EXHIBIT 3
ARTISTDIRECT, INC.
NON-STATUTORY STOCK OPTION AGREEMENT
RECITALS
A. The Board, including a majority of the independent directors
(as defined in Nasdaq Marketplace Rule 4200(a)(14)), of the Corporation and the
Board's Compensation Committee, comprised of a majority of independent
directors, have approved a stock option grant to Optionee as an inducement
material to Optionee's entering into employment with the Corporation.
B. Optionee has not previously been an Employee or director of
the Corporation, and the option evidenced by this Agreement (the "Option") is
granted to Optionee in order to attract and retain Optionee to serve the
Corporation in the capacity of Chief Executive Officer.
C. The Option is granted to Optionee in consideration of the
services Optionee is to render the Corporation and not for any capital-raising
purposes or in connection with any capital-raising activities.
D. The Option is intended to be a Non-Statutory Option which does
NOT satisfy the requirements of Section 422 of the Code.
E. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as
of the Grant Date, an Option to purchase up to the number of Option Shares
specified in the Grant Notice attached hereto. The Option Shares shall be
purchasable at any time or from time to time during the Option term specified in
Paragraph 2 at the Exercise Price.
2. OPTION TERM. The Option shall have a term of seven (7) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraphs 5 or 6.
3. LIMITED TRANSFERABILITY. The Option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee or as otherwise set forth herein. However,
the Option may, in connection with the Optionee's estate plan, be assigned in
whole or in part during Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established for the exclusive benefit
of one or more such family members. The assigned portion shall be exercisable
only by the person or persons who acquire a proprietary interest in the Option
pursuant to such assignment or as set forth
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herein. The terms applicable to the assigned portion shall be the same as those
in effect for the Option immediately prior to such assignment and shall be set
forth in such documents issued to the assignee as the Board may deem
appropriate.
4. DATES OF EXERCISE. The Option shall be immediately exercisable
for all of the Option Shares, and shall remain exercisable for all of the Option
Shares as to which it has not been exercised until the Expiration Date or sooner
termination of the Option term under Paragraphs 5 or 6.
5. CESSATION OF SERVICE. The Option term specified in Paragraph 2
shall terminate (and the Option shall cease to be outstanding) prior to the
Expiration Date in accordance with the following provisions:
(a) Should Optionee cease Service by reason of an
Involuntary Termination or Permanent Disability, then Optionee's right to
exercise the Option shall lapse, and the Option shall cease to be outstanding,
upon the later of (i) the expiration of the twelve (12)-month period measured
from the date of Optionee's cessation of Service or (ii) the expiration of the
twelve (12)-month period measured from the date Optionee's initial three-year
employment term expires as set forth in the Employment Agreement. In no event,
however, shall the Option be exercisable at any time after the Expiration Date.
In the event that such Permanent Disability prevents Optionee from personally
exercising the Option, the Option may be exercised by Optionee's personal
authorized representative to the same extent that Optionee could otherwise
exercise the Option.
(b) Should Optionee cease Service on or prior to August 15,
2006 for any reason other than (i) an Involuntary Termination, (ii) a
termination for Cause or (iii) Optionee's death or Permanent Disability, then
Optionee's right to exercise the Option shall lapse, and the Option shall cease
to be outstanding, upon the earlier of (x) the expiration of the ninety (90)-day
period measured from the date of Optionee's cessation of Service or (y) the
Expiration Date.
(c) Should Optionee cease Service after August 15, 2006 for
any reason other than (i) an Involuntary Termination, (ii) a termination for
Cause or (iii) Optionee's death or Permanent Disability, then Optionee's right
to exercise the Option shall lapse, and the Option shall cease to be
outstanding, upon the earlier of (x) the expiration of the twelve (12)-month
period measured from the date of Optionee's cessation of Service or (y) the
Expiration Date.
(d) Should Optionee's Service be terminated for Cause, then
the Option shall terminate immediately and cease to be outstanding.
(e) Should Optionee cease Service by reason of his death,
then the personal representative of Optionee's estate or the person or persons
to whom the Option is transferred pursuant to Optionee's will or in accordance
with the laws of descent and distribution or, if the Option has been transferred
to a trust in accordance with the terms herein, the trustee of such trust, shall
have the right to exercise the Option. Such right shall lapse, and the Option
shall
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cease to be outstanding, upon the earlier of (i) the expiration of the twelve
(12)-month period measured from the date of Optionee's death or (ii) the
Expiration Date.
(f) During the applicable post-Service exercise period, the
Option may not be exercised in the aggregate for more than the number of Option
Shares that are vested at the time of Optionee's cessation of Service, except
that, if Optionee ceases Service by reason of an Involuntary Termination,
Optionee thereupon shall be deemed to be fully vested in all of the Option
Shares. Upon the expiration of the applicable post-Service exercise period or
(if earlier) upon the Expiration Date, the Option shall terminate and cease to
be outstanding for any vested Option Shares for which the Option has not been
exercised. However, the Option shall, immediately upon Optionee's cessation of
Service for any reason, terminate and cease to be outstanding with respect to
any Option Shares in which Optionee is not at that time vested (under the first
sentence of this paragraph 5(f) or otherwise).
