, by and among Pzena Investment
Management, Inc. and the Holders parties thereto.
Exhibit 10.1
FINAL
AMENDED AND RESTATED
OPERATING AGREEMENT
PZENA INVESTMENT MANAGEMENT, LLC
(A Delaware Limited Liability Company)
Organized as of
November 27, 1995
Restated as of
January 3, 1996
Amended and Restated as of
January 3, 2005
Further Amended and Restated as of
January 3, 2006
Further Amended and Restated as of
December 31, 2006,
as amended as of March 31, 2007
Further Amended and Restated as of
October 30, 2007
TABLE OF CONTENTS
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Page
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ARTICLE I GENERAL PROVISIONS
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1
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1.01.
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Formation, Continuation and Name
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1
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1.02.
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Principal Place of Business; Registered Office
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2
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1.03.
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Purposes and Powers
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2
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1.04.
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Organization
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3
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1.05.
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Classes and Sub-Classes of Members
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3
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1.06.
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Classes of Units
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3
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1.07.
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Register of Members
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4
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1.08.
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Certain Definitions
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4
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1.09.
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Construction
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11
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ARTICLE II CAPITALIZATION
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11
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2.01.
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Contributions
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11
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2.02.
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Additional Capital Contributions
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12
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2.03.
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Members and the Executive Committee Not Liable
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12
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2.04.
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Capital Accounts
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12
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ARTICLE III INCOME AND LOSSES; ALLOCATION; DISTRIBUTIONS
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13
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3.01.
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Allocation of Company Income and Loss
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13
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3.02.
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Tax Allocations
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14
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3.03.
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Distributions
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15
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3.04.
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Tax Distributions
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15
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3.05.
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Restrictions on Distributions
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15
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3.06.
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Withholding
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15
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3.07.
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Indemnification and Reimbursement for Payments on Behalf of a Member
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15
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ARTICLE IV COSTS AND EXPENSES
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16
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4.01.
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Operating Costs
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16
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ARTICLE V MEMBERS
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16
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5.01.
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Liability of Members
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16
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5.02.
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Management of Business
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16
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5.03.
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Withdrawal
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17
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i
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Page
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5.04.
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Substitute Member
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17
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5.05.
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Power of Attorney
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18
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5.06.
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Voting
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18
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5.07.
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Non-Solicitation/Non Compete
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19
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5.08.
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Confidentiality; Work for Hire
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21
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5.09.
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New Class B Members and Issuance of Class B Units
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23
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5.10.
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Investment Representations of Members
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23
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5.11.
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Relationship With the Managing Member
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24
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ARTICLE VI TRANSFER OF UNITS
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27
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6.01.
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Transfer of Units
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27
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6.02.
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Vesting and Forfeiture of Units
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28
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6.03.
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Drag Along Rights
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30
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ARTICLE VII MANAGING MEMBER; EXECUTIVE COMMITTEE; OFFICERS
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31
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7.01.
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Powers of the Managing Member
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31
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7.02.
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Executive Committee
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32
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7.03.
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Administrative Officers
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32
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7.04.
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Binding Company
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33
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7.05.
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Reliance by Third Parties
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33
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7.06.
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Duties of Managing Member, the Executive Committee and Employee
Members
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33
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7.07.
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Liability of Managing Member and the Executive Committee
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34
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7.08.
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Indemnification, Reliance and Fiduciary Duty
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34
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ARTICLE VIII DISSOLUTION, LIQUIDATION AND TERMINATION OF THE COMPANY
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36
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8.01.
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Dissolution
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36
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8.02.
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Liquidation
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36
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ARTICLE IX RESERVES UPON DISSOLUTION
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37
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9.01.
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Reserves
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37
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9.02.
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Distribution of Reserves
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37
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ARTICLE X ACCOUNTING
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37
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10.01.
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Accounts of the Company
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37
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10.02.
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Annual Reports to Members
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38
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10.03.
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Tax Returns and Tax Elections
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38
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ii
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Page
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10.04.
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No Further Rights to Books and Records
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39
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ARTICLE XI MISCELLANEOUS
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39
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11.01.
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Amendments
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39
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11.02.
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Severability
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40
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11.03.
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Notices
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40
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11.04.
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No Waiver
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41
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11.05.
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Copy on File
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41
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11.06.
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Governing Law
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41
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11.07.
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Binding Effect
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41
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11.08.
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Entire Agreement
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41
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11.09.
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Other Activities
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41
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11.10.
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Further Assurances
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41
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11.11.
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Counterparts
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41
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11.12.
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Table of Contents and Captions Not Part of Agreement
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42
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11.13.
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Waiver of Right to Partition
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ARTICLE I GENERAL PROVISIONS
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2
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1.01.
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General.
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2
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1.02.
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Certain Definitions.
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2
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ARTICLE II EXCHANGE
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3
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2.01.
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Exchange Dates; Exchange Notices
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3
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iii
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2.02
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Permissible Exchanges by
Class B Members
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2.03.
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Exchange Request.
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2.04.
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Closing Date
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2.05.
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Closing Conditions
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2.06.
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Closing Deliveries.
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2.07.
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Expenses.
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2.08.
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Termination of Class B Membership; Cancellation of Class B Units;
Issuance of Class A Units.
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2.09.
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Tax Treatment.
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iv
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Page
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2.10. Amendments.
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9
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ANNEX A
Instrument of Transfer
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1
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Exhibit A 2006 Plan
Exhibit B Exchange Rights of Class B Members
Exhibit C Registration Rights Agreement
v
AMENDED AND RESTATED OPERATING AGREEMENT
OF
PZENA INVESTMENT MANAGEMENT, LLC
This Amended and Restated Operating Agreement made as of November 27, 1995, restated as of
January 3, 1996, further amended and restated as of January 3, 2005, further amended and restated
as of January 3, 2006, further amended and restated as of December 31, 2006, further amended as of
March 31, 2007, and further amended and restated as of October 30, 2007 by and among Pzena
Investment Management, Inc., a Delaware corporation (
Pzena Inc.
), and each other person
that executes and delivers a counterpart of this Agreement and is included in the Register of
Members. Capitalized terms used herein without definition have the meanings set forth in Section
1.08.
WHEREAS, Pzena Investment Management, LLC was formed on November 27, 1995 pursuant to and in
accordance with the Delaware Limited Liability Company Act (6 Del. C. § 18-101, et seq.) (the
Act
);
WHEREAS, the obligations of the Members are governed pursuant to a certain Amended and
Restated Operating Agreement of Pzena Investment Management, LLC, dated as of December 31, 2006, as
amended as of March 31, 2007 (as so amended, the
2006 Operating Agreement
);
WHEREAS, the Members desire to amend and restate the 2006 Operating Agreement on the terms
herein provided; and
WHEREAS, the Members desire to participate in the Company for the purposes described herein.
NOW, THEREFORE, in consideration of the agreements and covenants set forth herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby amend and restate the 2006 Operating Agreement in its entirety on the
foregoing and following terms and conditions:
ARTICLE I
GENERAL PROVISIONS
1.01.
Formation, Continuation and Name
. The Company has been formed under the laws of the
State of Delaware. The Managing Member and the other Members hereby agree to continue the Company
under and pursuant to the terms of the Act and agree further that the rights, duties and
obligations of the Members shall be as provided in the Act except as otherwise provided in this
Agreement. The name of the Company shall be Pzena Investment Management, LLC,
provided
that the Managing Member shall have the right to change the name of the Company, upon written
notice to each of the Members.
1.02.
Principal Place of Business; Registered Office
. The principal office of the Company
shall be maintained at 120 West 45th Street, 20th Floor, New York, New York, 10036, or at such
other location as the Managing Member may designate from time to time. The registered office of
the Company shall be 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The
name of the registered agent at that address is The Corporation Trust Company.
1.03.
Purposes and Powers
. The purpose of the Company shall be to manage investment
portfolios for, and provide investment advice to, investors of all kinds, including individuals,
endowments, trusts and estates, charitable foundations, partnerships, corporations, mutual funds,
investment funds and other investment companies, and tax-exempt funds such as pension and
profit-sharing plans, to engage in any and all businesses and activities similar to, related to or
which will enhance any of the foregoing and to engage in any other lawful act or activity for which
limited liability companies may be formed under the Act. In furtherance of the aforesaid purposes,
the Company shall have authority to do all things necessary or convenient for the accomplishment
thereof, alone or with others, as principal or agent, including, without limiting the foregoing,
the following:
(a) invest in and trade, for and on behalf of itself or its advisory clients, equity or debt
securities, or options, convertible securities, interest-bearing or interest rate sensitive
marketable securities (including those issued or guaranteed by any Governmental or Regulatory
Authority of the United States or instrumentalities of any Governmental or Regulatory Authority of
the United States), derivative securities of all kinds, currency and commodities contracts,
options, futures and forward contracts with respect to any of the foregoing, and any other
instruments which are traded in normal channels of trading for securities and commodities (all of
the foregoing sometimes referred to herein as
Securities
), and to vote such Securities,
solicit the voting of such Securities and to otherwise engage with respect to such Securities in
transactions in connection with mergers, consolidations, acquisitions, transfers of assets, tender
offers, exchange offers, recapitalizations, liquidations, or other similar transactions;
(b) to hold all or any part of the assets, property or funds of the Company in cash or cash
equivalents;
(c) to borrow or obtain credit from time to time, including for the purpose of financing
transactions in Securities, to secure the payment of any such indebtedness or credit by mortgage,
pledge, conveyance or assignment in trust, of the whole or any part of the assets or property of
the Company, whether at the time owned or thereafter acquired, to enter into repurchase agreements
and to buy, sell, pledge or otherwise dispose of any evidence of such indebtedness or obligation;
(d) to lend any of its assets, property or funds, including any Securities, either with or
without security;
2
(e) to select brokers and dealers for its clients and to open, maintain and close accounts
with such brokers, including margin accounts;
(f) to open, maintain and close bank accounts and draw checks and other orders for the payment
of money;
(g) to engage accountants, solicitors, custodians, attorneys and any and all other agents,
employees or assistants, both professional and nonprofessional, and to compensate them for such
services;
(h) to file statements and forms under the Advisers Act and other applicable regulatory Laws;
(i) to sue, prosecute, settle or compromise all claims against third parties, to compromise,
settle or accept judgment in respect of claims against the Company and to execute all documents and
make all representations, admissions and waivers in connection therewith; and
(j) to enter into, make and perform all other contracts, indemnifications, guarantees,
agreements and undertakings of any kind as the Managing Member may deem necessary, appropriate,
advisable or incident to carrying out the purpose of the Company.
1.04.
Organization
. The Company was organized upon the filing of its certificate of
formation in the Office of the Secretary of State of Delaware on November 27, 1995, and the Company
shall continue until the occurrence of an act or event specified in Section 8.01 hereof.
1.05.
Classes and Sub-Classes of Members
. The Company shall have two classes of Members:
(a) the Managing Member and (b) the Class B Members. The Class B Members shall be comprised of
three sub-classes: (a) Employee Members; (b) Permitted Transferees of Employee Members; and (c)
Non-Employee Members. The Employee Member sub-class shall be comprised of two groups: (a) Initial
Managing Principals and (b) Ordinary Employee Members. The Ordinary Employee Member group shall be
comprised of two sub-groups: (a) 1% Employee Members and (b) other Ordinary Employee Members.
1.06.
Classes of Units
. The Company shall have two classes of Units: (a) Class A Units,
which shall be held by the Managing Member and only by the Managing Member; and (b) Class B Units,
which shall be held by the Class B Members and only by the Class B Members. The Class B Units may
be vested or unvested and, except as expressly provided herein, any reference to Class B Units
shall be a reference to vested and unvested Class B Units. Except as provided in this Agreement,
(i) vested and unvested Class B Units shall share equally in rights to allocations and
distributions by the Company; (ii) vested Class B Units may be exchanged pursuant to Exhibit B and
unvested Class B Units may not be so exchanged; (iii) unvested Class
3
B Units shall vest pursuant to the provisions of Section 6.02; and (iv) vested and unvested Class B
Units may be forfeited by a Class B Member under the circumstances and in the number set forth in
this Agreement.
1.07.
Register of Members
. The Managing Member shall maintain and modify, or cause to be
maintained and modified, a register (the
Register of Members
) that sets forth (a) the
name and address of each Member; (b) the class and, if applicable, sub-class of each Member; (c)
with respect to a Permitted Transferee of an Employee Member, the name of such Employee Member; (d)
with respect to any unvested Class B Units, the number and date of issuance of each tranche of
Units issued or awarded to such Member; (e) the vesting provisions, if any, applicable to each such
tranche (which vesting provisions may be specified by reference to other documents held with the
records of the Company); and (f) such other information as the Managing Member may deem to be
appropriate. In connection with any modification, the Managing Member or an Administrative Officer
designated by the Managing Member shall duly execute a copy of the Register of Members maintained
in accordance with this Agreement. Absent manifest error, a duly executed Register of Members
shall be conclusive evidence as to the information contained therein.
1.08.
Certain Definitions
. For the purposes of this Agreement, the following terms have
the following meanings:
2006 Operating Agreement
has the meaning set forth in the recitals hereto.
Accounting Period
shall mean, as the context may require: (a) the period commencing
on the date of this Agreement and ending on December 31 of the same year; (b) any subsequent twelve
(12) month period beginning on January 1 and ending on December 31 and (c) any portion of the
period described in clauses (a) or (b) for which the Company is required or elects to allocate
items of Company Income and Company Loss, or any other items of Company income, gain, loss or
deduction pursuant to this Agreement.
Act
has the meaning set forth in the recitals hereto.
Administrative Officer
has the meaning set forth in Section 7.03 hereof.
Advisers Act
shall mean the Investment Advisers Act of 1940, as amended.
Affiliate(s)
shall mean, with respect to any Person, any other Person that directly,
or through one (1) or more intermediaries, controls or is controlling, controlled by, or under
common control with, such Person. For the purposes of this definition, the term control and its
corollaries shall mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a Person, whether through the ownership of voting
securities, contract, as trustee or executor or otherwise.
4
Agreement
shall mean this Amended and Restated Operating Agreement, including each
schedule and exhibit hereto, as amended, supplemented or restated from time to time,
provided
that the Register of Members shall not be a part of this Agreement.
Business Day
shall mean any day on which commercial banks located in New York, New
York are not required or authorized by Law to remain closed.
Capital Account(s)
has the meaning set forth in Section 2.04(a) hereof.
Capital Contribution(s)
shall mean the contribution made by a Member to the capital
of the Company from time to time pursuant to Section 2.01 or 2.02 hereof.
Capital Percentage
shall mean, with respect to a Member, as of any determination
date, a percentage, expressed as a fraction the numerator of which is the Capital Account balance
of such Member and the denominator of which is the aggregate Capital Accounts balances of all
Members.
Cause
shall mean, with respect to an Employee Member, (a) such Employee Members
being charged or indicted for a felony involving the Company Groups business, or being convicted
of any other felony (or guilty plea, or nolo contendere plea in connection therewith), (b) such
Employee Members willfully and materially defrauding the Company Group, or (c) such Employee
Members committing a willful and material breach of such Employee Members obligations to protect
the Company Groups confidential information, such Employee Members obligation of loyalty to the
Company Group or such Employee Members obligation to comply with the Company Groups Code of
Ethics or any other compliance regulations, policies or procedures, (d) the gross negligence or
willful misconduct of such Employee Member in the performance of such Employee Members duties
which gross negligence or willful misconduct has the purpose, or the reasonably likely effect, of
causing material harm to the Company Group, or (e) such Employee Member fails to maintain in good
standing any and all licenses, registrations or other permits necessary for the performance of his
duties hereunder. For purposes of the definition of Cause, materially, and material shall mean
damages caused to the Company Group in excess of $100,000 or any significant damage to the
reputation of the Company Group.
Chairman
shall mean the chairman of the Board of Directors of the Managing Member
or, if no Person shall hold such title, the senior most executive officer of the Managing Member,
whether designated as the chief executive officer, the president or otherwise.
Chief Compliance Officer
has the meaning set forth in Section 7.03(b) hereof.
Class A Share(s)
shall mean share(s) of Class A common stock of the Managing Member.
Class A Unit(s)
shall mean those Unit(s) in the Company held by the Managing Member.
Class B Share(s)
shall mean share(s) of Class B common stock of the Managing Member.
5
Class B Member(s)
shall mean those Person(s) that have executed and delivered a
counterpart of this Agreement and are named in the Register of Members as Class B Members.
Class B Stockholders Agreement
shall mean the Class B Stockholders Agreement, dated
as of the date hereof, by and among the Managing Member and holders of Class B Shares, as amended
or modified from time to time.
Class B Unit(s)
shall mean those Unit(s) in the Company held by Class B Member(s).
Client
shall mean, for purposes of Section 5.07(b) hereof, any Person who, in its
own name or through an Affiliate, has assets under management of at least $5,000,000 with the
Company Group and any Person with an account of $5,000,000 or more in any mutual fund or other
collective investment vehicle advised or subadvised by the Company Group as of the date of
cessation of the Employee Members employment, or, in either such case, within any time within six
(6) months prior to the date of cessation and any other Person who was solicited (in person or by
phone) by the Company Group for the purpose of placing assets under management within six (6)
months before such termination (a
Prospect
), except that such Prospect shall cease to be
a Client hereunder if such Prospect does not actually place assets under the Company Groups
management within six (6) months after the termination of the Employee Members employment with the
Company Group.
Code
shall mean the Internal Revenue Code of 1986, as it may be amended from time to
time (or any succeeding Law), and the Treasury Regulations promulgated pursuant thereto.
References to sections of the Code shall include amended or successor provisions thereto.
Company
shall mean this limited liability company.
Company Group
shall mean the Managing Member, the Company and any Person controlled
by the Managing Member or the Company.
Company Income
and
Company Loss
, for any period, shall mean, respectively,
the profits, income, gain, credit, deduction or loss determined by the Company in accordance with
GAAP. In the event that the Gross Asset Value of any Company asset is adjusted pursuant to
subparagraphs (c) or (d) of the definition of Gross Asset Value, the amount of such adjustment will
be treated as an item of Company Income (if the adjustment increases the Gross Asset Value of the
asset) or Company Loss (if the adjustment decreases the Gross Asset Value of the Asset) from the
disposition of such asset, and shall be taken into account in determining Company Income and
Company Loss.
Confidential Information
has the meaning set forth in Section 5.08(a) hereof.
Covered Person
shall mean the Managing Member, each Member, each officer and
director of the Managing Member, each Executive Committee member, the Chief Compliance Officer and
any Administrative Officer.
Disabling Conduct
has the meaning set forth in Section 7.08(a) hereof.
6
Employee Member
shall mean a Member who is or was at any time employed by the
Company Group.
Equity Proceeds
has the meaning set forth in Section 5.11(e)(i) hereof.
Exchange Act
shall mean the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder.
Executive Committee
has the meaning set forth in Section 7.02 hereof.
Fiscal Year
shall mean the calendar year.
GAAP
shall mean generally accepted accounting principles in the United States as in
effect at the time any applicable financial statements were prepared.
Governmental or Regulatory Authority
shall mean any instrumentality, subdivision,
court, administrative agency, commission, official or other authority of the United States or any
other country or any state, province, prefect, municipality, locality or other government or
political subdivision thereof, or any quasi-governmental or private body exercising any regulatory,
taxing, importing or other governmental or quasi-governmental authority.
Gross Asset Value
shall mean, with respect to any asset of the Company, such assets
adjusted basis for federal income tax purposes, except as follows:
(a) the initial aggregate Gross Asset Values of the assets of the Company as of the date of
this Agreement shall be as set forth on the books and records of the Company;
(b) the initial Gross Asset Value of any asset contributed by a Member to the Company will be
the gross fair market value of such asset, as determined by the Managing Member in its sole
discretion;
(c) the Gross Asset Value of all Company assets will be adjusted to equal their respective
gross fair market values, as determined by the Managing Member in its sole discretion, immediately
prior to: (i) the contribution of more than a de minimis amount of assets to the Company by a new
or an existing Member as consideration for an Interest; (ii) the distribution by the Company to a
Member of more than a de minimis amount of Company assets as consideration for the Interest of such
Member; (iii) the issuance, forfeiture (or redemption) of more than a de minimis amount of Units
after the date of this Agreement; (iv) the liquidation of the Company within the meaning of
Treasury Regulation Section 1.704-1(b)(2)(ii)(g); and (v) such other times as the Managing Member
may determine in its sole discretion; provided, that adjustments pursuant to clauses (i), (ii) and
(iii) of this sentence will be made only if the Managing Member, in its sole discretion, determines
that such adjustments are necessary or appropriate to reflect the relative economic interests of
the Members in the Company;
7
(d) the Gross Asset Value of any Company asset distributed to any Member will be adjusted so
as to equal the gross fair market value of such asset on the date of distribution, as determined by
the Managing Member, in its sole discretion, and any increase or decrease required to effect such
adjustment will be treated as an item of Company Income or Company Loss, as applicable; and
(e) if the Gross Asset Value of an asset has been determined or adjusted pursuant to paragraph
(b), (c) or (d) above, such Gross Asset Value will thereafter be adjusted by the depreciation taken
into account with respect to such asset for purposes of computing Company Income and Company Loss.
Initial Managing Principal
shall mean each of Richard S. Pzena, John P. Goetz, A.
Rama Krishna and William L. Lipsey.
Interest(s)
when used in reference to an interest in the Company, shall mean the
entire ownership interest of a Member in the Company at any particular time.
Investment Advisory Service
shall mean any services that involve (1) the management
of an investment account or fund (or portions thereof or a group of investment accounts or funds),
(2) the giving of advice with respect to the investment and/or reinvestment of assets or funds (or
any group of assets or funds), or (3) otherwise acting as an investment adviser within the
meaning of the Advisers Act (whether or not required to be registered under such act), and
performing activities related or incidental thereto,
provided
that Investment Advisory
Services shall exclude any service in respect of which no compensation or economic benefit is
provided directly or indirectly to any person in respect of such service.
Law
shall mean any statute, law, ordinance, rule or regulation of any Governmental
or Regulatory Authority.
Legal Representative(s)
shall mean any and all executors, administrators,
committees, guardians, conservators or trustees, in bankruptcy or otherwise, of a Member.
Lien
shall mean a mortgage, pledge, hypothecation, right of others, claim, security
interest, encumbrance, easement, right of way, restriction on the use of real property, title
defect, title retention agreement, voting trust agreement, option, right of first refusal, lien,
charge, license to third parties, lease to third parties, restriction on transfer or assignment, or
other restriction or limitation of any nature or irregularities in title.
Majority In Interest of the Class B Members
shall mean, as of the time of
determination, Class B Members holding more than 50% of the issued and outstanding Class B Units at
such time.
Managing Member
shall mean Pzena Inc. and any other successor of Pzena Inc.
8
Member(s)
shall mean each of those Persons identified on the Register of Members as
the Managing Member and Class B Members for so long they own Interests and any Person who becomes a
substitute Member in accordance with Section 5.04 hereof.
Non-Compete Period
shall mean (a) with respect to an Initial Managing Principal, the
period from the date of this Agreement through the third anniversary of the date of termination of
employment of such Initial Managing Principal with the Company Group, (b) with respect to a 1%
Member, the period from the date of this Agreement through the end of the Non-Compete Period
applicable to such 1% Member as set forth in Section 5.07(f) and (c) with respect to an Employee
Member other than an Initial Managing Principal or a 1% Member, the period from the date of this
Agreement through the date of termination of employment of such Employee Member with the Company
Group.
Non-Employee Member
shall mean a Class B Member that is not (a) an Employee Member
or (b) a Permitted Transferee of an Employee Member.
Non-Solicitation Period
shall mean (a) with respect to an Initial Managing
Principal, the period from the date of this Agreement through the third anniversary of the date of
termination of employment of such Initial Managing Principal with the Company Group and (b) with
respect to any other Member, the period from the date of this Agreement through the eighteenth
month anniversary of the date of termination of employment of such other Member with the Company
Group.
1% Member
shall mean, at the time of determination, (a) with respect to an Employee
that is employed by the Company Group, an Employee Member holding, together with Units transferred
by such Employee Member to, and held by, his or her Permitted Transferees, not less than 1% of all
outstanding Units of the Company at such time and (b) with respect to an Employee Member that was,
but is no longer, employed by the Company Group, an Employee Member holding, together with Units
transferred by such Employee Member to, and held by, his or her Permitted Transferees, not less
than 1% of all outstanding Units of the Company on the date of termination of employment of such
Employee Member so long as, pursuant to Section 5.07(f), (i) the Managing Member elects to treat
such Employee Member as a 1% Member and (ii) the Company Group satisfies its payment obligations to
such 1% Member.
Ordinary Employee Member
shall mean an Employee Member other than an Initial
Founding Principal.
Permitted Transferee
shall mean, with respect to an Employee Member, any Person to
whom such Employee Member (or, in the case of a subsequent Transfer, a Permitted Transferee of such
Employee Member) transferred Class B Units pursuant to the terms of this Agreement,
provided
that (a) neither the Company nor the Managing Member shall be designated as a
Permitted Transferee of an Employee Member following a Transfer of Class B Units to the Company or
the Managing Member, as the case may be, and (b) the Managing Member and such Employee Member may
agree in writing that a transferee of such Employee Member shall be designated as an Employee
Member or a Non-Employee Member rather than as a Permitted Transferee of such Employee Member.
9
Person(s)
shall mean any individual, partnership (whether general or limited), joint
venture, corporation, limited liability company, trust, an incorporated organization and a
Governmental or Regulatory Authority or other entity.
Plan
shall mean (a) the 2006 Plan or (b) any other equity incentive plan that may
hereinafter be adopted by the Company.
Prime Rate
shall mean U.S. prime rate published in The Wall Street Journal on the
business day immediately prior to the date of determination.
Pzena Inc.
has the meaning set forth in the preamble hereto.
Register of Members
has the meaning set forth in Section 1.07 hereof.
Registration Rights Agreement
shall mean the Resale and Registration Rights
Agreement, dated as of the date hereof, by and between Pzena Inc. and the Persons who, on or
following such date, may become parties to such agreement.
Securities
has the meaning set forth in Section 1.03(a) hereof.
Selling Holders
has the meaning set forth in Section 6.03 hereof.
Securities Act
shall mean the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
Sharing Percentage
shall mean, with respect to any Member, a percentage, expressed
as a fraction the numerator of which is the number of Units held by such Member and the denominator
of which is the aggregate number of Units held by all Members.
Super Majority In Interest of the Class B Members
shall mean, as of the time of
determination, Class B Members holding more than 66 2/3% of the issued and outstanding Class B
Units at such time.
Tax Allowance Amount
shall mean, with respect to any Member for any fiscal quarter
of the Company, an amount equal to the product of: (i) the highest combined federal and applicable
state and local tax rate applicable to any Member in respect of the taxable income and taxable loss
of the Company in respect of such fiscal quarter, taking into account the deductibility of state
and local taxes for federal income tax purposes, times (ii) an amount equal to the remainder of (a)
such Members share of the estimated net taxable income allocable to such Member arising from its
ownership of an interest in the Company calculated through such fiscal quarter minus (b) the sum of
(1) any net losses (for income tax purposes) of the Company for prior Fiscal Years and such fiscal
quarter that are allocable to such Member that were not previously utilized in the calculation of
the Tax Allowance Amounts in a prior Fiscal Year and (2) the amount of all prior distributions
(including distributions of Tax Allowance Amounts) for such Fiscal Year, all as determined by the
Managing Member.
Transfer
shall mean, as a noun, any voluntary or involuntary transfer, sale,
assignment, pledge, hypothecation, creation of a security interest or other disposition and, as a
verb,
10
voluntarily or involuntarily to transfer, sell, assign, pledge, hypothecate, grant a security
interest in or otherwise dispose of.
2007 Plan
shall mean the Pzena Investment Management, Inc. Equity and Incentive
Plan, as hereafter amended, modified or supplemented, and any other successor incentive plan.
2006 Plan
shall mean the Pzena Investment Management, LLC 2006 Equity Incentive Plan
in the form attached hereto as
Exhibit A
, as hereafter amended, modified or supplemented.
Unit(s)
shall mean the Class A Units and the Class B Units (whether or not vested).
Works
has the meaning set forth in Section 5.08(g) hereof.
1.09.
Construction
. For the purposes of this Agreement (a) any reference in this Agreement
to gender shall include all genders; (b) any words imparting the singular number only shall include
the plural and visa versa; (c) the terms herein, hereinafter, hereof, hereby and
hereunder and words of similar import refer to this Agreement as a whole (including all of the
exhibits and schedules hereto) and not merely to a subdivision in which such words appear unless
the context otherwise requires; (d) the word including or any variation thereof means including,
without limitation and shall not be construed to limit any general statement that it follows to
the specific or similar items or matters immediately following it; (e) any reference in this
Agreement to dollars or ($) shall mean United States dollars; (f) the word or shall not be
exclusive; (g) all references to any period of days shall be deemed to be to the relevant number of
calendar days unless otherwise specified; (h) all references to an employee of the Company Group
shall include any natural person that provides personal services to any member of the Company
Group, whether or not such natural person is treated as a partner (rather than as an employee)
for tax and tax withholding purposes; (i) any reference in this Agreement to writing or
comparable expressions includes a reference to facsimile transmissions or comparable means of
communication; and (j) references to any statute or statutory provision shall include a reference
to that statute or statutory provision as amended, consolidated or replaced from time to time
(whether before or after the date of this Agreement) and include subordinate legislation made under
the relevant statute or statutory provision.
ARTICLE II
CAPITALIZATION
2.01.
Contributions
.
(a) The Managing Member and each Class B Member identified on the Register of Members has the
number of Units of such designation as set forth opposite such Members name and each has been duly
admitted to the Company. The Company shall also set forth in its books and records Capital
Contributions made by each Member.
11
(b) At the time of admittance as a Class B Member, each Person being so admitted shall have
its name and the number of Units being granted to such Class B Member upon admittance, including
any conditions, adjustments or special provisions determined by the Managing Member to be
applicable to such Class B Member, added to the Register of Members and shall have its Capital
Contributions, if any, recorded in the books and records of the Company. The Managing Member may
admit Class B Members and issue Class B Units for contributions, or on terms and conditions
determined by the Managing Member in its sole discretion, it being expressly understood and agreed
among the Class B Members that such contribution and such terms and conditions may be different
from the corresponding terms and conditions for other Class B Members.
(c) No Member shall be entitled to the return of its Capital Contributions at any particular
time.
2.02.
Additional Capital Contributions
. No Member shall be obligated to make any
additional Capital Contributions. In addition, no Member shall be permitted to make additional
Capital Contributions of cash or property without the express permission of the Managing Member,
which permission may be withheld for any or no reason.
2.03.
Members and the Executive Committee Not Liable
. None of the Managing Member, any
other Member or any member of the Executive Committee shall be liable for any obligation or
liability of the Company or for distribution, return or payment of all or any portion of the
Capital Contributions or any additions to the Capital Accounts of any Member (or successor,
assignee or transferee), it being expressly agreed that any such distribution, return or payment as
may be made at any time, or from time to time, shall be made solely from the assets (which shall
not include any right of contribution from the Managing Member, any Member or any member of the
Executive Committee) of the Company.
2.04.
Capital Accounts
.
(a) A separate capital account (a
Capital Account
) shall be maintained for each
Member on the books of the Company.
(b) The Capital Account for each Member will be maintained in accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv) and the following provisions:
(1) to such Members Capital Account there will be credited such Members Capital
Contributions, such Members distributive share of Company Income and other items of income
or gain specially allocated hereunder, and the amount of any Company liabilities that are
assumed by such Member or that are secured by any Company assets distributed to such
Member;
12
(2) to such Members Capital Account there will be debited the amount of cash and the
Gross Asset Value of any other property of the Company distributed to such Member pursuant
to any provision of this Agreement, such Members distributive share of Company Losses and
other items of loss, expense and deduction specially allocated hereunder, and the amount of
any liabilities of such Member that are assumed by the Company or that are secured by any
property contributed by such Member to the Company;
(3) in determining the amount of any liability for purposes of this subsection (b),
there will be taken into account Section 752(c) of the Code and any other applicable
provisions of the Code and the Treasury Regulations; and
(4) such Members Capital Account will be appropriately adjusted to take into account
any adjustments to the Gross Asset Value of Company assets in accordance with the
definition of the term Gross Asset Value set forth in Section 1.08.
(c) After the date of this Agreement, in the event that all or a portion of any Interest in
the Company is Transferred (other than pursuant to the granting of a Lien) in accordance with the
terms of this Agreement, the transferee will succeed to the Capital Account of the transferor to
the extent such Capital Account relates to the portion of the Interest so Transferred, except to
the extent otherwise agreed by the transferor, the transferee and the Managing Member.
(d) No Member shall be entitled to receive any interest on or in respect of any amount
credited to his/her/its Capital Account.
(e) Except as otherwise provided in this Agreement, no Member shall have the right to receive
a return of any portion of its Capital Account.
ARTICLE III
INCOME AND LOSSES; ALLOCATION; DISTRIBUTIONS
3.01.
Allocation of Company Income and Loss
.
(a) Subject to Sections 3.01(b) and 3.02 hereof, Company Income and Company Loss for each
Accounting Period shall be allocated to and among all Members pro rata, based on their respective
Sharing Percentages as of the first day of such Accounting Period. Each Members Capital Account
balance shall be adjusted at the end of each Accounting Period by an amount equal to such
allocations.
13
(b) Notwithstanding Section 3.01(a), at such time as the Company makes any adjustments
pursuant to clause (c) of the definition of Gross Asset Value, Company Income and Company Loss
shall be allocated among the Members as follows:
(1)
First
, to the Members in such proportions and such amounts, as determined
by the Managing Member, as shall be necessary to cause the Capital Percentage of each
Member to equal (or to be closer to) the Sharing Percentage of such Member; and
(2)
Second
, to all Members in proportion to their respective Sharing
Percentages.
(c) For purposes of determining the Company Income, Company Loss, or any other items allocable
to any Accounting Period, Company Income, Company Loss and any such other items will be determined
on a daily, monthly or other basis (but no less frequently than once annually), as determined by
the Managing Member using any permissible method described in Code Section 706 and the Treasury
Regulations thereunder; provided that Company Income, Company Loss, and such other items will be
allocated at such times as the Gross Asset Values of the Company are adjusted pursuant to
subparagraph (c) of the definition of Gross Asset Value in Article I.
3.02.
Tax Allocations
.
(a)
Allocations for Income Tax Purposes
. The income, gains, losses, deductions and
credits of the Company shall be allocated for federal, state and local income tax purposes among
the Members, pro rata based on their Sharing Percentage. If any Interest is transferred, or is
increased or decreased by reason of the admission of a new Member or otherwise, during any
Accounting Period, each item of income, gain, loss, deduction, or credit of the Company for such
Accounting Period allocable may be allocated based on any method consistent with Section 706(d) of
the Code, in the sole discretion of the Managing Member.
(b)
Section 704(c) Allocations
. Notwithstanding any other provision in this Section
3.02, in accordance with Code Section 704(c) and the Treasury Regulations promulgated thereunder,
income, gain, loss, and deduction with respect to any property contributed to the capital of the
Company shall, solely for tax purposes, be allocated among the Members so as to take account of any
variation between the adjusted basis of such property to the Company for federal income tax
purposes and its fair market value on the date of contribution. Allocations pursuant to this
Section 3.02(b) are solely for purposes of federal, state and local taxes. As such, they shall not
affect or in any way be taken into account in computing a Members Capital Account or share of
Company Income, Company Loss, or other items or distributions pursuant to any provisions of this
Agreement.
14
3.03.
Distributions
. Subject to applicable Law and any limitations contained elsewhere in
this Agreement, distributions of all capital, earnings, income and other distributable items from
the Company (a) shall be made at such times as the Managing Member shall determine from time to
time and (b) shall be made to Members
pro rata
in proportion to their respective Units.
Distributions may take the form of cash, securities or other property, as determined by the
Managing Member.
3.04.
Tax Distributions
. Notwithstanding Section 3.03 hereof, on or before the date that
estimated income taxes are required to be paid, the Managing Member shall determine the Tax
Allowance Amount for each Member in respect of such quarter. Upon such determination, the Company
shall distribute each Members Tax Allowance Amount to such Member. All such distributions shall
have priority over any distributions pursuant to Section 3.03 hereof. Amounts distributed pursuant
to this Section 3.04 shall be treated as distributions for all purposes of this Agreement and shall
be offset against and reduce subsequent distributions made pursuant to Section 3.03.
3.05.
Restrictions on Distributions
. Notwithstanding the provisions of Sections 3.03 and
3.04 hereof to the contrary, no distribution shall be made to the Members if such distribution
would (i) violate any contract or agreement to which the Company is then a party or any Law then
applicable to the Company, (ii) have the effect of rendering the Company insolvent or (iii) result
in the Company having net capital lower than that required by applicable Law. Without limiting the
generality of the foregoing, the Company shall not make a distribution to a Member to the extent
that at the time of the distribution, after giving effect to the distribution, the aggregate of the
liabilities of the Company and liabilities for which the recourse of creditors is limited to
specified property of the Company, exceed the fair value of the assets of the Company (including,
without limitation, the fair value of the Companys goodwill), except that the fair value of
property that is subject to a liability for which the recourse of creditors is limited shall be
included in the assets of the Company only to the extent that the fair value of that property
exceeds that liability.
3.06.
Withholding
. Each Member hereby authorizes the Company to withhold and to pay to any
appropriate taxing authority any taxes payable by the Company as a result of such Members
participation in the Company; if and to the extent that the Company shall be required to withhold
and pay any such taxes, such Member shall be deemed for all purposes of this Agreement to have
received a payment from the Company in the amount of the sum withheld as of the time such
withholding is required to be paid to any appropriate taxing authority, which payment shall be
deemed to be a distribution to such Member to the extent that the Member is then entitled to
receive a distribution.
3.07.
Indemnification and Reimbursement for Payments on Behalf of a Member
. If the Company
is required by law to make any payment to a Governmental or Regulatory Entity that is specifically
attributable to a Member or a Members status as such (including federal withholding taxes, state
or local personal property taxes and state or local unincorporated business taxes), then such
Member shall indemnify the Company in full for the entire amount
15
paid (including interest, penalties and related expenses). A Members obligation to indemnify the
Company under this Section 3.07 shall survive termination, dissolution, liquidation and winding up
of the Company, and for purposes of this Section 3.07, the Company shall be treated as continuing
in existence. The Company may pursue and enforce all rights and remedies it may have against each
Member under this Section 3.07, including instituting a lawsuit to collect such indemnification,
with interest calculated at a rate equal to Prime Rate plus 2% (but not in excess of the highest
rate per annum permitted by law).
ARTICLE IV
COSTS AND EXPENSES
4.01.
Operating Costs
. The Company shall (i) pay, or cause to be paid, all costs, fees,
operating expenses and other expenses of the Company (including the costs, fees and expenses of
attorneys, accountants or other professionals and the compensation of all personnel providing
services to the Company) incurred in pursuing and conducting, or otherwise related to, the
activities of the Company, and (ii) in the sole discretion of the Managing Member, reimburse the
Managing Member or any member of the Executive Committee, any Administrative Officer, or any
Company employee for any out-of-pocket costs, fees and expenses incurred by them in connection
therewith. In light of the fact that the Managing Member is the managing member of the Company and
provides a means through which Class B Members may exchange their Class B Units for securities of
the Managing Member, the Managing Member may cause the Company to pay or bear all expenses of the
Managing Member, including, without suggesting any limitation of any kind, costs of securities
offerings not borne directly by Class B Members, Board of Directors compensation and meeting costs,
cost of periodic reports to its stockholders, litigation costs and damages arising from litigation,
accounting and legal costs and franchise taxes,
provided
that, without limiting the right
of the Managing Member to receive distributions pursuant to Sections 3.03 and 3.04, the Company
shall not pay or bear any income tax obligations of the Managing Member pursuant to this Section
4.01.
ARTICLE V
MEMBERS
5.01.
Liability of Members
. Except as otherwise provided by the Act or herein, the debts,
obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall
be solely the debts, obligations and liabilities of the Company, and the Members shall not be
obligated personally for any such debt, obligation or liability of the Company solely by reason of
being a member of the Company.
5.02.
Management of Business
. The business, property and affairs of the Company shall be
managed under the exclusive direction of the Managing Member, which may from time to time delegate
duties and authority in accordance with this Agreement to the Executive Committee, to the
Administrative Officers or to others to act on behalf of the Company. The Class B Members, in
their capacity as members of the Company, shall not take part in the management or control of
16
the Company. No Class B Member shall transact any business for the Company, and none may bind or
obligate the Company, unless specifically authorized by the Managing Member or the Executive
Committee to do so as part of the delegation of duties to such Class B Member as an Administrative
Officer.
5.03.
Withdrawal
. The Managing Member may not withdraw or resign from the Company. Except
as otherwise provided herein, a Class B Member may not withdraw or resign from the Company without
the prior written consent of the Managing Member; provided, that at such time as a Class B Member
no longer owns any Units, such Class B Member shall cease to be a member of the Company. The
resignation or cessation of membership of a Class B Member shall not dissolve the Company.
5.04.
Substitute Member
.
(a) No Class B Member shall have the right to substitute in his place a purchaser, assignee,
transferee, donee, heir, legatee, distributee, or other recipient of interests of such Class B
Member (other than in compliance with the provisions of Section 5.04(b) hereof), provided that any
purchaser, assignee, transferee, donee, heir, legatee, distributee or other recipient of interests
shall be admitted to the Company as a substitute Class B Member with, and only with, the consent of
the Managing Member, which consent may be granted or withheld in the sole discretion of the
Managing Member. Any such consent by the Managing Member shall be binding and conclusive without
the consent of the Class B Members.
(b) No Person shall become a substitute Class B Member until such Person shall have satisfied
the following requirements: (i) such Person shall, by written instrument in form and substance
reasonably satisfactory to the Managing Member, make representations and warranties to each
nontransferring Member (w) with respect to the capacity, power and authority of the transferee to
accept and adopt the terms and provisions of this Agreement, (x) that the execution, delivery and
performance of this Agreement by the transferee does not require any consent or approval and does
not violate any agreement to which the transferee is a party, (y) that the transferee has not
committed any act which could serve as a basis for (I) denial, suspension or revocation of the
registration of any investment adviser, including the Company, under Section 203(e) of the Advisers
Act or Rule 206(4)-4(b) thereunder, or for disqualification of any investment adviser, including
the Company, as an investment adviser to a registered investment company pursuant to Sections 9(a)
or 9(b) of the Investment Company Act of 1940, (II) precluding the Company from acting as a
fiduciary by operation of Section 411 of the Employee Retirement Income Security Act of 1974, as
amended, or (III) the Company failing to qualify as a Qualified Professional Asset Manager within
the meaning of Prohibited Transaction Exemption 84-14, and (z) that are otherwise determined by the
Managing Member as necessary or desired by the Company in order to comply with securities Laws, and
(ii) such Person accepts and adopts the terms and provisions of this Agreement pursuant to a
written instrument acceptable to the Managing Member in its sole discretion.
