STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of November 12, 1998, by and between
Hills Stores Company, a Delaware corporation ("Company") and Xxxx Department
Stores, Inc., a Delaware corporation ("Parent").
WHEREAS, concurrently with the execution and delivery of this
Agreement, Company, Parent and HSC Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of Parent ("Purchaser"), are entering into an
Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), which provides that, among other things, upon the terms and subject
to the conditions thereof, Purchaser will be merged with and into Company (the
"Merger"); and
WHEREAS, as a condition to Parent's and Purchaser's willingness to
enter into the Merger Agreement, Parent has requested that Company agree, and in
order to induce Parent and Purchaser to enter into the Merger Agreement, Company
has so agreed, to grant to Parent an option with respect to certain shares of
Company's common stock on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Grant of Option. Company hereby grants Parent an irrevocable option
(the "Stock Option") to purchase up to 2,073,753 shares of common stock, $.01
par value per share, of Company (the "Company Common Stock"), or such other
number of shares of Company Common Stock as equals 19.9% of the issued and
outstanding shares of Company Common Stock at the time of exercise of the Stock
Option, in the manner set forth below, at a price of $1.50 per share (the
"Exercise Price"), payable in cash in accordance with Section 4 hereof.
Capitalized terms used and not otherwise defined herein shall have the meanings
set forth in the Merger Agreement.
2. Exercise of Option. The Stock Option may be exercised by Parent, in
whole or in part, at any time or from time to time (a) after the Merger
Agreement is terminated pursuant to Section 8.01(d)(i) or 8.01(e)(i)(A) (a
"Trigger Event") or (b) at any time after the acceptance of the Offer by
Purchaser and prior to the Effective Time.
In the event Parent wishes to exercise the Stock Option, Parent shall
deliver to Company a written notice (an "Exercise Notice") specifying the total
number of shares of Company Common Stock it wishes to purchase. Each closing of
a purchase of shares of
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Company Common Stock (a "Closing") shall occur at a place, on a date and at a
time designated by Parent in an Exercise Notice delivered at least two business
days prior to the date of the Closing.
(a) The Stock Option shall terminate upon the earliest of: (i)
the Effective Time; (ii) the termination of the Merger Agreement pursuant to
Section 8.01 thereof, other than a termination as a result of the occurrence of
a Trigger Event; or (iii) 120 days following any termination of the Merger
Agreement as the result of the occurrence of a Trigger Event (or if, at the
expiration of such 120 day period the Stock Option cannot be exercised by reason
of any applicable judgment, decree, order, law or regulation, or because the
applicable waiting period under the HSR Act has not expired or been terminated,
10 business days after such impediment to exercise shall have been removed or
shall have become final and not subject to appeal, but in no event under this
clause (ii) later than 210 days after the date of termination of the Merger
Agreement).
(b) Notwithstanding the foregoing, the Stock Option may not be
exercised if Parent is in material breach of any of its representations,
warranties, covenants or agreements contained in this Agreement or in the Merger
Agreement.
3. Conditions to Closing. The obligation of Company to issue shares of
Company Common Stock to Parent hereunder is subject to the conditions that (i)
all waiting periods, if any, under the HSR Act applicable to the issuance of
shares of Company Common Stock hereunder shall have expired or have been
terminated, and all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any federal administrative agency
or commission or other federal governmental authority or instrumentality, if
any, required in connection with the issuance of shares of Company Common Stock
hereunder shall have been obtained or made, as the case may be; and (ii) no
preliminary or permanent injunction or other order by any court of competent
jurisdiction prohibiting or otherwise restraining such issuance shall be in
effect.
4. Closing. At any Closing, (a) Company will deliver to Parent a single
certificate in definitive form representing the number of shares of Company
Common Stock designated by Parent in its Exercise Notice, such certificate to be
registered in the name of Parent, Purchaser or such other affiliate of Parent as
Parent shall designate in the Exercise Notice and shall bear the legend set
forth in Section 10, and (b) Parent will deliver to Company the aggregate
Exercise Price for the shares of Company Common Stock so designated and being
purchased at such Closing by wire transfer of immediately available funds.