17
(c) For the purpose of allocating Company Income and Company Losses, a Person with respect to
whom the Managing Member has given consent as provided in Section 5.04(a) hereof shall be treated
as having become, and shall appear in the records of the Company as, a Member on the date of the
Transfer to such Person.
5.05.
Power of Attorney
. Each of the Class B Members hereby constitutes and appoints the
Managing Member his true and lawful representative and attorney-in-fact in his name, place and
stead, with full power of substitution, to make, execute, sign, acknowledge and file with respect
to the Company:
(a) all instruments which the Managing Member deems appropriate to reflect any duly adopted
amendment, change or modification of the Companys Certificate of Formation or this Agreement in
accordance with the terms of this Agreement;
(b) any amendment to this Agreement and all such other instruments, documents and
certificates, which may from time to time be required by the laws of the State of Delaware, the
United States of America (including tax laws and regulations), or any other jurisdiction in which
the Company shall determine to do business, or any political subdivision or agency thereof, to
effectuate, implement, continue and defend the valid and subsisting existence of the Company as a
limited liability company and to be treated as a partnership for tax purposes;
(c) all applications, certificates, certifications, reports or similar instruments or
documents required to be submitted by or on behalf of the Company to any Governmental or Regulatory
Authority or to any securities or commodities exchange, board of trade, clearing corporation or
association or similar institution or to any other self-regulatory organization or trade
association; and
(d) all papers which may be deemed necessary or desirable by the Managing Member to effect the
dissolution and liquidation of the Company if approved in accordance with the terms of this
Agreement;
provided, that no such representative and attorney-in-fact shall have any right, power or authority
to amend or modify this Agreement when acting in such capacity. The foregoing Power of Attorney is
hereby declared to be a power coupled with an interest and irrevocable, and shall not be revoked by
the death of a Class B Member and shall extend to such Class B Members Permitted Transferees.
5.06.
Voting
. The Class B Units shall have no voting or consent rights except as set forth
in Sections 6.03, 7.01(b), 8.01(a) and 11.01. If a vote, consent or approval of the Class B
Members is required by this Agreement, then each such Class B Member shall have one vote for each
Class B Unit held by such Class B Member. Except as otherwise expressly provided for
18
herein, (i) the Class B Members hereby consent to the exercise by the Managing Member of all such
powers and rights conferred on each Class B Member by the Act with respect to the management and
control of the Company and (ii) if a vote, consent or approval of the Class B Members is required
by the Act or other applicable Law with respect to any act to be taken by the Company or matter
considered by the Managing Member, each Class B Member agrees that it shall be deemed to have
consented to or approved such act or voted on such matter in accordance with the actions of the
Managing Member on such act or matter.
5.07.
Non-Solicitation/Non Compete
.
(a) In consideration of the Class B Units granted and to be granted to the Employee Members
from time to time by the Company, each Employee Member agrees that during the entire term of the
Non-Compete Period applicable to such Employee Member, such employee shall not, directly or
indirectly, whether as an officer, director, owner, partner, investor, member, adviser,
representative, consultant, agent, employee, co-venturer or otherwise, provide Investment Advisory
Services, except in the performance of his duties with the Company Group, or engage, or assist
others to engage, in whole or in part, in any business in competition with the business of the
Company Group.
(b) In consideration of the Class B Units granted and to be granted to the Employee Members
from time to time by the Company Group, each Employee Member agrees that during the entire term of
the Non-Solicitation Period applicable to such Employee Member, such Employee Member shall not,
directly or indirectly (other than in the course of performing his duties to the Company Group) (i)
solicit the hiring of or hire any employee of the Company Group or any Person who, within the prior
six months had been an employee of the Company Group, assist in, or encourage such hiring by any
Person or encourage any such employee to terminate or alter his relationship with the Company
Group; (ii) in competition with the Company Group, solicit, seek, induce, pursue in any way, or
accept a business relationship of any kind with, any Person who is a Client of the Company Group,
including by way of indirect or sub-advisory arrangements (such obligation to include the duty of
the Employee Member to decline any such offered business activity even if unsolicited); (iii)
otherwise solicit, encourage or induce any Client to terminate or reduce its business or
relationship with the Company Group; or (iv) otherwise take any action or have any communication
with any Person which purpose is, or the reasonably likely effect of which could be, to cause any
such Client to terminate, alter, reduce, modify or restrict in any way its relationship or business
with the Company Group.
(c) In the event that the Employee Member, upon notice from the Company of an inadvertent
breach of Section 5.07(b) by such Employee Member, promptly pays to the Company all fees and other
compensation that are earned by such Employee Member during the Non-Solicitation Period in
connection with such breach, such inadvertent breach shall not be treated as a breach resulting in
a forfeiture of Class B Units pursuant to Section 6.02(b)(2) or (3).
19
(d) Each Employee Member acknowledges and agrees that the covenants set forth in this Section
5.07 are reasonable and necessary for the protection of the Company. Each Employee Member further
agrees that irreparable injury will result to the Company in the event of any breach of any of the
terms of Section 5.07, and that in the event of any actual or threatened breach of any of the
provisions contained in Section 5.07, the Company will have no adequate remedy at Law. Each
Employee Member accordingly agrees that in the event of any actual or threatened breach by such
Employee Member of any of the provisions contained in this Section 5.07, the Company shall be
entitled to seek such injunctive and other equitable relief as may be deemed necessary or
appropriate by a court of competent jurisdiction, without the necessity of showing actual monetary
damages and without posting any bond or other security.
(e) If any court of competent jurisdiction shall at any time deem the term of any particular
restrictive covenant contained in this Section 5.07 too lengthy or the geographic scope too
extensive, the other provisions of this Section 5.07 shall nevertheless stand, the Non-Compete
Period and the Non-Solicitation Period applicable to such Employee Member shall be deemed to be the
longest period permissible by applicable Law under the circumstances and the geographic scope shall
be deemed to comprise the largest territory permissible by applicable Law under the circumstances.
The court in each case shall reduce the Non-Compete Period, the Non-Solicitation Period and/or
geographic scope to permissible duration or size.
(f) During the six (6) month period following the termination of employment of a 1% Member
with the Company Group, the Managing Member may, in its sole discretion, elect to cause the Company
Group to provide base and bonus compensation to such 1% Member at the same rate and the same time
as it was then compensating such 1% Member,
provided
that the bonus component of such
compensation applicable to such six (6) month period shall equal 50% (subject to reduction pursuant
to the last sentence of this Section 5.07(f)) of the annual bonus earned by such 1% Member most
recently prior to such termination of employment and shall be paid in cash promptly following the
end of such six (6) month period. In the event the Managing Member elects to provide such 1%
Member such compensation, the Non-Compete Period applicable to such 1% Member shall continue until
the last day of such six (6) month period. In order to make such election, the Managing Member
shall, within five (5) Business Days upon issuing to or receiving from a 1% Member a written notice
of termination of employment, notify such 1% Member in writing whether the Company Group will
provide such base and bonus compensation for such six (6) month period. If the Managing Member
does not timely make such an election, then the Non-Compete Period shall end when such 1% Members
employment with the Company Group terminates. Notwithstanding the foregoing, to the extent that a
1% Member gives a notice of termination of employment at least fourteen (14) days in advance of
such termination, (i) such 1% Members Non-Compete Period shall be reduced, for up to ninety (90)
days, by the number of days elapsed between the date of such notice and the date of the termination
of such 1% Members employment (such number, the
Reduced Number of Days
), (ii) the period
during which the Company shall provide compensation pursuant to this Section 5.07(f) shall be
reduced by the Reduced Number of Days and (iii) the percentage contained in the proviso to the
first sentence of this Section 5.07(f) (including with respect to the annual bonus) shall equal the
product of 50% multiplied by a fraction the numerator of which is 182 minus the Reduced Number of
Days and the denominator of which is 182.
20
5.08.
Confidentiality; Work for Hire
. In consideration of the benefits provided in this
Agreement, each Employee Member hereby agrees to the following:
(a) During the entire term of the Employee Members employment with the Company Group, the
Employee Member will have access to and become acquainted with confidential proprietary information
of the Company Group, including, without limitation, confidential or proprietary investment
methodologies and models, market analysis, trade secrets, know-how, designs, formulae, software
programs, proprietary or confidential plans, client identities and relationships, compilations of
information, client lists or files, service providers, business operations or techniques, records,
specifications, and data owned or used in the course of business by the Company Group
(collectively,
Confidential Information
). The Employee Member shall not disclose any of
the Confidential Information, directly or indirectly, or use it in any way, either during the
Employee Members employment with the Company Group or at any time thereafter, except as required
in the course of the Employee Members employment by the Company Group. All files, records,
documents, drawings, specifications, equipment and similar items relating to the business of the
Company Group, whether prepared by the Employee Member or otherwise coming into the Employee
Members possession, will remain the exclusive property of the Company Group, and if removed from
the premises of the Company Group will be immediately returned to the Company Group upon any
termination of the Employee Members employment.
(b) Each Employee Member agrees that any and all presently existing investment advisory
businesses of the Company Group and all businesses developed by the Company Group, including by the
Employee Member or any other employee or agent of the Company Group, including all investment
methodologies, all client investment advisory contracts, fees and fee schedules, commissions,
records, data, client lists, agreements, trade secrets, and any other incident of any business
developed by the Company Group or earned or carried on by the Employee Member for the Company
Group, and all trade names, service marks and logos under which the Company Group does business,
and any combinations or variations thereof, are and shall be, the exclusive property of the Company
Group for its sole use, and (where applicable) shall be, payable directly to the Company Group. In
addition, the Employee Member acknowledges and agrees that the investment performance of the
accounts managed by the Company Group is attributable to the efforts of the team of professionals
of the Company Group (including by the Employee Member during the Employee Members employment with
the Company Group) and not to the efforts of any single individual, and that, therefore, (i) the
performance records of the accounts managed by the Company Group (including by the Employee Member
during the Employee Members employment with the Company Group) are and shall be the exclusive
property of the Company Group and (ii) such records may not be used or cited by such Employee
Member at any time except as required in the course of the Employee Members employment by the
Company Group or with the prior written consent of the Managing Member.
(c) As used in this Section 5.08, the term Confidential Information does not include
information that the Employee Member can document (i) becomes or has been generally
21
available to the public other than as a result of the Employee Members or its
representatives disclosure; (ii) was available to the Employee Member on a non confidential basis
prior to its disclosure by the Company Group; or (iii) is independently developed or becomes
available to the Employee Member on a nonconfidential basis from a source other than the Company
Group.
(d) The Employee Member agrees that the Employee Member has not and will not during the term
of the Employee Members employment with the Company Group: (i) improperly use or disclose any
proprietary information or trade secrets of any former employer or other Person with which the
Employee Member has an agreement or duty to keep in confidence information acquired by the Employee
Member, if any; or (ii) bring onto the premises of the Company Group any document or confidential
or proprietary information belonging to such employer or Person unless consented to in writing by
such employer or Person. The Employee Member will indemnify the Company and hold it harmless from
and against all claims, liabilities, damages and expenses, including reasonable attorneys fees and
costs of suit, arising out of or in connection with any violation of the foregoing.
(e) The Employee Member recognizes that the Company Group may have received, and in the future
may receive, from third parties their confidential or proprietary information subject to a duty on
the Company Groups part to maintain the confidentiality of such information and to use it only for
certain limited purposes. The Employee Member agrees that the Employee Member owes the Company
Group and such third parties, during the Employee Members employment by the Company Group and
thereafter, a duty to hold all such confidential or proprietary information in the strictest
confidence and not to disclose it to any Person and to use it in a manner consistent with, and for
the limited purposes permitted by, the Company Groups agreement with such third party.
(f) In the event of the Employee Members termination of employment with the Company for any
reason whatsoever, the Employee Member agrees promptly to surrender and deliver to the Company all
records, notes, materials, equipment, drawings, documents and data of any nature pertaining to any
Confidential Information or to his employment, and the Employee Member will not retain or take with
the Employee Member any tangible materials containing or pertaining to any Confidential Information
that the Employee Member may produce, acquire or obtain access to during the course of his
employment.
(g)
Works Made for Hire
.
(1) The Employee Member acknowledges that all work performed by the Employee Member
for the Company Group, including without limitation copyrights, patents, inventions or any
other works (collectively, the
Works
), shall be considered works made for hire
as defined in the United States Copyright Act, as amended. For purposes of this Agreement,
the Company is the Person for whom this work is prepared and is considered the sole and
original author of any work done by the Employee Member hereunder. Therefore, the Company
owns all of the right, title and interest in
22
and to the Works, and shall have the sole and exclusive right (and may grant to others
the right) in perpetuity throughout the universe, to copyright, use, modify, change, adapt
or exploit the Works (and permit others to do the same) by any means, for any purpose, in
any media, now known or hereafter devised. The Employee Member hereby waives any and all
moral rights that he, or any Person working on his behalf, may have pursuant to any Laws or
in any jurisdiction regarding the Works.
(2) In the event that a court of competent jurisdiction ever determines that any of
the Works are not works made for hire, then such Works and all rights therein shall be
deemed assigned to the Company (and/or its successors or assigns). The foregoing
assignment includes all worldwide rights of any kind in and to the Works (whether or not
such rights are recognized in the United States or any other country in the world)
including, all rights incident to copyright ownership (including renewals or extensions),
to claims for damages by reason of past infringement and to the right to sue and recover
such damages for the use and benefit of the Company. Upon the Companys reasonable
request, the Employee Member agrees to execute additional documents, if any, necessary to
evidence, establish, maintain or protect the Company Groups (or its licensees,
successors or assigns) rights in and ownership of the Works and hereby appoints the
Company (and its successors or assigns) as his attorney-in-fact to execute such documents.
5.09.
New Class B Members and Issuance of Class B Units
. Subject to the terms of this
Agreement, the Managing Member may admit one (1) or more additional Class B Members or issue
additional Class B Units to an existing Class B Member at any time. As determined by the Managing
Member, the admission of additional Class B Members may result in dilution of the Interests of the
Companys then existing Members. No existing Member shall be entitled to be compensated or
reimbursed on account of any such dilution, nor will any Member be entitled to rights of first
refusal, pre-emptive rights or any other rights or benefits as a result of the issuance of
additional Units to any existing Member or the admission of a new Class B Member. The Managing
Member may do all things appropriate or convenient in connection with the issuance of Units or the
admission of any additional Class B Member. The admission of an additional Class B Member to the
Company shall not dissolve the Company.
5.10.
Investment Representations of Members
. Each Member hereby represents, warrants and
acknowledges to the Company that:
(a) Such Member has all requisite power to execute, deliver and perform this Agreement; the
performance of its obligations hereunder will not result in a breach or a violation of, or a
default under, any material agreement or instrument by which such Member or any of such Members
properties is bound or any statute, rule, regulation, order or other law to which it is subject,
nor require the obtaining of any consent, approval, permit or license from or filing with, any
governmental authority or other Person by such Person in connection with the execution, delivery
and performance by such Member of this Agreement.
23
(b) This Agreement constitutes (assuming its due authorization and execution by the other
Members) such Members legal, valid and binding obligation.
(c) Such Member is acquiring its Interest for investment solely for such Members own account
and not for distribution, transfer or sale to others in connection with any distribution or public
offering.
(d) Such Member (i) has received all information that such Member deems necessary to make an
informed investment decision with respect to an investment in the Company and (ii) has had the
unrestricted opportunity to make such investigation as such Member desires pertaining to the
Company and an investment therein and to verify any information furnished to such Member.
(e) Such Member understands that such Member must bear the economic risk of an investment in
the Company for an indefinite period of time because (i) the Interests have not been registered
under the Securities Act and applicable state securities laws and (ii) the Interests may not be
sold, transferred, pledged or otherwise disposed of except in accordance with this Agreement and
then only if they are subsequently registered in accordance with the provisions of the Securities
Act and applicable state securities laws or registration under the Securities Act or any applicable
state securities laws is not required.
5.11.
Relationship With the Managing Member
.
(a) It is the intention of each of the Managing Member and the Class B Members that, unless
otherwise determined by the Managing Member, the number of the Class A Shares and Class B Shares
outstanding shall at all times equal the number of Class A Units and Class B Units outstanding,
respectively, and each of the Company, the Managing Member and the Class B Members agrees to
cooperate to give effect to the intent of this Section 5.11(a).
(b) The Managing Member shall not, directly or indirectly, enter into or conduct any business,
or hold any assets other than (i) business conducted and assets held by the Company and its
Subsidiaries, (ii) the ownership, acquisition and disposition of equity interests of the Company,
(iii) the management of the business of the Company and its Subsidiaries, (iv) the offering, sale,
syndication, private placement or public offering of shares, bonds, securities or other interests
in compliance with this Section 5.11, (v) any activity or transaction contemplated by this
Agreement and the Registration Rights Agreement and (vi) such activities as are incidental to the
foregoing.
(c) The Managing Member shall not own any assets or take title to assets (other than
temporarily in connection with an acquisition prior to contributing such assets to the Company)
other than equity interests in the Company and such cash and cash equivalents, bank accounts or
24
similar instruments or accounts as the Board of Directors of the Managing Member deems
reasonably necessary for the Managing Member to carry out its responsibilities contemplated under
this Agreement.
(d) The Managing Member shall, directly, maintain at all times ownership of all outstanding
Class A Units, and shall not permit any Person to possess or exercise a right or ability to remove,
replace, appoint or elect the Managing Member of the Company.
(e) If the Managing Member issues any equity securities after the date of this Agreement:
(i) at any time the Managing Member issues any equity securities other than pursuant to the
2007 Plan, the Managing Member shall immediately contribute all the cash proceeds, assets or other
consideration or payments received from or in respect of the issuance of securities and from the
exercise of any rights contained in any such securities, including from a Class B Member in respect
of such issuance (collectively, the
Equity Proceeds
) (x) to the Company and the Company
shall immediately issue to the Managing Member, in exchange for the Equity Proceeds contributed to
the Company and any deemed Capital Contributions pursuant to Section 5.11(e)(iii), (A) in the case
of an issuance of a Class A Share, one Class A Unit, and (B) in the case of an issuance of any
other equity securities by the Managing Member, a new class or series of units or other equity
securities with designations, preferences and other rights, terms and provisions that are
substantially the same as those of such Managing Members equity securities equal in number to the
number of the Managing Members equity securities issued or, (y) if otherwise agreed in writing by
the Managing Member and any other Member, to such Member and such Member shall immediately transfer
to the Manager, in exchange for such Equity Proceeds, applicable Class B Units held by such Member,
which Class B Units shall be automatically converted upon transfer, (A) in the case of an issuance
of a Class A Share, one Class A Unit or, (B) in the case of an issuance of any other securities by
the Managing Member, a new class or series of units or other equity securities with designations,
preferences and other rights, terms and provisions that are substantially the same as those of such
Managing Members equity securities equal in number to the number of the Managing Members equity
securities issued;
(ii) at any time the Managing Member issues a Class A Share pursuant to the 2007 Plan (whether
pursuant to the exercise of a stock option or the grant of a stock award or otherwise), (x) the
Managing Member shall be deemed to have contributed to the Company an amount of cash equal to the
per share closing price of its Class A common stock on the New York Stock Exchange on the trading
day immediately prior to the date of such issuance (or, if earlier, on the date the related option
is exercised) and shall concurrently transfer the Equity Proceeds, if any, to the Company (such
Equity Proceeds shall not constitute a Capital Contribution) and (y) the Company shall be deemed to
have purchased from the Managing Member the Class A Shares for the amount of cash deemed
contributed by the Managing Member to the Company pursuant to clause (x) above and shall issue one
Class A Unit to the Managing Member; and
25
(iii) in the event of any issuance of Class A Shares by the Managing Member, and the
contribution to the Company, by the Managing Member, of the cash proceeds or other consideration or
payments received from or in respect of such issuance (including from a Class B Member in respect
of such issuance), if the cash proceeds or other consideration or payments actually received by the
Managing Member are less than the gross proceeds of such issuance as a result of any underwriters
discount or other expenses paid or incurred in connection with such issuance (after giving effect
to any consideration or payments paid by Class B Members in respect of such issuance), the Managing
Member shall be deemed to have made a capital contribution to the Company in the amount equal to
the sum of the cash proceeds or other consideration or payments of such issuance plus the amount of
such underwriters discount and other expenses paid by the Managing Member, which discount and
expense shall be treated as an expense for the benefit of the Company for purposes of Section 4.01.
(f) If, at any time, any Class A Shares (or such other class or series of equity securities)
of the Managing Member is to be redeemed by the Managing Member for cash, the Company shall,
immediately prior to such redemption, redeem one (1) Class A Unit (or such other class or series of
equity securities in the Company) held by the Managing Member, upon the same term and for the same
price per Class A Unit (or such other class or series of equity securities in the Company), as such
Class A Shares (or such other class or series of equity securities of the Managing Member).
(g) Neither the Company nor the Managing Member shall in any manner subdivide (by split,
distribution, reclassification, recapitalization or otherwise) or combine (by reverse split,
reclassification, recapitalization or otherwise) their respective class or series of outstanding
units and common stock with designations, preferences and other rights, terms and provisions that
are substantially the same, unless such class of series of units or common stock are subdivided or
combined concurrently in an identical manner.
(h) Each Class B Member shall, concurrently with the execution and delivery of this Agreement
or, in the event that any Class B Units are issued by the Company to such Class B Member subsequent
to the date hereof, concurrently with such subsequent issuance, (i) execute and deliver to the
Managing Member a subscription agreement in form satisfactory to the Managing Member, subscribing
to a number of Class B Shares equal to the number of Class B Units held by such Class B Member as
of the date hereof or, with respect to a subsequent issuance, the number of Class B Units to be
issued to such Class B Member at such subsequent issuance, (ii) pay to the Managing Member
consideration for such subscribed Class B Shares at the par value, (iii) if such Class B Member is
not a party to the Class B Stockholders Agreement, execute and deliver to the Managing Member a
counterpart to the Class B Stockholders Agreement or an additional party signature page thereto and
(iv) execute and deliver to the Managing Member such instruments, certificates, agreements and
other documents as may be reasonably required by the Managing Member to effect the issuance of such
subscribed Class B Shares. The Managing Member shall issue to such Class B Member, upon receipt of
the foregoing, the Class B Shares so subscribed.
26
(i) Notwithstanding the foregoing provisions of this Section 5.11, the Managing Member may
incur indebtedness and may take other actions if the Managing Member determines in good faith that
such indebtedness or other actions are in the best interests of the Company.
ARTICLE VI
TRANSFER OF UNITS
6.01.
Transfer of Units
.
(a) No Class B Member or transferee thereof shall, without the prior written consent of the
Managing Member, which may be withheld in its sole discretion, create, or suffer the creation of, a
Lien in such Members Units.
(b) The Managing Member shall not Transfer any Class A Units.
(c) No Class B Member shall Transfer, or suffer the Transfer of, such Class B Members Units
(including by way of indirect transfer resulting from the direct or indirect transfer of control of
any entity which is a Class B Member), in whole or in part, nor enter into any agreement as the
result of which any Person shall become interested with such Class B Member therein except subject
to Section 6.01(d), (i) with the prior written consent of the Managing Member, which may be
withheld in its sole discretion, (ii) by last will and testament to: (A) spouses or lineal
descendants, (B) inter vivos trusts, (C) family limited partnerships or similar entities or (D)
devices for the benefit of spouses and lineal descendants, on the condition in each case that each
Transferee thereof expressly acknowledges and agrees in writing that such transferred Interests (or
a portion thereof) are subject to this Agreement and all of the terms and conditions hereof or
(iii) pursuant to Exhibit B hereof.
(d) Except with the written consent of the Managing Member, no Transfer of a Unit shall be
permitted (and, if attempted, shall be void
ab initio
) if, in the determination of the Managing
Member,
(1) such Transfer is made to any Person who lacks the legal right, power or capacity
to own such Unit;
(2) such Transfer would require the registration of such transferred Unit or of any
class of Unit pursuant to any applicable United States federal or state securities laws
(including, without limitation, the Securities Act or the Exchange Act) or other foreign
securities laws or would constitute a non-exempt distribution pursuant to applicable state
securities laws;
27
(3) to the extent requested by the Managing Member, the Company does not receive such
legal and/or tax opinions and written instruments (including, without limitation, copies of
any instruments of Transfer and such Assignees consent to be bound by this Agreement as an
Assignee) that are in a form satisfactory to the Managing Member, as determined in the
Managing Members sole discretion;
(4) such a Transfer would pose a material risk that the Company would be a publicly
traded partnership as defined in Section 7704 of the Code;
(5) such Transfer would result in 50 percent or more of the Companys total
partnership interests having been sold or exchanged in any 12 month period (within the
meaning of Section 708(b)(1)(B) of the Code) and the resulting termination of the Company
pursuant to Section 708(b)(1)(B) would, in the determination of the Managing Member, have a
more than immaterial adverse effect on the Company or the Members; or
(6) in the case of a Class B Unit, such transfer shall have been made in accordance
with the Class B Stockholders Agreement.
(e) Notwithstanding Section 6.02(b), (i) at any time prior to or following a Transfer of Class
B Units by a Class B Member, the transferring Class B Member, the transferee and the Managing
Member may agree in writing, in the sole discretion of each such Person, that all or any portion of
the Class B Units that may be forfeited by a Permitted Transferee pursuant to Section 6.02(b) shall
instead be forfeited by the Employee Member that transferred such Class B Units; and (ii) with
respect to any Class B Units transferred by an Employee Member to a Permitted Transferee prior to
the date hereof, such Class B Units shall not be subject to forfeiture by such Permitted Transferee
and such Employee Member shall instead forfeit an additional number of Class B Units equal to the
number of Class B Units that otherwise would have been forfeited by such Permitted Transferees
pursuant to Section 6.02(b) (for example, if an Ordinary Employee Member transferred twenty (20)
Class B Units to a Permitted Transferee prior to the date hereof, retained eighty (80) Class B
Units and thereafter breached Section 5.07 during the term of his employment, such Ordinary
Employee Member shall forfeit twenty five (25) Class B Units and such Permitted Transferee shall
not forfeit any Class B Units).
(f) Any purported Transfer of Units not in compliance with this Section 6.01 shall be void and
shall not create any obligation of the party of the Company or its Members to recognize such
Transfer.
6.02.
Vesting and Forfeiture of Units
.
(a)
Vesting of Units
.
28
(1)
Units Held by the Managing Member and the Non-Employee Members
. All Class
A Units held by the Managing Member and, except as may be agreed in writing by the Managing
Member and a Non-Employee Member, all Class B Units held by a Non-Employee Member shall be
fully vested and shall not be subject to forfeiture under this Section 6.02 for any reason.
(2)
Units Held by Employee Members and their Permitted Transferees
. All Class
B Units shall be vested or subject to vesting provisions as set forth on the Register of
Members. Unvested Class B Units shall vest in accordance with the Plan under which such
Class B Units were issued. Except as may be agreed in writing by the Managing Member and a
Class B Member, Class B Units held by a Permitted Transferee of an Employee Member shall
vest at the same times as such Class B Units would have vested had such Class B Units
continued to be held by such Employee Member.
(3)
Forfeiture of Unvested Class B Units
. Except as provided in the Plan
pursuant to which an unvested Class B Unit is issued or as otherwise may be agreed in
writing by the Company and a Class B Member, all unvested Class B Units held by an Employee
Member and all unvested Class B Units transferred by such Employee Member to, and held by,
his or her Permitted Transferees, on the date of termination of employment of such Employee
Member with the Company Group shall be forfeited upon such termination.
(b)
Additional Forfeiture of Class B Units
.
(1)
Termination for Cause
. Subject to Section 6.01(e), in the event that an
Employee Members employment by the Company Group has been terminated for Cause, such
Employee Member and each of his or her Permitted Transferees shall each forfeit
seventy-five percent (75%) of the number of vested Class B Units and one hundred percent
(100%) of the unvested Class B Units held by such Member as of the date of such
termination, unless the Board of Directors of the Managing Member, in its sole discretion,
determines otherwise.
(2)
Initial Managing Principal Breach of Restrictive Covenants
. Subject to
Section 6.01(e), in the event that an Initial Managing Principal breaches Section 5.07
during the term of his employment with the Company Group or during the three years period
following such term of employment, in addition to any forfeiture that may result from the
application of Section 6.02(a)(3) (should such breach result in a termination of
employment), unless the Board of Directors of the Managing Member, in its sole discretion,
determines otherwise, such Initial Managing Principal and each of his or her Permitted
Transferees shall each forfeit one hundred percent (100%) of unvested Class B Units, and
the excess of (A) fifty (50%) of the number of vested Class B Units held by such Member as
of the earlier of (i) the date of such breach and (ii) the date of termination of such
Initial Managing Principals employment with the Company Group
29
over (B) the aggregate number of vested Class B Units (if any) previously forfeited by
such Member under this Section 6.03(b)(2).
(3)
Ordinary Employee Member Breach of Restrictive Covenants
. Subject to
Section 6.01(e), in the event that an Ordinary Employee Member breaches Section 5.07 during
the term of his or her employment or during the eighteen (18) month period following such
term of employment, in addition to any forfeiture that may result from the application of
Section 6.02(a)(3) (should such breach result in a termination of employment) , unless the
Board of Directors of the Managing Member, in its sole discretion, determines otherwise,
such Ordinary Employee Member and each of his or her Permitted Transferees shall each
forfeit one hundred percent (100%) of unvested Class B Units, and the excess of (A) 25% of
the number of vested Class B Units held by such Member as of the earlier of (i) the date of
such breach and (ii) the date of termination of such Ordinary Employee Members employment
with the Company Group over (B) the aggregate number of vested Class B Units (if any)
previously forfeited by such Member under this Section 6.03(b)(3).
(c)
Consequences of Forfeiture
. In the event a Class B Members Class B Units are
forfeited pursuant to Section 6.02(b), (i) the exact number of Class B Units (if not a whole
number) shall be determined by rounding to the nearest whole number of Class B Units, (ii) such
Class B Member shall cease to hold such number of Class B Units, (iii) forfeited Class B Units
shall be held in the treasury of the Company and thereafter may be awarded pursuant to a Plan and
(iv) the Managing Member shall reflect the reduction of the number of units by revising the
Register of Members. In addition, such Class B Member shall reasonably cooperate with the Managing
Member to assist in the redemption of an equal number of Class B Shares held by such Class B
Member.
6.03.
Drag Along Rights
. If holders of more than 50% of the outstanding Class B Units held
by Class B Members (the
Selling Holders
) propose to sell to a third party any Class B
Units held by such Class B Members (including Class B Units transferred by such Class B Members to,
and held by, their Permitted Transferees) (whether such sale is by way of purchase, merger,
recapitalization or other form of transaction), then upon (i) the request of the Selling Holders
and (ii) the consent of the Managing Member and a Majority in Interest of Class B Members, each
other Class B Member, shall sell the same percentage, as applicable, of the Class B Units
beneficially owned by such Class B Member to such third party buyer pursuant to the same terms and
conditions negotiated by the Selling Holders for the sale of the Class B Units held by the Selling
Holders. For example, if the Selling Holders propose to sell 35% of the Class B Units held by each
of them, any other Member shall, upon request of the Selling Holders and the consent of the
Managing Member and the Majority in Interest of Class B Members, sell 35% of the Class B Units held
by such other Class B Member. Each of the Class B Members agrees to such sale and to execute such
agreements, powers of attorney, voting proxies or other documents and instruments as may be
necessary or desirable to consummate such sale. Each of the Class B Members further agrees to
timely take such other actions as the Managing Member may reasonably request as necessary in
connection with the consummation of such sale. Each
30
Class B Member shall be required to make customary representations and warranties in connection
with such transfer with respect to his, her or its own authority to transfer his, her or its title
to the Class B Units transferred, together with such other representations and warranties with
respect to the Company as are made by the Selling Holders in connection with such sale; provided,
however, that the liability of each Class B Member with respect to the representations and
warranties concerning the Company shall be limited to his pro rata portion of the proceeds paid in
such sale. Each Class B Member shall pay his pro rata portion (based on the total value of the
consideration received by such Class B Member compared to the aggregate consideration received by
all Members in the transaction) of the reasonable out-of-pocket expenses incurred in connection
with a sale consummated pursuant to this Section 6.03.
ARTICLE VII
MANAGING MEMBER; EXECUTIVE COMMITTEE; OFFICERS
7.01.
Powers of the Managing Member
.
(a) The business and affairs of the Company shall be under the sole and exclusive direction,
management and supervision of the Managing Member. In addition to all powers provided or permitted
by the Laws of the State of Delaware or any other applicable Law, the Managing Member is hereby
authorized on behalf of the Company: to expend Company funds in furtherance of the business and
purpose of the Company; to admit Members and issue Units for consideration and on terms and
conditions in his discretion; to incur obligations for and on behalf of the Company in connection
with its business; to open, maintain and close, in the name of the Company, brokerage and bank
accounts, and to draw checks or other orders for the payment of money; to borrow or raise moneys
for and on behalf of the Company upon such terms and conditions as may be necessary or advisable
and without limit as to amount or manner and time of repayment; to issue, accept, endorse and
execute promissory notes, drafts, bills of exchange, bonds, debentures and other negotiable or
non-negotiable instruments and evidences of indebtedness; to hypothecate, mortgage or pledge the
whole or any part of the property or credit of the Company, whether at the time owned or thereafter
acquired; to repay in whole or in part, refinance, modify or extend any security interest affecting
property owned by the Company and, in connection therewith, to execute for and on behalf of the
Company any or all extensions, renewals, or modifications of such security interests; to lend funds
and other property of the Company either with or without security; to waive any default under any
agreement to which the Company is a party; to apply for membership or participation in any
exchanges, clearing agencies, trade associations or other organizations and to take any actions and
disclose any information necessary or appropriate in connection with such applications; to
determine, subject to the provisions of this Agreement, the terms of any offering of Units and the
manner of complying with applicable Law and to take any additional action as he shall deem
necessary or desirable to effectuate the offering of Units; to prepare, execute, file and deliver
any documents, instruments or agreements; to employ such agents, brokers, traders, consultants,
advisers, employees, attorneys and accountants as he deems appropriate and necessary to the conduct
of the Company, at such rates and fees as it deems necessary or appropriate, whether or not they
are associates or Affiliates of the Company or the Managing Member; to obtain insurance for the
31
proper protection of the Company and the Members; to commence or defend any litigation or
arbitration involving the Managing Member in its capacity as Managing Member, and to retain legal
counsel in connection therewith and to pay out of the assets of the Company any and all liabilities
and expenses, including fees of legal counsel, incurred in connection therewith (except if the
Managing Member is or becomes liable therefor under Section 7.07 hereof); to take any other action
contemplated to be taken by the Managing Member pursuant to this Agreement; and to make such other
decisions and enter into any other agreements or take such other action as he believes to be
necessary or desirable to carry out the business and purpose of the Company.
(b) Notwithstanding the foregoing, the Managing Member shall not, without the consent of a
Majority in Interest of the Class B Members, have the power and authority to effectuate the sale,
lease, transfer, exchange or other disposition of all or substantially all of the assets of the
Company (including, but not limited to, the exercise or grant of any conversion, option, privilege
or subscription right or any other right available in connection with any assets at any time held
by the Company) or the merger, consolidation, reorganization or other combination of the Company
with or into another entity.
7.02.
Executive Committee
. The Company shall have an executive committee (the
Executive Committee
) to which the Managing Member may delegate such power and authority
as the Managing Member may determine, subject to the right of Managing Member to revoke or modify
such delegation. The Executive Committee shall consist of the Chairman of the Managing Member,
together with such other Administrative Officers as may be designated and/or removed by the
Chairman. Each member of the Executive Committee shall have one (1) vote in any decision of the
Executive Committee. The Executive Committee may act only with majority vote or majority written
consent of its members and may act in accordance with such rules and procedures as it may determine
from time to time. Initially, Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L.
Lipsey shall serve as members of the executive committee.
7.03.
Administrative Officers
.
(a) The Managing Member may from time to time appoint or remove one (1) or more administrative
officers (individually, an
Administrative Officer
, and collectively, the
Administrative Officers
) from among the employees of the Company to carry out the
day-to-day affairs of the Company. No Administrative Officer need be a Member. Each
Administrative Officers title and authority shall be as determined from time to time by the
Managing Member.
(b) The Managing Member shall appoint a chief compliance officer of the Company to report
directly to the Managing Member (the
Chief Compliance Officer
). The responsibilities of
the Chief Compliance Officer shall include (i) recommending to the Managing Member policies and
procedures reasonably designed to prevent violation by the Company and its employees of federal
securities laws, (ii) administering the policies and procedures adopted
32
and implemented for such purpose and (iii) such other matters as the Managing Member shall
prescribe.
7.04.
Binding Company
. (a) No Class B Member, acting individually in its capacity as
such, has the right or authority to act for or bind, or to otherwise assume any obligation or
responsibility on behalf of, the Company except as specifically authorized in accordance with this
Agreement. The Company may only act and bind itself through:
(i) the action of the Managing Member in accordance with this Agreement;
(ii) the collective action of the members of the Executive Committee if and to the extent
authorized by the Managing Member or this Agreement or by the Managing Member; or
(iii) the action of an Administrative Officer if and to the extent authorized by this
Agreement, the Managing Member or the Executive Committee in accordance with this Agreement.
7.05.
Reliance by Third Parties
. Persons dealing with the Company are entitled to rely
conclusively upon the power and authority of the Managing Member or the Executive Committee as
hereinabove set forth and upon the certificate of the Managing Member or an Administrative Officer
(i) as to who the Members hereunder are, (ii) as to the existence or nonexistence of any fact or
facts which constitute conditions precedent to acts by the Members or in any other manner germane
to the affairs of the Company, (iii) as to who is authorized to execute and deliver any instrument
or document on behalf of the Company, (iv) as to the authenticity of any copy of this Agreement and
amendments hereto, (v) as to any act or failure to act by the Company or as to any other matter
whatsoever involving the Company or any Member (solely with respect to the activities of the
Company), or (vi) as to the authority of any Administrative Officer to act. Any corporation,
brokerage firm or transfer agent called upon to transfer any securities to or from the name of the
Company shall be entitled to rely on instructions or assignments signed or purporting to be signed
by a Managing Member or an Administrative Officer without inquiry as to the authority of the person
signing or purporting to sign such instructions or assignments or as to the validity of any
transfer to or from the name of the Company. At the time of any such transfer, any such
corporation, brokerage firm or transfer agent shall be entitled to assume that (i) the Company is
then in existence and (ii) that this Agreement is in full force and effect and has not been
amended, in each case unless such corporation, brokerage firm or transfer agent shall have received
written notice to the contrary.
7.06.
Duties of Managing Member, the Executive Committee and Employee Members
. During the
continuance of the Company, the Managing Member, each member of the Executive Committee and each
Employee Member shall devote such time and effort to the Company business as may be necessary to
promote adequately the interests of the Company. Failure of
33
any the Managing Member, any member of the Executive Committee or any Employee Member to devote his
time, skill and attention to the Company to the extent required pursuant to this Section 7.06 due
to illness shall not constitute a breach of his obligation to the Company pursuant to this Section
7.06.
7.07.
Liability of Managing Member and the Executive Committee
. Notwithstanding anything
to the contrary contained herein, a Managing Member or an Executive Committee member, individually,
or the Executive Committee, collectively, shall not be liable, responsible or accountable in damage
or otherwise to the Company or to any Member, successor, assignee or transferee except by reason of
acts or omissions due to fraud or intentional misconduct or that constitute a violation of the
implied contractual duty of good faith and fair dealing.
7.08.
Indemnification, Reliance and Fiduciary Duty
.
(a)
Indemnification by the Company
. To the fullest extent permitted by applicable
Law, the Company shall indemnify, defend and hold any Covered Person harmless from and against any
loss, liability, damage, cost or expense, including reasonable attorneys fees, in defense of any
demands, claims or lawsuits against such Covered Person in or as a result of or relating to its
capacity, acts or omissions as Managing Member, Executive Committee member, Chief Compliance
Officer, Administrative Officer or as an agent, employee, officer, adviser, or consultant,
concerning the business, or activities undertaken on behalf of the Company, including any demands,
claims or lawsuits initiated by a Member or resulting from or relating to the offer and sale of the
Units in the Company, provided that the acts or omissions of such Covered Person are not the result
of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and
fair dealing, or such a lesser standard of conduct as under applicable Law prevents indemnification
hereunder or were taken in the knowledge that such actions were not within the stated purposes and
powers of the Company (the
Disabling Conduct
).
A Covered Person shall be entitled to receive, upon application, advances to cover the costs
of defending any claim or action against such Covered Person; provided, however, that such advances
shall be repaid to the Company if such Covered Person violated any of the standards set forth in
the preceding paragraph. All rights of a Covered Person shall survive the dissolution of the
Company and the death, retirement, removal, dissolution, incompetency or insolvency of such Covered
Person, provided that notice of a potential claim for indemnification hereunder is made by or on
behalf of such Covered Person seeking such indemnification prior to the time distribution in
liquidation of the property of the Company is made pursuant to Section 8.02 hereof.
(b)
Reliance
. A Covered Person shall be fully protected in relying in good faith upon
the records of the Company and upon such information, opinions, reports or statements presented to
the Company by any Person (other than such Covered Person) as to matters the Covered Person
reasonably believes are within such other Persons professional or expert competence and who has
been selected with reasonable care by or on behalf of the Company, including
34
information, opinions, reports or statements as to the value and amount of the assets,
liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets
from which distributions to Members might properly be paid.
(c)
Fiduciary Duty
. To the extent that, at law or in equity, a Covered Person has
duties (including fiduciary duties) and liabilities relating to the Company or to another Member or
any Affiliate of another Member, a Covered Person acting pursuant to the terms, conditions and
limitations of this Agreement shall not be liable to the Company or to another Member or any
Affiliate of another Member for its good faith reliance on the provisions of this Agreement. The
provisions of this Agreement, to the extent that they expand or restrict the duties and liabilities
of a Covered Person otherwise existing at law or equity, are agreed by the Members to modify to
that extent such other duties and liabilities of the Covered Person to the extent permitted by law.
To the fullest extent permitted by applicable law and unless otherwise expressly provided
herein, (i) whenever a conflict of interest exists or arises between the Managing Member and the
Company or another Member, or (ii) whenever this Agreement or any other agreement contemplated
herein provides that the Managing Member shall act in a manner that is fair and reasonable to the
Company or any other Member, the Managing Member shall resolve such conflict of interest or take
such action, considering in each case the relative interest of the Company, each other Member and
the Managing Member, to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, any customary or accepted industry practices, and any
applicable generally accepted accounting practices or principles. So long as the Managing Member
acts, based on the foregoing sentence, in good faith and in a manner consistent with the foregoing
sentence, the resolution or action so made or taken by the Managing Member shall not constitute a
breach of this Agreement or any other agreement contemplated herein.
Notwithstanding anything to the contrary in the Agreement or under applicable Law, whenever in
this Agreement the Managing Member is permitted or required to make a decision or take an action or
omit to do any of the foregoing acting solely in its capacity as the Managing Member, the Managing
Member shall, except where an express standard is set forth, be entitled to make such decision in
its sole discretion (and the words in its sole discretion should be deemed inserted therefor in
each case in association with the words Managing Member, whether or not the words sole
discretion are actually included in the specific provisions of this Agreement), and in so acting
in its sole discretion the Managing Member shall be entitled to consider only such interests and
factors as it desires, including its own interests, and, except as set forth in the preceding
paragraph in the case of a conflict of interest, shall have no duty or obligation to give any
consideration to any interest of or factors affecting the Company, any of the Companys Affiliates,
any other Member or any other Person. To the fullest extent permitted by applicable Law, if
pursuant to this Agreement the Managing Member, acting solely in its capacity as the Managing
Member, is permitted or required to make a decision in its good faith or under another express
standard, the Managing Member shall act under such express standard and shall not be subject to any
other or different standard imposed by this Agreement or otherwise other applicable Law.
35
The Managing Member may consult with the legal counsel and accountants and any act or omission
suffered or taken by the Managing Member on behalf of the Company in furtherance of the interests
of the Company in good faith in reliance upon and in accordance with the advice of such counsel or
accountants will be full justification for any such act or omission, and the Managing Member will
be fully protected in so acting or omitting to act so long as such counsel or accountants were
selected with reasonable care.
(d)
Insurance
. To the fullest extent permitted by Law, the Company may purchase and
maintain insurance on behalf of any Covered Person against any liability asserted against such
Covered Person, whether or not the Company would have the power to indemnity such Covered Person
against such liability under the provision of this Section 7.08.
ARTICLE VIII
DISSOLUTION, LIQUIDATION AND TERMINATION OF THE COMPANY
8.01.
Dissolution
. The Company shall dissolve upon the first to occur of the following:
(a) a determination by the Managing Member and a Majority in Interest of the Class B Members
that the Company should dissolve; or
(b) the entry of a decree of judicial dissolution of the Company under Section 18-802 of the
Act.
Upon the dissolution of the Company, no further business shall be done in the Company name
except the completion of any incomplete transactions and the taking of such action as shall be
necessary for the winding up of the affairs of the Company and the distribution of its assets.
8.02.
Liquidation
.
(a) Subject to the provisions of Article IX, upon dissolution of the Company, the Managing
Member shall (i) cause such of the Company property as the Managing Member shall deem appropriate
to be sold in the manner and at the price the Managing Member determines, (ii) determine each
Members Capital Account pursuant to Article III hereof, (iii) determine each Members pro rata
share of Company Income and Company Loss in accordance with Sections 3.01 and 3.02 hereof; and (iv)
take the following actions and make the following distributions out of the property of the Company
in the following manner and order:
(1) pay all debts and liabilities of the Company and expenses of liquidation in the
order of priority provided by Law; and
36
(2) distribute the remainder of the property in cash to each Member in accordance with
the aggregate positive Capital Account balance, taking into account all allocations of
Company Income and Company Loss, and all distributions of Company assets, for the Fiscal
Year of the liquidation and for all prior periods. Any assets of the Company that are
distributed in kind hereunder shall be taken at their Gross Asset Value on the day of
distribution.
(b) No Member shall be obligated to restore a negative Capital Account.
Anything in the foregoing provisions of this Section 8.02 to the contrary notwithstanding, each
Member hereby agrees that any such dissolution or distribution shall be postponed for such period
of time as may be required by the Securities and Exchange Commission or any other Governmental or
Regulatory Authority having jurisdiction over the Company or its business, and any property of the
Company so retained by the Company shall continue at the risk of the Company and be subject to all
debts and other obligations of the Company; provided that the Managing Member will use his best
efforts to obtain the regulatory approvals necessary to effect such dissolution or distribution.
ARTICLE IX
RESERVES UPON DISSOLUTION
9.01.
Reserves
. The amount of any distribution upon a dissolution shall be made in cash or
in kind or partially in cash, as the Managing Member shall determine, less a reserve determined in
the sole discretion of the Managing Member.
9.02.
Distribution of Reserves
. Any reserve amounts so withheld will be deposited by the
Managing Member in an interest bearing account at a major bank headquartered in New York City.
Upon determination by the Managing Member that circumstances no longer require the retention of any
amount reserved pursuant to this Agreement, the Managing Member shall pay such sum to the Members
(or their respective Legal Representative), along with any interest earned on such account, at the
earliest practicable time.
ARTICLE X
ACCOUNTING
10.01.
Accounts of the Company
. The books and records of account of the Company shall be
maintained in accordance with GAAP consistently applied and shall be reconciled to comply with the
methods followed by the Company for United States Federal income tax purposes, consistently
applied. The books and records shall be maintained at the Companys principal office or at a
location designated by the Managing Member.
37
10.02.
Annual Reports to Members
. Within one hundred twenty (120) days after the end of
each Fiscal Year, the Managing Member shall cause to be prepared and mailed to each Member one (1)
or more reports setting forth, as of the end of such Fiscal Year, (a) a statement of Company Income
and the amount of such Members Capital Account and, as soon as thereafter practicable, the amount
of such Members share of the Companys taxable income or loss for such Fiscal Year, in sufficient
detail to enable him to prepare his federal, state and other tax returns and (b) a balance sheet
and statements of operations and cash flows for the Company and its subsidiaries as of and for the
Fiscal Year. The financial statements described in this Section 10.02 shall be prepared in
accordance with GAAP applied on a consistent basis (except as may be noted therein).
10.03.
Tax Returns and Tax Elections
.
(a) The Companys accountants shall prepare all federal, state and local tax returns of the
Company for each year for which such returns are required to be filed. The Managing Member, in his
or its sole discretion, shall determine the accounting methods and conventions under the tax laws
of the United States, the several states and other relevant jurisdictions as to the treatment of
income, gain, loss, deduction and credit of the Company or any other method or procedure related to
the preparation of such tax returns. The Managing Member, in its sole discretion, may cause the
Company to make or refrain from making any and all elections permitted by such tax laws,
provided
that the Company shall make an election under Section 754 of the Code promptly
following the date hereof.
(b) Each Member agrees that, in respect of any year in which he has or had any interest in the
Company, he shall not (i) treat, on his individual income tax returns, any item of income, gain,
loss, deduction or credit relating to his interest in the Company in a manner inconsistent with the
treatment of such item by the Company as reflected on the Form K-1 or other information statement
furnished by the Company to such Member for use in preparing his income tax returns or (ii) file
any claim for refund relating to any such item based upon, or that would result in, such
inconsistent treatment unless such Member has been advised by counsel that treating such item in a
manner consistent with the treatment of such item by the Company would subject such Member to
penalties under the Code.
(c) The Managing Member, or a Person designated by the Managing Member who is a Member, shall
be the Companys Tax Matters Partner (as that term is defined in Section 6231(a)(7) of the Code) in
the event of an income tax audit of any Company return. To the extent the Company is treated as an
entity for purposes of the audit, including administrative settlement and judicial review, the Tax
Matters Partner shall be authorized to act for and represent the Company, and to enter into a
settlement agreement within the meaning of Section 6224(c)(1) of the Code (or comparable provisions
under state or local Law) to which each Member agrees to be bound. All expenses incurred in
connection with any such audit shall be expenses of the Company. The Tax Matters Partner shall be
authorized to carry out on behalf of the Company and at the Companys expense all acts appropriate
to such designation with respect to federal, state and local taxing authorities.
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10.04.
No Further Rights to Books and Records
. Except for the information required to be
provided to the Members under this Agreement, no Class B Member shall have the right to demand from
the Company, and the Company shall have no obligation to provide to any Class B Member, any books
or records of the Company.
ARTICLE XI
MISCELLANEOUS
11.01.
Amendments
. (a) The terms and provisions of this Agreement (including, for the
avoidance of doubt, any Exhibit or Schedule hereto) may be modified or amended at any time and from
time to time with the written consent of the Managing Member and a Majority in Interest of the
Class B Members, provided that the Managing Member may, without the consent of any of the other
Members, amend this Agreement:
(i) to satisfy any requirements, conditions, guidelines or opinions contained in any opinion,
directive, order, ruling or regulation of the Securities and Exchange Commission, the Internal
Revenue Service or any other U.S. federal or state or non-U.S. governmental agency, or in any U.S.
federal or state or non-U.S. statute, compliance with which the Managing Member deems to be in the
best interest of the Company;
(ii) (A) to ensure that the Company will not be treated as (x) an association taxable as a
corporation for U.S. federal income tax purposes or (y) a publicly traded partnership for
purposes of Section 7704 of the Code or (B) to comply with the then existing requirements of the
Code, final or temporary Treasury Regulations and the rulings of the Internal Revenue Service
affecting the treatment of the Company as a partnership for federal income tax purposes;
(iii) to enable the Company to comply with the requirement of the liquidation value safe
harbor election within the meaning of the proposed revenue procedure of Notice 2005-43, 2005-24
I.R.B. 1, Proposed Treasury Regulations § 1.83-3(1) or Proposed Treasury Regulations §
1.704-1(b)(4)(xii) at such time, if any, as such proposed revenue procedure and Treasury
Regulations are promulgated in final or temporary form and made effective as to the Company, and to
make any such other related amendments as may be required by pronouncements or final or temporary
Treasury Regulations issued by the Internal Revenue Service or Treasury Department after the date
of this Agreement and applicable to the Company;
(iv) to make any change necessary, appropriate or desirable to give effect to the express
intentions and provisions of Section 5.11, so long as such change does not have a material adverse
effect or result in a material adverse change to the rights or obligations of any sub-class or
group of Class B Members specified in Section 1.05 singularly or the Class B Members as a whole;
(v) to change the name of the Company; or
(vi) to make any other change that is for the benefit of, or not adverse to the interests of,
the Class B Members.
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(b) Notwithstanding the provisions of Section 11.01(a), no modification of or amendment to
this Agreement shall be made that will:
(i) materially and adversely affect the rights of a Class B Member in a manner that
discriminates against such Class B Member vis-à-vis the other Class B Members, or increase the
Capital Contribution obligations of a Class B Member, without the written consent of such Class B
Member;
(ii) modify or amend Sections 5.07, 5.08 or 6.02 in a manner adverse to any Employee Member
without the written consent of either (x) such Employee Member or (y) a Super Majority in Interest
of the Class B Members,
provided
, that (A) no such modification or amendment pursuant to
clause (y) of this Section 11.01(b)(ii) shall be effective unless each Employee Member adversely
affected thereby shall have received at least sixty (60) days prior notice thereof, (B) any such
modification or amendment shall only apply to such Employee Member if such Employee Member is an
employee of the Company Group at the end of such sixty (60) day period and (C) any Employee Member
who resigns during such sixty (60) day notice period shall be subject to such sections as in effect
prior to such amendment or modification,
provided
,
further
, however, that the
Managing Member may, without the consent of any of the other Members, modify or amend Sections
5.07, 5.08 or 6.02 in a manner that applies solely to Members admitted following the time of such
amendment; or
(iii) modify or amend the requirement in any provision of this Agreement (including this
Section 11.01) calling for the consent, vote or approval of a Majority in Interest of the Class B
Members, of a Super Majority in Interest of the Class B Member or of a Class B Member, without the
written consent of such Majority in Interest of the Class B Members, such Super Majority in
Interest of the Class B Members or such Class B Member, as the case may be.
11.02.
Severability
. If any term, provision, agreement, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, agreements, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be affected, impaired or
invalidated so long as the economic or legal substance of the transactions contemplated hereby is
not effected in any manner materially adverse to any party. Upon such a determination, the parties
hereof shall negotiate in good faith to modify this Agreement so as to effect the original intent
of the parties as closely as possible in an acceptable manner in order that the transactions
contemplated hereby be consummated as originally contemplated to the fullest extent possible.
11.03.
Notices
. All notices to the Company shall be addressed to its principal office.
All notices addressed to a Member or his Legal Representative or to the Members as a group shall be
addressed to such Member or Legal Representative or Members at the address of such Member or Legal
Representative for the Members set forth on the Register of Members. Any Member or the Legal
Representative of any Member may designate a new address by notice to such effect given to the
Company. All notices and other communications to be given to a Member or his Legal Representative
shall be sufficiently given for all purposes hereunder (a) when received, if
40
in writing and delivered by hand, (b) two (2) Business Days following deposit with a nationally
recognized courier or overnight delivery service, (c) three (3) days after being mailed by
certified or registered mail, return receipt requested, with appropriate postage prepaid, or (d)
when sent, if sent in the form of an e-mail message or facsimile if receipt thereof is confirmed by
telephone.
11.04.
No Waiver
. No waiver of any breach or condition of this Agreement shall be deemed
to be a waiver of any other subsequent breach or condition, whether of like or different nature.
11.05.
Copy on File
. Each Member hereby agrees that one executed counterpart of this
Agreement or set of executed counterparts shall be held at the principal office of the Company,
that a Certificate of Formation and all amendments thereto shall be filed in the Office of the
Secretary of State of Delaware and copies thereof shall be held at the principal office of the
Company and that there shall be distributed to each Member, upon the request of such Member, a
conformed copy of this Agreement, as amended from time to time.
11.06.
Governing Law
. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
11.07.
Binding Effect
. Except as otherwise provided in this Agreement, every covenant,
term, and provision of this Agreement shall be binding upon and inure to the benefit of the Members
and their respective heirs, personal representatives, successors, permitted transferees and
permitted assigns.
11.08.
Entire Agreement
. This Agreement constitutes the full and entire understanding and
agreement, whether written or oral, among the parties with regard to the subject matter of this
Agreement and supersedes all prior agreements and understandings with respect to such subject
matter.
11.09.
Other Activities
. Neither the Company nor any Member (or any Affiliate of any
Member) shall have any right by virtue of this Agreement either to participate in or to share in
any other now existing or future ventures, activities or opportunities of any of the other Members
or their Affiliates, or in the income or proceeds derived from such ventures, activities or
opportunities.
11.10.
Further Assurances
. Each Member agrees to execute and deliver any and all
additional instruments and documents and do any and all acts and things as may be necessary or
expedient to effectuate more fully this Agreement or any provisions hereof or to carry on the
business contemplated hereunder.
11.11.
Counterparts
. This Agreement may be executed in one or more counterparts, including
counterparts executed by additional Class B Members admitted to the Company, and
41
each of such counterparts shall, for all purposes, be deemed to be an original, but all of such
counterparts shall constitute one and the same instrument.
11.12.
Table of Contents and Captions Not Part of Agreement
. The table of contents and
captions contained in this Agreement are inserted only as a matter of convenience and in no way
define, limit or extend the scope or intent of this Agreement or any provisions hereof.
11.13.
Waiver of Right to Partition
. Each of the Members irrevocably waives during the
term of the Company any right that such Member may have to maintain any action for partition with
respect to the property and assets of the Company, and hereby agrees not to file a bill for a
membership accounting or otherwise proceed adversely in any manner whatsoever against the other
Members or the Company, except for bad faith, gross negligence, fraud, intentional misconduct or
violation of this Agreement.
[Signatures on next page]
42
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of this 30
th
day of October, 2007.
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MANAGING MEMBER:
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PZENA INVESTMENT MANAGEMENT, INC.
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BY:
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/s/ Richard S. Pzena
Name: Richard S. Pzena
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Title: Chief Executive Officer
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CLASS B MEMBERS:
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/s/ Richard S. Pzena
Richard S. Pzena
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/s/ Wayne A. Palladino
Wayne A. Palladino
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/s/ Spencer Chen
Spencer Chen
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CLASS B MEMBERS (continued):
JOHN P. GOETZ
WILLIAM L. LIPSEY
A. RAMA KRISHNA
MICHAEL D. PETERSON
KEITH KOMAR
LAWRENCE KOHN
LISA ROTH
EVAN FIRE
JOAN BERGER
CAROLINE CAI
ALLISON FISCH
BRIAN MANN
WILLIAM C. CONNOLLY
COURTNEY HEHRE
MANOJ TANDON
GREGORY MARTIN
TOPALLI MURTI
JAMES M. KREBS
THE RICHARD PZENA DESCENDANTS TRUST, THE AARON PZENA FAMILY TRUST
THE MICHELE PZENA FAMILY TRUST
THE DANIEL PZENA FAMILY TRUST
THE ERIC PZENA FAMILY TRUST
THE RACHEL THERESA GOETZ TRUST
THE CARRIE ESTHER GOETZ TRUST
THE KRISHNA FAMILY TRUST
THE WILLIAM LIPSEY DYNASTY TRUST
THE WILLIAM LIPSEY GRANTOR RETAINED ANNUITY TRUST
THE MICHAEL D. PETERSON GRANTOR RETAINED ANNUITY TRUST
THE SARAH M. PETERSON GRANTOR RETAINED ANNUITY TRUST
CC GRANTOR RETAINED ANNUITY TRUST I
ANTONIO DESPIRITO
ADS III 2007 GRANTOR RETAINED ANNUITY TRUST
BENJAMIN SILVER
BSS GRANTOR RETAINED ANNUITY TRUST
LJK TRUST I
LJK TRUST IV
MILESTONE ASSOCIATES, L.L.C.
PIPING BROOK, LLC
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By:
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/s/ Richard S. Pzena
Name: Richard S. Pzena
Title: Attorney-in-Fact for each of the above-listed Class B Members
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By:
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/s/ Wayne A. Palladino
Name: Wayne A. Palladino
Title: Attorney-in-Fact for each of the above-listed Class B Members
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Exhibit B
EXCHANGE RIGHTS OF CLASS B MEMBERS
ARTICLE I
GENERAL PROVISIONS
1.01.
General
. This Exhibit B is a part of the Amended and Restated Operating
Agreement of Pzena Investment Management, LLC, dated as of October 30, 2007 (the Agreement).
Capitalized terms used in this Exhibit B have the respective meanings given to them in Section 1.2
hereof or, if not defined therein, in Section 1.08 of the Agreement. Except as otherwise provided
herein, references to Sections in this Exhibit B shall be references to Sections of this Exhibit B.
In the event that the Company is dissolved pursuant to the Agreement, any exchange right provided
in this Exhibit B shall expire on the final distribution of the assets of the Company.
1.02.
Certain Definitions
. As used in this Exhibit, the following terms shall have
the following meanings:
Annual Period
shall mean (a) the First Period and (b) each annual period beginning
on a date after the First Period and ending on an annual anniversary of the IPO Date.
Certificate
shall mean the Amended and Restated Certificate of Incorporation of
Pzena Inc., filed with the Secretary of State of the State of Delaware on October 30, 2007, as
thereafter amended from time to time.
Class A Shares
shall mean shares of Class A Common Stock of Pzena Inc.
Class B Shares
shall mean shares of Class B Common Stock of Pzena Inc.
Closing
has the meaning set forth in Section 2.4(a).
Closing Date
has the meaning set forth in Section 2.4(a).
Employee Member Group
has the meaning set forth in Section 2.2(a)(i).
Exchange
shall mean the exchange by a Class B Member of one or more Class B Units
for an equal number of Class A Shares pursuant to the provisions of this Exhibit B.
Exchange Date
has the meaning set forth in Section 2.3(a).
Exchange Notice
has the meaning set forth in Section 2.1(b).
Exchange Request
has the meaning set forth in Section 2.3.
First Effective Date
shall mean the first effective date of a registration statement
on Form S-3 filed by Pzena Inc.
First Period
shall mean the period commencing on the First Effective Date and ending
on the second anniversary of the IPO Date.
IPO Date
shall mean the date of the closing of the initial public offering of the
Class A Shares.
Registration Rights Agreement
shall mean the Resale and Registration Rights
Agreement, dated as of October 30, 2007, by and among Pzena Inc. and the Holders named on the
signature pages thereto.
ARTICLE II
EXCHANGE
2.01.
Exchange Dates; Exchange Notices
.
(a) The Managing Member shall establish one or more dates in each Annual Period as a date on
which the Class B Members shall be permitted to Exchange their Class B Units (such date, an
Exchange Date), provided that the Managing Member may, by notice to each Class B Member, postpone
any Exchange Date one or more times; provided, further, that if the Managing Member fails to
establish at least one Exchange Date during any Annual Period, the last Business Day of such Annual
Period shall be an Exchange Date. For the avoidance of doubt, the Managing Member may establish as
many Exchange Dates as it shall determine in its sole discretion.
(b) The Managing Member shall provide, in respect of at least one (1) Exchange Date in each
Annual Period, a written notice (an Exchange Notice) to all Class B Members at least thirty (30)
calendar days prior to such Exchange Date. In respect of any other Exchange Date within such
Annual Period, the Managing Member may provide an Exchange Notice to one or more Class B Members
such number of days prior to such Exchange Date as the Managing Member may determine in its sole
discretion.
(c) The Managing Member may permit, in writing or orally, one or more Class B Members to
submit Exchange Requests, such permission to be granted, withheld or granted on such terms and
conditions as determined by the Managing Member in its sole discretion.
2.02.
Permissible Exchanges by Class B Members
.
(a)
Employee Members
.
(1)
General Rule
. Subject to Sections 2.2(a)(ii) and (iii), 2.2(c) and
2.5, during any Annual Period commencing on or following the First Effective Date
and until the date of termination of employment of an Employee Member, each Employee
Member and all Permitted Transferees of such Employee Member (collectively, the
Employee Member Group
) shall be permitted collectively to Exchange a
number of vested Class B Units in an amount of up to fifteen percent (15%) of the
aggregate number of vested and unvested Class B Units held by such Employee Member
Group as of the first day of such Annual Period in which the applicable Exchange
occurs,
provided
that, in the event the members of an Employee Member Group
submit requests to Exchange a number of vested Class B Units that is greater than
the number permitted under this Section 2.2(a)(i) and such members are unable to
resolve any dispute among themselves as to the number of Class B Units that each
member may Exchange within five (5) Business Days of notice by the Managing Member
of such dispute, then each member of such Employee Member Group shall be permitted
to Exchange a number of vested Class B Units in an amount of up to fifteen percent
(15%) of the vested and unvested Class B Units held by such member of such Employee
Member Group as of the first Business Day of such Annual Period.
(2)
Initial Managing Principals
. Notwithstanding Section 2.2(a)(i) but
subject to Sections 2.2(c) and 2.5, during the period beginning on the day following
the date of termination of employment of an Initial Managing Principal and ending on
and including the third anniversary of such date, no Initial Managing Principal, nor
any Permitted Transferee of such Initial Managing Principal, may Exchange vested
Class B Units held by such Initial Managing Principal or such Permitted Transferee,
as the case may be. Thereafter, an Initial Managing Principal and his Permitted
Transferees shall be permitted to Exchange any or all of the vested Class B Units
held by such Initial Managing Principal and his Permitted Transferees.
(3)
Ordinary Employee Members
. Notwithstanding Section 2.2(a)(i) but
subject to Sections 2.2(c) and 2.5, (A) during the period beginning on the day
following the date of termination of employment of an Ordinary Employee Member and
ending on and including the first anniversary of such date, no Ordinary Employee
Member, nor any Permitted Transferee of such Ordinary Employee Member, may Exchange
vested Class B Units held by such Ordinary Employee Member or such Permitted
Transferee, as the case may be and (B) beginning on the day following the first
anniversary of the date of termination of employment of an Ordinary Employee Member
and ending six
months thereafter, if an Exchange Date occurs during such six month period, an
Ordinary Employee Member, and each Permitted Transferee of such Ordinary Employee
Member, shall be permitted to Exchange any number of vested Class B Units,
provided
that, except as may be agreed in writing by the Managing Member,
such Ordinary Employee Member shall continue to hold throughout such period at least
twenty-five percent (25%) of the aggregate number of vested and unvested Class B
Units held by such Ordinary Employee Member and all Permitted Transferees of such
Ordinary Employee Member on the date of termination of employment of such Ordinary
Employee Member. Thereafter, an Ordinary Employee Member and all Permitted
Transferees of such Ordinary Employee Member shall be permitted to Exchange any or
all of the vested Class B Units held by such Ordinary Employee Member and such
Permitted Transferees.
(b)
Non-Employee Members
. Subject to Sections 2.2(c) and 2.5, during any Annual
Period that begins on the First Effective Date and ends on the third anniversary of the IPO Date,
each Non-Employee Member shall be permitted to Exchange a number of vested Class B Units in an
amount up to fifteen percent (15%) of the aggregate number of vested and unvested Class B Units
held by such Non-Employee Member as of the first day of such Annual Period in which the applicable
Exchange occurs. Following the third anniversary of the date hereof, each Non-Employee Member
shall be permitted to Exchange any or all of the vested Class B Units held by such Non-Employee
Member on an applicable Exchange Date.
(c)
Exceptions
. Notwithstanding Section 2.2(a) and (b), (i) following the First
Effective Date, the Managing Member may permit any Class B Member to exchange vested Class B units
in amounts exceeding those described in Section 2.2(a) and (b), which permission may be withheld,
delayed, or granted on such terms and conditions as the Managing Member may determine in its sole
discretion and (ii) in the event that the amount of income taxes payable by a member of an Employee
Member Group due to the grant or vesting of Class B Units, the exercise of options to acquire Class
B Units and/or the Exchange of Class B Units for Class A Shares (whether or not such member is or
was an employee of the Company Group at the time that such tax payment obligation arises) exceeds
the net proceeds such member would receive upon the sale of the Class A Shares issued to such
member in exchange for vested Class B Units pursuant to this Section 2.2(a), as reasonably
determined by the Managing Member based upon such reasonable simplifying assumptions as the
Managing Member may make, such member shall instead be entitled to Exchange for Class A Shares the
number of vested Class B Units such that the net proceeds from the sale of such Class A Shares
would enable such member to satisfy such tax obligations, as reasonably determined by the Managing
Member.
(d)
Restrictions on Class A Shares
. Each Class B Member hereby acknowledges and
agrees that (i) neither the Company nor the Managing Member shall have any obligation to deliver
Class A Shares that have been registered under the Securities Act, and (ii) the Company reserves
the right on any Exchange Date to provide registered Class A Shares, unregistered Class A Shares or
any combination of thereof, as it may determine in its sole
discretion. The Managing Member and the Company reserve the right to cause certificates
evidencing such Class A Shares to be imprinted with legends as to restrictions on transfer that it
may deem necessary or appropriate, including legends as to applicable U.S. federal or state
securities laws or other legal or contractual restrictions and may require any Class B Member to
which Class A Shares are to be distributed to agree in writing (i) that such Class A Shares will
not be transferred except in compliance with such restrictions and (b) to such other matters as the
Managing Member may deem reasonably necessary or appropriate in light of applicable law and
existing agreements.
(e)
Unvested Class B Units
. For the avoidance of doubt, a Class B Member may not
Exchange any unvested Class B Units at any time.
2.03.
Exchange Request
. Upon receiving the Exchange Notice or as permitted by the
Managing Member pursuant to Section 2.1(c), a Class B Member may submit a request to effect an
Exchange by delivering to the Company, not less than fourteen (14) calendar days prior to an
Exchange Date (or such lesser number of days as the Managing Member may permit in its sole
discretion), a written notice (the
Exchange Request
). An Exchange Request shall set
forth the number of Class B Units such Class B Member elects to exchange for Class A Shares at the
Closing on such Exchange Date. The Class B Member shall represent to each of the Company and the
Managing Member that such Class B Member owns the Class B Units to be delivered at such Closing
pursuant to Section 2.6, free and clear of all Liens, except as set forth therein, and, if there
are any Liens identified in the Exchange Request, such Class B Member shall covenant that such
Class B Member will deliver at the applicable Closing evidence reasonably satisfactory to the
Company and the Managing Member, that all such Liens have been released. An Exchange Request is
not revocable or modifiable, except with the written consent of the Managing Member and the Class B
Member that submitted the request.
2.04.
Closing Date.
(a) If an Exchange Request has been timely delivered pursuant to Section 2.3, then, on the
next Exchange Date (as may be extended pursuant to this Section 2.4, the
Closing Date
),
the parties shall effect the closing (the
Closing
) of the transactions contemplated by
this Article II at the offices of Pzena Inc. at 120 West 45
th
Street, 20
th
Floor, New York, New York 10036, or at such other time, at such other place, and in such other
manner, as the applicable parties to such Exchange shall agree in writing;
provided
,
however
, that, except as may be determined otherwise by the Company in its sole discretion,
if an applicable Exchange Date falls on a day during which directors, officers or other employees
of Pzena Inc. or any of its affiliates are prohibited by the trading policies of Pzena Inc. from
disposing of equity securities of Pzena Inc., then with respect to all requested Exchanges, the
Closing Date shall instead be deemed to be the first Business Day after such Exchange Date that
such officers and directors are allowed to dispose of equity securities of Pzena Inc. pursuant to
the trading policies of Pzena Inc.
(b) No Exchange shall be permitted (and, if attempted, shall be void
ab initio
) if, in the
good faith determination of the Managing Member, such an Exchange would pose a material risk that
the Company would be a publicly traded partnership as defined in Section 7704 of the Code.
2.05.
Closing Conditions
.
(a) The obligations of any of the parties to consummate an Exchange pursuant to this Article
II shall be subject to the conditions that there shall be no injunction, restraining order or
decree of any nature of any Governmental or Regulatory Authority that is then in effect that
restrains or prohibits the Exchange of Class B Units or the transfer of Class B Shares for
redemption.
(b) The obligations of the Company and the Managing Member to consummate an Exchange pursuant
to this Article II with respect to a Class B Member Exchanging Class B Units at such Closing shall
be subject to the following conditions:
(1) Such Class B Member shall have taken all actions reasonably requested by
Pzena Inc. to permit the automatic redemption, immediately following the Closing, of
a number of Class B Shares equal to the number of Class B Units being Exchanged by
such Class B Member at such Closing (including delivery to the Company of
certificates evidencing such number of Class B Shares and confirmation that any
Liens on such Class B Shares shall have been released); and
(2) If such Class B Member is not a party to the Registration Rights Agreement,
such Class B Member shall have executed and delivered a counterpart signature page
of the Registration Rights Agreement.
(c) The obligations of each Class B Member exchanging Class B Units at such Closing shall be
subject to the following conditions:
(1) Pzena Inc. shall have taken all actions reasonably required to permit the
automatic redemption, immediately following the Closing, of a number of Class B
Shares held by such Class B Member equal to the number of Class B Units being
Exchanged by such Class B Member at such Closing; and
(2) If such Class B Member is not a party to the Registration Rights Agreement,
Pzena Inc. shall have executed and delivered a copy of the Registration Rights
Agreement.
2.06.
Closing Deliveries
. At each Closing, the Company, the Managing Member and each
Class B Member that has submitted an Exchange Request in respect of such Closing shall deliver the
following:
(a) each such Class B Member shall deliver an instrument of transfer, substantially in the
form of Annex A hereto or otherwise in form reasonably satisfactory to the Managing Member,
sufficient (i) to transfer to the Company the number of vested Class B Units set forth in the
Exchange Request of such Class B Member and (ii) in the case of an Employee Member, to affirm that
such Class B Member agrees to comply with the covenants contained in Section 5.07 and 5.08 of the
Agreement as may be applicable to such Employee Member at that time;
(b) if applicable, each such Class B Member shall deliver evidence reasonably satisfactory to
the Company and the Managing Member, that all Liens on such Class B Members Class B Units
delivered pursuant to this Section 2.6 have been released;
(c) the Managing Member shall deliver to the Company a certificate issued in the name of each
such Class B Member representing an amount of Class A Shares equal to the number of Class B Units
such Class B Member elected to Exchange; and
(d) the Company shall deliver to each such Class B Member a certificate representing an amount
of Class A Shares equal to the number of such Class B Units such Class B Member elected to
Exchange.
2.07.
Expenses
. Each party hereto shall bear such partys own expenses in connection
with the consummation of any of the transactions contemplated hereby, whether or not any such
transaction is ultimately consummated.
2.08.
Termination of Class B Membership; Cancellation of Class B Units; Issuance of Class
A Units
. Upon consummation of each Closing contemplated by this Article II, each Class B Unit
transferred to the Company at such Closing shall be cancelled, the Company shall issue one Class A
Unit to the Managing Member in respect of each such Class B Unit that was transferred and
surrendered, and the Managing Member shall modify the Register of Members to reflect such
cancellation and issuance. In the event that, as a result of an Exchange a Class B Member shall
cease to hold any vested or unvested Class B Units, such Class B Member shall cease to be a
member of the Company for any purpose under the Agreement or the Act.
2.09.
Tax Treatment
. As required by the Code and the Regulations: (i) the parties
shall report an Exchange consummated hereunder as a taxable sale of Class B Units by a Class B
Member to the Company (in conjunction with an associated cancellation of Class B Shares) and (ii)
no party shall take a contrary position on any income tax return, amendment thereof or
communication with a taxing authority.
2.10.
Amendments
. This Exhibit B may not be amended except as set forth in Section
11.01 of the Agreement.
ANNEX A
INSTRUMENT OF TRANSFER
This INSTRUMENT OF TRANSFER (this
Instrument
)
is made as of the Applicable Date
by the undersigned (the
Transferor
). Capitalized terms used but not otherwise defined
herein shall have the meanings set forth on the signature page to this Instrument and, if not
defined therein, in the Amended and Restated Operating Agreement (as amended or modified, the
Operating Agreement
) of the Pzena Investment Management, LLC, a Delaware limited
liability company (the
Company
).
W
I
T
N
E
S
S
E
T
H
WHEREAS, Transferor is the owner of the Applicable Number of vested Class B Units (the
Transferred Units
) and a party to the Operating Agreement;
WHEREAS, Transferor has submitted to the Company an Exchange Request, dated as of the Exchange
Request Date, electing to exchange (the
Exchange
) the Transferred Units for an equal
number of Class A Shares of Pzena Inc. (the
Exchange Shares
); and
WHEREAS, in connection with the Exchange, Transferor desires to transfer to the Company all of
Transferors right, title and interest in, to and under the Transferred Units.
NOW, THEREFORE, in consideration of the promises and mutual covenants set forth herein and in the
Operating Agreement and for other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledges, Transferor hereby agrees as follows:
1.
Transfer
. Transferor hereby transfers, assigns and delivers to the Company, free and
clear of all Liens, all of Transferors right, title and interest in, to and under the Transferred
Units.
2.
Representations and Warranties
. Transferor hereby represents and warrants to the
Company as follows:
(a)
Transferred Units
. Immediately prior to giving effect to the transfer
contemplated by this Instrument, Transferor owns, beneficially and of record, the Transferred Units
free and clear of any Liens.
(b)
Authority of Transferor
. If Transferor is not a natural person, Transferor is
duly formed or organized, validly existing and in good standing under the laws of the jurisdiction
in which Transferor was formed or organized. Transferor has full right, authority, power and legal
capacity to enter into this Instrument and each agreement, document and instrument to be executed
and delivered by Transferor pursuant to, or as contemplated by, this Instrument and to carry out
the transactions contemplated hereby and thereby. This Instrument and each agreement, document and
instrument executed and delivered by Transferor pursuant to, or as contemplated by, this Instrument
constitutes, or when executed and delivered will constitute, the legal, valid and binding
obligations of Transferor enforceable in accordance with their respective terms. The execution,
delivery and performance by Transferor of this Instrument and each such other agreement, document
and instrument:
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(i)
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does not and will not violate any laws applicable to
Transferor, or require Transferor to obtain any approval, consent or waiver of,
or make any filing with, any person or entity (governmental or otherwise) that
has not been obtained or made;
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(ii)
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does not and will not result in a breach of, constitute a
default under, accelerate any obligation under, or give rise to a right of
termination of, any agreement, contract, instrument, lien, security interest,
lease, permit, authorization, order, writ, judgment, injunction, decree,
determination or arbitration award to which Transferor is a party or by which
the property of Transferor is bound or affected, or result in the creation or
imposition of any Lien on any of the assets of Transferor; and
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(iii)
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in the event that Transferor is not a natural person, does not
and will not violate any provision of any organization document of Transferor.
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(c)
Accredited Investor
. Transferor has either (1) completed and delivered to the
Company a questionnaire in the form of schedule 1 attached hereto in respect of Transferors
qualification as an accredited investor, as such term is defined in Rule 501 of Regulation D
promulgated under the Securities Act, and the representations and warranties made by Transferor to
the Company in such questionnaire are true, complete and accurate or (2) provided to the Company
such representations, warranties and undertakings as the Company shall reasonably required to
ensure that the Exchange does not violate the Securities Act and/or other applicable securities
laws.
(d)
Investment Purpose
. The Exchange Shares to be acquired by Transferor upon the
consummation of the Exchange are being acquired by Transferor for investment for Transferors own
account, not as a nominee or agent, and not with a view towards the public sale or distribution
thereof, except pursuant to a sale or sales that are registered under the Securities Act or exempt
from such registration. Transferor (other than a natural person) either (1) was not formed for the
purpose of investing in Pzena Inc. or (2) has provided to the Company and Pzena Inc. such
representations, warranties and undertakings as the Company and/or Pzena Inc. shall reasonably
require to ensure that the Exchange does not violate the Securities Act and/or other applicable
securities laws. Transferor acknowledges that holders of the Exchange Shares must bear the
economic risk of an investment in the Exchange Shares so acquired for an indefinite period of time
because, among other reasons, such Exchange Shares have not been registered under the Securities
Act and, therefore, such Exchange Shares cannot be sold unless subsequently registered under the
Securities Act or an exemption from such registration is available. Transferor also acknowledges
that transfers of the Exchange Shares so acquired are further restricted by applicable United
States federal and state and foreign securities laws.
(e)
Access to Information
. Transferor understands the risks of, and other
considerations relating to, the acquisition and ownership of the Exchange Shares. Transferor has
been provided an opportunity to ask questions of, and has received answers satisfactory to
Transferor from, Pzena Inc. and its representatives regarding the Exchange Shares, and has obtained
any and all additional information from Pzena Inc. and its representatives that Transferor deems
necessary regarding the Exchange Shares.
(f)
Evaluation of and Ability to Bear Risks
. Transferor has such knowledge and
experience in financial affairs that Transferor is capable of evaluating the merits and risks of,
and other considerations relating to, the ownership of the Exchange Shares, and has not relied in
connection with the acquisition of the Exchange Shares upon any representations, warranties or
agreements other than those set forth in this Instrument. Transferor s financial situation is
such that Transferor can afford to bear the economic risk of holding the Exchange Shares for an
indefinite period of time, and Transferor can afford to suffer the complete loss of its investment
in the Exchange Shares.
(g)
Registration Rights Agreement
. Transferor has executed and delivered to Pzena
Inc. a countersigned signature page to the Registration Rights Agreement and understands that the
Exchange Shares will be subject to the provisions of the Registration Rights Agreement, which
provides certain restrictions on the transferability of such Exchange Shares.
3.
Employee Member Acknowledgement
. In the event Transferor is an Employee Member,
Transferor hereby acknowledges that he or she is receiving a significant economic benefit by
Exchanging the otherwise illiquid Transferred Units into the Exchange Shares and therefore
reaffirms his or her obligation to comply with the restive covenants contained in Sections 5.07 and
5.08 of the Operating Agreement as may be applicable to such Employee Member on and following the
date hereof.
4.
Further Assurance
. Transferor hereby agrees to execute and deliver such further
agreements and instruments and take such other actions as may be necessary to make effective the
transfer contemplated by this Instrument.
5.
Successors and Assigns
. This Instrument shall be binding upon, inure to the benefit of
and be enforceable by the respective successors and permitted assigns of the parties hereto.
6.
Governing Law
. This Instrument shall be governed by and construed and enforced in
accordance with the law of the State of Delaware, without regard to principles of conflict of laws.
7.
Descriptive Headings
. The descriptive headings in this Instrument are for convenience
of reference only and shall not be deemed to alter or affect the meaning or interpretation of any
provision of this Instrument.
8.
Counterparts
. This Instrument may be executed in one or more counterparts, each of
which shall be deemed an original and all of which taken together shall constitute one and the same
instrument.
9.
Entire Agreement
. This Instrument and any other schedules, certificates, lists and
documents referred to herein, and any documents executed by any of the parties simultaneously
herewith or pursuant thereto, constitutes the entire agreement of the parties hereto, except as
expressly provided herein, and supersedes all prior agreements and understandings, discussions,
negotiations and communications, written and oral, among the parties with respect to the subject
matter hereof.
[Remainder of page intentionally left blank]
IN WITNESS WHEREOF, intending to be legally bound hereby, Transferor has executed this
Instrument as of the Applicable Date.
Acknowledged and accepted
as of the Applicable Date by:
PZENA INVESTMENT MANAGEMENT, LLC
Certain Defined Terms
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Applicable Date:
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Transferor:
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Applicable Number:
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Exchange Request Date:
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[Signature Page to Instrument of Transfer]
Schedule 1
Transferor represents and warrants to the Company that Transferor is an accredited investor
within the meaning of Regulation D promulgated under the Securities Act and has answered Yes to
the applicable statements below pursuant to which Transferor so qualify.
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Yes
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If Transferor is a natural person, Transferors own net worth, taken
together with the net worth of Transferors spouse, exceeds
$1,000,000. Net worth for this purpose means total assets
(including residence, personal property and other assets) in excess
of total liabilities.
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Yes
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If Transferor is a natural person, Transferor had an individual
gross income in excess of $200,000 (or joint income with
Transferors spouse in excess of $300,000) in each of the two
previous years and reasonably expects a gross individual income in
excess of $200,000 (or joint income with Transferors spouse in
excess of $300,000) this year.
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Yes
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If Transferor is an entity, Transferor has total assets in excess of
$5,000,000, AND was not formed for the specific purpose of acquiring
the securities offered, AND is any of the following:
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a corporation,
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a partnership,
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a limited liability company,
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a Massachusetts or similar business trust, or
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an organization described in Section 501(c)(3) of the
Internal Revenue Code
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Yes
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If Transferor is an entity, all of Transferors equity owners are
accredited investors within the meaning of Regulation D (taking
into account the need to look through certain entities under
applicable law).
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[Signature Page to Instrument of Transfer]
Exhibit C
Registration Rights Agreement
Exhibit 10.2
FINAL
TAX RECEIVABLE AGREEMENT
This TAX RECEIVABLE AGREEMENT (as amended from time to time, this
Agreement
), dated
as of October 30, 2007, is hereby entered into by and among Pzena Investment Management, Inc., a
Delaware corporation (the
Corporation
), Pzena Investment Management, LLC, a Delaware
limited liability company (
PIM
) and each of the undersigned parties hereto identified as
Continuing Members or Exiting Members.