5. Representations and Warranties of Company. Company represents and
warrants to Parent that (a) Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder, (b) the execution and delivery of this Agreement by
Company and the consummation by Company
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of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Company and no other corporate
proceedings on the part of Company are necessary to authorize this Agreement or
any of the transactions contemplated hereby, (c) this Agreement has been duly
executed and delivered by Company and constitutes a valid and binding obligation
of Company, and, assuming this Agreement constitutes a valid and binding
obligation of Parent, is enforceable against Company in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles, (d) Company has taken all
necessary corporate action to authorize and reserve for issuance and to permit
it to issue, upon exercise of the Stock Option, and at all times from the date
hereof through the expiration of the Stock Option will have so reserved,
2,073,753 unissued shares of Company Common Stock, all of which, upon their
issuance and delivery in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, (e) upon delivery of such shares
of Company Common Stock to Parent upon exercise of the Stock Option, Parent will
acquire valid title to all of such shares, free and clear of any and all liens
of any nature whatsoever, (f) the execution and delivery of this Agreement by
Company does not, and the performance of this Agreement by Company will not (1)
violate the certificate of incorporation or by-laws of Company, (2) conflict
with or violate any statute, rule, regulation, order, judgment or decree
applicable to Company or by which it or any of its assets or properties is bound
or affected, or (3) result in any breach or violation of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give rise to any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of any lien on any of the property or
assets of Company pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, or other instrument or obligation to which Company or
any of its Subsidiaries is a party or by which Company or any of its assets or
properties is bound or affected (except, in the case of clauses (2) or (3)
above, for violations, breaches or defaults which would not, individually or in
the aggregate, have a Material Adverse Effect on Company), and (g) the execution
and delivery of this Agreement by Company does not, and the performance of this
Agreement by Company will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or regulatory
authority except for pre-merger notification requirements of the HSR Act.
6. Representations and Warranties of Parent. Parent represents and
warrants to Company that (a) Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder, (b) the execution and delivery of this Agreement by
Parent and the consummation by Parent of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Parent and no other corporate proceedings on the part of Parent are necessary to
authorize this Agreement or any of the transactions contemplated hereby, (c)
this Agreement has been duly executed and delivered by Parent and constitutes a
valid and binding obligation of Parent, and, assuming this Agreement constitutes
a valid and binding obligation of Company,
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is enforceable against Parent in accordance with its terms subject to
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles, (d) the execution and delivery of this
Agreement by Parent does not, and the performance of this Agreement by Parent
will not (1) violate the certificate of incorporation or by-laws of Parent, (2)
conflict with or violate any statute, rule, regulation, order, judgment or
decree applicable to Parent or by which it or any of its properties or assets is
bound or affected, or (3) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give rise to any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien on any of the property or
assets of Parent pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, or other instrument or obligation to which Parent is
a party or by which Parent or any of its properties or assets is bound or
affected (except, in the case of clauses (2) and (3) above, for violations,
breaches, or defaults which would not, individually or in the aggregate, have a
material adverse effect on the business, operations, financial condition, assets
or liabilities of Parent), (e) the execution and delivery of this Agreement by
Parent does not, and the performance of this Agreement by Parent will not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, except for pre-merger
notification requirements of the HSR Act, and (f) any shares of Company Common
Stock acquired upon exercise of the Stock Option will be, and the Stock Option
is being, acquired by Parent for its own account and not with a view to the
public distribution or resale thereof in any manner which would be in violation
of applicable United States securities laws.
7. Certain Repurchases. (a) Parent Put. At the request of Parent at any
time during which the Stock Option is exercisable pursuant to Section 2 (the
"Repurchase Period"), Company (or any successor entity thereof) shall repurchase
from Parent the Stock Option, or any portion thereof, for a price equal to the
amount by which the "Market/Tender Offer Price" for shares of Company Common
Stock as of the date Parent gives notice of its intent to exercise its rights
under this Section 7 (defined as the higher of (A) the highest price per share
paid as of such date pursuant to any tender or exchange offer or other Takeover
Proposal or (B) the average of the closing sale prices of shares of Company
Common Stock on the NYSE for the ten trading days immediately preceding such
date) exceeds the Exercise Price, multiplied by the number of shares of Company
Common Stock purchasable pursuant to the Stock Option (or portion thereof with
respect to which Parent is exercising its rights under this Section 7)).
(b) Payment and Redelivery of Stock Option or Shares. In the
event Parent exercises its rights under this Section 7, Company shall, within 10
business days thereafter, pay the required amount to Parent in immediately
available funds and Parent shall surrender to Company the Stock Option.