RECITALS
WHEREAS, the Continuing Members hold membership interests (
Units
) in PIM, which is
treated as a partnership for United States federal income Tax (as defined below) purposes;
WHEREAS, immediately prior to the consummation of the IPO (as defined below) and the
Corporations acquisition of certain Units from the Exiting Members in exchange for a portion of
the net proceeds of the IPO, the Exiting Members held Units in PIM;
WHEREAS, the Corporation is the managing member of, and holds and will hold Units in, PIM;
WHEREAS, as a result of the Continuing Members agreement to hold Units rather than
transferring all of their Units in exchange for shares of Class A common stock of the Corporation,
par value $0.01 per share (
Class A Shares
), the Corporation is expected to incur
significantly lower Tax liabilities on an ongoing basis with respect to the operations of PIM;
WHEREAS, (i) certain of the Continuing Members have sold a portion of the Units they hold to
the Corporation and (ii) each of the Exiting Members have sold all the Units they hold to the
Company (together, the
Original Sale
) in exchange for the net proceeds of the IPO, each
on the date hereof;
WHEREAS, the Units are exchangeable for Class A Shares;
WHEREAS, PIM and each of its direct and indirect subsidiaries treated as a partnership for
United States federal income Tax purposes has or will have in effect an election under Section 754
of the Internal Revenue Code of 1986, as amended (the
Code
), for the
Taxable Year (as defined below) in which the Original Sale occurs and for each subsequent Taxable Year in which an
exchange of Units for Class A Shares occurs, which election will result in an adjustment to the Tax
basis of the assets owned by PIM and such subsidiaries, solely with respect to the Corporation, at
the time of the Original Sale, an exchange of Units for Class A Shares or any other deemed or
actual acquisition of Units by the Corporation for cash or otherwise (collectively, and together
with the Original Sale, an
Exchange
) (such time, including the date of the Original Sale,
the
Exchange Date
) by reason of such Exchange and the payments under this Agreement;
WHEREAS, the income, gain, loss, expense and other Tax items of (i) PIM, solely with respect
to the Corporation, may be affected by the Basis Adjustment (defined below) and (ii) the
Corporation may be affected by the Imputed Interest (as defined below); and
WHEREAS, the parties to this Agreement desire to make certain arrangements with respect to the
effect of the Basis Adjustment and Imputed Interest on the actual liability for Taxes of the
Corporation.
NOW, THEREFORE, in consideration of the foregoing and the respective covenants and agreements
set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Definitions
. As used in this Agreement, the terms set forth in this Article I shall
have the following meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined).
Advisory Firm
means Ernst & Young LLP, or any other accounting firm that is
nationally recognized as being expert in Tax matters and that is appointed by the Board.
Advisory Firm Letter
shall mean a letter from the Advisory Firm stating that the
relevant schedule, notice or other information to be provided by the Corporation to the Applicable
Member and all supporting schedules and work papers were prepared by the Corporation in good faith.
Affiliate
means, with respect to any Person, any other Person that directly or
indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common
Control with, such first Person.
2
Agreed Rate
means LIBOR.
Agreement
is defined in the preamble of this Agreement.
Amended Schedule
is defined in Section 2.04(b) of this Agreement.
Applicable Member
means in respect of that portion of any Tax Benefit Payment that
arises from an Exchange or a deemed Exchange pursuant to clause (5) of the definition of Valuation
Assumptions, the Exchanging Member or Member deemed to Exchange, as applicable.
Basis Adjustment
means the adjustment to the Tax basis of an Exchange Asset as a
result of an Exchange and the payments made pursuant to this Agreement, as calculated under Section
2.01 of this Agreement, under Section 732(b) of the Code (in a situation where, as a result of one
or more Exchanges, PIM becomes an entity that is disregarded as separate from its owner for Tax
purposes) or Sections 743(b) and 754 of the Code (including in situations where, following an
Exchange, PIM remains in existence as an entity for Tax purposes) or otherwise, as applicable, and,
in each case, comparable sections of state, local and foreign Tax laws. Notwithstanding any other
provision of this Agreement, the amount of any Basis Adjustment resulting from an Exchange of one
or more Units shall be determined without regard to any Pre-Exchange Transfer of such Units and as
if any such Pre-Exchange Transfer had not occurred.
A
Beneficial Owner
of a security is a Person who directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or shares: (i) voting power,
which includes the power to vote, or to direct the voting of, such security and/or (ii) investment
power, which includes the power to dispose of, or to direct the disposition of, such security. The
terms
Beneficially Own
and
Beneficial Ownership
shall have correlative
meanings.
Board
means the board of directors of the Corporation.
Business Day
means Monday through Friday of each week, except that a legal holiday
recognized as such by the government of the United States of America or the State of New York shall
not be regarded as a Business Day.
Change of Control
means the occurrence of any of the following events:
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(i)
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any Person or any group of Persons acting
together which would constitute a group for purposes of Section 13(d)
of the Securities and Exchange Act of 1934, or any successor
provisions thereto, excluding a group of Persons, which, if it includes
any Key
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Member or any of such Key Members Affiliates, includes all Key
Members then employed by PIM or any of PIMs Affiliates, is or becomes
the Beneficial Owner, directly or indirectly, of securities of the
Corporation representing more than fifty percent (50%) of the combined
voting power of the Corporations then outstanding voting securities;
or
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(ii)
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the following individuals cease for any reason to constitute a
majority of the number of directors of the Corporation then serving:
individuals who, on the date of the consummation of the IPO, constitute the
Board and any new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election contest,
including but not limited to a consent solicitation, relating to an election of
directors of the Corporation) whose appointment or election by the Board or
nomination for election by the Corporations stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors on the date of the consummation of the IPO
or whose appointment, election or nomination for election was previously so
approved or recommended by the directors referred to in this clause (ii); or
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(iii)
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there is consummated a merger or consolidation of the
Corporation with any other corporation or other entity, and, immediately after
the consummation of such merger or consolidation, either (x) the Board
immediately prior to the merger or consolidation does not constitute at least a
majority of the board of directors of the company surviving the merger or, if
the surviving company is a subsidiary, the ultimate parent thereof, or (y) all
of the Persons who were the respective Beneficial Owners of the voting
securities of the Corporation immediately prior to such merger or consolidation
do not Beneficially Own, directly or indirectly, more than 50% of the combined
voting power of the then outstanding voting securities of the Person resulting
from such merger or consolidation; or
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(iv)
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the stockholders of the Corporation approve a plan of complete
liquidation or dissolution of the Corporation or there is consummated an
agreement or series of related agreements for the sale or other disposition,
directly, or indirectly, by the Corporation of all or substantially all of the
Corporations assets, other than such sale or other disposition by the
Corporation of all or substantially all of the Corporations assets to an
entity, at least fifty percent (50%) of the combined voting power of the voting
securities of which are owned by stockholders of the Corporation in
substantially the same proportions as their voting power of the Corporation
immediately prior to such sale.
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Notwithstanding the foregoing, except with respect to clause (ii) and clause (iii)(x) above, a
Change in Control shall not be deemed to have occurred by virtue of the consummation of
4
any transaction or series of integrated transactions immediately following which the record holders of
the shares of capital stock of the Corporation immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate voting power in an entity which
owns all or substantially all of the assets of the Corporation immediately following such
transaction or series of transactions.
Class A Shares
is defined in the Recitals of this Agreement.
Code
is defined in the Recitals of this Agreement.
Continuing Members
is defined in the Preamble of this Agreement.
Control
means the possession, direct or indirect, 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.
Corporation
is defined in the Preamble of this Agreement.
Corporation Return
means the United States federal, state, local and/or foreign Tax
Return, as applicable, of the Corporation filed with respect to Taxes for any Taxable Year.
Cumulative Net Realized Tax Benefit
for a Taxable Year means the cumulative amount
of Realized Tax Benefits for all Taxable Years of the Corporation, up to and including such Taxable
Year, net of the cumulative amount of Realized Tax Detriments for the same period. The Realized
Tax Benefit and Realized Tax Detriment for each Taxable Year shall be determined based on the most
recent Tax Benefit Schedule or Amended Schedule, if any, in existence at the time of such
determination.
Default Rate
means LIBOR plus 300 basis points.
Determination
shall have the meaning ascribed to such term in Section 1313(a) of the
Code or similar provision of state, local and foreign Tax law, as applicable, or any other event
(including the execution of a Form 870-AD) that finally and conclusively establishes the amount of
any liability for Tax.
Dispute
is defined in Section 7.08(a).
5
Early Termination Date
means the date of an Early Termination Notice for purposes of
determining the Early Termination Payment.
Early Termination Notice
is defined in Section 4.02 of this Agreement.
Early Termination Schedule
is defined in Section 4.02 of this Agreement.
Early Termination Payment
is defined in Section 4.03(b) of this Agreement.
Early Termination Rate
means the long-term Treasury rate in effect on the applicable
date.
Exchange
is defined in the Recitals of this Agreement; Exchanged and Exchanging
shall have correlative meanings.
Exchange Assets
means each asset that is held by PIM, or by any of its direct or
indirect subsidiaries treated as a partnership or disregarded entity for purposes of the applicable
Tax, at the time of an Exchange.
Exchange Basis Schedule
is defined in Section 2.02 of this Agreement.
Exchange Date
is defined in the Recitals of this Agreement.
Exchange Payment
is defined in Section 5.01.
Exiting Members
is defined in the Preamble of this Agreement.
Expert
is defined in Section 7.09 of this Agreement.
Hypothetical Tax Liability
means, with respect to any Taxable Year, the liability
for Taxes of the Corporation (or PIM, but only with respect to income realized by PIM the Tax
liability for which is allocable to the Corporation for such Taxable Year using the same methods,
elections, conventions and similar practices used on the relevant Corporation Return) but using the
Non-Stepped Up Tax Basis instead of the Tax basis of the Exchange Assets and excluding any
deduction attributable to Imputed Interest.
6
Imputed Interest
shall mean any interest imputed under Section 1272, 1274 or 483 or
other provision of the Code and any similar provision of state, local and foreign Tax law with
respect to the Corporations payment obligations under this Agreement.
IPO
means the initial public offering of the Class A Shares that is being
consummated on the date hereof.
IRS
means the United States Internal Revenue Service.
Key Member
means any of Richard S. Pzena, A. Rama Krishna, John P. Goetz, William L.
Lipsey, Joel M. Greenblatt or Milestone Associates, L.L.C.
LIBOR
means for each month (or portion thereof) during any period, an interest rate
per annum equal to the rate per annum reported, on the date two days prior to the first day of such
month, as published by Reuters (or other commercially available source providing quotations of
LIBOR) for London interbank offered rates for United States dollar deposits for such month (or
portion thereof).
LLC Agreement
means the Amended and Restated Operating Agreement of PIM, dated
October 30, 2007, as may be amended from time to time.
Market Value
means, with respect to the Class A Shares, on any given date: (i) if
the Class A Shares are listed for trading on the New York Stock Exchange, the closing sale price
per share of the Class A Shares on the New York Stock Exchange on that date (or, if no closing sale
price is reported, the last reported sale price), (ii) if the Class A Shares are not listed for
trading on the New York Stock Exchange, the closing sale price (or, if no closing sale price is
reported, the last reported sale price) as reported on that date in composite transactions for the
principal national securities exchange registered pursuant to Section 6(g) of the Securities and
Exchange Act of 1934, as amended, on which the Class A Shares are listed, (iii) if the Class A
Shares are not so listed on a national securities exchange, the last quoted bid price for the Class
A Shares on that date in the over-the-counter market as reported by Pink Sheets LLC or a similar
organization, or (iv) if the Class A Shares are not so quoted by Pink Sheets LLC or a similar
organization such value as the Board, in its sole discretion, shall determine in good faith.
Material Objection Notice
has the meaning set forth in Section 4.02.
Members
means the Continuing Members and the Exiting Members, and each other Person
who from time to time executes a Joinder Agreement in the form attached hereto as Exhibit A.
7
Non-Stepped Up Tax Basis
means, with respect to any asset at any time, the Tax basis
that such asset would have had at such time if no Basis Adjustment had been made.
Objection Notice
has the meaning set forth in Section 2.04(a).
Original Sale
is defined in the Recitals of this Agreement.
Payment Date
means any date on which a payment is required to be made pursuant to
this Agreement.
Person
means any individual, corporation, firm, partnership, joint venture, limited
liability company, estate, trust, business association, organization, governmental entity or other
entity.
Pre-Exchange Transfer
means any transfer (including upon the death of a Member) of
one or more Units (i) that occurs prior to an Exchange of such Units, and (ii) to which Section
743(b) of the Code applies.
Realized Tax Benefit
means, for a Taxable Year and for all Taxes collectively, the
net excess, if any, of the Hypothetical Tax Liability over the actual liability for Taxes of the
Corporation (or PIM, but only with respect to income realized by PIM the Tax liability for which is
allocable to the Corporation for such Taxable Year using the same methods, elections, conventions
and similar practices used on the relevant Corporation Return), determined, for the avoidance of
doubt, using the with or without methodology. If all or a portion of the actual liability for
Taxes of the Corporation (or PIM, but only with respect to income realized by PIM the Tax liability
for which is allocable to the Corporation for such Taxable Year using the same methods, elections,
conventions and similar practices used on the relevant Corporation Return) for the Taxable Year
arises as a result of an audit by a Taxing Authority of any Taxable Year, such liability shall not
be included in determining the Realized Tax Benefit unless and until there has been a
Determination.
Realized Tax Detriment
means, for a Taxable Year and for all Taxes collectively, the
net excess, if any, of the actual liability for Taxes of the Corporation (or PIM, but only with
respect to income realized by PIM the Tax liability for which is allocable to the Corporation for
such Taxable Year using the same methods, elections, conventions and similar practices used on the
relevant Corporation Return) over the Hypothetical Tax Liability for such Taxable Year determined,
for the avoidance of doubt, using the with or without methodology. If all or a portion of the
actual liability for Taxes of the Corporation (or PIM, but only with respect to income realized by
PIM the Tax liability for which is allocable to the Corporation for such Taxable Year using the
same methods, elections, conventions and similar practices used on the relevant Corporation Return)
for the Taxable Year arises as a result of an audit by a Taxing
8
Authority of any Taxable Year, such liability shall not be included in determining the
Realized Tax Detriment unless and until there has been a Determination.
Reconciliation Dispute
has the meaning set forth in Section 7.09.
Reconciliation Procedures
shall mean those procedures set forth in Section 7.09 of
this Agreement.
Schedule
means any Exchange Basis Schedule or Tax Benefit Schedule and the Early
Termination Schedule.
Senior Obligations
is defined in Section 5.01 of this Agreement.
Subsidiaries
means, with respect to any Person, as of any date of determination, any
other Person as to which such Person, owns, directly or indirectly, or otherwise controls more than
50% of the voting shares or other similar interests or the sole general partner interest or
managing member or similar interest of such Person.
Tax Benefit Payment
is defined in Section 3.01(b) of this Agreement.
Tax Benefit Schedule
is defined in Section 2.03 of this Agreement.
Tax Return
means any return, declaration, report or similar statement required to be
filed with respect to Taxes (including any attached schedules), including, without limitation, any
information return, claim for refund, amended return and declaration of estimated Tax.
Taxable Year
means a Taxable year of the Corporation as defined in Section 441(b) of
the Code or comparable section of state, local or foreign Tax law, as applicable (and, therefore,
for the avoidance of doubt, may include a period of less than 12 months for which a Tax Return is
prepared)in which there is a Basis Adjustment or increased depreciation, amortization or interest
deductions attributable to an Exchange.
Taxes
means any and all United States federal, state, local and foreign Taxes,
assessments or similar charges that are based on or measured with respect to net income or profits,
whether as an exclusive or on an alternative basis, and any interest related to such Tax.
Taxing Authority
shall mean any domestic, foreign, federal, national, state, county
or municipal or other local government, any subdivision, agency, commission or
9
authority thereof, or any quasi-governmental body exercising any Taxing authority or any other
authority exercising Tax regulatory authority.
Treasury Regulations
means the final, temporary and proposed regulations under the
Code promulgated from time to time (including corresponding provisions and succeeding provisions)
as in effect for the relevant Taxable period.
Units
is defined in the Recitals of this Agreement.
Valuation Assumptions
shall mean, as of an Early Termination Date, or following a
Change of Control, as applicable, the assumptions that (1) in each Taxable Year ending on or after
such Early Termination Date, the Corporation will have sufficient Taxable income to fully offset
the deductions in such Taxable Year attributable to any Basis Adjustment, increased depreciation or
amortization deductions attributable to an Exchange, and Imputed Interest, (2) the U.S. federal
income Tax rates and state, local and foreign income Tax rates that will be in effect for each such
Taxable Year will be those specified for each such Taxable Year by the Code and other law as in
effect on the Early Termination Date, (3) any loss carryovers generated by any Basis Adjustment or
Imputed Interest and available as of the date of the Early Termination Schedule will be used by the
Corporation on a pro rata basis from the date of the Early Termination Schedule through the
scheduled expiration date of such loss carryovers, (4) any non-amortizable assets will be disposed
of on the fifteenth anniversary of the Early Termination Date,
provided
,
however
,
that, in the event of a Change of Control, non-amortizable assets shall be deemed disposed of at
the earlier of (i) the time of sale of the relevant asset or (ii) as generally provided in this
Valuation Assumption (4) and (5) if, at the Early Termination Date, there are Units that have not
been Exchanged, then each such Unit shall be deemed to be Exchanged for the Market Value of the
Class A Shares and the amount of cash that would be transferred if the Exchange occurred on the
Early Termination Date.
ARTICLE II
DETERMINATION OF CUMULATIVE REALIZED TAX BENEFIT
Section 2.01
Basis Adjustment
.
(a)
Exchange Assets
. For purposes of this Agreement, as a result of an Exchange, PIM
shall be entitled to a Basis Adjustment for each Exchange Asset with respect to the Corporation,
the amount of which Basis Adjustment will be the excess, if any, of (i) the sum of (x) the Market
Value of the Class A Shares, cash or the amount of any other consideration transferred to the
Applicable Member pursuant to the Exchange as payment for the exchanged Units, to the extent
attributable to such Exchange Assets, plus (y) the amount of payments made pursuant to this
Agreement with respect to such Exchange, to the extent attributable to such Exchange Assets, plus
(z) the amount of debt and other liabilities allocated to the Units acquired pursuant to such
Exchange, to the extent attributable to such Exchange Assets; over (ii) the
10
Corporations share of PIMs basis for such Exchange Assets immediately after the Exchange,
attributable to the Units exchanged, determined as if (x) PIM were to remain in existence as an
entity for Tax purposes and (y) PIM had not made the election provided by Section 754 of the Code.
(b)
Imputed Interest
. For the avoidance of doubt, payments made under this Agreement
shall not be treated as resulting in a Basis Adjustment to the extent such payments are treated as
Imputed Interest.
Section 2.02
Exchange Basis Schedule
. Within 45 calendar days after the filing of the
United States federal income Tax return of the Corporation for each Taxable Year, the Corporation
shall deliver to each Member a schedule (the
Exchange Basis Schedule
) that shows, in
reasonable detail, for purposes of federal income Taxes, (i) the actual unadjusted Tax basis of the
Exchange Assets as of each applicable Exchange Date, (ii) the Basis Adjustment with respect to the
Exchange Assets as a result of the Exchanges effected in such Taxable Year, calculated in the
aggregate, (iii) the period or periods, if any, over which the Exchange Assets are amortizable
and/or depreciable and (iv) the period or periods, if any, over which each Basis Adjustment is
amortizable and/or depreciable (which, for non-amortizable assets, shall be based on the Valuation
Assumptions).
Section 2.03
Tax Benefit Schedule
. Within 45 calendar days after the filing of the United
States federal income Tax return of the Corporation for any Taxable Year in which there is a
Realized Tax Benefit or Realized Tax Detriment, the Corporation shall provide to each Member a
schedule showing, in reasonable detail, the calculation of the Realized Tax Benefit or Realized Tax
Detriment for such Taxable Year (a
Tax Benefit Schedule
). The Tax Benefit Schedule will
become final as provided in Section 2.04(a) and may be amended as provided in Section 2.04(b)
(subject to the procedures set forth in Section 2.04(b)).
Section 2.04
Procedures, Amendments
(a)
Procedure
. Every time the Corporation delivers to the Applicable Member an
applicable Schedule under this Agreement, including any Amended Schedule delivered pursuant to
Section 2.04(b), but excluding any Early Termination Schedule or amended Early Termination
Schedule, the Corporation also shall (x) deliver to the Applicable Member schedules and work papers
providing reasonable detail regarding the preparation of such Schedule and an Advisory Firm Letter
supporting such Schedule and (y) allow the Applicable Member reasonable access, at no cost, to the
appropriate representatives at the Corporation and the Advisory Firm in connection with a review of
such Schedule. The applicable Schedule shall become final and binding on all parties unless the
Applicable Member, within 30 calendar days after receiving an Exchange Basis Schedule or amendment
thereto or a Tax Benefit Schedule or amendment thereto, provides the Corporation with notice of a
material objection to such Schedule (
Objection Notice
) made in good faith. If the
parties, for any reason, are unable to successfully resolve the issues raised in such notice within
30 calendar days of receipt by the Corporation of an Objection Notice with respect to such Exchange
Basis Schedule or Tax
11
Benefit Schedule, the Corporation and the Applicable Member shall employ the reconciliation
procedures as described in Section 7.09 of this Agreement (the
Reconciliation
Procedures
).
(b)
Amended Schedule
. The applicable Schedule for any Taxable Year may be amended from
time to time by the Corporation (i) in connection with a Determination affecting such Schedule,
(ii) to correct material inaccuracies in the Schedule identified as a result of the receipt of
additional factual information relating to a Taxable Year after the date the Schedule was provided
to the Applicable Member, (iii) to comply with the Experts determination under the Reconciliation
Procedures, (iv) to reflect a material change in the Realized Tax Benefit or Realized Tax Detriment
for such Taxable Year attributable to a carryback or carryforward of a loss or other Tax item to
such Taxable Year, (v) to reflect a material change in the Realized Tax Benefit or Realized Tax
Detriment for such Taxable Year attributable to an amended Tax Return filed for such Taxable Year,
or (vi) to adjust the Exchange Basis Schedule to take into account payments made pursuant to this
Agreement (such Schedule, an
Amended Schedule
).
ARTICLE III
TAX BENEFIT PAYMENTS
Section 3.01
Payments
(a)
Payments
. Within three (3) business days of a Tax Benefit Schedule that was
delivered to an Applicable Member becoming final in accordance with Section 2.04(a), the
Corporation shall pay to the Applicable Member for such Taxable Year the Tax Benefit Payment
determined pursuant to Section 3.01(b). Each such Tax Benefit Payment shall be made by wire
transfer of immediately available funds to a bank account of the Applicable Member previously
designated by such Member to the Corporation. For the avoidance of doubt, no Tax Benefit Payment
shall be made in respect of estimated Tax payments, including, without limitation, U.S. federal
income Tax payments.
(b) A
Tax Benefit Payment
means an amount, not less than zero, equal to 85% of the
sum of the Net Tax Benefit and the Interest Amount. The
Net Tax Benefit
"
for
each Taxable Year shall be an amount equal to the excess, if any, of the Cumulative Net Realized
Tax Benefit as of the end of such Taxable Year over the total amount of payments previously made
under this Section 3.01, excluding payments attributable to the Interest Amount;
provided
,
however
, that for the avoidance of doubt, no Member shall be required to return any portion
of any previously received Tax Benefit Payment under any circumstances. The
Interest
Amount
for a given Taxable Year shall equal the interest on the Net Tax Benefit for such
Taxable Year calculated at the Agreed Rate from the due date (without extensions) for filing the
Corporation Return with respect to Taxes for the most recently ended Taxable Year until the Payment
Date. The Net Tax Benefit and the Interest Amount shall be determined separately with respect to
each separate Exchange. Notwithstanding the foregoing, for each Taxable Year
12
ending on or after the date of a Change of Control, all Tax Benefit Payments, whether paid
with respect to Partnership Units that were exchanged (i) prior to the date of such Change of
Control or (ii) on or after the date of such Change of Control, shall be calculated by utilizing
Valuation Assumptions (1), (3), and (4), substituting in each case the terms the closing date of a
Change of Control for an Early Termination Date.
Section 3.02
No Duplicative Payments
. It is intended that the provisions of this Agreement
will not result in duplicative payment of any amount (including interest) required under this
Agreement. It is also intended that the provisions of this Agreement will result in 85% of the
Corporations Cumulative Net Realized Tax Benefit, and the Interest Amount thereon, being paid to
the Members pursuant to this Agreement. The provisions of this Agreement shall be construed in the
appropriate manner to achieve these fundamental results.
Section 3.03
Pro Rata Payments
. For the avoidance of doubt, to the extent that (i) the
Corporations deductions with respect to any Basis Adjustment is limited in a particular Taxable
Year or (ii) the Corporation lacks sufficient funds to satisfy or is prevented under any credit
agreement or other arrangement from satisfying its obligations to make all Tax Benefit Payments due
in a particular Taxable year, the limitation on the deduction, or the Tax Benefit Payments that may
be made, as the case may be, shall be taken into account or made for the Applicable Member in the
same proportion as Tax Benefit Payments would have been made absent the limitations in clauses (i)
and (ii) of this paragraph, as applicable.
ARTICLE IV
TERMINATION
Section 4.01
Early Termination and Breach of Agreement
.
(a) The Corporation may terminate this Agreement with respect to all of the Units held (or
previously held and Exchanged) by all Members at any time by paying to the Members the Early
Termination Payment;
provided
,
however
, that this Agreement shall terminate only
upon the receipt of the Early Termination Payment by all Members, and
provided
,
further
, that the Corporation may withdraw any notice to execute its termination rights
under this Section 4.01(a) prior to the time at which any Early Termination Payment has been paid.
Upon payment of the Early Termination Payments by the Corporation, neither the Members nor the
Corporation shall have any further payment obligations under this Agreement, other than for any (x)
Tax Benefit Payment agreed by the Corporation acting in good faith and the Applicable Member to be
due and payable but unpaid as of the Early Termination Notice and (y) Tax Benefit Payment due for
the Taxable Year ending with or including the date of the Early Termination Notice (except to the
extent that the amount described in clause (y) is included in the Early Termination Payment). For
the avoidance of doubt, if an Exchange occurs after the Corporation makes the Early Termination
Payments with respect to all Members, the Corporation shall have no obligations under this
Agreement with respect to such Exchange, and its only obligations under this Agreement in such case
shall be its obligations to all Members under Section 4.03(a).
13
(b) In the event that the Corporation breaches any of its material obligations under this
Agreement, whether as a result of failure to make any payment when due, failure to honor any other
material obligation required hereunder or by operation of law as a result of the rejection of this
Agreement in a case commenced under the Bankruptcy Code or otherwise, then all obligations
hereunder shall be accelerated and such obligations shall be calculated as if an Early Termination
Notice had been delivered on the date of such breach and shall include, but shall not be limited
to, (1) the Early Termination Payment calculated as if an Early Termination Notice had been
delivered on the date of a breach, (2) any Tax Benefit Payment agreed by the Corporation acting in
good faith and any Applicable Member to be due and payable but unpaid as of the date of a breach,
and (3) any Tax Benefit Payment due for the Taxable Year ending with or including the date of a
breach. Notwithstanding the foregoing, in the event that the Corporation breaches this Agreement,
the Members shall be entitled to elect to receive the amounts set forth in clauses (1), (2) and (3)
above or to seek specific performance of the terms hereof. The parties agree that the failure to
make any payment due pursuant to this Agreement within three months of the date such payment is due
shall be deemed to be a breach of a material obligation under this Agreement for all purposes of
this Agreement, and that it shall not be considered to be a breach of a material obligation under
this Agreement to make a payment due pursuant to this Agreement within three months of the date
such payment is due.
(c) The Corporation, PIM and each of the Members hereby acknowledge that, as of the date of
this Agreement, the aggregate value of the Tax Benefit Payments cannot reasonably be ascertained
for United States federal income Tax or other applicable Tax purposes.
Section 4.02
Early Termination Notice
. If the Corporation chooses to exercise its right of
early termination under Section 4.01 above, the Corporation shall deliver to each present or former
Member notice of such intention to exercise such right (
Early Termination Notice
) and a
schedule (the
Early Termination Schedule
) specifying the Corporations intention to
exercise such right and showing in reasonable detail the calculation of the Early Termination
Payment. The Early Termination Schedule shall become final and binding on all parties unless an
Applicable Member, within 30 calendar days after receiving the Early Termination Schedule, provides
the Corporation with notice of a material objection to such Schedule made in good faith
(
Material Objection Notice
). If the parties, for any reason, are unable to successfully
resolve the issues raised in such notice within 30 calendar days after receipt by the Corporation
of the Material Objection Notice, the Corporation and the applicable Member shall employ the
Reconciliation Procedures as described in Section 7.09 of this Agreement.
Section 4.03
Payment upon Early Termination
. (a) Within three (3) business days after the
Early Termination Schedule has become final and binding, the Corporation shall pay to each
Applicable Member an amount equal to the Early Termination Payment. Such payment shall be made by
wire transfer of immediately available funds to a bank account designated by the Applicable Member.
14
(b) The
Early Termination Payment
as of the date of the delivery of an Early
Termination Schedule shall equal with respect to the Applicable Member the present value,
discounted at the Early Termination Rate as of such date, of all Tax Benefit Payments that would be
required to be paid by the Corporation to the Applicable Member beginning from the Early
Termination Date and assuming that the Valuation Assumptions are applied.
ARTICLE V
SUBORDINATION AND LATE PAYMENTS
Section 5.01
Subordination
. Notwithstanding any other provision of this Agreement to the
contrary, any Tax Benefit Payment or Early Termination Payment required to be made by the
Corporation to the Members under this Agreement (an
Exchange Payment
) shall rank
subordinate and junior in right of payment to any principal, interest or other amounts due and
payable in respect of any obligations in respect of indebtedness for borrowed money of the
Corporation and its Subsidiaries (
Senior Obligations
) and shall rank pari passu with all
current or future unsecured obligations of the Corporation that are not Senior Obligations.
Section 5.02
Late Payments by the Corporation
. The amount of all or any portion of any
Exchange Payment not made to any Member when due (without regard to Section 5.01) under the terms
of this Agreement shall be payable together with any interest thereon, computed at the Default Rate
and commencing from the date on which such Exchange Payment was due and payable.
ARTICLE VI
NO DISPUTES; CONSISTENCY; COOPERATION
Section 6.01
Member Participation in the Corporation and PIMs Tax Matters
. Except as
otherwise provided herein, the Corporation shall have full responsibility for, and sole discretion
over, all Tax matters concerning the Corporation and PIM, including without limitation the
preparation, filing or amending of any Tax Return and defending, contesting or settling any issue
pertaining to Taxes. Notwithstanding the foregoing, the Corporation shall notify each applicable
Member of, and keep such applicable Member reasonably informed with respect to the portion of any
audit of the Corporation and PIM by a Taxing Authority the outcome of which is reasonably expected
to affect such applicable Members rights and obligations under this Agreement, and shall provide
to such applicable Member reasonable opportunity to provide information and other input to the
Corporation, PIM and their respective advisors concerning the conduct of any such portion of such
audit;
provided
,
however
, that the Corporation and PIM shall not be required to
take any action that is inconsistent with any provision of the LLC Agreement.
Section 6.02
Consistency
. Except upon the written advice of an Advisory Firm, the
Corporation and the Applicable Member agree to report and cause to be reported for all purposes,
including U.S. federal, state, local and foreign Tax purposes and financial reporting
15
purposes, all Tax-related items (including without limitation the Basis Adjustment and each Tax
Benefit Payment) in a manner consistent with that specified by the Corporation in any Schedule
required to be provided by or on behalf of the Corporation under this Agreement. Any Dispute
concerning such advice shall be subject to the terms of Section 7.09. In the event that an
Advisory Firm is replaced with another firm acceptable to the Corporation and the Applicable
Member, such replacement Advisory Firm shall be required to perform its services under this
Agreement using procedures and methodologies consistent with the previous Advisory Firm, unless (a)
otherwise required by law or (b) the Corporation and the Applicable Member agree to the use of
other procedures and methodologies.
Section 6.03
Cooperation
. The Applicable Member shall (a) furnish to the Corporation in a
timely manner such information, documents and other materials as the Corporation may reasonably
request for purposes of making any determination or computation necessary or appropriate under this
Agreement, preparing any Tax Return or contesting or defending any audit, examination or
controversy with any Taxing Authority, (b) make itself available to the Corporation and its
representatives to provide explanations of documents and materials and such other information as
the Corporation or its representatives may reasonably request in connection with any of the matters
described in clause (a) above, and (c) reasonably cooperate in connection with any such matter
described in clause (a) above. The Corporation shall reimburse the Applicable Member for any
reasonable third-party costs and expenses incurred pursuant to this Section 6.03.
ARTICLE VII
MISCELLANEOUS
Section 7.01
Notices
. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be deemed duly given and received (a) on the date of
delivery if delivered personally, or by facsimile upon confirmation of transmission by the senders
fax machine if sent on a Business Day (or otherwise on the next Business Day) or (b) on the first
Business Day following the date of dispatch if delivered by a recognized next-day courier service.
All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions
as may be designated in writing by the party to receive such notice:
if to the Corporation, to:
Pzena Investment Management, Inc.
c/o Pzena Investment Management, LLC
120 West Forty-Fifth Street, 20
th
Floor
New York, NY 10036
(T) (212) 583-1291
(F) (212)308-0010
Attention: General Counsel
with a copy to:
16
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
(T) (212) 735-3000
(F) (212) 735-2000
Attention: Richard B. Aftanas, Esq.
Ralph Arditi, Esq.
If to the Applicable Member, to:
The address and facsimile number set forth in the records of PIM.
Any party may change its address or fax number by giving the other party written notice of its new
address or fax number in the manner set forth above.
Section 7.02
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 parties, it being
understood that all parties need not sign the same counterpart. Delivery of an executed signature
page to this Agreement by facsimile transmission shall be as effective as delivery of a manually
signed counterpart of this Agreement.
Section 7.03
Entire Agreement; No Third Party Beneficiaries
. This Agreement constitutes the
entire agreement and supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto and their respective successors and permitted
assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any
other Person any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
Section 7.04
Governing Law
. This Agreement shall be governed by, and construed in
accordance with, the law of the State of New York, without regard to the conflicts of laws
principles thereof that would mandate the application of the laws of another jurisdiction.
Section 7.05
Severability
. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other terms and provisions
of this Agreement shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision is invalid, illegal
or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as possible in an
acceptable manner in order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
17
Section 7.06
Successors; Assignment; Amendments; Waivers
. No Member may assign this
Agreement to any person without the prior written consent of the Corporation;
provided
,
however
, that (i) to the extent Units are transferred in accordance with the terms of the
LLC Agreement, the transferring Member shall have the option to assign to the transferee of such
Units the transferring Members rights under this Agreement with respect to such transferred Units,
as long as such transferee has executed and delivered, or, in connection with such transfer,
executes and delivers, a joinder to this Agreement, in form and substance reasonably satisfactory
to the Corporation, agreeing to become a Member for all purposes of this Agreement, except as
otherwise provided in such joinder, and (ii) once an Exchange has occurred, any and all payments
that may become payable to a Member pursuant to this Agreement with respect to the Exchanged Units
may be assigned to any Person or Persons as long as any such Person has executed and delivered, or,
in connection with such assignment, executes and delivers, a joinder to this Agreement, in form and
substance reasonably satisfactory to the Corporation, agreeing to be bound by Section 7.12 and
acknowledging specifically the terms of the next paragraph of this Section 7.06. For the avoidance
of doubt, if a Person transfers Units (regardless of whether the transferee is a Permitted
Transferee under the terms of the LLC Agreement) but does not assign to the transferee of such
Units such Persons rights, if any, under this Agreement with respect to such transferred Units,
such Person shall be entitled to receive the Tax Benefit Payments, if any, due hereunder with
respect to, including any Tax Benefit Payments arising in respect of a subsequent Exchange of, such
Units.
Notwithstanding the foregoing provisions of this Section 7.06, no transferee described in
clause (i) of the first sentence of the immediately preceding paragraph shall have the right to
enforce the provisions of Section 2.04, 4.02, 6.01 or 6.02 of this Agreement, and no assignee
described in clause (ii) of the first sentence of the immediately preceding paragraph shall have
any rights under this Agreement except for the right to enforce its right to receive payments under
this Agreement.
No provision of this Agreement may be amended unless such amendment is approved in writing by
each of the Corporation and PIM and by Members who would be entitled to receive at least two-thirds
of the Early Termination Payments payable to all Members hereunder if the Corporation had exercised
its right of early termination on the date of the most recent Exchange prior to such amendment
(excluding, for purposes of this sentence, all payments made to any Member pursuant to this
Agreement since the date of such most recent Exchange);
provided
,
however
, that no
such amendment shall be effective if such amendment would have a disproportionate effect on the
payments certain Members will or may receive under this Agreement unless all such Members
disproportionately effected consent in writing to such amendment. No provision of this Agreement
may be waived unless such waiver is in writing and signed by the party against whom the waiver is
to be effective.
Except as otherwise specifically provided herein, all of the terms and provisions of this
Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the
parties hereto and their respective successors, assigns, heirs, executors, administrators and legal
representatives. The Corporation shall require and cause any direct or indirect successor
18
(whether by purchase, merger, consolidation or otherwise) to all or substantially all of the
business or assets of the Corporation, by written agreement, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the Corporation would be
required to perform if no such succession had taken place. Notwithstanding anything to the
contrary herein, in the event a Member transfers his Units to a Permitted Transferee (as defined in
the LLC Agreement), excluding any other Member, such Member shall have the right, on behalf of such
transferee, to enforce the provisions of Sections 2.04, 4.02 or 6.01 with respect to such
transferred Units.
Section 7.07
Titles and Subtitles
. The titles of the sections and subsections of this
Agreement are for convenience of reference only and are not to be considered in construing this
Agreement.
Section 7.08
Resolution of Disputes.
(a) Any and all disputes which are not governed by Section 7.09, including but not limited to
any ancillary claims of any party, arising out of, relating to or in connection with the validity,
negotiation, execution, interpretation, performance or non-performance of this Agreement (including
the validity, scope and enforceability of this arbitration provision) (each a
Dispute
)
shall be finally settled by arbitration conducted by a single arbitrator in New York in accordance
with the then-existing Rules of Arbitration of the International Chamber of Commerce. If the
parties to the Dispute fail to agree on the selection of an arbitrator within ten (10) days of the
receipt of the request for arbitration, the International Chamber of Commerce shall make the
appointment. The arbitrator shall be a lawyer admitted to the practice of law in the State of New
York and shall conduct the proceedings in the English language. Performance under this Agreement
shall continue if reasonably possible during any arbitration proceedings. In addition to monetary
damages, the arbitrator shall be empowered to award equitable relief, including, but not limited to
an injunction and specific performance of any obligation under this Agreement. The arbitrator is
not empowered to award damages in excess of compensatory damages, and each party hereby irrevocably
waives any right to recover punitive, exemplary or similar damages with respect to any Dispute.
The award shall be final and binding upon the parties as from the date rendered, and shall be the
sole and exclusive remedy between the parties regarding any claims, counterclaims, issues, or
accounting presented to the arbitral tribunal. Judgment upon any award may be entered and enforced
in any court having jurisdiction over a party or any of its assets.
(b) Notwithstanding the provisions of paragraph (a), the Corporation may bring an action or
special proceeding in any court of competent jurisdiction for the purpose of compelling a party to
arbitrate, seeking temporary or preliminary relief in aid of an arbitration hereunder, and/or
enforcing an arbitration award and, for the purposes of this paragraph (b), each Member (i)
expressly consents to the application of paragraph (c) of this Section 7.08 to any such action or
proceeding, (ii) agrees that proof shall not be required that monetary damages for breach of the
provisions of this Agreement would be difficult to calculate and that remedies at law would be
inadequate, and (iii) irrevocably appoints the Corporation as such Members agent
19
for service of process in connection with any such action or proceeding and agrees that
service of process upon such agent, who shall promptly advise such Member of any such service of
process, shall be deemed in every respect effective service of process upon the Member in any such
action or proceeding.
(c) (i) EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF COURTS LOCATED IN NEW
YORK, NEW YORK FOR THE PURPOSE OF ANY JUDICIAL PROCEEDING BROUGHT IN ACCORDANCE WITH THE PROVISIONS
OF PARAGRAPH (B) OF THIS SECTION 7.08, OR ANY JUDICIAL PROCEEDING ANCILLARY TO AN ARBITRATION OR
CONTEMPLATED ARBITRATION ARISING OUT OF OR RELATING TO OR CONCERNING THIS AGREEMENT. Such ancillary
judicial proceedings include any suit, action or proceeding to compel arbitration, to obtain
temporary or preliminary judicial relief in aid of arbitration, or to confirm an arbitration award.
The parties acknowledge that the forums designated by this paragraph (c) have a reasonable relation
to this Agreement, and to the parties relationship with one another; and (ii) the parties hereby
waive, to the fullest extent permitted by applicable law, any objection which they now or hereafter
may have to personal jurisdiction or to the laying of venue of any such ancillary suit, action or
proceeding brought in any court referred to in paragraph (c) (i) of this Section 7.08 and such
parties agree not to plead or claim the same.
Section 7.09
Reconciliation
. In the event that the Corporation and the applicable Member
are unable to resolve a disagreement with respect to the matters governed by Sections 2.04, 4.02
and 6.02 within the relevant period designated in this Agreement (
Reconciliation
Dispute
), the Reconciliation Dispute shall be submitted for determination to a nationally
recognized expert (the
Expert
) in the particular area of disagreement mutually acceptable
to both parties. The Expert shall be a partner in a nationally recognized accounting firm or a law
firm (other than the Advisory Firm), and the Expert shall not, and the firm that employs the Expert
shall not, have any material relationship with either the Corporation or the applicable Member or
other actual or potential conflict of interest. If the parties are unable to agree on an Expert
within fifteen (15) days of receipt by the respondent(s) of written notice of a Reconciliation
Dispute, the Expert shall be appointed by the International Chamber of Commerce Centre for
Expertise. The Expert shall resolve any matter relating to the Exchange Basis Schedule or an
amendment thereto or the Early Termination Schedule or an amendment thereto within thirty (30)
calendar days and shall resolve any matter relating to a Tax Benefit Schedule or an amendment
thereto within fifteen (15) calendar days or as soon thereafter as is reasonably practicable, in
each case after the matter has been submitted to the Expert for resolution. Notwithstanding the
preceding sentence, if the matter is not resolved before any payment that is the subject of a
disagreement would be due (in the absence of such disagreement) or any Tax Return reflecting the
subject of a disagreement is due, the undisputed amount shall be paid on such date and such Tax
Return may be filed as prepared by the Corporation, subject to adjustment or amendment upon
resolution. In the event that this reconciliation provision is utilized, the fees of the Expert
shall be paid in proportion to the manner in which the dispute is resolved, such that, for example,
if the entire dispute is resolved in favor of the Corporation, the applicable Member shall pay all
of the fees, or if the items in dispute are resolved 50% in favor of the Corporation and 50% in
favor of the applicable Member, each of the Corporation and the applicable Member shall pay 50% of
the fees of the Expert. Any dispute as to whether a dispute
20
is a Reconciliation Dispute within the meaning of this Section 7.09 shall be decided by the Expert.
The Expert shall finally determine any Reconciliation Dispute and the determinations of the Expert
pursuant to this Section 7.09 shall be binding on the Corporation and the applicable Member and may
be entered and enforced in any court having jurisdiction.
Section 7.10
Withholding
. The Corporation shall be entitled to deduct and withhold from any
payment payable pursuant to this Agreement such amounts as the Corporation is required to deduct
and withhold with respect to the making of such payment under the Code or any provision of state,
local or foreign Tax law. To the extent that amounts are so withheld and paid over to the
appropriate Taxing Authority by the Corporation, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the Applicable Member.
Section 7.11
Admission of the Corporation into a Consolidated Group; Transfers of
Corporate Assets
.
(a) If the Corporation becomes a member of another affiliated or consolidated group of
corporations that files a consolidated income Tax return pursuant to Sections 1501 et seq. of the
Code or any corresponding provisions of state, local or foreign law, then: (i) the provisions of
this Agreement shall be applied with respect to the group as a whole; and (ii) Tax Benefit
Payments, Early Termination Payments and other applicable items hereunder shall be computed with
reference to the consolidated Taxable income of the group as a whole.
(b) If any entity that is obligated to make an Exchange Payment hereunder transfers one or
more assets to a corporation with which such entity does not file a consolidated Tax return
pursuant to Section 1501 of the Code, such entity, for purposes of calculating the amount of any
Exchange Payment (e.g., calculating the gross income of the entity and determining the Realized Tax
Benefit of such entity) due hereunder, shall be treated as having disposed of such asset in a fully
Taxable transaction on the date of such contribution. The consideration deemed to be received by
such entity shall be equal to the fair market value of the contributed asset, plus (i) the amount
of debt to which such asset is subject, in the case of a contribution of an encumbered asset or
(ii) the amount of debt allocated to such asset, in the case of a contribution of a partnership
interest.
Section 7.12
Confidentiality
. Each Member and assignee acknowledges and agrees that the
information of the Corporation and of its Affiliates is confidential and, except in the course of
performing any duties as necessary for the Corporation and its Affiliates, as required by law or
legal process or to enforce the terms of this Agreement, such person shall keep and retain in the
strictest confidence and not disclose to any Person any confidential matters, acquired pursuant to
this Agreement, of the Corporation and its Affiliates and successors, concerning PIM and its
Affiliates and successors or the other Members, learned by the Member heretofore or hereafter.
This clause 7.12 shall not apply to (i) any information that has been made publicly available by
the Corporation or any of its Affiliates, becomes public knowledge (except as a result of an act of
such Member in violation of this Agreement) or is generally
21
known to the business community and (ii) the disclosure of information to the extent necessary for
a Member to prepare and file his or her Tax returns, to respond to any inquiries regarding the same
from any Taxing authority or to prosecute or defend any action, proceeding or audit by any Taxing
authority with respect to such returns. Notwithstanding anything to the contrary herein, each
Member and assignee (and each employee, representative or other agent of such Member or assignee,
as applicable) may disclose to any and all Persons, without limitation of any kind, the Tax
treatment and Tax structure of the Corporation, PIM, the Members and their Affiliates, and any of
their transactions, and all materials of any kind (including opinions or other Tax analyses) that
are provided to the Members relating to such Tax treatment and Tax structure.
If a Member or assignee commits a breach, or threatens to commit a breach, of any of the
provisions of this Section 7.12, the Corporation shall have the right and remedy to have the
provisions of this Section 7.12 specifically enforced by injunctive relief or otherwise by any
court of competent jurisdiction without the need to post any bond or other security, it being
acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to
the Corporation or any of its Subsidiaries or the other Members and the accounts and funds managed
by the Corporation and that money damages alone shall not provide an adequate remedy to such
Persons. Such rights and remedies shall be in addition to, and not in lieu of, any other rights
and remedies available at law or in equity.
Section 7.13
LLC Agreement
. This Agreement shall be treated as part of the partnership
agreement of PIM as described in Section 761(c) of the Code and Sections 1.704-1(b)(2)(ii)(h) and
1.761-1(c) of the Treasury Regulations.
Section 7.14
Partnerships
. The Corporation hereby agrees that, to the extent it acquires a
general partnership interest, managing member interest or similar interest in any Person after the
date hereof, it shall cause such Person to execute and deliver a joinder to this Agreement and such
Person shall be treated as a partnership for all purposes of this Agreement.
22
IN WITNESS WHEREOF, the Corporation, PIM, each Continuing Member and each Exiting Member have
duly executed this Agreement as of the date first written above.
PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
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Name:
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Richard S. Pzena
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Title:
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Chief Executive Officer
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PZENA INVESTMENT MANAGEMENT, LLC
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By:
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Pzena Investment Management, Inc.,
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its Managing Member
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By:
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/s/ Richard S. Pzena
Name: Richard S. Pzena
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Title: Chief Executive Officer
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CONTINUING MEMBERS:
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Richard S. Pzena
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Wayne A. Palladino
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Spencer Chen
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CONTINUING MEMBERS (continued):
JOHN P. GOETZ
WILLIAM L. LIPSEY
A. RAMA KRISHNA
MICHAEL D. PETERSON
KEITH KOMAR
LAWRENCE KOHN
LISA ROTH
EVAN FIRE
JOAN BERGER
CAROLINE CAI
ALLISON FISCH
BRIAN MANN
WILLIAM C. CONNOLLY
COURTNEY HEHRE
MANOJ TANDON
GREGORY MARTIN
TOPALLI MURTI
JAMES M. KREBS
THE RICHARD PZENA DESCENDANTS TRUST, THE AARON PZENA FAMILY TRUST
THE MICHELE PZENA FAMILY TRUST
THE DANIEL PZENA FAMILY TRUST
THE ERIC PZENA FAMILY TRUST
THE RACHEL THERESA GOETZ TRUST
THE CARRIE ESTHER GOETZ TRUST
THE KRISHNA FAMILY TRUST
THE WILLIAM LIPSEY DYNASTY TRUST
THE WILLIAM LIPSEY GRANTOR RETAINED ANNUITY TRUST
THE MICHAEL D. PETERSON GRANTOR RETAINED ANNUITY TRUST
THE SARAH M. PETERSON GRANTOR RETAINED ANNUITY TRUST
CC GRANTOR RETAINED ANNUITY TRUST I
ANTONIO DESPIRITO
ADS III 2007 GRANTOR RETAINED ANNUITY TRUST
BENJAMIN SILVER
BSS GRANTOR RETAINED ANNUITY TRUST
LJK TRUST I
LJK TRUST IV
MILESTONE ASSOCIATES, L.L.C.
PIPING BROOK, LLC
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By:
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/s/ Richard S. Pzena
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Name: Richard S. Pzena
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Title: Attorney-in-Fact for each of the above-listed Continuing Members
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By:
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/s/ Wayne A. Palladino
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Name: Wayne A. Palladino
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Title: Attorney-in-Fact for each of the above-listed Continuing Members
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EXITING MEMBERS:
THE ACJF TRUST
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By:
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/s/ Daniel Feinberg
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Name:
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Daniel Feinberg
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Title:
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Trustee
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EXHIBIT A
JOINDER
This JOINDER (this
Joinder
) to the Tax Receivable Agreement, dated as of October 30,
2007, by and among Pzena Investment Management, Inc., a Delaware corporation (the Corporation),
Pzena Investment Management, L.L.C., a Delaware limited liability company (PIM) and
(Permitted Transferee).
WHEREAS, on
, Permitted Transferee acquired (the
Acquisition
)
Units
in PIM and the corresponding shares of Class B common stock of the Corporation (collectively,
Interests
and, together with all other Interests hereinafter acquired by Permitted
Transferee from Transferor and its Permitted Transferees (as defined in the Tax Receivable
Agreement), the
Acquired Interests
) from
(
Transferor
); and
WHEREAS, Transferor, in connection with the Acquisition, has required Permitted Transferee to
execute and deliver this Joinder pursuant to Section 7.06 of the Tax Receivable Agreement.
NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein,
Permitted Transferee hereby agrees as follows:
Section 1.1
Definitions
. To the extent capitalized words used in this Joinder are not
defined in this Joinder, such words shall have the meaning set forth in the Tax Receivable
Agreement.
Section 1.2
Joinder
. Permitted Transferee hereby acknowledges and agrees to become a
Member (as defined in the Tax Receivable Agreement) for all purposes of the Tax Receivable
Agreement, including but not limited to, being bound by Sections 7.12, 2.04, 4.02, 6.01 and 6.02 of
the Tax Receivable Agreement, with respect to the Acquired Interests, and any other Interests
Permitted Transferee acquires hereafter.
Section 1.3
Notice
. All notices, requests, consents and other communications
hereunder to Permitted Transferee shall be deemed to be sufficient if contained in a written
instrument delivered in person or sent by facsimile (
provided
a copy is thereafter promptly
delivered as provided in this Section 1.3) or nationally recognized overnight courier, addressed to
Permitted Transferee at the address or facsimile number set forth below or such other address or
facsimile number as may hereafter be designated in writing by Permitted Transferee:
Section 1.4
Governing Law
.
THIS JOINDER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF.
IN WITNESS WHEREOF, this Joinder has been duly executed and delivered by Permitted Transferee
as of the date first above written.
Signature Page for Joinder by
to the Tax Receivable Agreement
Exhibit 10.3
As Adopted
by the Board of Directors of
Pzena Investment Management, Inc.
on October 24, 2007
PZENA INVESTMENT MANAGEMENT, LLC
Amended and Restated 2006 Equity Incentive Plan
Table of Contents
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Page
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1.
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Purpose
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1
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2.
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Definitions
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1
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3.
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Term of the Plan
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4
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4.
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Administration
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4
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5.
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Authorization of Grants
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5
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6.
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Specific Terms of Awards
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6
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7.
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Adjustment Provisions
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8.
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Settlement of Awards
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9.
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No Special Employment or Other Rights
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10.
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Nonexclusivity of the Plan
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11.
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Termination and Amendment of the Plan and Awards
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12.
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Notices and Other Communications
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13.
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Governing Law
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PZENA INVESTMENT MANAGEMENT, LLC
2006 Equity Incentive Plan
1. Purpose
Pzena Investment Management, LLC hereby adopts this Pzena Investment Management, LLC Amended
and Restated 2006 Equity Incentive Plan effective as of October 30, 2007. This Plan is intended to
encourage ownership of Class B Units of the Company by persons providing services to the Company
and/or its subsidiaries, including members of the Company and employees and consultants of the
Company and/or its subsidiaries, and to provide additional incentives for them to promote the
success of the Companys business.
2. Definitions
As used in this Plan, the following terms shall have the following meanings:
2.1.
Accelerate
,
Accelerated
, and
Acceleration
, when used with respect
to an Option or Unit-Based Award, means that as of the time of reference the Option or Unit-Based
Award will vest and, if applicable, will become exercisable with respect to some or all of the
Class B Units or cash equivalent for which such Option or Unit-Based Award was not then otherwise
exercisable by its terms, and, when used with respect to Restricted Units, means that the Risk of
Forfeiture otherwise applicable to the Class B Units shall expire with respect to some or all of
the Class B Units then otherwise subject to the Risk of Forfeiture.
2.2.
Award
means any grant or sale pursuant to the Plan of Options, Restricted Units,
Unit Grants or other Unit-Based Awards or LTIP Units.
2.3.
Award Agreement
means an agreement between the Company and the recipient of an
Award, setting forth the terms and conditions of the Award.
2.4.
Cause
means Cause, as described in the Operating
Agreement,
provided
that references to an Employee
Member shall be replaced by references to a Participant.
2.5.
Class A Stock
means Class A common stock, par value $0.01 per share, of Pzena
Investment Management, Inc.
2.6.
Class B Unit
means a Class B Unit in the Company, as defined in the Operating
Agreement.
2.7.
Client
means Client, as described in the Operating Agreement,
provided
that
references to an Employee Member shall be replaced by references to a Participant.
2.8.
Code
means the Internal Revenue Code of 1986, as amended from time to time, or
any successor statute thereto, and any regulations issued from time to time thereunder. To the
extent that reference is made to any particular section of the Code, such reference shall be, where
the context so admits, to any corresponding provisions of any succeeding law.
2.9.
Committee
means any committee of the board of directors of Pzena Investment
Management, Inc., in its capacity as the Managing Member of the Company, that is delegated
responsibility by such board of directors for the administration of the Plan, as provided in
Section 4 of the Plan;
provided
, that such committee shall be comprised solely of directors of
Pzena Investment Management, Inc. who are (a) non-employee directors under Rule 16b-3 of the
Exchange Act, (b) outside directors under Code Section 162(m) and (c) independent directors
pursuant to New York Stock Exchange requirements. For any period during which no such committee is
in existence, Committee shall mean the Managing Member and all authority and responsibility
assigned to the Committee under the Plan shall be exercised, if at all, by the Managing Member.
2.10.
Company
means Pzena Investment Management, LLC, a limited liability company
organized under the laws of the State of Delaware.
2.11
Confidential Information
means Confidential Information, as defined in the
Operating Agreement.
2.12.
Exchange Act
means the Securities Exchange Act of 1934, as amended from time to
time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases.
2.13.
Fair Market Value
of a Class B Unit on any given date means: (i) if the Class A
Stock is listed for trading on the New York Stock Exchange, the closing sale price per share of
Class A Stock on the New York Stock Exchange on that date (or, if no closing sale price is
reported, the last reported sale price), (ii) if the Class A Stock is not listed for trading on the
New York Stock Exchange, the closing sale price (or, if no closing sale price is reported, the last
reported sale price) as reported on that date in composite transactions for the principal national
securities exchange registered pursuant to Section 6(g) of the Exchange Act on which the Class A
Stock is listed, (iii) if the Class A Stock is not so listed on a national securities exchange, the
last quoted bid price for the Class A Stock on that date in the over-the-counter market as reported
by Pink Sheets LLC or a similar organization, or (iv) if the Class A Stock is not so quoted by Pink
Sheets LLC or a similar organization such value as the Committee, in its sole discretion, shall
determine in good faith.
2.14.
Good Reason
means the occurrence of any of the following events without either
(i) the Participants prior written consent; or (ii) full cure within 30 days after the Participant
gives written notice to the Company describing the event in reasonable detail and requesting cure:
any material diminution in the Participants title, responsibilities or authority with the Company;
or any relocation of the Participants place of employment to a location that is more than 50 miles
from both the Companys principal office and the Participants then current principal residence.
2.15.
Grant Date
means the date as of which an Option is granted, as determined under
Section 6.1(a).
2
2.16.
Investment Advisory Services
means any services that involve (i) the management
of an investment account or fund (or portions thereof or a group of investment accounts or funds),
(ii) the giving of advice with respect to the investment and/or reinvestment of assets or funds (or
any group of assets or funds), or (iii) otherwise acting as an investment adviser within the
meaning of the Investment Advisers Act of 1940, as amended (whether or not required to be
registered under such act), and performing activities related or incidental thereto,
provided
that
Investment Advisory Services shall exclude any service in respect of which no compensation or
economic benefit is provided directly or indirectly to any person in respect of such service.
2.17.
IPO
means the initial public offering of Class A Stock, as contemplated in the
registration statement on Form S-1 of Pzena Investment Management, Inc. (No. 333-143660).
2.18.
LTIP Unit
means a certain class or classes of membership interests in the
Company which, upon the occurrence of certain events, may convert into Class B Units.
2.19.
Managing Member
has the meaning set forth in the Operating Agreement
2.20.
Obligations
means the Participant not engaging in any of the following activies:
(i) directly or indirectly, whether as an officer, director, owner, partner, investor, member,
adviser, representative, consultant, agent, employee, co-venturer or otherwise, providing
Investment Advisory Services, except in the performance of his duties with the Company, or
engaging, or assisting others to engage, in whole or in part, in any business in competition with
the business of the Company, (ii) directly or indirectly (other than in the course of performing
his duties to the Company) (a) soliciting the hiring of or hiring any employee of the Company or
any person who, within the prior six months, had been an employee of the Company, assisting in, or
encouraging such hiring by any person or encouraging any such employee to terminate or alter his
relationship with the Company; (b) in competition with the Company, soliciting, seeking, inducing,
pursuing in any way, or accepting a business relationship of any kind with, any person who is a
Client of the Company, including by way of indirect or sub-advisory arrangements (such obligation
to include the duty of the Participant to decline any such offered business activity even if
unsolicited); (c) otherwise soliciting, encouraging or inducing any Client to terminate or reduce
its business or relationship with the Company; or (d) otherwise take any action or have any
communication with any person the purpose of which is, or the reasonably likely effect of which
could be, to cause any such Client to terminate, alter, reduce, modify or restrict in any way its
relationship or business with the Company; or (iii) except as required by law or on the written
request or with the written consent of the Company, disclosing any Confidential Information,
directly or indirectly, or using Confidential Information in any way.
2.21.
Operating Agreement
means the Companys Amended and Restated Operating
Agreement, dated as of October 30, 2007, as in effect from time to time.
2.22.
Option
means an option to purchase Class B Units of the Company.
3
2.23.
Optionee
means a Participant to whom an Option shall have been granted under the
Plan.
2.24.
Participant
means any holder of an outstanding Award under the Plan.
2.25.
Plan
means this Pzena Investment Management, LLC 2006 Amended and Restated
Equity Incentive Plan, as amended from time to time, and including any attachments or addenda
hereto.
2.26.
Restricted Units
means Class B Units issued or sold to a Participant subject to
a Risk of Forfeiture.
2.27.
Restriction Period
means the period of time, established by the Committee in
connection with an Award of Restricted Units, during which such Restricted Units are subject to a
Risk of Forfeiture described in the applicable Award Agreement.
2.28.
Risk of Forfeiture
means a limitation on the right of the Participant to retain
Restricted Units, including a right in the Company to reacquire the Restricted Units at less than
their then Fair Market Value, arising because of the occurrence or non-occurrence of specified
events or conditions.
2.29.
Securities Act
means the Securities Act of 1933, as amended from time to time.
2.30.
Unit Grant
means a grant of Class B Units not subject to restrictions or other
forfeiture conditions.
2.31.
Unit-Based Award
means an Award granted pursuant to Section 6.4 of the Plan.
3. Term of the Plan
Unless the Plan shall have been earlier terminated by the Company, Awards may be granted under
this Plan at any time in the period commencing on the date of approval of the Plan by the Company
and ending immediately prior to the tenth anniversary of such date. Awards granted pursuant to the
Plan within that period shall not expire solely by reason of the termination of the Plan.
4. Administration
The Plan shall be administered by the Committee;
provided, however
, that at any time and on
any one or more occasions the Managing Member may itself exercise any of the powers and
responsibilities assigned the Committee under the Plan and when so acting shall have the benefit of
all of the provisions of the Plan pertaining to the Committees exercise of its authorities
hereunder; and
provided further, however,
that the Committee may delegate to one or more executive
officers (as defined under applicable rules promulgated under the Exchange Act) the authority to
grant Awards hereunder to employees who are not executive officers, and to consultants, in
accordance with such
4
guidelines as the Committee shall set forth at any time or from time to time. Subject to the
provisions of the Plan, the Committee shall have complete authority, in its discretion, to make or
to select the manner of making all determinations with respect to each Award to be granted by the
Company under the Plan including the member, employee or consultant to receive the Award and the
form of Award. In making such determinations, the Committee may take into account the nature of
the services rendered by such members, employees and consultants, their present and potential
contributions to the success of the Company, and such other factors as the Committee in its
discretion shall deem relevant. Subject to the provisions of the Plan, the Committee shall also
have complete authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the respective Award
Agreements (which need not be identical), and to make all other determinations necessary or
advisable for the administration of the Plan. The Committees determinations made in good faith on
matters referred to in the Plan shall be final, binding and conclusive on all persons having or
claiming any interest under the Plan or an Award made pursuant hereto.
5. Authorization of Grants
5.1.
Eligibility
. The Committee may grant from time to time and at any time prior to
the termination of the Plan one or more Awards, either alone or in combination with any other
Awards, to any service provider to the Company or any of its subsidiaries, including members of the
Company and employees and consultants of the Company and/or its subsidiaries.
5.2.
General Terms of Awards
. Each grant of an Award shall be subject to all
applicable terms and conditions of the Plan (including but not limited to any specific terms and
conditions applicable to that type of Award set out in Section 6), and such other terms and
conditions, not inconsistent with the terms of the Plan, as the Committee may prescribe.
Restricted Units and Units Grants under the Plan shall at all times be subject to the terms of the
Operating Agreement.
5.3.
Non-Transferability of Awards
. Awards shall not be transferable, and no Awards
or interest therein may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution, and all of a
Participants rights in any Award may be exercised during the life of the Participant only by the
Participant or the Participants legal representative. Notwithstanding the foregoing, Unit Grants
and, following lapse of the Restriction Period, Restricted Units may be transferred in accordance
with the provisions of the Operating Agreement.
5.4.
Conditions to Receipt of Awards
.
(a) No prospective Participant shall have any rights with respect to an Award unless and until
such Participant has executed an agreement evidencing the Award, delivered a fully executed copy
thereof to the Company, and otherwise complied with the applicable terms and conditions of such
Award.
5
(b) Notwithstanding anything herein to the contrary, no Award of Options, Restricted Units,
Unit Grants, other Unit- Based Awards, LTIP Units and no issuance of Class B Units upon exercise of
an Option or the settlement of any Unit-Based Award, may be made to a person who has committed any
act which could serve as a basis for (i) denial, suspension or revocation of the registration of
any investment adviser, including the Company, under Section 203(e) of the Investment Advisers Act
of 1940, as amended, or Rule 206(4)-4(b) thereunder, or for disqualification of any investment
adviser, including the Company, as an investment adviser to a registered investment company
pursuant to Sections 9(a) or 9(b) of the Investment Company Act of 1940, as amended, (ii)
precluding the Company from acting as a fiduciary by operation of Section 411 of the Employee
Retirement Income Security Act of 1974, as amended, or (iii) the Company failing to qualify as a
qualified professional asset manager within the meaning of Department of Labor Prohibited
Transaction Exemption 84-14.
(c) Each Award of Restricted Units, Unit Grants, other Unit-based Awards or LTIP Units and
each issuance of Class B Units to the recipient of an Award of Options upon exercise of the Options
or upon settlement of a Unit-Based Award, shall be conditioned upon the recipients execution of
the Operating Agreement or an agreement of accession thereto.
5.5.
Units Subject to Plan
. The maximum number of Class B Units reserved for the
grant or settlement of Awards under the Plan shall be 10,113,996 Class B Units, subject to
adjustment as provided herein. If any Class B Units subject to an Award are forfeited, canceled,
exchanged or surrendered or if an Award otherwise terminates or expires without a distribution of
Class B Units to the Participant, the Class B Units with respect to such Award shall, to the extent
of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be
available for Awards under the Plan. Notwithstanding the foregoing, Class B Units that are
exchanged by a Participant or withheld by the Company as full or partial payment in connection with
any Award under the Plan, as well as any Class B Units exchanged by a Participant or withheld by
the Company to satisfy the tax withholding obligations related to any Award under the Plan, shall
not be available for subsequent Awards under the Plan.
6. Specific Terms of Awards
6.1.
Options
.
(a)
Date of Grant
. The granting of an Option shall take place at the time specified
in the Award Agreement.
(b)
Exercise Price
. The price at which a Class B Unit may be acquired under each
Option shall be no less than 100% of the Fair Market Value of such Class B Unit on the Grant Date.
(c)
Option Period
. The exercise period with respect to each Option shall be
determined in the sole discretion of the Committee and specified in each Award
6
Agreement;
provided, however,
that no Option may be exercised on or after the tenth
anniversary of the Grant Date.
(d) Exercisability. An Option may be immediately exercisable or become exercisable in such
installments, cumulative or non-cumulative, as the Committee may determine and as set forth in each
Award Agreement. In the case of an Option not otherwise immediately exercisable in full, the
Committee may Accelerate such Option in whole or in part at any time.
(e)
Termination of Association with the Company Generally
. Unless the Committee
shall provide otherwise for any Award with respect to any Option and except as provided in Section
6.1(f), if the Optionees employment or other association with the Company ends for any reason, any
outstanding Option of the Optionee shall cease to be exercisable in any respect and shall terminate
not later than 90 days following that event and, for the period it remains exercisable following
that event, shall be exercisable only to the extent exercisable at the date of that event (and to
the extent not then exercisable, shall terminate as of the date of such event), after giving effect
to the last sentence of this Section 6(e). Military or sick leave or other bona fide leave shall
not be deemed a termination of employment or other association,
provided
that it does not exceed
the longer of ninety (90) days or the period during which the absent Optionees reemployment
rights, if any, are guaranteed by statute or by contract. Notwithstanding anything contained
herein to the contrary, unless the Committee shall otherwise provide, an Optionee shall immediately
become fully vested in all Options if (i) such Optionee dies while employed by or providing
services to the Company, (ii) such Optionees employment with or provision of services to the
Company is terminated by the Company without Cause or (iii) such Optionee voluntarily terminates
the provision of services to or employment with the Company with Good Reason;
provided
, that any
termination of an Optionees employment (x) by reason of the Companys waiver of any termination
notice period given by an Optionee or (y) by the Company after such Optionee has given notice of
voluntary termination will, in either case, be deemed a voluntary termination as of the date of the
Optionees actual termination of employment.
(f)
Termination of Association with the Company Following Ten Years of Continuous
Service
. Notwithstanding anything contained herein to the contrary and unless the Committee
shall provide otherwise for any Award with respect to any Option, in the event the Optionee
voluntarily terminates employment or other association with the Company and has, as of the time of
such termination, been employed by or providing services to the Company for a continuous period of
no less than ten years, then (i) such Optionee will, subject to the Optionees continued compliance
with the Obligations, continue to vest in any outstanding Options held by the Optionee in
accordance with the vesting schedule set forth in the Award Agreement and (ii) any outstanding
Option of the Optionee will remain outstanding until the earlier to occur of (x) the expiration
date of such Option and (y) the date the Optionee violates any of the Obligations.
(g)
Method of Exercise
. An Option may be exercised by the Optionee giving written
notice, in the manner provided in Section 12, specifying the number of
7
Class B Units with respect to which the Option is then being exercised. Where the exercise of
an Option is to be accompanied by payment, the Committee may determine the required or permitted
forms of payment, subject to the following: (a) all payments will be by cash or check acceptable to
the Committee, or (b) if so permitted by the Committee, (i) through the delivery of Class B Units
that have a Fair Market Value equal to the exercise price, except where payment by delivery of
Class B Units would adversely affect the Companys results of operations under U.S. generally
accepted accounting principles or where payment by delivery of Class B Units outstanding for less
than six months would require application of securities laws relating to profit realized on such
Class B Units, (ii) by other means acceptable to the Committee, or (iii) by means of withholding of
Class B Units, with an aggregate Fair Market Value equal to (A) the aggregate exercise price and
(B) unless the Company is precluded or restricted from doing so under debt covenants, minimum
statutory withholding taxes with respect to such exercise, or (iv) by any combination of the
foregoing permissible forms of payment. The delivery of Class B Units in payment of the exercise
price under clause (g)(i) above may be accomplished either by actual delivery or by constructive
delivery through attestation of ownership, subject to such rules as the Committee may prescribe.
(h)
No Certificates
. Class B Units are not represented by certificates. The
issuance of Class B Units pursuant to the exercise of an Option granted under the Plan shall not
require the creation or delivery of a certificate or other evidence of ownership, other than that
provided by the applicable Award Agreement, but instead only the Companys recognition of the
Optionee on its books and records as the beneficial holder of such Class B Units.
(i)
Rights Pending Exercise
. No person holding an Option shall be deemed for any
purpose to be a member of the Company with respect to any of the Class B Units issuable pursuant to
his or her Option, except to the extent that the Option shall have been exercised with respect
thereto.
6.2.
Restricted Unit
s.
(a)
Purchase Price
. Class B Units or Restricted Units shall be issued under the Plan
for such consideration, in cash, other property or services, or any combination thereof, as is
determined by the Committee.
(b)
No Certificates
. Class B Units are not represented by certificates. The
issuance of Class B Units or Restricted Units under the Plan shall not require the creation or
delivery of a certificate or other evidence of ownership, other than that provided by the
applicable Award Agreement, but instead only the Companys recognition of the Participant on its
books and records as the beneficial holder of such Class B Units or Restricted Units.
(c)
Restrictions and Restriction Period
. During the Restriction Period applicable to
Restricted Units, such Restricted Units shall be subject to limitations on transferability and a
Risk of Forfeiture arising on the basis of such conditions related to the performance of services,
Company performance or otherwise as the Committee may
8
determine and provide for in the applicable Award Agreement. Any such Risk of Forfeiture may
be waived or terminated, or the Restriction Period shortened, at any time by the Committee on such
basis as it deems appropriate.
(d) R
ights Pending Lapse of Risk of Forfeiture or Forfeiture of Awar
d. Except as
otherwise provided in the Plan or the applicable Award Agreement, at all times prior to lapse of
any Risk of Forfeiture applicable to, or forfeiture of, an Award of Restricted Units, the
Participant shall have all of the rights of a holder of Class B Units of the Company, including the
right to receive any distributions with respect to, the Restricted Units.
(e)
Termination of Association with the Company Generally
. Unless the Committee
shall provide otherwise for any Award of Restricted Units and except as provided in Section 6.2(f),
upon termination of a Participants employment or other association with the Company and its
subsidiaries for any reason during the Restriction Period, all Restricted Units still subject to
Risk of Forfeiture shall be forfeited or otherwise subject to return to or repurchase by the
Company on the terms specified in the Award Agreement;
provided, however
, that military or sick
leave or other bona fide leave shall not be deemed a termination of employment or other association
if it does not exceed the longer of ninety (90) days or the period during which the absent
Participants reemployment rights, if any, are guaranteed by statute or by contract.
Notwithstanding anything contained herein to the contrary, unless the Committee provides otherwise,
the Restriction Period applicable to Restricted Units shall immediately lapse if (i) such
Participant dies while employed by or providing services to the Company, (ii) such Participants
employment with or provision of services to the Company is terminated by the Company without Cause
or (iii) such Participant voluntarily terminates the provision of services to or employment with
the Company with Good Reason;
provided
, that any termination of a Participants employment (x) by
reason of the Companys waiver of any termination notice period given by a Participant or (y) by
the Company after such Participant has given notice of voluntary termination will, in either case,
be deemed a voluntary termination as of the date of the Participants actual termination of
employment.
(f)
Termination of Association with the Company Following Ten Years of Continuous
Service
. Notwithstanding anything contained herein to the contrary and unless the Committee
shall provide otherwise for any Award of Restricted Units with respect to any Option, in the event
a Participant voluntarily terminates employment or other association with the Company and has, as
of the time of such termination, been employed by or providing services to the Company for a
continuous period of no less than ten years, then (i) such Participant will, subject to the
Participants continued compliance with the Obligations, continue to vest in any outstanding
Restricted Units subject to a Risk of Forfeiture in accordance with the vesting schedule set forth
in the Award Agreement and (ii) any outstanding Restricted Units held by the Participant will
remain outstanding until the earlier to occur of (x) the expiration date of such Restricted Units
and (y) the date the Participant violates any of the Obligations.
9
6.3.
Unit Grants
. Class B Unit Grants shall be awarded solely in recognition of
significant contributions to the success of the Company, in lieu of compensation otherwise already
due and in such other limited circumstances as the Committee deems appropriate. Unit Grants shall
be made without forfeiture conditions of any kind.
6.4.
Unit-Based Awards
. The Committee, in its sole discretion, may grant Awards of
phantom Class B Units and other Awards that are valued in whole or in part by reference to, or are
otherwise based on the Fair Market Value of a Class B Unit. Such Unit-Based Awards shall be in
such form, and dependent on such conditions, as the Committee shall determine, including, without
limitation, the right to receive one or more Class B Units (or the equivalent cash value of such
Class B Units) upon the completion of a specified period of service, the occurrence of an event
and/or the attainment of performance objectives. Unit-Based Awards may be granted alone or in
addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the
Committee shall determine: (a) the number of Class B Units to be awarded under (or otherwise
related to) such Unit-Based Awards; (b) whether such Unit-Based Awards shall be settled in cash,
Class B Units or a combination of cash and Class B Units; and (c) all other terms and conditions of
such Unit-Based Awards (including, without limitation, the vesting provisions thereof).
6.5.
LTIP Units
. LTIP Units may be granted as free-standing awards or in tandem with
other Awards under the Plan, and may be valued by reference to the Class B Units, and will be
subject to such other conditions and restrictions as the Committee, in its sole and absolute
discretion, may determine, including, but not limited to, continued employment or service,
computation of financial metrics and/or achievement of pre-established performance goals and
objectives. LTIP Units, whether vested or unvested, may entitle the participant to receive,
currently or on a deferred or contingent basis, distributions or distribution equivalent payments
with respect to the number of Class B Units corresponding to the LTIP Unit or other distributions
from the Company and the Committee may provide in the applicable Award Agreement that such amounts
(if any) shall be deemed to have been reinvested in additional Class B Units or LTIP Units. The
LTIP Units granted under the Plan will be subject to such terms and conditions as may be determined
by the Administrator in its sole and absolute discretion, including, but not limited to the
conversion ratio, if any, pursuant to which LTIP Units may be exchanged for Class B Units in
accordance with the terms of the Operating Agreement. LTIP Units may be structured as profits
interests, capital interests or other types of interests for federal income tax purposes.
6.6.
Awards to Participants Outside the United States
. The Committee may modify the
terms of any Award under the Plan granted to a Participant who is, at the time of grant or during
the term of the Award, resident or primarily employed outside of the United States in any manner
deemed by the Committee to be necessary or appropriate in order that the Award shall conform to
laws, regulations, and customs of the country in which the Participant is then resident or
primarily employed, or so that the value and other benefits of the Award to the Participant, as
affected by foreign tax laws and other restrictions applicable as a result of the Participants
residence or employment abroad, shall be comparable to the value of such an Award to a Participant
who is resident or
10
primarily employed in the United States. The Committee may establish supplements to, or
amendments, restatements, or alternative versions of the Plan for the purpose of granting and
administrating any such modified Award.
7. Adjustment Provisions
7.1.
Adjustment for Company Actions
. Subject to Section 7.2, if subsequent to the
adoption of the Plan by the Company the outstanding Class B Units are increased, decreased, or
exchanged for a different number or kind of units or other securities, or if additional units or
new or different units or other securities are distributed with respect to Class B Units, through
merger, consolidation, sale of all or substantially all the property of the Company,
reorganization, recapitalization, reclassification, dividend, unit split, reverse unit split, or
other similar distribution with respect to such Class B Units, the Committee shall make an
adjustment, to the extent appropriate and proportionate, in (i) the numbers and kinds of Class B
Units or other securities subject to the then outstanding Awards, and (ii) the exercise price for
each Class B Unit or other securities subject to then outstanding Options (without change in the
aggregate purchase price as to which such Options remain exercisable).
7.2.
Reorganizations
. Upon a sale, merger, reorganization, separation or liquidation of the
Company or a sale of all or substantially all of the Companys assets, except to the extent
modified by an applicable Award Agreement, the Committee shall have the discretion, exercisable
either in advance of such a transaction or at the time thereof, to provide for one or more of the
following: (i) the continuation of outstanding Awards after the transaction without change (ii) the
cash-out of outstanding Options as of the time of the transaction as part of the transaction for an
amount equal to the difference between the price that would have been paid for the Class B Units
subject to such outstanding Options if such Options were exercised upon the closing of such
transaction and the exercise price of such outstanding Options;
provided
that if the exercise price
of the Options exceeds the price that would have been paid for the Class B Units subject to the
outstanding Options if such Options were exercised upon the closing of the transaction, then such
Options may be cancelled without making a payment to the Optionees, (iii) the expiration of the
exercise period for outstanding Options upon the closing of the transaction, (iv) the cancellation
of outstanding Restricted Units and/or Unit-Based Awards and payment to the Participants holding
such Restricted Units and/or Unit-Based Awards equal to the value of the underlying Class B Units
as of the closing date of the transaction, in such form and at such time as the Committee shall
determine, (v) a requirement that the buyer in the transaction assume outstanding Options and/or
Restricted Units and/or Unit-Based Awards, (vi) a requirement that the buyer in the transaction
substitute outstanding Options with comparable options to purchase the equity interests of the
buyer or its parent and/or substitute outstanding Restricted Units and/or Unit-Based Awards with
comparable restricted stock or units of the buyer or its parent, and (vii) the Acceleration of
outstanding Options, Restricted Units and Unit-Based Awards. Each outstanding Option, Restricted
Unit and Unit-Based Award that is assumed in connection with such a transaction, or is otherwise to
continue in effect subsequent to the transaction, will be appropriately adjusted, immediately after
the
11
transaction, as to the number and class of securities and, with respect to an Option, the
price at which it may be exercised, in accordance with Section 7.1.
7.3.
Dissolution or Liquidation
. Upon dissolution or liquidation of the Company,
other than as part of a transaction referred to in Section 7.2, each outstanding Option shall
terminate, but the Optionee (if at the time in the employ of or otherwise associated with the
Company) shall have the right, immediately prior to the dissolution or liquidation, to exercise the
Option to the extent exercisable on the date of dissolution or liquidation.
7.4.
Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring
Events
. In the event of any Company action not specifically covered by the preceding Sections,
including but not limited to an extraordinary cash distribution on Units, a Company separation,
spin-off, split off or other reorganization or liquidation, the Committee shall make such
adjustment of outstanding Awards and their terms, if any, as it, in its sole discretion, may deem
equitable and appropriate in the circumstances.
7.5.
Related Matters
. Any adjustment in Awards made pursuant to this Section 7 shall
be determined and made, if at all, by the Committee and shall include any correlative modification
of terms, including of Option exercise prices, rates of vesting or exercisability, Risks of
Forfeiture and applicable repurchase prices for Restricted Units and Unit-Based Awards, which the
Committee may deem necessary or appropriate so as to ensure the rights of the Participants in their
respective Awards are not substantially diminished nor enlarged as a result of the adjustment and
Company action other than as expressly contemplated in this Section 7. No fraction of a Class B
Unit shall be issued or purchasable or deliverable upon exercise, but in the event any adjustment
hereunder of the number of Class B Units covered by an Award shall cause such number to include a
fraction of a Class B Unit, such number of Class B Units shall be adjusted to the nearest smaller
whole number of Class B Units.
8. Settlement of Awards
8.1.
Violation of Law
. Notwithstanding any other provision of the Plan or the
relevant Award Agreement, if, at any time, in the reasonable opinion of the Company, the issuance
of Class B Units or LTIP Units covered by an Award may constitute a violation of law, then the
Company may delay such issuance and the delivery of such Class B Units or LTIP Units, as
applicable, until approval shall have been obtained from such governmental agencies as may be
required under any applicable law, rule, or regulation, and the Company shall take all reasonable
efforts to obtain such approval.
8.2.
Restrictions on Rights in Units
. Any Class B Unit or LTIP Unit to be issued
pursuant to Awards granted under the Plan shall be subject to all restrictions upon the transfer
thereof which may be now or hereafter imposed by the Certificate of Formation of the Company, as
amended from time to time, and the Operating Agreement, as amended from time to time.
12
8.3.
Investment Representations
. The Company shall be under no obligation to issue
any Class B Units or LTIP Units covered by any Award unless the intended recipient has made such
written representations to the Company (upon which the Company believes it may reasonably rely) as
the Company may deem necessary or appropriate for purposes of confirming that the issuance of such
Class B Units or LTIP Units, as applicable, will be exempt from the registration requirements of
the Securities Act and any applicable state securities laws and otherwise in compliance with all
applicable laws, rules and regulations, including but not limited to that the Participant is
acquiring the Class B Units or LTIP Units, as applicable, for his or her own account for the
purpose of investment and not with a view to, or for sale in connection with, the distribution of
any such Class B Units or LTIP Units.
8.4.
Registration
. If the Company shall deem it necessary or desirable to register under the
Securities Act or other applicable statutes any Class B Units or LTIP Units issued or to be issued
pursuant to Awards granted under the Plan, or to qualify any such Class B Units or LTIP Units, as
applicable for exemption from the Securities Act or other applicable statutes, then the Company
shall take such action at its own expense. The Company may require from each recipient of an Award
such information in writing for use in any registration statement, prospectus, preliminary
prospectus or offering circular as is reasonably necessary for that purpose and may require
reasonable indemnity to the Company and its Managing Member, officers and directors from that
holder against all losses, claims, damage and liabilities arising from use of the information so
furnished and caused by any untrue statement of any material fact therein or caused by the omission
to state a material fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made. In addition, the
Company may require of any such person that he or she agree that, without the prior written consent
of the Company or the managing underwriter in any public offering of Class B Units or LTIP Units,
as applicable, he or she will not sell, make any short sale of, loan, grant any option for the
purchase of, pledge or otherwise encumber, or otherwise dispose of, any Class B Units or LTIP
Units, as applicable, during the 180 day period commencing on the effective date of the
registration statement relating to the underwritten public offering of securities.
8.5.
Tax Withholding
. Whenever Class B Units or LTIP Units are issued or to be issued
pursuant to Awards granted under the Plan, the Company shall have the right to require the
recipient to remit to the Company in cash an amount sufficient to satisfy federal, state, local or
other withholding tax requirements if, when, and to the extent required by law (whether so required
to secure for the Company an otherwise available tax deduction or otherwise) coincident with the
recipients exercise of such Option or receipt of Class B Units or LTIP Units, as applicable. The
obligations of the Company under the Plan shall be conditional on satisfaction of all such
withholding obligations and the Company shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the recipient of an Award.