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8. Registration Rights. In the event that Parent shall desire to sell
any of the shares of Company Common Stock purchased pursuant to the Stock Option
within 3 years after such purchase, and such sale requires in the opinion of
counsel to Parent, which opinion shall be reasonably satisfactory to Company and
its counsel, registration of such shares under the Securities Act of 1933,
Parent may, by written notice (the "Registration Notice") to Company (the
"Registrant"), request the Registrant to register under the Securities Act all
or any part of the shares purchased pursuant to the Stock Option ("Restricted
Shares") beneficially owned by Parent (the "Registrable Securities") pursuant to
a bona fide firm commitment underwritten public offering in which the Parent and
the underwriters shall effect as wide a distribution of such Registrable
Securities as is reasonably practicable and shall use their best efforts to
prevent any person (including any "group" (as defined in Section 13(d)(3) of the
Exchange Act)) and its affiliates from purchasing through such offering
Restricted Shares representing more than 2% of the outstanding shares of common
stock of the Registrant on a fully diluted basis (a "Permitted Offering"). The
Registration Notice shall include a certificate executed by the Parent and its
proposed managing underwriter, which underwriter shall be an investment banking
firm of nationally recognized standing reasonably acceptable to Company (the
"Manager"), stating that (i) they have a good faith intention to commence
promptly a Permitted Offering and (ii) the Manager in good faith believes that,
based on the then prevailing market conditions, it will be able to sell the
Registrable Securities at a per share price to be specified in such Registration
Notice (the "Fair Market Value"). The Registrant (and/or any person designated
by the Registrant) shall thereupon have the option exercisable by written notice
delivered to the Parent within 10 business days after the receipt of the
Registration Notice, irrevocably to agree to purchase all or any part of the
Registrable Securities for cash at a price (the "Option Price") equal to the
product of (i) the number of Registrable Securities and (ii) the Fair Market
Value of such Registrable Securities. Any such purchase of Registrable
Securities by the Registrant hereunder shall take place at a closing to be held
at the principal executive offices of the Registrant or its counsel at any
reasonable date and time designated by the Registrant and its designee in such
notice within 20 business days after delivery of such notice. Any payment for
the shares to be purchased shall be made by delivery at the time of such closing
of the Option Price in immediately available funds.
If the Registrant does not elect to exercise its option
pursuant to this Section 8 with respect to all Registrable Securities designated
in the Registration Notice, it shall use its best efforts to effect, as promptly
as practicable, the registration under the Securities Act of the unpurchased
Registrable Securities; provided, however, that (i) Parent shall not be entitled
to more than an aggregate of two effective registration statements hereunder,
and (ii) the Registrant will not be required to file any such registration
statement during any period of time (not to exceed 90 days after such request in
the case of clause (B) below or 120 days in the case of clause (A) below) when
(A) the Registrant is in possession of material non-public information which it
reasonably believes would be detrimental to be disclosed at such time and, in
the judgment of the Board of Directors of the Registrant, such information would
have to be disclosed if a registration statement were filed at that time; or (B)
the
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Registrant is required under the Securities Act to include audited financial
statements for any period in such registration statement and such financial
statements are not yet available for inclusion in such registration statement.
If consummation of the sale of any Registrable Securities pursuant to a
registration hereunder does not occur within 120 days after the filing with the
SEC of the initial registration statement with respect thereto, the provisions
of this Section 8 shall again be applicable to any proposed registration;
provided, however, that Parent shall not be entitled to request more than two
registrations pursuant to this Section 8 in any 12 month period. The Registrant
shall use its best efforts to cause all Registrable Securities registered
pursuant to this Section 8 to be qualified for sale under the securities or
blue-sky laws of such jurisdictions as Parent may reasonably request and shall
continue such registration or qualification in effect in such jurisdiction;
provided, however, that the Registrant shall not be required to qualify to do
business in, or consent to general service of process in, any jurisdiction by
reason of this provision.
The registration rights set forth in this Section 8 are
subject to the condition that Parent shall provide the Registrant with such
information with respect to Parent's Registrable Securities, the plans for the
distribution thereof, and such other information with respect to Parent as, in
the reasonable judgment of counsel for the Registrant, is necessary to enable
the Registrant to include in such registration statement all material facts
required to be disclosed with respect to a registration thereunder.
A registration effected under this Section 8 shall be effected
at the Registrant's expense, except for underwriting discounts and commissions,
and the Registrant shall provide to the underwriters such documentation
(including certificates, opinions of counsel and "comfort" letters from
auditors) as are customary in connection with underwritten public offerings as
such underwriters may reasonably require. In connection with any such
registration, the parties agree (i) to indemnify each other and the underwriters
in the customary manner, and (ii) to enter into an underwriting agreement in
form and substance customary to transactions of this type with the Manager and
the other underwriters participating in such offering.