13
9. No Special Employment or Other Rights
Nothing contained in the Plan or in any Award Agreement shall confer upon any recipient of an
Award any right with respect to the continuation of his or her employment or other association with
the Company or any of its subsidiaries, or interfere in any way with the right of the Company or
any of its subsidiaries, subject to the terms of any separate employment or consulting agreement,
any provision of law, the Companys Certificate of Formation or the Operating Agreement to the
contrary, at any time to terminate such employment or consulting agreement or to increase or
decrease, or otherwise adjust, the other terms and conditions of the recipients employment or
other association with the Company or any of its subsidiaries.
10. Nonexclusivity of the Plan
The adoption of the Plan by the Company shall not be construed as creating any limitations on
the power of the Company to adopt such other incentive arrangements as it may deem desirable,
including without limitation, the granting of options and restricted units other than under the
Plan, and such arrangements may be either applicable generally or only in specific cases.
11. Termination and Amendment of the Plan and Awards
The Company may at any time terminate the Plan or make such modifications of the Plan as it
shall deem advisable. Unless the Company otherwise expressly provides, or may deem necessary or
appropriate to comply with applicable law, including without limitation the provisions of Section
409A of the Code, no termination or amendment of the Plan may adversely affect the rights of the
recipient of an Award previously granted hereunder without the consent of the recipient of such
Award.
The Committee may amend the terms of any Award theretofore granted, prospectively or
retroactively,
provided
that the Award as amended is consistent with the terms of the Plan, and
further provided
that, other than as the Committee may deem necessary or appropriate to comply with
applicable law, including without limitation the provisions of Section 409A of the Code, no
amendment or modification of an outstanding Award may adversely affect the rights of the recipient
of such Award without his or her consent.
12. Notices and Other Communications
Any notice, demand, request or other communication hereunder to any party shall be deemed to
be sufficient if contained in a written instrument delivered in person or duly sent by first class
registered, certified or overnight mail, postage prepaid, or by facsimile with a confirmation copy
by regular, certified or overnight mail, addressed or sent by facsimile, as the case may be, (i) if
to the recipient of an Award, at his or her residence address last filed with the Company and (ii)
if to the Company, at its principal place of business, addressed to the attention of the Managing
Member, or to such other address or facsimile number, as the case may be, as the addressee may have
designated by notice to
14
the addressor. All such notices, requests, demands and other communications shall be deemed
to have been received: (i) in the case of personal delivery, on the date of such delivery, (ii) in
the case of mailing, when received by the addressee, and (iii) in the case of facsimile
transmission, when confirmed by facsimile machine report.
13. Governing Law
The Plan and all Award Agreements and actions taken thereunder shall be governed, interpreted
and enforced in accordance with the laws of the State of New York without regard to the conflict of
laws principles thereof.
15
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (Agreement) is made as of October 24, 2007, by and between
Pzena Investment Management, Inc., a Delaware corporation (along with any entities referred to in
Section 2(c) below, the Company), and Richard S. Pzena (Director).
RECITALS
WHEREAS
, highly competent persons have become more reluctant to serve publicly-held
corporations as directors or in other capacities unless they are provided with adequate protection
through insurance or adequate indemnification against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of the corporation.
WHEREAS
, the Board of Directors of the Company (the Board) has determined that, in order to
attract and retain qualified individuals as members of the Board, the Company will attempt to
maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving
the Company and its subsidiaries from certain liabilities. Although the furnishing of such
insurance has been a customary and widespread practice among United States based corporations and
other business enterprises, such insurance may be available to it in the future only at higher
premiums and with more exclusions. At the same time, directors are being increasingly subjected to
expensive and time-consuming litigation relating to the business and affairs of corporations. The
Company recognizes that the cost of defending and otherwise participating in such litigation is far
greater than the financial benefits of serving as a Director. Article Seventh of the Certificate
of Incorporation of the Company, as in effect on the date hereof, and the Delaware General
Corporation Law (DGCL) expressly provide that the indemnification provisions set forth therein
are not exclusive and contemplate that agreements may be entered into between the Company and
members of the Board (or parties serving at the request of the Board) with respect to
indemnification;
WHEREAS
, the uncertainties relating to insurance have increased the difficulty of attracting
and retaining directors;
WHEREAS
, the Board has determined that the increased difficulty in attracting and retaining
directors is detrimental to the best interests of the Companys stockholders;
WHEREAS
, it is reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify, and to pay expenses on behalf of, directors to the fullest extent permitted by
applicable law so that they will serve or continue to serve the Company free from undue concern
that they will not be so indemnified;
WHEREAS
, this Agreement is in furtherance of the Amended and Restated Certificate of
Incorporation of the Company, its Amended and Restated Bylaws and any resolutions adopted pursuant
thereto, and the DGCL, and shall not be deemed a substitute therefor, nor to diminish or abrogate
any rights of Director thereunder;
WHEREAS
, the Company has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Director to serve as a director or officer of the Company, and the
Company acknowledges that Director is relying upon this Agreement in serving as a director or
officer of the Company; and
WHEREAS
, Director is willing to serve, continue to serve and to take on additional service for
or on behalf of the Company on the condition that he be so indemnified;
NOW, THEREFORE
, in consideration of the promises and the covenants contained herein, the
Company and Director do hereby covenant and agree as follows:
1.
Services to the Company
.
Director will serve or continue to serve, at the will of the
Company and its stockholders for so long as Director is duly elected or appointed or until Director
tenders his or her resignation.
2.
Definitions
.
As used in this Agreement:
(a) Beneficial Owner shall have the meaning given to such term in Rule 13d-3 under the
Securities Exchange Act of 1934.
(b) A Change in Control shall be deemed to occur upon the earliest to occur after the date
of this Agreement of any of the following events:
(i)
Acquisition of Stock by Third Party
. Any Person, other than a Principal or a
Related Party of a Principal (as each such term is defined below), is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or
more of the combined voting power of the Companys then outstanding securities;
(ii)
Change in Board of Directors
. During any period of two (2) consecutive years
(not including any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board (together with any new directors whose election to
the Board or whose nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so approved) cease for
any reason to constitute at least a majority of the members of the Board;
(iii)
Corporate Transactions
. The effective date of a merger or consolidation of the
Company with any other entity, unless such merger or consolidation would result in the voting
securities of the Company outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity, including the parent corporation of such surviving entity) at least 50% of the
total voting power of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of the board of
directors or other governing body of such surviving entity;
2
(iv)
Liquidation
. The approval by the stockholders of the Company of a complete
liquidation of the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Companys assets; and
(v)
Other Events
. There occurs any other event of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any
similar item on any similar schedule or form) promulgated under the Exchange Act (as defined
below), whether or not the Company is then subject to such reporting requirement.
(c) Company shall include, in addition to Pzena Investment Management, Inc., any
corporation, partnership, joint venture, limited liability company, trust or other enterprise of
which such Director is or was serving as a director, officer, employee or agent of at the request
of the Company, or any corporation which results from or survives a consolidation or merger with
Pzena Investment Management, Inc., as well as any corporation resulting from a consolidation or
merger which, if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that if Director is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company
,
trust or other enterprise, Director shall
stand in the same position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Director would have with respect to such constituent corporation if its
separate existence had continued.
(d) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding as defined herein in respect of which indemnification is sought by Director.
(e) Enterprise shall mean the Company and any other corporation, partnership, limited
liability company, joint venture, trust, employee benefit plan or other enterprise of which
Director is or was serving at the request of the Company as a director, officer, employee, agent or
fiduciary.
(f) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(g) Expenses shall include all reasonable attorneys and accountants fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in,
or otherwise being involved with, a Proceeding as defined in this Agreement. Expenses also shall
include Expenses incurred in connection with any appeal resulting from any Proceeding, including
without limitation the premium, security for, and other costs relating to any cost bond,
supersedeas bond, or other appeal
3
bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by
Director or the amount of judgments or fines against Director.
(h) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five years has been, retained
to represent: (i) the Company or Director in any matter material to either such party or (ii) any
other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding
the foregoing, the term Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Director in an action to determine Directors rights under this
Agreement.
(i) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange
Act; provided, however, that Person shall exclude (i) the Company or a person or entity that
directly or indirectly controls, is controlled by, or is under common control with, the Company,
(ii) any trustee or other fiduciary holding securities under an employee benefit plan of the
Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the Company.
(j) Principal means Richard S. Pzena, John P. Goetz, William L. Lipsey, A. Rama Krishna and
Joel Greenblatt.
(k) The term Proceeding shall include any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation (including but not limited to
any internal corporate investigation), inquiry, administrative hearing or any other actual,
threatened or completed proceeding, including any and all appeals, whether brought in the right of
the Company or otherwise and whether of a civil, criminal, administrative or investigative nature,
in which Director was, is, or will be a party to, a witness in or otherwise participates in by
reason of the fact that Director is or was a director or officer of the Company, by reason of any
action taken by him or of any action on his part while acting as director or officer of the
Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another Enterprise, in each case whether or not serving in
such capacity at the time any liability or expense is incurred for which indemnification,
reimbursement, or payment of expenses can be provided under this Agreement; except one initiated by
a Director to enforce his rights under this Agreement. Any Director serving, in any capacity, (i)
another corporation of which a majority of the shares entitled to vote in the election of its
directors is held by the Company, or (ii) any employee benefit plan of the Company or of any
corporation referred to in clause (i), shall be deemed to be doing so at the request of the
Company.
(l) Related Party means: (1) in the case of an individual, any immediate family member of
any Principal; or (2) any trust, corporation, partnership, limited liability company or other
entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially holding
an 80% or more controlling interest of which
4
consist of any one or more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
(m) References to fines shall include, but are not limited to, any excise tax assessed with
respect to any employee benefit plan; references to serving at the request of the Company shall
include any service as a director, officer, employee or agent of the Company which imposes duties
on, or involves services by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants and beneficiaries of
an employee benefit plan shall be deemed to have acted in a manner not opposed to the best
interests of the Company as referred to in this Agreement.
3.
Indemnity in Third-Party Proceedings
.
A Third-Party Proceeding is a Proceeding other
than a Proceeding by or in the right of the Company to procure a judgment in its favor. The Company
shall indemnify Director in accordance with the provisions of this Section 3 if Director is, or is
threatened to be made, a party to, a witness in or otherwise participates in any Third-Party
Proceeding. Pursuant to this Section 3, Director shall be indemnified against all Expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred by Director or on
his behalf in connection with such Third-Party Proceeding or any claim, issue or matter therein, if
Director acted in good faith and in a manner Director reasonably believed to be in or not opposed
to the best interests of the Company and, in the case of a criminal proceeding had no reasonable
cause to believe that such conduct was unlawful.
4.
Indemnity in Proceedings by or in the Right of the Company
.
The Company shall indemnify
Director in accordance with the provisions of this Section 4 if Director is, or is threatened to be
made, a party to, a witness in or otherwise participates in any Proceeding by or in the right of
the Company to procure a judgment in its favor. Pursuant to this Section 4, Director shall be
indemnified against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter therein and to the extent permitted
by law, amounts paid in settlement, if Director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No indemnification for
Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which
Director shall have been finally adjudged by a court to be liable to the Company, unless and only
to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought
shall determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, Director is fairly and reasonably entitled to indemnification.
5.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
(a) In any Proceeding referred to in Section 4, if Director is not wholly successful in such
Proceeding, but has been adjudged to be liable to the Company as to one or more but less than all
claims, issues or matters in such Proceeding, no indemnification shall be made in respect of any
claim, issue or matter as to which
5
Director shall have been adjudged to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was brought shall
determine upon application that, despite the adjudication of liability to the Company, in view of
all the circumstances of the case, Director is fairly and reasonably entitled to such
indemnification. However, in any Proceeding referred to in Section 4, the Company shall indemnify
Director against all Expenses actually and reasonably incurred by him or on his behalf and, to the
extent permitted by law, amounts paid in settlement, in connection with each claim, issue or matter
as to which Director is successful on the merits or has reached a settlement.
(b) To the extent that Director has been successful on the merits or otherwise in defense of
any Proceeding (including any Proceeding referred to in Section 4), or in defense of any claim,
issue or matter therein, Director shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against all
Expenses actually and reasonably incurred or suffered by Director or on Directors behalf in
connection therewith. Indemnification pursuant to this Section 5(b) shall not require a
determination pursuant to Section 10 of this Agreement.
(c) For purposes of this Section 5 and without limitation, the termination of any claim, issue
or matter in a Proceeding in which Director is a defendant by dismissal, with or without prejudice,
shall be deemed to be a successful result as to such claim, issue or matter.
6.
Additional Indemnification
.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify
Director to the extent permitted by law if Director is a party to or threatened to be made a party
to, a witness in or otherwise participates in any Proceeding against all Expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by Director in connection with the
Proceeding (1) unless Directors conduct constitutes a breach of Directors duty of loyalty to the
Company or its stockholders
,
(2) except for liability for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) except for liability under
Section 174 of the DGCL, or (4) except for liability relating to any transaction from which the
Director derived an improper benefit.
(b) For purposes of Section 6(a), the meaning of the phrase to the extent permitted by law
shall mean:
(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates
additional indemnification by agreement, or the corresponding provision of any amendment to or
replacement of the DGCL; and
(ii) the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL adopted after the date of this Agreement that increase the extent to which a corporation may
indemnify its officers and directors.
6
7.
Exclusions
.
Notwithstanding any provision in this Agreement, the Company shall not be
obligated under this Agreement to make any payment for indemnity including Expenses, judgments,
fines and amounts paid in settlement to the extent that the amount for which Director seeks
indemnification, or a portion thereof:
(a) has actually been made to or on behalf of Director under any insurance policy, contract,
agreement or otherwise; or
(b) is based upon an accounting of profits made from the purchase and sale (or sale and
purchase) by Director of securities of the Company in violation of Section 16(b) of the Exchange
Act or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated or brought
voluntarily by Director, including any Proceeding (or any part of any Proceeding) initiated by
Director against the Company or its directors, officers or employees, unless (i) the Board
authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the
Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law.
8.
Notification of Indemnifiable Claim
.
Director shall, as a condition precedent to his
right to be indemnified under this Agreement, give the Company notice in writing as soon as
practicable of any claim made against Director for which indemnification will or could be sought
under this Agreement. Director agrees promptly to notify the Company in writing upon being served
with any summons, citation, subpoena, complaint, indictment, information or other document relating
to any Proceeding or matter which will or could be subject to indemnification or payment of
Expenses covered hereunder. The Secretary of the Company shall, promptly upon receipt of such
notice, advise the Board in writing of such notice. The failure of Director to timely notify the
Company shall not relieve the Company of any obligation which it may have to the Director under
this Agreement or otherwise, unless such failure to provide timely notice materially prejudices the
Company. The omission to notify the Company will not relieve the Company from any liability for
indemnification which it may have to Director otherwise than under this Agreement.
9.
Payment of Expenses
.
Without regard to Directors ultimate entitlement to
indemnification under other provisions of this Agreement, the Company shall pay the Expenses as
incurred by Director or reimburse Director for his payment of such Expenses in connection with any
Proceeding within thirty (30) days after the receipt by the Company of a written request for
payment of expenses. If the DGCL so requires, payment of Expenses by the Company under this
Section 9 shall be made only upon delivery to the Company of an undertaking (Undertaking). The
Undertaking shall constitute the Directors agreement that: (i) he shall repay the Expenses paid by
the Company to the extent that it is ultimately determined by final judicial decision from which
there is no further right to appeal that the Director is not entitled to be indemnified by the
Company; and (ii) that in consideration for the payment of such expenses, the Company may, at its
sole discretion, select counsel for Director, assume the defense or otherwise participate in the
defense of such Proceeding. Payment of Expenses pursuant to
7
this Section shall be unsecured and interest free. Payment of Expenses shall be made without
regard to Directors ability to repay the expenses and without regard to Directors ultimate
entitlement to indemnification under the other provisions of this Agreement. Such payment shall
include any and all reasonable Expenses incurred pursuing an action to enforce this right of
payment of Expenses, including Expenses incurred preparing and forwarding statements to the Company
to support the payment claimed. This Section 9 shall not apply to any claim for Expenses made by
Director for which indemnity is excluded pursuant to Section 7. Notwithstanding anything else
contained in this Section 9, to the extent that the Company is prohibited by applicable law from
making payment of Expenses to the Director prior to the Companys determination that the Director
is entitled to indemnification, the Company shall not pay Expenses to the Director pursuant to this
Section. Nothing herein shall be construed to limit the Companys right to seek damages from the
Director, including but not limited to the full amount of the Expenses paid by the Company
hereunder. The selection by the Company of defense counsel for the Director in connection with any
Proceeding, shall be made only with the approval of the Director, which approval shall not be
unreasonably withheld, upon the delivery to Director of written notice of the Companys election to
do so. After delivery of such notice, approval of such counsel by Director and the retention of
such counsel by the Company, the Company will not be liable to Director under this Agreement for
any fees of counsel subsequently incurred by Director with respect to the same Proceeding, provided
that (i) Director shall have the right to employ his counsel in any such Proceeding at Directors
expense; and (ii) if (A) the employment of counsel by Director has been previously authorized by
the Company, (B) Director shall have reasonably concluded that there may be a conflict of interest
between the Company and Director in the conduct of any such defense, or (C) the Company shall not,
in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses
of Directors counsel shall be at the expense of the Company.
10.
Procedure Upon Application for Indemnification
.
(a) Upon final disposition of a Proceeding for which indemnification is sought pursuant to
Section 3 or Section 4, Director shall submit promptly (and in any event, no later than the
applicable statute of limitations) to the Board a written request for indemnification averring that
he has met the applicable standard of conduct set forth herein. Any indemnification made under this
Agreement pursuant to Section 3 or Section 4 shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the Director is proper in the
circumstances because Director has met the applicable standard of conduct. Such determination
shall be made in the following manner: (i) if a Change in Control shall have occurred and the
Director is not a director at the time of such determination, by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Director; and (ii) in any other
circumstance: (A) by a majority vote of the Disinterested Directors, even though less than a quorum
of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the
Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such
Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to Director or (D) if so directed
by the Board, by the stockholders of the
8
Company, and, if it is so determined that Director is entitled to indemnification, payment to
Director shall be made within thirty (30) days after such determination. Director shall cooperate
with the person, persons or entity making such determination with respect to Directors entitlement
to indemnification, including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Director and reasonably necessary to such
determination. Any costs or expenses (including attorneys fees and disbursements) incurred by
Director in so cooperating with the person, persons or entity making such determination shall be
borne by the Company (irrespective of the determination as to Directors entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold Director harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 10(a) hereof, the Independent Counsel shall be selected as
provided in this Section 10(b). If a Change in Control shall not have occurred, the Independent
Counsel shall be selected by the Board within ten (10) days of submission of a written request by
Director for indemnification pursuant to Section 10(a), and the Company shall give written notice
to Director advising him of the identity of the Independent Counsel so selected. If a Change in
Control shall have occurred, the Independent Counsel shall be selected by Director within ten (10)
days of submission of a written request by Director for indemnification pursuant to Section 10(a),
(unless Director shall request that such selection be made by the Board, in which event the
preceding sentence shall apply), and Director shall give written notice to the Company advising it
of the identity of the Independent Counsel so selected. In either event, Director or the Company,
as the case may be, may, within ten (10) days after such written notice of selection shall have
been given, deliver to the Company or to Director, as the case may be, a written objection to such
selection;
provided
,
however
, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. The objection must also include a proposed
substitute Independent Counsel. If objection including a proposed substituted Independent Counsel
is timely made, such substituted Independent Counsel shall serve as Independent Counsel unless
objected to within ten (10) days. An objection to the substituted Independent Counsel may be
asserted only on the ground that the Independent Counsel so selected does not meet the requirements
of Independent Counsel as defined in Section 2 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If written objection is made, the
Independent Counsel or substituted Independent Counsel proposed may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined that such objection
is without merit. If, within thirty (30) days after submission by Director of a written request for
indemnification pursuant to Section 10(a) hereof, the parties have not agreed upon the selection of
the Independent Counsel, either the Company or Director may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the Company or Director
to the others selection of Independent Counsel and/or for the appointment as Independent Counsel
of a person selected by the Court or by such other person as the Court shall
9
designate, and the person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 10(a) hereof.
11.
Presumptions and Effect of Certain Proceedings
.
(a) The submission of the Application for Indemnification to the Board shall create a
rebuttable presumption that the Director is entitled to indemnification under this Agreement, and
the Board, Independent Counsel, or stockholders, as the case may be, may, at any time, specifically
determine that the Director is so entitled, unless it or they possess sufficient evidence to rebut
the presumption that Director has met the applicable standard of conduct. If a determination shall
have been made pursuant to this Agreement that Director is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding commenced pursuant to Section 12,
absent (i) a misstatement by Director of a material fact, or an omission of a material fact
necessary to make Directors statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under applicable law. Neither
the failure of the Company (including by its directors or Independent Counsel) to have made a
determination prior to the commencement of any action pursuant to this Agreement that
indemnification is proper in the circumstances because Director has met the applicable standard of
conduct, nor an actual determination by the Company (including by its directors or Independent
Counsel) that Director has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Director has not met the applicable standard of conduct.
Moreover, the fact that the Company has paid the Directors Expenses pursuant to Section 9 herein
shall not create a presumption that Director has met the applicable standard of conduct for
indemnification.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely affect the right of
Director to indemnification or create a presumption that Director did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal Proceeding, that Director had reasonable cause to believe that his
conduct was unlawful.
(c) For purposes of any determination of good faith, Director shall be deemed to have acted in
good faith if Directors action is based on the advice of legal counsel for the Company or on
information or records given or reports made to the Company by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by the Company. The
provisions of this Section 11(d) shall not be deemed exclusive or to limit in any way the other
circumstances in which the Director may be deemed to have met the applicable standard of conduct
set forth in this Agreement.
(d) To the extent legally permissible, the knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Enterprise shall not be imputed to Director for
purposes of determining the right to indemnification under this Agreement.
10
12.
Remedies of Director
.
(a) In the event that (i) a determination is made pursuant to Section 10 of this Agreement
that Director is not entitled to indemnification under this Agreement, (ii) payment of Expenses is
not timely made pursuant to Section 9 of this Agreement, or (iii) payment of indemnification
pursuant to Section 3, 4, 5(a) or 6 of this Agreement is not made within thirty (30) days after a
determination has been made that Director is entitled to indemnification, Director shall be
entitled to an adjudication by a court of his entitlement to such indemnification or payment of
Expenses.
(b) In the event that Director successfully sues the Company for indemnification or payment of
Expenses, and is successful in whole or in part, Director shall be entitled to be paid by the
Company for the Expense of prosecuting such suit. If the Company sues Director to recover Expenses
paid and Director is successful in defending such suit, in whole or in part, Director shall be
entitled to be paid the Expense of defending such suit.
(c) In the event that a determination shall have been made under this Agreement that Director
is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section
shall be conducted in all respects as a de novo trial on the merits and Director shall not be
prejudiced by reason of that adverse determination. In any judicial proceeding pursuant to this
Section, the Company shall have the burden of proving Director is not entitled to indemnification
or payment of Expenses, as the case may be.
(d) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement. The Company shall indemnify Director against any and all Expenses
and, if requested by Director, shall (within
thirty (30)
days after receipt by the Company of a
written request therefore) pay such Expenses to Director, which are incurred by Director in
connection with any action brought by Director for indemnification or payment of Expenses from the
Company under this Agreement or under any directors and officers liability insurance policies
maintained by the Company, regardless of whether Director ultimately is determined to be entitled
to such indemnification, payment of Expenses or insurance recovery, as the case may be.
13.
Non-exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification and to receive payment of Expenses as provided by this
Agreement shall not be deemed exclusive of any other rights to which Director may at any time be
entitled under applicable law, the Companys Certificate of Incorporation, the Companys Bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Director under this Agreement in respect of any action taken or omitted by such Director prior
to such
11
amendment, alteration or repeal. To the extent that a change in Delaware law, whether by
statute or judicial decision, permits greater indemnification or payment of Expenses than would be
afforded currently under the Companys Amended and Restated Certificate of Incorporation, Amended
and Restated Bylaws and this Agreement, it is the intent of the parties hereto that Director shall
enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given hereunder or now
or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) The Company shall, from time to time, make the good faith determination whether or not it
is practicable for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the directors, officers, employees, or agents of the
Company with coverage for losses from wrongful acts, or to ensure the Companys performance of its
indemnification obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection afforded by such
coverage. To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors of the Company or of any other corporation, partnership, joint
venture, trust, employee benefits plan or other enterprise which the Director serves at the request
of the Company, Director shall be covered by such policy or policies in such manner as to provide
the Director the same rights and benefits as are accorded to the most favorably insured of the
Companys directors. The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Director, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Director, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
14.
Duration of Agreement
.
This Agreement shall continue until and terminate upon the
later of: (a) six (6) years after the date that Director shall have ceased to serve as a director
or officer of the Company or as a director, officer, employee or agent of any other corporation,
partnership, joint venture, limited liability company, trust, employee benefit plan or other
enterprise which Director served at the request of the Company (Six Year Anniversary Date); or
(b) one (1) year after the final termination of each and every Proceeding, commenced prior to the
Six Year Anniversary Date.
15.
Successors and Assigns
.
This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Director and his heirs, executors and
administrators.
12
16.
Severability
.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
17.
Entire Agreement
.
Except as otherwise specified herein, this Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied, between the parties
hereto with respect to the subject matter hereof.
18.
Effectiveness of Agreement
.
This Agreement shall be effective as of the date set forth
on the first page and may apply to acts or omissions of Director which occurred prior to such date
if Director was an officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other enterprise, at the time such
act or omission occurred, and shall continue to exist after the rescission or restrictive
modification of this Agreement with respect to events occurring prior to such rescission or
restrictive modification.
19.
Modification and Waiver
.
No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by the parties thereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions
of this Agreement nor shall any waiver constitute a continuing waiver.
20.
Notices
.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and
receipted for by the party to whom said notice or other communication shall have been directed, or
(b) if sent by an overnight courier service (such as Federal Express) to:
(i) if to Director, at the address of Director provided to the Company most
recently prior to the date of said notice or other communication, and
(ii) if to the Company, at: Pzena Investment Management, Inc.
Attention: General Counsel
120 West 45
th
Street, 20
th
Floor
New York, New York 10036
13
or to any other address as may have been furnished to Director by the Company.
21.
Contribution
.
To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Director for any reason
whatsoever, the Company, in lieu of indemnifying Director, shall contribute to the amount incurred
by Director, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event
under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the
circumstances of such Proceeding in order to reflect (i) the relative benefits received by the
Company and Director as a result of the event(s) and/or transaction(s) giving cause to such
Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees
and agents) and Director in connection with such event(s) and/or transaction(s).
22.
Applicable Law and Consent to Jurisdiction
.
This Agreement and the legal relations
among the parties shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware, without regard to its conflict of laws rules. The Company and Director
hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware
(the Delaware Court), and not in any other state or federal court in the United States of America
or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the
Delaware Court for purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the
Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action
or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
23.
Identical Counterparts
.
This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24.
Miscellaneous
.
Use of the masculine pronoun shall be deemed to include usage of the
feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
14
IN WITNESS WHEREOF
, the parties have caused this Agreement to be signed as of the day and year
first above written.
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PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
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Name: Richard S. Pzena
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Title: Chief Executive Officer
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/s/ Richard S. Pzena
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Richard S. Pzena
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15
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (Agreement) is made as of October 24, 2007, by and between
Pzena Investment Management, Inc., a Delaware corporation (along with any entities referred to in
Section 2(c) below, the Company), and Steven M. Galbraith (Director).
RECITALS
WHEREAS
, highly competent persons have become more reluctant to serve publicly-held
corporations as directors or in other capacities unless they are provided with adequate protection
through insurance or adequate indemnification against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of the corporation.
WHEREAS
, the Board of Directors of the Company (the Board) has determined that, in order to
attract and retain qualified individuals as members of the Board, the Company will attempt to
maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving
the Company and its subsidiaries from certain liabilities. Although the furnishing of such
insurance has been a customary and widespread practice among United States based corporations and
other business enterprises, such insurance may be available to it in the future only at higher
premiums and with more exclusions. At the same time, directors are being increasingly subjected to
expensive and time-consuming litigation relating to the business and affairs of corporations. The
Company recognizes that the cost of defending and otherwise participating in such litigation is far
greater than the financial benefits of serving as a Director. Article Seventh of the Certificate
of Incorporation of the Company, as in effect on the date hereof, and the Delaware General
Corporation Law (DGCL) expressly provide that the indemnification provisions set forth therein
are not exclusive and contemplate that agreements may be entered into between the Company and
members of the Board (or parties serving at the request of the Board) with respect to
indemnification;
WHEREAS
, the uncertainties relating to insurance have increased the difficulty of attracting
and retaining directors;
WHEREAS
, the Board has determined that the increased difficulty in attracting and retaining
directors is detrimental to the best interests of the Companys stockholders;
WHEREAS
, it is reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify, and to pay expenses on behalf of, directors to the fullest extent permitted by
applicable law so that they will serve or continue to serve the Company free from undue concern
that they will not be so indemnified;
WHEREAS
, this Agreement is in furtherance of the Amended and Restated Certificate of
Incorporation of the Company, its Amended and Restated Bylaws and any resolutions adopted pursuant
thereto, and the DGCL, and shall not be deemed a substitute therefor, nor to diminish or abrogate
any rights of Director thereunder;
WHEREAS
, the Company has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Director to serve as a director or officer of the Company, and the
Company acknowledges that Director is relying upon this Agreement in serving as a director or
officer of the Company; and
WHEREAS
, Director is willing to serve, continue to serve and to take on additional service for
or on behalf of the Company on the condition that he be so indemnified;
NOW, THEREFORE
, in consideration of the promises and the covenants contained herein, the
Company and Director do hereby covenant and agree as follows:
1.
Services to the Company
.
Director will serve or continue to serve, at the will of the
Company and its stockholders for so long as Director is duly elected or appointed or until Director
tenders his or her resignation.
2.
Definitions
.
As used in this Agreement:
(a) Beneficial Owner shall have the meaning given to such term in Rule 13d-3 under the
Securities Exchange Act of 1934.
(b) A Change in Control shall be deemed to occur upon the earliest to occur after the date
of this Agreement of any of the following events:
(i)
Acquisition of Stock by Third Party
. Any Person, other than a Principal or a
Related Party of a Principal (as each such term is defined below), is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or
more of the combined voting power of the Companys then outstanding securities;
(ii)
Change in Board of Directors
. During any period of two (2) consecutive years
(not including any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board (together with any new directors whose election to
the Board or whose nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so approved) cease for
any reason to constitute at least a majority of the members of the Board;
(iii)
Corporate Transactions
. The effective date of a merger or consolidation of the
Company with any other entity, unless such merger or consolidation would result in the voting
securities of the Company outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity, including the parent corporation of such surviving entity) at least 50% of the
total voting power of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of the board of
directors or other governing body of such surviving entity;
2
(iv)
Liquidation
. The approval by the stockholders of the Company of a complete
liquidation of the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Companys assets; and
(v)
Other Events
. There occurs any other event of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any
similar item on any similar schedule or form) promulgated under the Exchange Act (as defined
below), whether or not the Company is then subject to such reporting requirement.
(c) Company shall include, in addition to Pzena Investment Management, Inc., any
corporation, partnership, joint venture, limited liability company, trust or other enterprise of
which such Director is or was serving as a director, officer, employee or agent of at the request
of the Company, or any corporation which results from or survives a consolidation or merger with
Pzena Investment Management, Inc., as well as any corporation resulting from a consolidation or
merger which, if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that if Director is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company
,
trust or other enterprise, Director shall
stand in the same position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Director would have with respect to such constituent corporation if its
separate existence had continued.
(d) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding as defined herein in respect of which indemnification is sought by Director.
(e) Enterprise shall mean the Company and any other corporation, partnership, limited
liability company, joint venture, trust, employee benefit plan or other enterprise of which
Director is or was serving at the request of the Company as a director, officer, employee, agent or
fiduciary.
(f) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(g) Expenses shall include all reasonable attorneys and accountants fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in,
or otherwise being involved with, a Proceeding as defined in this Agreement. Expenses also shall
include Expenses incurred in connection with any appeal resulting from any Proceeding, including
without limitation the premium, security for, and other costs relating to any cost bond,
supersedeas bond, or other appeal
3
bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by
Director or the amount of judgments or fines against Director.
(h) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five years has been, retained
to represent: (i) the Company or Director in any matter material to either such party or (ii) any
other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding
the foregoing, the term Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Director in an action to determine Directors rights under this
Agreement.
(i) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange
Act; provided, however, that Person shall exclude (i) the Company or a person or entity that
directly or indirectly controls, is controlled by, or is under common control with, the Company,
(ii) any trustee or other fiduciary holding securities under an employee benefit plan of the
Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the Company.
(j) Principal means Richard S. Pzena, John P. Goetz, William L. Lipsey, A. Rama Krishna and
Joel Greenblatt.
(k) The term Proceeding shall include any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation (including but not limited to
any internal corporate investigation), inquiry, administrative hearing or any other actual,
threatened or completed proceeding, including any and all appeals, whether brought in the right of
the Company or otherwise and whether of a civil, criminal, administrative or investigative nature,
in which Director was, is, or will be a party to, a witness in or otherwise participates in by
reason of the fact that Director is or was a director or officer of the Company, by reason of any
action taken by him or of any action on his part while acting as director or officer of the
Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another Enterprise, in each case whether or not serving in
such capacity at the time any liability or expense is incurred for which indemnification,
reimbursement, or payment of expenses can be provided under this Agreement; except one initiated by
a Director to enforce his rights under this Agreement. Any Director serving, in any capacity, (i)
another corporation of which a majority of the shares entitled to vote in the election of its
directors is held by the Company, or (ii) any employee benefit plan of the Company or of any
corporation referred to in clause (i), shall be deemed to be doing so at the request of the
Company.
(l) Related Party means: (1) in the case of an individual, any immediate family member of
any Principal; or (2) any trust, corporation, partnership, limited liability company or other
entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially holding
an 80% or more controlling interest of which
4
consist of any one or more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
(m) References to fines shall include, but are not limited to, any excise tax assessed with
respect to any employee benefit plan; references to serving at the request of the Company shall
include any service as a director, officer, employee or agent of the Company which imposes duties
on, or involves services by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants and beneficiaries of
an employee benefit plan shall be deemed to have acted in a manner not opposed to the best
interests of the Company as referred to in this Agreement.
3.
Indemnity in Third-Party Proceedings
.
A Third-Party Proceeding is a Proceeding other
than a Proceeding by or in the right of the Company to procure a judgment in its favor. The Company
shall indemnify Director in accordance with the provisions of this Section 3 if Director is, or is
threatened to be made, a party to, a witness in or otherwise participates in any Third-Party
Proceeding. Pursuant to this Section 3, Director shall be indemnified against all Expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred by Director or on
his behalf in connection with such Third-Party Proceeding or any claim, issue or matter therein, if
Director acted in good faith and in a manner Director reasonably believed to be in or not opposed
to the best interests of the Company and, in the case of a criminal proceeding had no reasonable
cause to believe that such conduct was unlawful.
4.
Indemnity in Proceedings by or in the Right of the Company
.
The Company shall indemnify
Director in accordance with the provisions of this Section 4 if Director is, or is threatened to be
made, a party to, a witness in or otherwise participates in any Proceeding by or in the right of
the Company to procure a judgment in its favor. Pursuant to this Section 4, Director shall be
indemnified against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter therein and to the extent permitted
by law, amounts paid in settlement, if Director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No indemnification for
Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which
Director shall have been finally adjudged by a court to be liable to the Company, unless and only
to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought
shall determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, Director is fairly and reasonably entitled to indemnification.
5.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
(a) In any Proceeding referred to in Section 4, if Director is not wholly successful in such
Proceeding, but has been adjudged to be liable to the Company as to one or more but less than all
claims, issues or matters in such Proceeding, no indemnification shall be made in respect of any
claim, issue or matter as to which
5
Director shall have been adjudged to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was brought shall
determine upon application that, despite the adjudication of liability to the Company, in view of
all the circumstances of the case, Director is fairly and reasonably entitled to such
indemnification. However, in any Proceeding referred to in Section 4, the Company shall indemnify
Director against all Expenses actually and reasonably incurred by him or on his behalf and, to the
extent permitted by law, amounts paid in settlement, in connection with each claim, issue or matter
as to which Director is successful on the merits or has reached a settlement.
(b) To the extent that Director has been successful on the merits or otherwise in defense of
any Proceeding (including any Proceeding referred to in Section 4), or in defense of any claim,
issue or matter therein, Director shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against all
Expenses actually and reasonably incurred or suffered by Director or on Directors behalf in
connection therewith. Indemnification pursuant to this Section 5(b) shall not require a
determination pursuant to Section 10 of this Agreement.
(c) For purposes of this Section 5 and without limitation, the termination of any claim, issue
or matter in a Proceeding in which Director is a defendant by dismissal, with or without prejudice,
shall be deemed to be a successful result as to such claim, issue or matter.
6.
Additional Indemnification
.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify
Director to the extent permitted by law if Director is a party to or threatened to be made a party
to, a witness in or otherwise participates in any Proceeding against all Expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by Director in connection with the
Proceeding (1) unless Directors conduct constitutes a breach of Directors duty of loyalty to the
Company or its stockholders
,
(2) except for liability for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) except for liability under
Section 174 of the DGCL, or (4) except for liability relating to any transaction from which the
Director derived an improper benefit.
(b) For purposes of Section 6(a), the meaning of the phrase to the extent permitted by law
shall mean:
(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates
additional indemnification by agreement, or the corresponding provision of any amendment to or
replacement of the DGCL; and
(ii) the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL adopted after the date of this Agreement that increase the extent to which a corporation may
indemnify its officers and directors.
6
7.
Exclusions
.
Notwithstanding any provision in this Agreement, the Company shall not be
obligated under this Agreement to make any payment for indemnity including Expenses, judgments,
fines and amounts paid in settlement to the extent that the amount for which Director seeks
indemnification, or a portion thereof:
(a) has actually been made to or on behalf of Director under any insurance policy, contract,
agreement or otherwise; or
(b) is based upon an accounting of profits made from the purchase and sale (or sale and
purchase) by Director of securities of the Company in violation of Section 16(b) of the Exchange
Act or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated or brought
voluntarily by Director, including any Proceeding (or any part of any Proceeding) initiated by
Director against the Company or its directors, officers or employees, unless (i) the Board
authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the
Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law.
8.
Notification of Indemnifiable Claim
.
Director shall, as a condition precedent to his
right to be indemnified under this Agreement, give the Company notice in writing as soon as
practicable of any claim made against Director for which indemnification will or could be sought
under this Agreement. Director agrees promptly to notify the Company in writing upon being served
with any summons, citation, subpoena, complaint, indictment, information or other document relating
to any Proceeding or matter which will or could be subject to indemnification or payment of
Expenses covered hereunder. The Secretary of the Company shall, promptly upon receipt of such
notice, advise the Board in writing of such notice. The failure of Director to timely notify the
Company shall not relieve the Company of any obligation which it may have to the Director under
this Agreement or otherwise, unless such failure to provide timely notice materially prejudices the
Company. The omission to notify the Company will not relieve the Company from any liability for
indemnification which it may have to Director otherwise than under this Agreement.
9.
Payment of Expenses
.
Without regard to Directors ultimate entitlement to
indemnification under other provisions of this Agreement, the Company shall pay the Expenses as
incurred by Director or reimburse Director for his payment of such Expenses in connection with any
Proceeding within thirty (30) days after the receipt by the Company of a written request for
payment of expenses. If the DGCL so requires, payment of Expenses by the Company under this
Section 9 shall be made only upon delivery to the Company of an undertaking (Undertaking). The
Undertaking shall constitute the Directors agreement that: (i) he shall repay the Expenses paid by
the Company to the extent that it is ultimately determined by final judicial decision from which
there is no further right to appeal that the Director is not entitled to be indemnified by the
Company; and (ii) that in consideration for the payment of such expenses, the Company may, at its
sole discretion, select counsel for Director, assume the defense or otherwise participate in the
defense of such Proceeding. Payment of Expenses pursuant to
7
this Section shall be unsecured and interest free. Payment of Expenses shall be made without
regard to Directors ability to repay the expenses and without regard to Directors ultimate
entitlement to indemnification under the other provisions of this Agreement. Such payment shall
include any and all reasonable Expenses incurred pursuing an action to enforce this right of
payment of Expenses, including Expenses incurred preparing and forwarding statements to the Company
to support the payment claimed. This Section 9 shall not apply to any claim for Expenses made by
Director for which indemnity is excluded pursuant to Section 7. Notwithstanding anything else
contained in this Section 9, to the extent that the Company is prohibited by applicable law from
making payment of Expenses to the Director prior to the Companys determination that the Director
is entitled to indemnification, the Company shall not pay Expenses to the Director pursuant to this
Section. Nothing herein shall be construed to limit the Companys right to seek damages from the
Director, including but not limited to the full amount of the Expenses paid by the Company
hereunder. The selection by the Company of defense counsel for the Director in connection with any
Proceeding, shall be made only with the approval of the Director, which approval shall not be
unreasonably withheld, upon the delivery to Director of written notice of the Companys election to
do so. After delivery of such notice, approval of such counsel by Director and the retention of
such counsel by the Company, the Company will not be liable to Director under this Agreement for
any fees of counsel subsequently incurred by Director with respect to the same Proceeding, provided
that (i) Director shall have the right to employ his counsel in any such Proceeding at Directors
expense; and (ii) if (A) the employment of counsel by Director has been previously authorized by
the Company, (B) Director shall have reasonably concluded that there may be a conflict of interest
between the Company and Director in the conduct of any such defense, or (C) the Company shall not,
in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses
of Directors counsel shall be at the expense of the Company.
10.
Procedure Upon Application for Indemnification
.
(a) Upon final disposition of a Proceeding for which indemnification is sought pursuant to
Section 3 or Section 4, Director shall submit promptly (and in any event, no later than the
applicable statute of limitations) to the Board a written request for indemnification averring that
he has met the applicable standard of conduct set forth herein. Any indemnification made under this
Agreement pursuant to Section 3 or Section 4 shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the Director is proper in the
circumstances because Director has met the applicable standard of conduct. Such determination
shall be made in the following manner: (i) if a Change in Control shall have occurred and the
Director is not a director at the time of such determination, by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Director; and (ii) in any other
circumstance: (A) by a majority vote of the Disinterested Directors, even though less than a quorum
of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the
Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such
Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to Director or (D) if so directed
by the Board, by the stockholders of the
8
Company, and, if it is so determined that Director is entitled to indemnification, payment to
Director shall be made within thirty (30) days after such determination. Director shall cooperate
with the person, persons or entity making such determination with respect to Directors entitlement
to indemnification, including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Director and reasonably necessary to such
determination. Any costs or expenses (including attorneys fees and disbursements) incurred by
Director in so cooperating with the person, persons or entity making such determination shall be
borne by the Company (irrespective of the determination as to Directors entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold Director harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 10(a) hereof, the Independent Counsel shall be selected as
provided in this Section 10(b). If a Change in Control shall not have occurred, the Independent
Counsel shall be selected by the Board within ten (10) days of submission of a written request by
Director for indemnification pursuant to Section 10(a), and the Company shall give written notice
to Director advising him of the identity of the Independent Counsel so selected. If a Change in
Control shall have occurred, the Independent Counsel shall be selected by Director within ten (10)
days of submission of a written request by Director for indemnification pursuant to Section 10(a),
(unless Director shall request that such selection be made by the Board, in which event the
preceding sentence shall apply), and Director shall give written notice to the Company advising it
of the identity of the Independent Counsel so selected. In either event, Director or the Company,
as the case may be, may, within ten (10) days after such written notice of selection shall have
been given, deliver to the Company or to Director, as the case may be, a written objection to such
selection;
provided
,
however
, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. The objection must also include a proposed
substitute Independent Counsel. If objection including a proposed substituted Independent Counsel
is timely made, such substituted Independent Counsel shall serve as Independent Counsel unless
objected to within ten (10) days. An objection to the substituted Independent Counsel may be
asserted only on the ground that the Independent Counsel so selected does not meet the requirements
of Independent Counsel as defined in Section 2 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If written objection is made, the
Independent Counsel or substituted Independent Counsel proposed may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined that such objection
is without merit. If, within thirty (30) days after submission by Director of a written request for
indemnification pursuant to Section 10(a) hereof, the parties have not agreed upon the selection of
the Independent Counsel, either the Company or Director may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the Company or Director
to the others selection of Independent Counsel and/or for the appointment as Independent Counsel
of a person selected by the Court or by such other person as the Court shall
9
designate, and the person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 10(a) hereof.
11.
Presumptions and Effect of Certain Proceedings
.
(a) The submission of the Application for Indemnification to the Board shall create a
rebuttable presumption that the Director is entitled to indemnification under this Agreement, and
the Board, Independent Counsel, or stockholders, as the case may be, may, at any time, specifically
determine that the Director is so entitled, unless it or they possess sufficient evidence to rebut
the presumption that Director has met the applicable standard of conduct. If a determination shall
have been made pursuant to this Agreement that Director is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding commenced pursuant to Section 12,
absent (i) a misstatement by Director of a material fact, or an omission of a material fact
necessary to make Directors statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under applicable law. Neither
the failure of the Company (including by its directors or Independent Counsel) to have made a
determination prior to the commencement of any action pursuant to this Agreement that
indemnification is proper in the circumstances because Director has met the applicable standard of
conduct, nor an actual determination by the Company (including by its directors or Independent
Counsel) that Director has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Director has not met the applicable standard of conduct.
Moreover, the fact that the Company has paid the Directors Expenses pursuant to Section 9 herein
shall not create a presumption that Director has met the applicable standard of conduct for
indemnification.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely affect the right of
Director to indemnification or create a presumption that Director did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal Proceeding, that Director had reasonable cause to believe that his
conduct was unlawful.
(c) For purposes of any determination of good faith, Director shall be deemed to have acted in
good faith if Directors action is based on the advice of legal counsel for the Company or on
information or records given or reports made to the Company by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by the Company. The
provisions of this Section 11(d) shall not be deemed exclusive or to limit in any way the other
circumstances in which the Director may be deemed to have met the applicable standard of conduct
set forth in this Agreement.
(d) To the extent legally permissible, the knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Enterprise shall not be imputed to Director for
purposes of determining the right to indemnification under this Agreement.
10
12.
Remedies of Director
.
(a) In the event that (i) a determination is made pursuant to Section 10 of this Agreement
that Director is not entitled to indemnification under this Agreement, (ii) payment of Expenses is
not timely made pursuant to Section 9 of this Agreement, or (iii) payment of indemnification
pursuant to Section 3, 4, 5(a) or 6 of this Agreement is not made within thirty (30) days after a
determination has been made that Director is entitled to indemnification, Director shall be
entitled to an adjudication by a court of his entitlement to such indemnification or payment of
Expenses.
(b) In the event that Director successfully sues the Company for indemnification or payment of
Expenses, and is successful in whole or in part, Director shall be entitled to be paid by the
Company for the Expense of prosecuting such suit. If the Company sues Director to recover Expenses
paid and Director is successful in defending such suit, in whole or in part, Director shall be
entitled to be paid the Expense of defending such suit.
(c) In the event that a determination shall have been made under this Agreement that Director
is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section
shall be conducted in all respects as a de novo trial on the merits and Director shall not be
prejudiced by reason of that adverse determination. In any judicial proceeding pursuant to this
Section, the Company shall have the burden of proving Director is not entitled to indemnification
or payment of Expenses, as the case may be.
(d) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement. The Company shall indemnify Director against any and all Expenses
and, if requested by Director, shall (within
thirty (30)
days after receipt by the Company of a
written request therefore) pay such Expenses to Director, which are incurred by Director in
connection with any action brought by Director for indemnification or payment of Expenses from the
Company under this Agreement or under any directors and officers liability insurance policies
maintained by the Company, regardless of whether Director ultimately is determined to be entitled
to such indemnification, payment of Expenses or insurance recovery, as the case may be.
13.
Non-exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification and to receive payment of Expenses as provided by this
Agreement shall not be deemed exclusive of any other rights to which Director may at any time be
entitled under applicable law, the Companys Certificate of Incorporation, the Companys Bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Director under this Agreement in respect of any action taken or omitted by such Director prior
to such
11
amendment, alteration or repeal. To the extent that a change in Delaware law, whether by
statute or judicial decision, permits greater indemnification or payment of Expenses than would be
afforded currently under the Companys Amended and Restated Certificate of Incorporation, Amended
and Restated Bylaws and this Agreement, it is the intent of the parties hereto that Director shall
enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given hereunder or now
or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) The Company shall, from time to time, make the good faith determination whether or not it
is practicable for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the directors, officers, employees, or agents of the
Company with coverage for losses from wrongful acts, or to ensure the Companys performance of its
indemnification obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection afforded by such
coverage. To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors of the Company or of any other corporation, partnership, joint
venture, trust, employee benefits plan or other enterprise which the Director serves at the request
of the Company, Director shall be covered by such policy or policies in such manner as to provide
the Director the same rights and benefits as are accorded to the most favorably insured of the
Companys directors. The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Director, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Director, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
14.
Duration of Agreement
.
This Agreement shall continue until and terminate upon the
later of: (a) six (6) years after the date that Director shall have ceased to serve as a director
or officer of the Company or as a director, officer, employee or agent of any other corporation,
partnership, joint venture, limited liability company, trust, employee benefit plan or other
enterprise which Director served at the request of the Company (Six Year Anniversary Date); or
(b) one (1) year after the final termination of each and every Proceeding, commenced prior to the
Six Year Anniversary Date.
15.
Successors and Assigns
.
This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Director and his heirs, executors and
administrators.
12
16.
Severability
.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
17.
Entire Agreement
.
Except as otherwise specified herein, this Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied, between the parties
hereto with respect to the subject matter hereof.
18.
Effectiveness of Agreement
.
This Agreement shall be effective as of the date set forth
on the first page and may apply to acts or omissions of Director which occurred prior to such date
if Director was an officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other enterprise, at the time such
act or omission occurred, and shall continue to exist after the rescission or restrictive
modification of this Agreement with respect to events occurring prior to such rescission or
restrictive modification.
19.
Modification and Waiver
.
No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by the parties thereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions
of this Agreement nor shall any waiver constitute a continuing waiver.
20.
Notices
.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and
receipted for by the party to whom said notice or other communication shall have been directed, or
(b) if sent by an overnight courier service (such as Federal Express) to:
(i) if to Director, at the address of Director provided to the Company most
recently prior to the date of said notice or other communication, and
(ii) if to the Company, at: Pzena Investment Management, Inc.
Attention: General Counsel
120 West 45
th
Street, 20
th
Floor
New York, New York 10036
13
or to any other address as may have been furnished to Director by the Company.
21.
Contribution
.
To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Director for any reason
whatsoever, the Company, in lieu of indemnifying Director, shall contribute to the amount incurred
by Director, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event
under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the
circumstances of such Proceeding in order to reflect (i) the relative benefits received by the
Company and Director as a result of the event(s) and/or transaction(s) giving cause to such
Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees
and agents) and Director in connection with such event(s) and/or transaction(s).
22.
Applicable Law and Consent to Jurisdiction
.
This Agreement and the legal relations
among the parties shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware, without regard to its conflict of laws rules. The Company and Director
hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware
(the Delaware Court), and not in any other state or federal court in the United States of America
or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the
Delaware Court for purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the
Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action
or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
23.
Identical Counterparts
.
This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24.
Miscellaneous
.
Use of the masculine pronoun shall be deemed to include usage of the
feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
14
IN WITNESS WHEREOF
, the parties have caused this Agreement to be signed as of the day and year
first above written.
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PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
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Name: Richard S. Pzena
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Title: Chief Executive Officer
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/s/ Steven M. Galbraith
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Steven M. Galbraith
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15
EXHIBIT 10.14
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (Agreement) is made as of October 24, 2007, by and between
Pzena Investment Management, Inc., a Delaware corporation (along with any entities referred to in
Section 2(c) below, the Company), and Joel M. Greenblatt (Director).
RECITALS
WHEREAS
, highly competent persons have become more reluctant to serve publicly-held
corporations as directors or in other capacities unless they are provided with adequate protection
through insurance or adequate indemnification against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of the corporation.
WHEREAS
, the Board of Directors of the Company (the Board) has determined that, in order to
attract and retain qualified individuals as members of the Board, the Company will attempt to
maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving
the Company and its subsidiaries from certain liabilities. Although the furnishing of such
insurance has been a customary and widespread practice among United States based corporations and
other business enterprises, such insurance may be available to it in the future only at higher
premiums and with more exclusions. At the same time, directors are being increasingly subjected to
expensive and time-consuming litigation relating to the business and affairs of corporations. The
Company recognizes that the cost of defending and otherwise participating in such litigation is far
greater than the financial benefits of serving as a Director. Article Seventh of the Certificate
of Incorporation of the Company, as in effect on the date hereof, and the Delaware General
Corporation Law (DGCL) expressly provide that the indemnification provisions set forth therein
are not exclusive and contemplate that agreements may be entered into between the Company and
members of the Board (or parties serving at the request of the Board) with respect to
indemnification;
WHEREAS
, the uncertainties relating to insurance have increased the difficulty of attracting
and retaining directors;
WHEREAS
, the Board has determined that the increased difficulty in attracting and retaining
directors is detrimental to the best interests of the Companys stockholders;
WHEREAS
, it is reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify, and to pay expenses on behalf of, directors to the fullest extent permitted by
applicable law so that they will serve or continue to serve the Company free from undue concern
that they will not be so indemnified;
WHEREAS
, this Agreement is in furtherance of the Amended and Restated Certificate of
Incorporation of the Company, its Amended and Restated Bylaws and any resolutions adopted pursuant
thereto, and the DGCL, and shall not be deemed a substitute therefor, nor to diminish or abrogate
any rights of Director thereunder;
WHEREAS
, the Company has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Director to serve as a director or officer of the Company, and the
Company acknowledges that Director is relying upon this Agreement in serving as a director or
officer of the Company; and
WHEREAS
, Director is willing to serve, continue to serve and to take on additional service for
or on behalf of the Company on the condition that he be so indemnified;
NOW, THEREFORE
, in consideration of the promises and the covenants contained herein, the
Company and Director do hereby covenant and agree as follows:
1.
Services to the Company
.
Director will serve or continue to serve, at the will of the
Company and its stockholders for so long as Director is duly elected or appointed or until Director
tenders his or her resignation.
2.
Definitions
.
As used in this Agreement:
(a) Beneficial Owner shall have the meaning given to such term in Rule 13d-3 under the
Securities Exchange Act of 1934.
(b) A Change in Control shall be deemed to occur upon the earliest to occur after the date
of this Agreement of any of the following events:
(i)
Acquisition of Stock by Third Party
. Any Person, other than a Principal or a
Related Party of a Principal (as each such term is defined below), is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or
more of the combined voting power of the Companys then outstanding securities;
(ii)
Change in Board of Directors
. During any period of two (2) consecutive years
(not including any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board (together with any new directors whose election to
the Board or whose nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so approved) cease for
any reason to constitute at least a majority of the members of the Board;
(iii)
Corporate Transactions
. The effective date of a merger or consolidation of the
Company with any other entity, unless such merger or consolidation would result in the voting
securities of the Company outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity, including the parent corporation of such surviving entity) at least 50% of the
total voting power of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of the board of
directors or other governing body of such surviving entity;
2
(iv)
Liquidation
. The approval by the stockholders of the Company of a complete
liquidation of the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Companys assets; and
(v)
Other Events
. There occurs any other event of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any
similar item on any similar schedule or form) promulgated under the Exchange Act (as defined
below), whether or not the Company is then subject to such reporting requirement.
(c) Company shall include, in addition to Pzena Investment Management, Inc., any
corporation, partnership, joint venture, limited liability company, trust or other enterprise of
which such Director is or was serving as a director, officer, employee or agent of at the request
of the Company, or any corporation which results from or survives a consolidation or merger with
Pzena Investment Management, Inc., as well as any corporation resulting from a consolidation or
merger which, if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that if Director is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company
,
trust or other enterprise, Director shall
stand in the same position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Director would have with respect to such constituent corporation if its
separate existence had continued.
(d) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding as defined herein in respect of which indemnification is sought by Director.
(e) Enterprise shall mean the Company and any other corporation, partnership, limited
liability company, joint venture, trust, employee benefit plan or other enterprise of which
Director is or was serving at the request of the Company as a director, officer, employee, agent or
fiduciary.
(f) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(g) Expenses shall include all reasonable attorneys and accountants fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in,
or otherwise being involved with, a Proceeding as defined in this Agreement. Expenses also shall
include Expenses incurred in connection with any appeal resulting from any Proceeding, including
without limitation the premium, security for, and other costs relating to any cost bond,
supersedeas bond, or other appeal
3
bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by
Director or the amount of judgments or fines against Director.
(h) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five years has been, retained
to represent: (i) the Company or Director in any matter material to either such party or (ii) any
other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding
the foregoing, the term Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Director in an action to determine Directors rights under this
Agreement.
(i) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange
Act; provided, however, that Person shall exclude (i) the Company or a person or entity that
directly or indirectly controls, is controlled by, or is under common control with, the Company,
(ii) any trustee or other fiduciary holding securities under an employee benefit plan of the
Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the Company.
(j) Principal means Richard S. Pzena, John P. Goetz, William L. Lipsey, A. Rama Krishna and
Joel Greenblatt.
(k) The term Proceeding shall include any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation (including but not limited to
any internal corporate investigation), inquiry, administrative hearing or any other actual,
threatened or completed proceeding, including any and all appeals, whether brought in the right of
the Company or otherwise and whether of a civil, criminal, administrative or investigative nature,
in which Director was, is, or will be a party to, a witness in or otherwise participates in by
reason of the fact that Director is or was a director or officer of the Company, by reason of any
action taken by him or of any action on his part while acting as director or officer of the
Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another Enterprise, in each case whether or not serving in
such capacity at the time any liability or expense is incurred for which indemnification,
reimbursement, or payment of expenses can be provided under this Agreement; except one initiated by
a Director to enforce his rights under this Agreement. Any Director serving, in any capacity, (i)
another corporation of which a majority of the shares entitled to vote in the election of its
directors is held by the Company, or (ii) any employee benefit plan of the Company or of any
corporation referred to in clause (i), shall be deemed to be doing so at the request of the
Company.
(l) Related Party means: (1) in the case of an individual, any immediate family member of
any Principal; or (2) any trust, corporation, partnership, limited liability company or other
entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially holding
an 80% or more controlling interest of which
4
consist of any one or more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
(m) References to fines shall include, but are not limited to, any excise tax assessed with
respect to any employee benefit plan; references to serving at the request of the Company shall
include any service as a director, officer, employee or agent of the Company which imposes duties
on, or involves services by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants and beneficiaries of
an employee benefit plan shall be deemed to have acted in a manner not opposed to the best
interests of the Company as referred to in this Agreement.
3.
Indemnity in Third-Party Proceedings
.
A Third-Party Proceeding is a Proceeding other
than a Proceeding by or in the right of the Company to procure a judgment in its favor. The Company
shall indemnify Director in accordance with the provisions of this Section 3 if Director is, or is
threatened to be made, a party to, a witness in or otherwise participates in any Third-Party
Proceeding. Pursuant to this Section 3, Director shall be indemnified against all Expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred by Director or on
his behalf in connection with such Third-Party Proceeding or any claim, issue or matter therein, if
Director acted in good faith and in a manner Director reasonably believed to be in or not opposed
to the best interests of the Company and, in the case of a criminal proceeding had no reasonable
cause to believe that such conduct was unlawful.
4.
Indemnity in Proceedings by or in the Right of the Company
.
The Company shall indemnify
Director in accordance with the provisions of this Section 4 if Director is, or is threatened to be
made, a party to, a witness in or otherwise participates in any Proceeding by or in the right of
the Company to procure a judgment in its favor. Pursuant to this Section 4, Director shall be
indemnified against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter therein and to the extent permitted
by law, amounts paid in settlement, if Director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No indemnification for
Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which
Director shall have been finally adjudged by a court to be liable to the Company, unless and only
to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought
shall determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, Director is fairly and reasonably entitled to indemnification.
5.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
(a) In any Proceeding referred to in Section 4, if Director is not wholly successful in such
Proceeding, but has been adjudged to be liable to the Company as to one or more but less than all
claims, issues or matters in such Proceeding, no indemnification shall be made in respect of any
claim, issue or matter as to which
5
Director shall have been adjudged to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was brought shall
determine upon application that, despite the adjudication of liability to the Company, in view of
all the circumstances of the case, Director is fairly and reasonably entitled to such
indemnification. However, in any Proceeding referred to in Section 4, the Company shall indemnify
Director against all Expenses actually and reasonably incurred by him or on his behalf and, to the
extent permitted by law, amounts paid in settlement, in connection with each claim, issue or matter
as to which Director is successful on the merits or has reached a settlement.
(b) To the extent that Director has been successful on the merits or otherwise in defense of
any Proceeding (including any Proceeding referred to in Section 4), or in defense of any claim,
issue or matter therein, Director shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against all
Expenses actually and reasonably incurred or suffered by Director or on Directors behalf in
connection therewith. Indemnification pursuant to this Section 5(b) shall not require a
determination pursuant to Section 10 of this Agreement.
(c) For purposes of this Section 5 and without limitation, the termination of any claim, issue
or matter in a Proceeding in which Director is a defendant by dismissal, with or without prejudice,
shall be deemed to be a successful result as to such claim, issue or matter.
6.
Additional Indemnification
.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify
Director to the extent permitted by law if Director is a party to or threatened to be made a party
to, a witness in or otherwise participates in any Proceeding against all Expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by Director in connection with the
Proceeding (1) unless Directors conduct constitutes a breach of Directors duty of loyalty to the
Company or its stockholders
,
(2) except for liability for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) except for liability under
Section 174 of the DGCL, or (4) except for liability relating to any transaction from which the
Director derived an improper benefit.
(b) For purposes of Section 6(a), the meaning of the phrase to the extent permitted by law
shall mean:
(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates
additional indemnification by agreement, or the corresponding provision of any amendment to or
replacement of the DGCL; and
(ii) the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL adopted after the date of this Agreement that increase the extent to which a corporation may
indemnify its officers and directors.
6
7.
Exclusions
.
Notwithstanding any provision in this Agreement, the Company shall not be
obligated under this Agreement to make any payment for indemnity including Expenses, judgments,
fines and amounts paid in settlement to the extent that the amount for which Director seeks
indemnification, or a portion thereof:
(a) has actually been made to or on behalf of Director under any insurance policy, contract,
agreement or otherwise; or
(b) is based upon an accounting of profits made from the purchase and sale (or sale and
purchase) by Director of securities of the Company in violation of Section 16(b) of the Exchange
Act or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated or brought
voluntarily by Director, including any Proceeding (or any part of any Proceeding) initiated by
Director against the Company or its directors, officers or employees, unless (i) the Board
authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the
Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law.
8.
Notification of Indemnifiable Claim
.
Director shall, as a condition precedent to his
right to be indemnified under this Agreement, give the Company notice in writing as soon as
practicable of any claim made against Director for which indemnification will or could be sought
under this Agreement. Director agrees promptly to notify the Company in writing upon being served
with any summons, citation, subpoena, complaint, indictment, information or other document relating
to any Proceeding or matter which will or could be subject to indemnification or payment of
Expenses covered hereunder. The Secretary of the Company shall, promptly upon receipt of such
notice, advise the Board in writing of such notice. The failure of Director to timely notify the
Company shall not relieve the Company of any obligation which it may have to the Director under
this Agreement or otherwise, unless such failure to provide timely notice materially prejudices the
Company. The omission to notify the Company will not relieve the Company from any liability for
indemnification which it may have to Director otherwise than under this Agreement.
9.
Payment of Expenses
.
Without regard to Directors ultimate entitlement to
indemnification under other provisions of this Agreement, the Company shall pay the Expenses as
incurred by Director or reimburse Director for his payment of such Expenses in connection with any
Proceeding within thirty (30) days after the receipt by the Company of a written request for
payment of expenses. If the DGCL so requires, payment of Expenses by the Company under this
Section 9 shall be made only upon delivery to the Company of an undertaking (Undertaking). The
Undertaking shall constitute the Directors agreement that: (i) he shall repay the Expenses paid by
the Company to the extent that it is ultimately determined by final judicial decision from which
there is no further right to appeal that the Director is not entitled to be indemnified by the
Company; and (ii) that in consideration for the payment of such expenses, the Company may, at its
sole discretion, select counsel for Director, assume the defense or otherwise participate in the
defense of such Proceeding. Payment of Expenses pursuant to
7
this Section shall be unsecured and interest free. Payment of Expenses shall be made without
regard to Directors ability to repay the expenses and without regard to Directors ultimate
entitlement to indemnification under the other provisions of this Agreement. Such payment shall
include any and all reasonable Expenses incurred pursuing an action to enforce this right of
payment of Expenses, including Expenses incurred preparing and forwarding statements to the Company
to support the payment claimed. This Section 9 shall not apply to any claim for Expenses made by
Director for which indemnity is excluded pursuant to Section 7. Notwithstanding anything else
contained in this Section 9, to the extent that the Company is prohibited by applicable law from
making payment of Expenses to the Director prior to the Companys determination that the Director
is entitled to indemnification, the Company shall not pay Expenses to the Director pursuant to this
Section. Nothing herein shall be construed to limit the Companys right to seek damages from the
Director, including but not limited to the full amount of the Expenses paid by the Company
hereunder. The selection by the Company of defense counsel for the Director in connection with any
Proceeding, shall be made only with the approval of the Director, which approval shall not be
unreasonably withheld, upon the delivery to Director of written notice of the Companys election to
do so. After delivery of such notice, approval of such counsel by Director and the retention of
such counsel by the Company, the Company will not be liable to Director under this Agreement for
any fees of counsel subsequently incurred by Director with respect to the same Proceeding, provided
that (i) Director shall have the right to employ his counsel in any such Proceeding at Directors
expense; and (ii) if (A) the employment of counsel by Director has been previously authorized by
the Company, (B) Director shall have reasonably concluded that there may be a conflict of interest
between the Company and Director in the conduct of any such defense, or (C) the Company shall not,
in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses
of Directors counsel shall be at the expense of the Company.
10.
Procedure Upon Application for Indemnification
.
(a) Upon final disposition of a Proceeding for which indemnification is sought pursuant to
Section 3 or Section 4, Director shall submit promptly (and in any event, no later than the
applicable statute of limitations) to the Board a written request for indemnification averring that
he has met the applicable standard of conduct set forth herein. Any indemnification made under this
Agreement pursuant to Section 3 or Section 4 shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the Director is proper in the
circumstances because Director has met the applicable standard of conduct. Such determination
shall be made in the following manner: (i) if a Change in Control shall have occurred and the
Director is not a director at the time of such determination, by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Director; and (ii) in any other
circumstance: (A) by a majority vote of the Disinterested Directors, even though less than a quorum
of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the
Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such
Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to Director or (D) if so directed
by the Board, by the stockholders of the
8
Company, and, if it is so determined that Director is entitled to indemnification, payment to
Director shall be made within thirty (30) days after such determination. Director shall cooperate
with the person, persons or entity making such determination with respect to Directors entitlement
to indemnification, including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Director and reasonably necessary to such
determination. Any costs or expenses (including attorneys fees and disbursements) incurred by
Director in so cooperating with the person, persons or entity making such determination shall be
borne by the Company (irrespective of the determination as to Directors entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold Director harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 10(a) hereof, the Independent Counsel shall be selected as
provided in this Section 10(b). If a Change in Control shall not have occurred, the Independent
Counsel shall be selected by the Board within ten (10) days of submission of a written request by
Director for indemnification pursuant to Section 10(a), and the Company shall give written notice
to Director advising him of the identity of the Independent Counsel so selected. If a Change in
Control shall have occurred, the Independent Counsel shall be selected by Director within ten (10)
days of submission of a written request by Director for indemnification pursuant to Section 10(a),
(unless Director shall request that such selection be made by the Board, in which event the
preceding sentence shall apply), and Director shall give written notice to the Company advising it
of the identity of the Independent Counsel so selected. In either event, Director or the Company,
as the case may be, may, within ten (10) days after such written notice of selection shall have
been given, deliver to the Company or to Director, as the case may be, a written objection to such
selection;
provided
,
however
, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. The objection must also include a proposed
substitute Independent Counsel. If objection including a proposed substituted Independent Counsel
is timely made, such substituted Independent Counsel shall serve as Independent Counsel unless
objected to within ten (10) days. An objection to the substituted Independent Counsel may be
asserted only on the ground that the Independent Counsel so selected does not meet the requirements
of Independent Counsel as defined in Section 2 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If written objection is made, the
Independent Counsel or substituted Independent Counsel proposed may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined that such objection
is without merit. If, within thirty (30) days after submission by Director of a written request for
indemnification pursuant to Section 10(a) hereof, the parties have not agreed upon the selection of
the Independent Counsel, either the Company or Director may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the Company or Director
to the others selection of Independent Counsel and/or for the appointment as Independent Counsel
of a person selected by the Court or by such other person as the Court shall
9
designate, and the person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 10(a) hereof.
11.
Presumptions and Effect of Certain Proceedings
.
(a) The submission of the Application for Indemnification to the Board shall create a
rebuttable presumption that the Director is entitled to indemnification under this Agreement, and
the Board, Independent Counsel, or stockholders, as the case may be, may, at any time, specifically
determine that the Director is so entitled, unless it or they possess sufficient evidence to rebut
the presumption that Director has met the applicable standard of conduct. If a determination shall
have been made pursuant to this Agreement that Director is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding commenced pursuant to Section 12,
absent (i) a misstatement by Director of a material fact, or an omission of a material fact
necessary to make Directors statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under applicable law. Neither
the failure of the Company (including by its directors or Independent Counsel) to have made a
determination prior to the commencement of any action pursuant to this Agreement that
indemnification is proper in the circumstances because Director has met the applicable standard of
conduct, nor an actual determination by the Company (including by its directors or Independent
Counsel) that Director has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Director has not met the applicable standard of conduct.
Moreover, the fact that the Company has paid the Directors Expenses pursuant to Section 9 herein
shall not create a presumption that Director has met the applicable standard of conduct for
indemnification.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely affect the right of
Director to indemnification or create a presumption that Director did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal Proceeding, that Director had reasonable cause to believe that his
conduct was unlawful.
(c) For purposes of any determination of good faith, Director shall be deemed to have acted in
good faith if Directors action is based on the advice of legal counsel for the Company or on
information or records given or reports made to the Company by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by the Company. The
provisions of this Section 11(d) shall not be deemed exclusive or to limit in any way the other
circumstances in which the Director may be deemed to have met the applicable standard of conduct
set forth in this Agreement.
(d) To the extent legally permissible, the knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Enterprise shall not be imputed to Director for
purposes of determining the right to indemnification under this Agreement.
10
12.
Remedies of Director
.
(a) In the event that (i) a determination is made pursuant to Section 10 of this Agreement
that Director is not entitled to indemnification under this Agreement, (ii) payment of Expenses is
not timely made pursuant to Section 9 of this Agreement, or (iii) payment of indemnification
pursuant to Section 3, 4, 5(a) or 6 of this Agreement is not made within thirty (30) days after a
determination has been made that Director is entitled to indemnification, Director shall be
entitled to an adjudication by a court of his entitlement to such indemnification or payment of
Expenses.
(b) In the event that Director successfully sues the Company for indemnification or payment of
Expenses, and is successful in whole or in part, Director shall be entitled to be paid by the
Company for the Expense of prosecuting such suit. If the Company sues Director to recover Expenses
paid and Director is successful in defending such suit, in whole or in part, Director shall be
entitled to be paid the Expense of defending such suit.
(c) In the event that a determination shall have been made under this Agreement that Director
is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section
shall be conducted in all respects as a de novo trial on the merits and Director shall not be
prejudiced by reason of that adverse determination. In any judicial proceeding pursuant to this
Section, the Company shall have the burden of proving Director is not entitled to indemnification
or payment of Expenses, as the case may be.
(d) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement. The Company shall indemnify Director against any and all Expenses
and, if requested by Director, shall (within
thirty (30)
days after receipt by the Company of a
written request therefore) pay such Expenses to Director, which are incurred by Director in
connection with any action brought by Director for indemnification or payment of Expenses from the
Company under this Agreement or under any directors and officers liability insurance policies
maintained by the Company, regardless of whether Director ultimately is determined to be entitled
to such indemnification, payment of Expenses or insurance recovery, as the case may be.
13.
Non-exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification and to receive payment of Expenses as provided by this
Agreement shall not be deemed exclusive of any other rights to which Director may at any time be
entitled under applicable law, the Companys Certificate of Incorporation, the Companys Bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Director under this Agreement in respect of any action taken or omitted by such Director prior
to such
11
amendment, alteration or repeal. To the extent that a change in Delaware law, whether by
statute or judicial decision, permits greater indemnification or payment of Expenses than would be
afforded currently under the Companys Amended and Restated Certificate of Incorporation, Amended
and Restated Bylaws and this Agreement, it is the intent of the parties hereto that Director shall
enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given hereunder or now
or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) The Company shall, from time to time, make the good faith determination whether or not it
is practicable for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the directors, officers, employees, or agents of the
Company with coverage for losses from wrongful acts, or to ensure the Companys performance of its
indemnification obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection afforded by such
coverage. To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors of the Company or of any other corporation, partnership, joint
venture, trust, employee benefits plan or other enterprise which the Director serves at the request
of the Company, Director shall be covered by such policy or policies in such manner as to provide
the Director the same rights and benefits as are accorded to the most favorably insured of the
Companys directors. The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Director, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Director, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
14.
Duration of Agreement
.
This Agreement shall continue until and terminate upon the
later of: (a) six (6) years after the date that Director shall have ceased to serve as a director
or officer of the Company or as a director, officer, employee or agent of any other corporation,
partnership, joint venture, limited liability company, trust, employee benefit plan or other
enterprise which Director served at the request of the Company (Six Year Anniversary Date); or
(b) one (1) year after the final termination of each and every Proceeding, commenced prior to the
Six Year Anniversary Date.
15.
Successors and Assigns
.
This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Director and his heirs, executors and
administrators.
12
16.
Severability
.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
17.
Entire Agreement
.
Except as otherwise specified herein, this Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied, between the parties
hereto with respect to the subject matter hereof.
18.
Effectiveness of Agreement
.
This Agreement shall be effective as of the date set forth
on the first page and may apply to acts or omissions of Director which occurred prior to such date
if Director was an officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other enterprise, at the time such
act or omission occurred, and shall continue to exist after the rescission or restrictive
modification of this Agreement with respect to events occurring prior to such rescission or
restrictive modification.
19.
Modification and Waiver
.
No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by the parties thereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions
of this Agreement nor shall any waiver constitute a continuing waiver.
20.
Notices
.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and
receipted for by the party to whom said notice or other communication shall have been directed, or
(b) if sent by an overnight courier service (such as Federal Express) to:
(i) if to Director, at the address of Director provided to the Company most
recently prior to the date of said notice or other communication, and
(ii) if to the Company, at: Pzena Investment Management, Inc.
Attention: General Counsel
120 West 45
th
Street, 20
th
Floor
New York, New York 10036
13
or to any other address as may have been furnished to Director by the Company.
21.
Contribution
.
To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Director for any reason
whatsoever, the Company, in lieu of indemnifying Director, shall contribute to the amount incurred
by Director, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event
under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the
circumstances of such Proceeding in order to reflect (i) the relative benefits received by the
Company and Director as a result of the event(s) and/or transaction(s) giving cause to such
Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees
and agents) and Director in connection with such event(s) and/or transaction(s).
22.
Applicable Law and Consent to Jurisdiction
.
This Agreement and the legal relations
among the parties shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware, without regard to its conflict of laws rules. The Company and Director
hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware
(the Delaware Court), and not in any other state or federal court in the United States of America
or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the
Delaware Court for purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the
Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action
or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
23.
Identical Counterparts
.
This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24.
Miscellaneous
.
Use of the masculine pronoun shall be deemed to include usage of the
feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
14
IN WITNESS WHEREOF
, the parties have caused this Agreement to be signed as of the day and year
first above written.
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PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
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Name: Richard S. Pzena
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Title: Chief Executive Officer
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/s/ Joel M. Greenblatt
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Joel M. Greenblatt
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15
EXHIBIT 10.15
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (Agreement) is made as of October 24, 2007, by and between
Pzena Investment Management, Inc., a Delaware corporation (along with any entities referred to in
Section 2(c) below, the Company), and Richard P.
Meyerowich (Director).
RECITALS
WHEREAS
, highly competent persons have become more reluctant to serve publicly-held
corporations as directors or in other capacities unless they are provided with adequate protection
through insurance or adequate indemnification against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of the corporation.
WHEREAS
, the Board of Directors of the Company (the Board) has determined that, in order to
attract and retain qualified individuals as members of the Board, the Company will attempt to
maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving
the Company and its subsidiaries from certain liabilities. Although the furnishing of such
insurance has been a customary and widespread practice among United States based corporations and
other business enterprises, such insurance may be available to it in the future only at higher
premiums and with more exclusions. At the same time, directors are being increasingly subjected to
expensive and time-consuming litigation relating to the business and affairs of corporations. The
Company recognizes that the cost of defending and otherwise participating in such litigation is far
greater than the financial benefits of serving as a Director. Article Seventh of the Certificate
of Incorporation of the Company, as in effect on the date hereof, and the Delaware General
Corporation Law (DGCL) expressly provide that the indemnification provisions set forth therein
are not exclusive and contemplate that agreements may be entered into between the Company and
members of the Board (or parties serving at the request of the Board) with respect to
indemnification;
WHEREAS
, the uncertainties relating to insurance have increased the difficulty of attracting
and retaining directors;
WHEREAS
, the Board has determined that the increased difficulty in attracting and retaining
directors is detrimental to the best interests of the Companys stockholders;
WHEREAS
, it is reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify, and to pay expenses on behalf of, directors to the fullest extent permitted by
applicable law so that they will serve or continue to serve the Company free from undue concern
that they will not be so indemnified;
WHEREAS
, this Agreement is in furtherance of the Amended and Restated Certificate of
Incorporation of the Company, its Amended and Restated Bylaws and any resolutions adopted pursuant
thereto, and the DGCL, and shall not be deemed a substitute therefor, nor to diminish or abrogate
any rights of Director thereunder;
WHEREAS
, the Company has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Director to serve as a director or officer of the Company, and the
Company acknowledges that Director is relying upon this Agreement in serving as a director or
officer of the Company; and
WHEREAS
, Director is willing to serve, continue to serve and to take on additional service for
or on behalf of the Company on the condition that he be so indemnified;
NOW, THEREFORE
, in consideration of the promises and the covenants contained herein, the
Company and Director do hereby covenant and agree as follows:
1.
Services to the Company
.
Director will serve or continue to serve, at the will of the
Company and its stockholders for so long as Director is duly elected or appointed or until Director
tenders his or her resignation.
2.
Definitions
.
As used in this Agreement:
(a) Beneficial Owner shall have the meaning given to such term in Rule 13d-3 under the
Securities Exchange Act of 1934.
(b) A Change in Control shall be deemed to occur upon the earliest to occur after the date
of this Agreement of any of the following events:
(i)
Acquisition of Stock by Third Party
. Any Person, other than a Principal or a
Related Party of a Principal (as each such term is defined below), is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or
more of the combined voting power of the Companys then outstanding securities;
(ii)
Change in Board of Directors
. During any period of two (2) consecutive years
(not including any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board (together with any new directors whose election to
the Board or whose nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so approved) cease for
any reason to constitute at least a majority of the members of the Board;
(iii)
Corporate Transactions
. The effective date of a merger or consolidation of the
Company with any other entity, unless such merger or consolidation would result in the voting
securities of the Company outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity, including the parent corporation of such surviving entity) at least 50% of the
total voting power of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of the board of
directors or other governing body of such surviving entity;
2
(iv)
Liquidation
. The approval by the stockholders of the Company of a complete
liquidation of the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Companys assets; and
(v)
Other Events
. There occurs any other event of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any
similar item on any similar schedule or form) promulgated under the Exchange Act (as defined
below), whether or not the Company is then subject to such reporting requirement.
(c) Company shall include, in addition to Pzena Investment Management, Inc., any
corporation, partnership, joint venture, limited liability company, trust or other enterprise of
which such Director is or was serving as a director, officer, employee or agent of at the request
of the Company, or any corporation which results from or survives a consolidation or merger with
Pzena Investment Management, Inc., as well as any corporation resulting from a consolidation or
merger which, if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that if Director is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company
,
trust or other enterprise, Director shall
stand in the same position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Director would have with respect to such constituent corporation if its
separate existence had continued.
(d) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding as defined herein in respect of which indemnification is sought by Director.
(e) Enterprise shall mean the Company and any other corporation, partnership, limited
liability company, joint venture, trust, employee benefit plan or other enterprise of which
Director is or was serving at the request of the Company as a director, officer, employee, agent or
fiduciary.
(f) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(g) Expenses shall include all reasonable attorneys and accountants fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in,
or otherwise being involved with, a Proceeding as defined in this Agreement. Expenses also shall
include Expenses incurred in connection with any appeal resulting from any Proceeding, including
without limitation the premium, security for, and other costs relating to any cost bond,
supersedeas bond, or other appeal
3
bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by
Director or the amount of judgments or fines against Director.
(h) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five years has been, retained
to represent: (i) the Company or Director in any matter material to either such party or (ii) any
other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding
the foregoing, the term Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Director in an action to determine Directors rights under this
Agreement.
(i) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange
Act; provided, however, that Person shall exclude (i) the Company or a person or entity that
directly or indirectly controls, is controlled by, or is under common control with, the Company,
(ii) any trustee or other fiduciary holding securities under an employee benefit plan of the
Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the Company.
(j) Principal means Richard S. Pzena, John P. Goetz, William L. Lipsey, A. Rama Krishna and
Joel Greenblatt.
(k) The term Proceeding shall include any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation (including but not limited to
any internal corporate investigation), inquiry, administrative hearing or any other actual,
threatened or completed proceeding, including any and all appeals, whether brought in the right of
the Company or otherwise and whether of a civil, criminal, administrative or investigative nature,
in which Director was, is, or will be a party to, a witness in or otherwise participates in by
reason of the fact that Director is or was a director or officer of the Company, by reason of any
action taken by him or of any action on his part while acting as director or officer of the
Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another Enterprise, in each case whether or not serving in
such capacity at the time any liability or expense is incurred for which indemnification,
reimbursement, or payment of expenses can be provided under this Agreement; except one initiated by
a Director to enforce his rights under this Agreement. Any Director serving, in any capacity, (i)
another corporation of which a majority of the shares entitled to vote in the election of its
directors is held by the Company, or (ii) any employee benefit plan of the Company or of any
corporation referred to in clause (i), shall be deemed to be doing so at the request of the
Company.
(l) Related Party means: (1) in the case of an individual, any immediate family member of
any Principal; or (2) any trust, corporation, partnership, limited liability company or other
entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially holding
an 80% or more controlling interest of which
4
consist of any one or more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
(m) References to fines shall include, but are not limited to, any excise tax assessed with
respect to any employee benefit plan; references to serving at the request of the Company shall
include any service as a director, officer, employee or agent of the Company which imposes duties
on, or involves services by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants and beneficiaries of
an employee benefit plan shall be deemed to have acted in a manner not opposed to the best
interests of the Company as referred to in this Agreement.
3.
Indemnity in Third-Party Proceedings
.
A Third-Party Proceeding is a Proceeding other
than a Proceeding by or in the right of the Company to procure a judgment in its favor. The Company
shall indemnify Director in accordance with the provisions of this Section 3 if Director is, or is
threatened to be made, a party to, a witness in or otherwise participates in any Third-Party
Proceeding. Pursuant to this Section 3, Director shall be indemnified against all Expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred by Director or on
his behalf in connection with such Third-Party Proceeding or any claim, issue or matter therein, if
Director acted in good faith and in a manner Director reasonably believed to be in or not opposed
to the best interests of the Company and, in the case of a criminal proceeding had no reasonable
cause to believe that such conduct was unlawful.
4.
Indemnity in Proceedings by or in the Right of the Company
.
The Company shall indemnify
Director in accordance with the provisions of this Section 4 if Director is, or is threatened to be
made, a party to, a witness in or otherwise participates in any Proceeding by or in the right of
the Company to procure a judgment in its favor. Pursuant to this Section 4, Director shall be
indemnified against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter therein and to the extent permitted
by law, amounts paid in settlement, if Director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No indemnification for
Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which
Director shall have been finally adjudged by a court to be liable to the Company, unless and only
to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought
shall determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, Director is fairly and reasonably entitled to indemnification.
5.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
(a) In any Proceeding referred to in Section 4, if Director is not wholly successful in such
Proceeding, but has been adjudged to be liable to the Company as to one or more but less than all
claims, issues or matters in such Proceeding, no indemnification shall be made in respect of any
claim, issue or matter as to which
5
Director shall have been adjudged to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was brought shall
determine upon application that, despite the adjudication of liability to the Company, in view of
all the circumstances of the case, Director is fairly and reasonably entitled to such
indemnification. However, in any Proceeding referred to in Section 4, the Company shall indemnify
Director against all Expenses actually and reasonably incurred by him or on his behalf and, to the
extent permitted by law, amounts paid in settlement, in connection with each claim, issue or matter
as to which Director is successful on the merits or has reached a settlement.