9. Adjustment upon Changes in Capitalization. In the event of any
change in Company Common Stock by reason of stock dividends, stock splits,
mergers (other than the Merger), recapitalizations, combinations, exchange of
shares or the like, the type and number of shares or securities subject to the
Stock Option, and the Exercise Price per share, shall be adjusted appropriately.
10. Restrictive Legends. Each certificate representing shares of
Company Common Stock issued to Parent hereunder shall initially be endorsed with
a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
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AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION
FROM SUCH REGISTRATION AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT, DATED NOVEMBER
11, 1998, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER HEREOF.
11. Binding Effect; No Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors,
and permitted assigns. Except as expressly provided in this Agreement, neither
this Agreement nor the rights or the obligations of either party hereto are
assignable, except by operation of law, or with the written consent of the other
party. Nothing contained in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto and their respective
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any Restricted Shares sold by a party in compliance with the
provisions of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement. In no event
will any transferee of any Restricted Shares be entitled to the rights of Parent
hereunder. Certificates representing shares sold in a registered public offering
pursuant to Section 8 shall not be required to bear the legend set forth in
Section 10.
12. Specific Performance. The parties recognize and agree that if for
any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party agrees that, in addition to other
remedies, the other party shall be entitled to an injunction restraining any
violation or threatened violation of the provisions of this Agreement. In the
event that any action should be brought in equity to enforce the provisions of
the Agreement, neither party will allege, and each party hereby waives the
defense, that there is an adequate remedy at law.
13. Entire Agreement. This Agreement and the Merger Agreement (together
with the other documents and instruments referred to in the Merger Agreement,
and the exhibits and disclosure schedules thereto) constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all other prior agreements and understandings, both written and oral,
among the parties or any of them with respect to the subject matter hereof.
14. Further Assurances. Each party will execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
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15. No Remedy in Certain Circumstances. Each party agrees that, should
any court or other competent authority hold any provision of this Agreement or
part hereof to be null, void or unenforceable, or order any party to take any
action inconsistent herewith or not to take an action consistent herewith or
required hereby, the validity, legality and enforceability of the remaining
provisions and obligations contained or set forth herein shall not in any way be
affected or impaired thereby, unless the foregoing inconsistent action or the
failure to take an action constitutes a material breach of this Agreement or
makes the Agreement impossible to perform in which case this Agreement shall
terminate. Except as otherwise contemplated by this Agreement, to the extent
that a party hereto took an action inconsistent herewith or failed to take
action consistent herewith or required hereby pursuant to an order or judgment
of a court or other competent authority, such party shall incur no liability or
obligation unless such party did not in good faith seek to resist or object to
the imposition or entering of such order or judgment.
16. Notices. Any notice or communication required or permitted
hereunder shall be in writing and either delivered personally, by recognized
national delivery service or sent by certified or registered mail, postage
prepaid, and shall be deemed to be given upon receipt at the following address,
or to such other address or addresses as such person may subsequently designate
by notice given hereunder:
(a) if to Parent, to:
Xxxx Department Stores, Inc.
0000 Xxxx Xxxxxx
Xxxxx Xxxx, Xxxxxxxxxxx 00000
Attention: Xxxxx Xxxxx, Esq.
with a copy (which shall
not constitute notice) to:
Weil, Gotshal & Xxxxxx LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxx X. Xxxxxxxx, Esq.
(b) if to Company, to:
Hills Stores Company
00 Xxx Xxxx
Xxxxxx, Xxxxxxxxxxxxx 00000
Attention: Xxxxxxx Xxxxxx, Esq.
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with a copy (which shall
not constitute notice) to:
Xxxxxx Xxxxx Xxxxxxxx & Xxxxxxx LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxx X. Xxxxxxxx, Esq.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such state.
18. Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
19. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same instrument.
20. Expenses. Except as otherwise expressly provided herein or in the
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party incurring
such expenses.
21. Amendments; Waiver. This Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
HILLS STORES COMPANY
By: /s/ Xxxxx X. Xxxxxxxxx
----------------------------------------
Name: Xxxxx X. Xxxxxxxxx
Title: Chairman
XXXX DEPARTMENT STORES, INC.
By: /s/ Xxxxxx X. Xxxxxx
----------------------------------------
Name: Xxxxxx X. Xxxxxx
Title: President
HSC ACQUISITION CORP.
By: /s/ Xxxxxx X. Xxxxxx
----------------------------------------
Name: Xxxxxx X. Xxxxxx
Title: President
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