(b) To the extent that Director has been successful on the merits or otherwise in defense of
any Proceeding (including any Proceeding referred to in Section 4), or in defense of any claim,
issue or matter therein, Director shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against all
Expenses actually and reasonably incurred or suffered by Director or on Directors behalf in
connection therewith. Indemnification pursuant to this Section 5(b) shall not require a
determination pursuant to Section 10 of this Agreement.
(c) For purposes of this Section 5 and without limitation, the termination of any claim, issue
or matter in a Proceeding in which Director is a defendant by dismissal, with or without prejudice,
shall be deemed to be a successful result as to such claim, issue or matter.
6.
Additional Indemnification
.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify
Director to the extent permitted by law if Director is a party to or threatened to be made a party
to, a witness in or otherwise participates in any Proceeding against all Expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by Director in connection with the
Proceeding (1) unless Directors conduct constitutes a breach of Directors duty of loyalty to the
Company or its stockholders
,
(2) except for liability for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) except for liability under
Section 174 of the DGCL, or (4) except for liability relating to any transaction from which the
Director derived an improper benefit.
(b) For purposes of Section 6(a), the meaning of the phrase to the extent permitted by law
shall mean:
(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates
additional indemnification by agreement, or the corresponding provision of any amendment to or
replacement of the DGCL; and
(ii) the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL adopted after the date of this Agreement that increase the extent to which a corporation may
indemnify its officers and directors.
6
7.
Exclusions
.
Notwithstanding any provision in this Agreement, the Company shall not be
obligated under this Agreement to make any payment for indemnity including Expenses, judgments,
fines and amounts paid in settlement to the extent that the amount for which Director seeks
indemnification, or a portion thereof:
(a) has actually been made to or on behalf of Director under any insurance policy, contract,
agreement or otherwise; or
(b) is based upon an accounting of profits made from the purchase and sale (or sale and
purchase) by Director of securities of the Company in violation of Section 16(b) of the Exchange
Act or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated or brought
voluntarily by Director, including any Proceeding (or any part of any Proceeding) initiated by
Director against the Company or its directors, officers or employees, unless (i) the Board
authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the
Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law.
8.
Notification of Indemnifiable Claim
.
Director shall, as a condition precedent to his
right to be indemnified under this Agreement, give the Company notice in writing as soon as
practicable of any claim made against Director for which indemnification will or could be sought
under this Agreement. Director agrees promptly to notify the Company in writing upon being served
with any summons, citation, subpoena, complaint, indictment, information or other document relating
to any Proceeding or matter which will or could be subject to indemnification or payment of
Expenses covered hereunder. The Secretary of the Company shall, promptly upon receipt of such
notice, advise the Board in writing of such notice. The failure of Director to timely notify the
Company shall not relieve the Company of any obligation which it may have to the Director under
this Agreement or otherwise, unless such failure to provide timely notice materially prejudices the
Company. The omission to notify the Company will not relieve the Company from any liability for
indemnification which it may have to Director otherwise than under this Agreement.
9.
Payment of Expenses
.
Without regard to Directors ultimate entitlement to
indemnification under other provisions of this Agreement, the Company shall pay the Expenses as
incurred by Director or reimburse Director for his payment of such Expenses in connection with any
Proceeding within thirty (30) days after the receipt by the Company of a written request for
payment of expenses. If the DGCL so requires, payment of Expenses by the Company under this
Section 9 shall be made only upon delivery to the Company of an undertaking (Undertaking). The
Undertaking shall constitute the Directors agreement that: (i) he shall repay the Expenses paid by
the Company to the extent that it is ultimately determined by final judicial decision from which
there is no further right to appeal that the Director is not entitled to be indemnified by the
Company; and (ii) that in consideration for the payment of such expenses, the Company may, at its
sole discretion, select counsel for Director, assume the defense or otherwise participate in the
defense of such Proceeding. Payment of Expenses pursuant to
7
this Section shall be unsecured and interest free. Payment of Expenses shall be made without
regard to Directors ability to repay the expenses and without regard to Directors ultimate
entitlement to indemnification under the other provisions of this Agreement. Such payment shall
include any and all reasonable Expenses incurred pursuing an action to enforce this right of
payment of Expenses, including Expenses incurred preparing and forwarding statements to the Company
to support the payment claimed. This Section 9 shall not apply to any claim for Expenses made by
Director for which indemnity is excluded pursuant to Section 7. Notwithstanding anything else
contained in this Section 9, to the extent that the Company is prohibited by applicable law from
making payment of Expenses to the Director prior to the Companys determination that the Director
is entitled to indemnification, the Company shall not pay Expenses to the Director pursuant to this
Section. Nothing herein shall be construed to limit the Companys right to seek damages from the
Director, including but not limited to the full amount of the Expenses paid by the Company
hereunder. The selection by the Company of defense counsel for the Director in connection with any
Proceeding, shall be made only with the approval of the Director, which approval shall not be
unreasonably withheld, upon the delivery to Director of written notice of the Companys election to
do so. After delivery of such notice, approval of such counsel by Director and the retention of
such counsel by the Company, the Company will not be liable to Director under this Agreement for
any fees of counsel subsequently incurred by Director with respect to the same Proceeding, provided
that (i) Director shall have the right to employ his counsel in any such Proceeding at Directors
expense; and (ii) if (A) the employment of counsel by Director has been previously authorized by
the Company, (B) Director shall have reasonably concluded that there may be a conflict of interest
between the Company and Director in the conduct of any such defense, or (C) the Company shall not,
in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses
of Directors counsel shall be at the expense of the Company.
10.
Procedure Upon Application for Indemnification
.
(a) Upon final disposition of a Proceeding for which indemnification is sought pursuant to
Section 3 or Section 4, Director shall submit promptly (and in any event, no later than the
applicable statute of limitations) to the Board a written request for indemnification averring that
he has met the applicable standard of conduct set forth herein. Any indemnification made under this
Agreement pursuant to Section 3 or Section 4 shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the Director is proper in the
circumstances because Director has met the applicable standard of conduct. Such determination
shall be made in the following manner: (i) if a Change in Control shall have occurred and the
Director is not a director at the time of such determination, by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Director; and (ii) in any other
circumstance: (A) by a majority vote of the Disinterested Directors, even though less than a quorum
of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the
Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such
Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to Director or (D) if so directed
by the Board, by the stockholders of the
8
Company, and, if it is so determined that Director is entitled to indemnification, payment to
Director shall be made within thirty (30) days after such determination. Director shall cooperate
with the person, persons or entity making such determination with respect to Directors entitlement
to indemnification, including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Director and reasonably necessary to such
determination. Any costs or expenses (including attorneys fees and disbursements) incurred by
Director in so cooperating with the person, persons or entity making such determination shall be
borne by the Company (irrespective of the determination as to Directors entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold Director harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 10(a) hereof, the Independent Counsel shall be selected as
provided in this Section 10(b). If a Change in Control shall not have occurred, the Independent
Counsel shall be selected by the Board within ten (10) days of submission of a written request by
Director for indemnification pursuant to Section 10(a), and the Company shall give written notice
to Director advising him of the identity of the Independent Counsel so selected. If a Change in
Control shall have occurred, the Independent Counsel shall be selected by Director within ten (10)
days of submission of a written request by Director for indemnification pursuant to Section 10(a),
(unless Director shall request that such selection be made by the Board, in which event the
preceding sentence shall apply), and Director shall give written notice to the Company advising it
of the identity of the Independent Counsel so selected. In either event, Director or the Company,
as the case may be, may, within ten (10) days after such written notice of selection shall have
been given, deliver to the Company or to Director, as the case may be, a written objection to such
selection;
provided
,
however
, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. The objection must also include a proposed
substitute Independent Counsel. If objection including a proposed substituted Independent Counsel
is timely made, such substituted Independent Counsel shall serve as Independent Counsel unless
objected to within ten (10) days. An objection to the substituted Independent Counsel may be
asserted only on the ground that the Independent Counsel so selected does not meet the requirements
of Independent Counsel as defined in Section 2 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If written objection is made, the
Independent Counsel or substituted Independent Counsel proposed may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined that such objection
is without merit. If, within thirty (30) days after submission by Director of a written request for
indemnification pursuant to Section 10(a) hereof, the parties have not agreed upon the selection of
the Independent Counsel, either the Company or Director may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the Company or Director
to the others selection of Independent Counsel and/or for the appointment as Independent Counsel
of a person selected by the Court or by such other person as the Court shall
9
designate, and the person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 10(a) hereof.
11.
Presumptions and Effect of Certain Proceedings
.
(a) The submission of the Application for Indemnification to the Board shall create a
rebuttable presumption that the Director is entitled to indemnification under this Agreement, and
the Board, Independent Counsel, or stockholders, as the case may be, may, at any time, specifically
determine that the Director is so entitled, unless it or they possess sufficient evidence to rebut
the presumption that Director has met the applicable standard of conduct. If a determination shall
have been made pursuant to this Agreement that Director is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding commenced pursuant to Section 12,
absent (i) a misstatement by Director of a material fact, or an omission of a material fact
necessary to make Directors statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under applicable law. Neither
the failure of the Company (including by its directors or Independent Counsel) to have made a
determination prior to the commencement of any action pursuant to this Agreement that
indemnification is proper in the circumstances because Director has met the applicable standard of
conduct, nor an actual determination by the Company (including by its directors or Independent
Counsel) that Director has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Director has not met the applicable standard of conduct.
Moreover, the fact that the Company has paid the Directors Expenses pursuant to Section 9 herein
shall not create a presumption that Director has met the applicable standard of conduct for
indemnification.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely affect the right of
Director to indemnification or create a presumption that Director did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal Proceeding, that Director had reasonable cause to believe that his
conduct was unlawful.
(c) For purposes of any determination of good faith, Director shall be deemed to have acted in
good faith if Directors action is based on the advice of legal counsel for the Company or on
information or records given or reports made to the Company by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by the Company. The
provisions of this Section 11(d) shall not be deemed exclusive or to limit in any way the other
circumstances in which the Director may be deemed to have met the applicable standard of conduct
set forth in this Agreement.
(d) To the extent legally permissible, the knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Enterprise shall not be imputed to Director for
purposes of determining the right to indemnification under this Agreement.
10
12.
Remedies of Director
.
(a) In the event that (i) a determination is made pursuant to Section 10 of this Agreement
that Director is not entitled to indemnification under this Agreement, (ii) payment of Expenses is
not timely made pursuant to Section 9 of this Agreement, or (iii) payment of indemnification
pursuant to Section 3, 4, 5(a) or 6 of this Agreement is not made within thirty (30) days after a
determination has been made that Director is entitled to indemnification, Director shall be
entitled to an adjudication by a court of his entitlement to such indemnification or payment of
Expenses.
(b) In the event that Director successfully sues the Company for indemnification or payment of
Expenses, and is successful in whole or in part, Director shall be entitled to be paid by the
Company for the Expense of prosecuting such suit. If the Company sues Director to recover Expenses
paid and Director is successful in defending such suit, in whole or in part, Director shall be
entitled to be paid the Expense of defending such suit.
(c) In the event that a determination shall have been made under this Agreement that Director
is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section
shall be conducted in all respects as a de novo trial on the merits and Director shall not be
prejudiced by reason of that adverse determination. In any judicial proceeding pursuant to this
Section, the Company shall have the burden of proving Director is not entitled to indemnification
or payment of Expenses, as the case may be.
(d) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement. The Company shall indemnify Director against any and all Expenses
and, if requested by Director, shall (within
thirty (30)
days after receipt by the Company of a
written request therefore) pay such Expenses to Director, which are incurred by Director in
connection with any action brought by Director for indemnification or payment of Expenses from the
Company under this Agreement or under any directors and officers liability insurance policies
maintained by the Company, regardless of whether Director ultimately is determined to be entitled
to such indemnification, payment of Expenses or insurance recovery, as the case may be.
13.
Non-exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification and to receive payment of Expenses as provided by this
Agreement shall not be deemed exclusive of any other rights to which Director may at any time be
entitled under applicable law, the Companys Certificate of Incorporation, the Companys Bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Director under this Agreement in respect of any action taken or omitted by such Director prior
to such
11
amendment, alteration or repeal. To the extent that a change in Delaware law, whether by
statute or judicial decision, permits greater indemnification or payment of Expenses than would be
afforded currently under the Companys Amended and Restated Certificate of Incorporation, Amended
and Restated Bylaws and this Agreement, it is the intent of the parties hereto that Director shall
enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given hereunder or now
or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) The Company shall, from time to time, make the good faith determination whether or not it
is practicable for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the directors, officers, employees, or agents of the
Company with coverage for losses from wrongful acts, or to ensure the Companys performance of its
indemnification obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection afforded by such
coverage. To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors of the Company or of any other corporation, partnership, joint
venture, trust, employee benefits plan or other enterprise which the Director serves at the request
of the Company, Director shall be covered by such policy or policies in such manner as to provide
the Director the same rights and benefits as are accorded to the most favorably insured of the
Companys directors. The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Director, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Director, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
14.
Duration of Agreement
.
This Agreement shall continue until and terminate upon the
later of: (a) six (6) years after the date that Director shall have ceased to serve as a director
or officer of the Company or as a director, officer, employee or agent of any other corporation,
partnership, joint venture, limited liability company, trust, employee benefit plan or other
enterprise which Director served at the request of the Company (Six Year Anniversary Date); or
(b) one (1) year after the final termination of each and every Proceeding, commenced prior to the
Six Year Anniversary Date.
15.
Successors and Assigns
.
This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Director and his heirs, executors and
administrators.
12
16.
Severability
.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
17.
Entire Agreement
.
Except as otherwise specified herein, this Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied, between the parties
hereto with respect to the subject matter hereof.
18.
Effectiveness of Agreement
.
This Agreement shall be effective as of the date set forth
on the first page and may apply to acts or omissions of Director which occurred prior to such date
if Director was an officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other enterprise, at the time such
act or omission occurred, and shall continue to exist after the rescission or restrictive
modification of this Agreement with respect to events occurring prior to such rescission or
restrictive modification.
19.
Modification and Waiver
.
No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by the parties thereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions
of this Agreement nor shall any waiver constitute a continuing waiver.
20.
Notices
.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and
receipted for by the party to whom said notice or other communication shall have been directed, or
(b) if sent by an overnight courier service (such as Federal Express) to:
(i) if to Director, at the address of Director provided to the Company most
recently prior to the date of said notice or other communication, and
(ii) if to the Company, at: Pzena Investment Management, Inc.
Attention: General Counsel
120 West 45
th
Street, 20
th
Floor
New York, New York 10036
13
or to any other address as may have been furnished to Director by the Company.
21.
Contribution
.
To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Director for any reason
whatsoever, the Company, in lieu of indemnifying Director, shall contribute to the amount incurred
by Director, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event
under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the
circumstances of such Proceeding in order to reflect (i) the relative benefits received by the
Company and Director as a result of the event(s) and/or transaction(s) giving cause to such
Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees
and agents) and Director in connection with such event(s) and/or transaction(s).
22.
Applicable Law and Consent to Jurisdiction
.
This Agreement and the legal relations
among the parties shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware, without regard to its conflict of laws rules. The Company and Director
hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware
(the Delaware Court), and not in any other state or federal court in the United States of America
or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the
Delaware Court for purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the
Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action
or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
23.
Identical Counterparts
.
This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24.
Miscellaneous
.
Use of the masculine pronoun shall be deemed to include usage of the
feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
14
IN WITNESS WHEREOF
, the parties have caused this Agreement to be signed as of the day and year
first above written.
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PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
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Name: Richard S. Pzena
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Title: Chief Executive Officer
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/s/ Richard P.
Meyerowich
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Richard P.
Meyerowich
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15
EXHIBIT 10.16
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (Agreement) is made as of October 24, 2007, by and between
Pzena Investment Management, Inc., a Delaware corporation (along with any entities referred to in
Section 2(c) below, the Company), and Myron E. Ullman, III (Director).
RECITALS
WHEREAS
, highly competent persons have become more reluctant to serve publicly-held
corporations as directors or in other capacities unless they are provided with adequate protection
through insurance or adequate indemnification against inordinate risks of claims and actions
against them arising out of their service to and activities on behalf of the corporation.
WHEREAS
, the Board of Directors of the Company (the Board) has determined that, in order to
attract and retain qualified individuals as members of the Board, the Company will attempt to
maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving
the Company and its subsidiaries from certain liabilities. Although the furnishing of such
insurance has been a customary and widespread practice among United States based corporations and
other business enterprises, such insurance may be available to it in the future only at higher
premiums and with more exclusions. At the same time, directors are being increasingly subjected to
expensive and time-consuming litigation relating to the business and affairs of corporations. The
Company recognizes that the cost of defending and otherwise participating in such litigation is far
greater than the financial benefits of serving as a Director. Article Seventh of the Certificate
of Incorporation of the Company, as in effect on the date hereof, and the Delaware General
Corporation Law (DGCL) expressly provide that the indemnification provisions set forth therein
are not exclusive and contemplate that agreements may be entered into between the Company and
members of the Board (or parties serving at the request of the Board) with respect to
indemnification;
WHEREAS
, the uncertainties relating to insurance have increased the difficulty of attracting
and retaining directors;
WHEREAS
, the Board has determined that the increased difficulty in attracting and retaining
directors is detrimental to the best interests of the Companys stockholders;
WHEREAS
, it is reasonable, prudent and necessary for the Company contractually to obligate
itself to indemnify, and to pay expenses on behalf of, directors to the fullest extent permitted by
applicable law so that they will serve or continue to serve the Company free from undue concern
that they will not be so indemnified;
WHEREAS
, this Agreement is in furtherance of the Amended and Restated Certificate of
Incorporation of the Company, its Amended and Restated Bylaws and any resolutions adopted pursuant
thereto, and the DGCL, and shall not be deemed a substitute therefor, nor to diminish or abrogate
any rights of Director thereunder;
WHEREAS
, the Company has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce Director to serve as a director or officer of the Company, and the
Company acknowledges that Director is relying upon this Agreement in serving as a director or
officer of the Company; and
WHEREAS
, Director is willing to serve, continue to serve and to take on additional service for
or on behalf of the Company on the condition that he be so indemnified;
NOW, THEREFORE
, in consideration of the promises and the covenants contained herein, the
Company and Director do hereby covenant and agree as follows:
1.
Services to the Company
.
Director will serve or continue to serve, at the will of the
Company and its stockholders for so long as Director is duly elected or appointed or until Director
tenders his or her resignation.
2.
Definitions
.
As used in this Agreement:
(a) Beneficial Owner shall have the meaning given to such term in Rule 13d-3 under the
Securities Exchange Act of 1934.
(b) A Change in Control shall be deemed to occur upon the earliest to occur after the date
of this Agreement of any of the following events:
(i)
Acquisition of Stock by Third Party
. Any Person, other than a Principal or a
Related Party of a Principal (as each such term is defined below), is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or
more of the combined voting power of the Companys then outstanding securities;
(ii)
Change in Board of Directors
. During any period of two (2) consecutive years
(not including any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board (together with any new directors whose election to
the Board or whose nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so approved) cease for
any reason to constitute at least a majority of the members of the Board;
(iii)
Corporate Transactions
. The effective date of a merger or consolidation of the
Company with any other entity, unless such merger or consolidation would result in the voting
securities of the Company outstanding immediately prior to such merger or consolidation continuing
to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity, including the parent corporation of such surviving entity) at least 50% of the
total voting power of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation and with the power to elect at least a majority of the board of
directors or other governing body of such surviving entity;
2
(iv)
Liquidation
. The approval by the stockholders of the Company of a complete
liquidation of the Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Companys assets; and
(v)
Other Events
. There occurs any other event of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any
similar item on any similar schedule or form) promulgated under the Exchange Act (as defined
below), whether or not the Company is then subject to such reporting requirement.
(c) Company shall include, in addition to Pzena Investment Management, Inc., any
corporation, partnership, joint venture, limited liability company, trust or other enterprise of
which such Director is or was serving as a director, officer, employee or agent of at the request
of the Company, or any corporation which results from or survives a consolidation or merger with
Pzena Investment Management, Inc., as well as any corporation resulting from a consolidation or
merger which, if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that if Director is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company
,
trust or other enterprise, Director shall
stand in the same position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Director would have with respect to such constituent corporation if its
separate existence had continued.
(d) Disinterested Director means a director of the Company who is not and was not a party to
the Proceeding as defined herein in respect of which indemnification is sought by Director.
(e) Enterprise shall mean the Company and any other corporation, partnership, limited
liability company, joint venture, trust, employee benefit plan or other enterprise of which
Director is or was serving at the request of the Company as a director, officer, employee, agent or
fiduciary.
(f) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
(g) Expenses shall include all reasonable attorneys and accountants fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in,
or otherwise being involved with, a Proceeding as defined in this Agreement. Expenses also shall
include Expenses incurred in connection with any appeal resulting from any Proceeding, including
without limitation the premium, security for, and other costs relating to any cost bond,
supersedeas bond, or other appeal
3
bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by
Director or the amount of judgments or fines against Director.
(h) Independent Counsel means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five years has been, retained
to represent: (i) the Company or Director in any matter material to either such party or (ii) any
other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding
the foregoing, the term Independent Counsel shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Director in an action to determine Directors rights under this
Agreement.
(i) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange
Act; provided, however, that Person shall exclude (i) the Company or a person or entity that
directly or indirectly controls, is controlled by, or is under common control with, the Company,
(ii) any trustee or other fiduciary holding securities under an employee benefit plan of the
Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the Company.
(j) Principal means Richard S. Pzena, John P. Goetz, William L. Lipsey, A. Rama Krishna and
Joel Greenblatt.
(k) The term Proceeding shall include any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, investigation (including but not limited to
any internal corporate investigation), inquiry, administrative hearing or any other actual,
threatened or completed proceeding, including any and all appeals, whether brought in the right of
the Company or otherwise and whether of a civil, criminal, administrative or investigative nature,
in which Director was, is, or will be a party to, a witness in or otherwise participates in by
reason of the fact that Director is or was a director or officer of the Company, by reason of any
action taken by him or of any action on his part while acting as director or officer of the
Company, or by reason of the fact that he is or was serving at the request of the Company as a
director, officer, employee or agent of another Enterprise, in each case whether or not serving in
such capacity at the time any liability or expense is incurred for which indemnification,
reimbursement, or payment of expenses can be provided under this Agreement; except one initiated by
a Director to enforce his rights under this Agreement. Any Director serving, in any capacity, (i)
another corporation of which a majority of the shares entitled to vote in the election of its
directors is held by the Company, or (ii) any employee benefit plan of the Company or of any
corporation referred to in clause (i), shall be deemed to be doing so at the request of the
Company.
(l) Related Party means: (1) in the case of an individual, any immediate family member of
any Principal; or (2) any trust, corporation, partnership, limited liability company or other
entity, the beneficiaries, stockholders, partners, members, owners or Persons beneficially holding
an 80% or more controlling interest of which
4
consist of any one or more Principals and/or such other Persons referred to in the immediately
preceding clause (1).
(m) References to fines shall include, but are not limited to, any excise tax assessed with
respect to any employee benefit plan; references to serving at the request of the Company shall
include any service as a director, officer, employee or agent of the Company which imposes duties
on, or involves services by, such director, officer, employee or agent with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the best interests of the participants and beneficiaries of
an employee benefit plan shall be deemed to have acted in a manner not opposed to the best
interests of the Company as referred to in this Agreement.
3.
Indemnity in Third-Party Proceedings
.
A Third-Party Proceeding is a Proceeding other
than a Proceeding by or in the right of the Company to procure a judgment in its favor. The Company
shall indemnify Director in accordance with the provisions of this Section 3 if Director is, or is
threatened to be made, a party to, a witness in or otherwise participates in any Third-Party
Proceeding. Pursuant to this Section 3, Director shall be indemnified against all Expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred by Director or on
his behalf in connection with such Third-Party Proceeding or any claim, issue or matter therein, if
Director acted in good faith and in a manner Director reasonably believed to be in or not opposed
to the best interests of the Company and, in the case of a criminal proceeding had no reasonable
cause to believe that such conduct was unlawful.
4.
Indemnity in Proceedings by or in the Right of the Company
.
The Company shall indemnify
Director in accordance with the provisions of this Section 4 if Director is, or is threatened to be
made, a party to, a witness in or otherwise participates in any Proceeding by or in the right of
the Company to procure a judgment in its favor. Pursuant to this Section 4, Director shall be
indemnified against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter therein and to the extent permitted
by law, amounts paid in settlement, if Director acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. No indemnification for
Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which
Director shall have been finally adjudged by a court to be liable to the Company, unless and only
to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought
shall determine upon application that, despite the adjudication of liability but in view of all the
circumstances of the case, Director is fairly and reasonably entitled to indemnification.
5.
Indemnification for Expenses of a Party Who is Wholly or Partly Successful
.
(a) In any Proceeding referred to in Section 4, if Director is not wholly successful in such
Proceeding, but has been adjudged to be liable to the Company as to one or more but less than all
claims, issues or matters in such Proceeding, no indemnification shall be made in respect of any
claim, issue or matter as to which
5
Director shall have been adjudged to be liable to the Company, unless and only to the extent
that the Delaware Court of Chancery or any court in which the Proceeding was brought shall
determine upon application that, despite the adjudication of liability to the Company, in view of
all the circumstances of the case, Director is fairly and reasonably entitled to such
indemnification. However, in any Proceeding referred to in Section 4, the Company shall indemnify
Director against all Expenses actually and reasonably incurred by him or on his behalf and, to the
extent permitted by law, amounts paid in settlement, in connection with each claim, issue or matter
as to which Director is successful on the merits or has reached a settlement.
(b) To the extent that Director has been successful on the merits or otherwise in defense of
any Proceeding (including any Proceeding referred to in Section 4), or in defense of any claim,
issue or matter therein, Director shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against all
Expenses actually and reasonably incurred or suffered by Director or on Directors behalf in
connection therewith. Indemnification pursuant to this Section 5(b) shall not require a
determination pursuant to Section 10 of this Agreement.
(c) For purposes of this Section 5 and without limitation, the termination of any claim, issue
or matter in a Proceeding in which Director is a defendant by dismissal, with or without prejudice,
shall be deemed to be a successful result as to such claim, issue or matter.
6.
Additional Indemnification
.
(a) Notwithstanding any limitation in Sections 3, 4, or 5, the Company shall indemnify
Director to the extent permitted by law if Director is a party to or threatened to be made a party
to, a witness in or otherwise participates in any Proceeding against all Expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by Director in connection with the
Proceeding (1) unless Directors conduct constitutes a breach of Directors duty of loyalty to the
Company or its stockholders
,
(2) except for liability for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) except for liability under
Section 174 of the DGCL, or (4) except for liability relating to any transaction from which the
Director derived an improper benefit.
(b) For purposes of Section 6(a), the meaning of the phrase to the extent permitted by law
shall mean:
(i) the fullest extent permitted by the provision of the DGCL that authorizes or contemplates
additional indemnification by agreement, or the corresponding provision of any amendment to or
replacement of the DGCL; and
(ii) the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL adopted after the date of this Agreement that increase the extent to which a corporation may
indemnify its officers and directors.
6
7.
Exclusions
.
Notwithstanding any provision in this Agreement, the Company shall not be
obligated under this Agreement to make any payment for indemnity including Expenses, judgments,
fines and amounts paid in settlement to the extent that the amount for which Director seeks
indemnification, or a portion thereof:
(a) has actually been made to or on behalf of Director under any insurance policy, contract,
agreement or otherwise; or
(b) is based upon an accounting of profits made from the purchase and sale (or sale and
purchase) by Director of securities of the Company in violation of Section 16(b) of the Exchange
Act or similar provisions of state statutory law or common law; or
(c) in connection with any Proceeding (or any part of any Proceeding) initiated or brought
voluntarily by Director, including any Proceeding (or any part of any Proceeding) initiated by
Director against the Company or its directors, officers or employees, unless (i) the Board
authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the
Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law.
8.
Notification of Indemnifiable Claim
.
Director shall, as a condition precedent to his
right to be indemnified under this Agreement, give the Company notice in writing as soon as
practicable of any claim made against Director for which indemnification will or could be sought
under this Agreement. Director agrees promptly to notify the Company in writing upon being served
with any summons, citation, subpoena, complaint, indictment, information or other document relating
to any Proceeding or matter which will or could be subject to indemnification or payment of
Expenses covered hereunder. The Secretary of the Company shall, promptly upon receipt of such
notice, advise the Board in writing of such notice. The failure of Director to timely notify the
Company shall not relieve the Company of any obligation which it may have to the Director under
this Agreement or otherwise, unless such failure to provide timely notice materially prejudices the
Company. The omission to notify the Company will not relieve the Company from any liability for
indemnification which it may have to Director otherwise than under this Agreement.
9.
Payment of Expenses
.
Without regard to Directors ultimate entitlement to
indemnification under other provisions of this Agreement, the Company shall pay the Expenses as
incurred by Director or reimburse Director for his payment of such Expenses in connection with any
Proceeding within thirty (30) days after the receipt by the Company of a written request for
payment of expenses. If the DGCL so requires, payment of Expenses by the Company under this
Section 9 shall be made only upon delivery to the Company of an undertaking (Undertaking). The
Undertaking shall constitute the Directors agreement that: (i) he shall repay the Expenses paid by
the Company to the extent that it is ultimately determined by final judicial decision from which
there is no further right to appeal that the Director is not entitled to be indemnified by the
Company; and (ii) that in consideration for the payment of such expenses, the Company may, at its
sole discretion, select counsel for Director, assume the defense or otherwise participate in the
defense of such Proceeding. Payment of Expenses pursuant to
7
this Section shall be unsecured and interest free. Payment of Expenses shall be made without
regard to Directors ability to repay the expenses and without regard to Directors ultimate
entitlement to indemnification under the other provisions of this Agreement. Such payment shall
include any and all reasonable Expenses incurred pursuing an action to enforce this right of
payment of Expenses, including Expenses incurred preparing and forwarding statements to the Company
to support the payment claimed. This Section 9 shall not apply to any claim for Expenses made by
Director for which indemnity is excluded pursuant to Section 7. Notwithstanding anything else
contained in this Section 9, to the extent that the Company is prohibited by applicable law from
making payment of Expenses to the Director prior to the Companys determination that the Director
is entitled to indemnification, the Company shall not pay Expenses to the Director pursuant to this
Section. Nothing herein shall be construed to limit the Companys right to seek damages from the
Director, including but not limited to the full amount of the Expenses paid by the Company
hereunder. The selection by the Company of defense counsel for the Director in connection with any
Proceeding, shall be made only with the approval of the Director, which approval shall not be
unreasonably withheld, upon the delivery to Director of written notice of the Companys election to
do so. After delivery of such notice, approval of such counsel by Director and the retention of
such counsel by the Company, the Company will not be liable to Director under this Agreement for
any fees of counsel subsequently incurred by Director with respect to the same Proceeding, provided
that (i) Director shall have the right to employ his counsel in any such Proceeding at Directors
expense; and (ii) if (A) the employment of counsel by Director has been previously authorized by
the Company, (B) Director shall have reasonably concluded that there may be a conflict of interest
between the Company and Director in the conduct of any such defense, or (C) the Company shall not,
in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses
of Directors counsel shall be at the expense of the Company.
10.
Procedure Upon Application for Indemnification
.
(a) Upon final disposition of a Proceeding for which indemnification is sought pursuant to
Section 3 or Section 4, Director shall submit promptly (and in any event, no later than the
applicable statute of limitations) to the Board a written request for indemnification averring that
he has met the applicable standard of conduct set forth herein. Any indemnification made under this
Agreement pursuant to Section 3 or Section 4 shall be made by the Company only as authorized in the
specific case upon a determination that indemnification of the Director is proper in the
circumstances because Director has met the applicable standard of conduct. Such determination
shall be made in the following manner: (i) if a Change in Control shall have occurred and the
Director is not a director at the time of such determination, by Independent Counsel in a written
opinion to the Board, a copy of which shall be delivered to Director; and (ii) in any other
circumstance: (A) by a majority vote of the Disinterested Directors, even though less than a quorum
of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the
Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such
Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a
written opinion to the Board, a copy of which shall be delivered to Director or (D) if so directed
by the Board, by the stockholders of the
8
Company, and, if it is so determined that Director is entitled to indemnification, payment to
Director shall be made within thirty (30) days after such determination. Director shall cooperate
with the person, persons or entity making such determination with respect to Directors entitlement
to indemnification, including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Director and reasonably necessary to such
determination. Any costs or expenses (including attorneys fees and disbursements) incurred by
Director in so cooperating with the person, persons or entity making such determination shall be
borne by the Company (irrespective of the determination as to Directors entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold Director harmless therefrom.
(b) In the event the determination of entitlement to indemnification is to be made by
Independent Counsel pursuant to Section 10(a) hereof, the Independent Counsel shall be selected as
provided in this Section 10(b). If a Change in Control shall not have occurred, the Independent
Counsel shall be selected by the Board within ten (10) days of submission of a written request by
Director for indemnification pursuant to Section 10(a), and the Company shall give written notice
to Director advising him of the identity of the Independent Counsel so selected. If a Change in
Control shall have occurred, the Independent Counsel shall be selected by Director within ten (10)
days of submission of a written request by Director for indemnification pursuant to Section 10(a),
(unless Director shall request that such selection be made by the Board, in which event the
preceding sentence shall apply), and Director shall give written notice to the Company advising it
of the identity of the Independent Counsel so selected. In either event, Director or the Company,
as the case may be, may, within ten (10) days after such written notice of selection shall have
been given, deliver to the Company or to Director, as the case may be, a written objection to such
selection;
provided
,
however
, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. The objection must also include a proposed
substitute Independent Counsel. If objection including a proposed substituted Independent Counsel
is timely made, such substituted Independent Counsel shall serve as Independent Counsel unless
objected to within ten (10) days. An objection to the substituted Independent Counsel may be
asserted only on the ground that the Independent Counsel so selected does not meet the requirements
of Independent Counsel as defined in Section 2 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. If written objection is made, the
Independent Counsel or substituted Independent Counsel proposed may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined that such objection
is without merit. If, within thirty (30) days after submission by Director of a written request for
indemnification pursuant to Section 10(a) hereof, the parties have not agreed upon the selection of
the Independent Counsel, either the Company or Director may petition a court of competent
jurisdiction for resolution of any objection which shall have been made by the Company or Director
to the others selection of Independent Counsel and/or for the appointment as Independent Counsel
of a person selected by the Court or by such other person as the Court shall
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designate, and the person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 10(a) hereof.
11.
Presumptions and Effect of Certain Proceedings
.
(a) The submission of the Application for Indemnification to the Board shall create a
rebuttable presumption that the Director is entitled to indemnification under this Agreement, and
the Board, Independent Counsel, or stockholders, as the case may be, may, at any time, specifically
determine that the Director is so entitled, unless it or they possess sufficient evidence to rebut
the presumption that Director has met the applicable standard of conduct. If a determination shall
have been made pursuant to this Agreement that Director is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding commenced pursuant to Section 12,
absent (i) a misstatement by Director of a material fact, or an omission of a material fact
necessary to make Directors statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under applicable law. Neither
the failure of the Company (including by its directors or Independent Counsel) to have made a
determination prior to the commencement of any action pursuant to this Agreement that
indemnification is proper in the circumstances because Director has met the applicable standard of
conduct, nor an actual determination by the Company (including by its directors or Independent
Counsel) that Director has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Director has not met the applicable standard of conduct.
Moreover, the fact that the Company has paid the Directors Expenses pursuant to Section 9 herein
shall not create a presumption that Director has met the applicable standard of conduct for
indemnification.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely affect the right of
Director to indemnification or create a presumption that Director did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal Proceeding, that Director had reasonable cause to believe that his
conduct was unlawful.
(c) For purposes of any determination of good faith, Director shall be deemed to have acted in
good faith if Directors action is based on the advice of legal counsel for the Company or on
information or records given or reports made to the Company by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by the Company. The
provisions of this Section 11(d) shall not be deemed exclusive or to limit in any way the other
circumstances in which the Director may be deemed to have met the applicable standard of conduct
set forth in this Agreement.
(d) To the extent legally permissible, the knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Enterprise shall not be imputed to Director for
purposes of determining the right to indemnification under this Agreement.
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12.
Remedies of Director
.
(a) In the event that (i) a determination is made pursuant to Section 10 of this Agreement
that Director is not entitled to indemnification under this Agreement, (ii) payment of Expenses is
not timely made pursuant to Section 9 of this Agreement, or (iii) payment of indemnification
pursuant to Section 3, 4, 5(a) or 6 of this Agreement is not made within thirty (30) days after a
determination has been made that Director is entitled to indemnification, Director shall be
entitled to an adjudication by a court of his entitlement to such indemnification or payment of
Expenses.
(b) In the event that Director successfully sues the Company for indemnification or payment of
Expenses, and is successful in whole or in part, Director shall be entitled to be paid by the
Company for the Expense of prosecuting such suit. If the Company sues Director to recover Expenses
paid and Director is successful in defending such suit, in whole or in part, Director shall be
entitled to be paid the Expense of defending such suit.
(c) In the event that a determination shall have been made under this Agreement that Director
is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section
shall be conducted in all respects as a de novo trial on the merits and Director shall not be
prejudiced by reason of that adverse determination. In any judicial proceeding pursuant to this
Section, the Company shall have the burden of proving Director is not entitled to indemnification
or payment of Expenses, as the case may be.
(d) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court that the Company is bound by all the
provisions of this Agreement. The Company shall indemnify Director against any and all Expenses
and, if requested by Director, shall (within
thirty (30)
days after receipt by the Company of a
written request therefore) pay such Expenses to Director, which are incurred by Director in
connection with any action brought by Director for indemnification or payment of Expenses from the
Company under this Agreement or under any directors and officers liability insurance policies
maintained by the Company, regardless of whether Director ultimately is determined to be entitled
to such indemnification, payment of Expenses or insurance recovery, as the case may be.
13.
Non-exclusivity; Survival of Rights; Insurance; Subrogation
.
(a) The rights of indemnification and to receive payment of Expenses as provided by this
Agreement shall not be deemed exclusive of any other rights to which Director may at any time be
entitled under applicable law, the Companys Certificate of Incorporation, the Companys Bylaws,
any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right
of Director under this Agreement in respect of any action taken or omitted by such Director prior
to such
11
amendment, alteration or repeal. To the extent that a change in Delaware law, whether by
statute or judicial decision, permits greater indemnification or payment of Expenses than would be
afforded currently under the Companys Amended and Restated Certificate of Incorporation, Amended
and Restated Bylaws and this Agreement, it is the intent of the parties hereto that Director shall
enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given hereunder or now
or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) The Company shall, from time to time, make the good faith determination whether or not it
is practicable for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the directors, officers, employees, or agents of the
Company with coverage for losses from wrongful acts, or to ensure the Companys performance of its
indemnification obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection afforded by such
coverage. To the extent that the Company maintains an insurance policy or policies providing
liability insurance for directors of the Company or of any other corporation, partnership, joint
venture, trust, employee benefits plan or other enterprise which the Director serves at the request
of the Company, Director shall be covered by such policy or policies in such manner as to provide
the Director the same rights and benefits as are accorded to the most favorably insured of the
Companys directors. The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Director, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event of any payment under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of recovery of Director, who shall execute all papers
required and take all action necessary to secure such rights, including execution of such documents
as are necessary to enable the Company to bring suit to enforce such rights.
14.
Duration of Agreement
.
This Agreement shall continue until and terminate upon the
later of: (a) six (6) years after the date that Director shall have ceased to serve as a director
or officer of the Company or as a director, officer, employee or agent of any other corporation,
partnership, joint venture, limited liability company, trust, employee benefit plan or other
enterprise which Director served at the request of the Company (Six Year Anniversary Date); or
(b) one (1) year after the final termination of each and every Proceeding, commenced prior to the
Six Year Anniversary Date.
15.
Successors and Assigns
.
This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit of Director and his heirs, executors and
administrators.
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16.
Severability
.
If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
17.
Entire Agreement
.
Except as otherwise specified herein, this Agreement constitutes the
entire agreement between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied, between the parties
hereto with respect to the subject matter hereof.
18.
Effectiveness of Agreement
.
This Agreement shall be effective as of the date set forth
on the first page and may apply to acts or omissions of Director which occurred prior to such date
if Director was an officer, director, employee or other agent of the Company, or was serving at the
request of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, limited liability company, trust or other enterprise, at the time such
act or omission occurred, and shall continue to exist after the rescission or restrictive
modification of this Agreement with respect to events occurring prior to such rescission or
restrictive modification.
19.
Modification and Waiver
.
No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by the parties thereto. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions
of this Agreement nor shall any waiver constitute a continuing waiver.
20.
Notices
.
All notices, requests, demands and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) if delivered by hand and
receipted for by the party to whom said notice or other communication shall have been directed, or
(b) if sent by an overnight courier service (such as Federal Express) to:
(i) if to Director, at the address of Director provided to the Company most
recently prior to the date of said notice or other communication, and
(ii) if to the Company, at: Pzena Investment Management, Inc.
Attention: General Counsel
120 West 45
th
Street, 20
th
Floor
New York, New York 10036
13
or to any other address as may have been furnished to Director by the Company.
21.
Contribution
.
To the fullest extent permissible under applicable law, if the
indemnification provided for in this Agreement is unavailable to Director for any reason
whatsoever, the Company, in lieu of indemnifying Director, shall contribute to the amount incurred
by Director, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event
under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the
circumstances of such Proceeding in order to reflect (i) the relative benefits received by the
Company and Director as a result of the event(s) and/or transaction(s) giving cause to such
Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees
and agents) and Director in connection with such event(s) and/or transaction(s).
22.
Applicable Law and Consent to Jurisdiction
.
This Agreement and the legal relations
among the parties shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware, without regard to its conflict of laws rules. The Company and Director
hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware
(the Delaware Court), and not in any other state or federal court in the United States of America
or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the
Delaware Court for purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the
Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action
or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
23.
Identical Counterparts
.
This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original but all of which together shall
constitute one and the same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24.
Miscellaneous
.
Use of the masculine pronoun shall be deemed to include usage of the
feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
14
IN WITNESS WHEREOF
, the parties have caused this Agreement to be signed as of the day and year
first above written.
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PZENA INVESTMENT MANAGEMENT, INC.
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By:
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/s/ Richard S. Pzena
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Name: Richard S. Pzena
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Title: Chief Executive Officer
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/s/ Myron E. Ullman, III
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Myron E. Ullman, III
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