6. CORPORATE TRANSACTION
(a) The Option, to the extent outstanding at the time of a
Corporate Transaction, shall automatically accelerate immediately prior to the
effective date of such Corporate Transaction so that all of the Option Shares
shall be deemed to be fully vested. No such acceleration of vesting of the
Option shall occur, however, if and to the extent: (i) the Option is, in
connection with the Corporate Transaction, to be assumed by the surviving or
successor entity (or parent thereof) or (ii) the Option is to be replaced with a
cash incentive program of the surviving or successor entity (or parent thereof)
which provides Optionee with substantially equivalent economic benefits by
preserving the spread existing at the time of the Corporate Transaction on the
Option Shares for which the Option is not otherwise at that time vested (the
excess of the Fair Market Value of those Option Shares over the aggregate
Exercise Price payable for such shares) and provides for subsequent payout in
accordance with the same Option vesting schedule set forth in the Grant Notice.
(b) Immediately following a Corporate Transaction, this
Option shall terminate and cease to be outstanding, except to the extent assumed
by the surviving or successor entity (or parent thereof) in connection with the
Corporate Transaction.
(c) If the Option is assumed in connection with a Corporate
Transaction, then the Option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the Option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price per share to provide that the aggregate Exercise Price shall remain the
same as before such Corporate Transaction.
(d) To the extent the Option is to be assumed by the
surviving or successor entity (or parent thereof) in connection with a Corporate
Transaction, or a substitute option is issued to the Optionee as provided above,
vesting of the Option shall not accelerate upon the occurrence of that Corporate
Transaction, and the Option shall accordingly continue, over Optionee's period
of Service after the Corporate Transaction, to vest in one or more
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installments in accordance with the provisions of the Grant Notice, subject to
acceleration upon an Involuntary Termination as provided in Paragraph 5(f)
above.
(e) This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, in order to reflect such change and thereby preclude a dilution
or enlargement of benefits hereunder appropriate adjustments shall be made to
(i) the number and/or class of securities subject to the Option and (ii) the
Exercise Price, but no change shall be made in the aggregate Exercise Price.
8. STOCKHOLDER RIGHTS. The holder of the Option shall not have
any stockholder rights with respect to the Option Shares until such person shall
have exercised the Option, paid the Exercise Price and become a holder of record
of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise the Option with respect to all or
any part of the Option Shares for which the Option is at the time exercisable,
Optionee (or any other person or persons exercising the Option) must take the
following actions:
(i) Execute and deliver to the Corporation a Notice of
Exercise for the number of Option Shares for which the Option is
exercised.
(ii) Pay the aggregate Exercise Price for the purchased
shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation;
(B) shares of Common Stock held by Optionee (or
any other person or persons exercising the Option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(C) through a special sale and remittance
procedure pursuant to which Optionee (or any other person or persons
exercising the Option) shall concurrently provide irrevocable
instructions (a) to a brokerage firm, not arranged by and not having
any pre-existing business relationship with the Corporation, to
effect the immediate sale of
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all or some of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, not later
than three (3) days after the Exercise Date, sufficient funds to
cover the aggregate Exercise Price payable for the purchased shares
plus all applicable federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of such
exercise and (b) to the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to
complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the Option exercise, payment of the
Exercise Price must accompany the Notice of Exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the Option (if other
than Optionee) have the right to exercise the Option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order
for it to comply with the applicable requirements of federal and state
securities laws.
(v) Make appropriate arrangements with the Corporation
(or Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all federal, state and local income and employment tax
withholding requirements applicable to the Option exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising the Option) a certificate for the purchased Option Shares.
(c) In no event may the Option be exercised for any
fractional shares.
10. LOCK-UP. Optionee agrees that prior to the one-year
anniversary of the commencement of his employment with the Corporation (or any
earlier date upon which Optionee's Service ceases by reason of an Involuntary
Termination), he will not sell, make any short sale of, hedge, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
of or transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to the Option Shares without the written consent of
the Corporation's Board.
11. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of the Option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the Nasdaq
Stock Market or other national market, if applicable, or the Over The Counter
Bulletin Board) on which the Common Stock may be listed for trading at the time
of
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such exercise and issuance. The Corporation and Optionee shall use reasonable
efforts to comply with all such requirements of law and applicable regulations.
(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to the Option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
13. GOVERNING LAW. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the State of California
without resort to that State's conflict-of-laws rules.
14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
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EXHIBIT 1
NOTICE OF EXERCISE
I hereby notify ARTISTdirect, Inc. (the "Corporation") that I elect to
purchase ______________ shares of the Corporation's Common Stock (the "Purchased
Shares") at the option exercise price of $_____________________________ per
share (the "Exercise Price") pursuant to that certain option (the "Option")
granted to me on ________________________________, 20_____.
Concurrently with the delivery of this Exercise Notice to the Corporation,
I shall hereby pay to the Corporation the Exercise Price for the Purchased
Shares in accordance with the provisions of my agreement with the Corporation
(or other documents) evidencing the Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.
Alternatively, I may utilize the special broker-dealer sale and remittance
procedure specified in my agreement to effect payment of the Exercise Price.
____________________, 20_____
Date
--------------------------------------
Optionee
Address:
------------------------------
--------------------------------------
Print name in exact manner it is to
appear on the stock certificate: --------------------------------------
Address to which certificate is to be
sent, if different from address above: --------------------------------------
--------------------------------------
Social Security Number: --------------------------------------
Employee Number: --------------------------------------
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CAUSE shall have the meaning given such term in the Employment
Agreement.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean any of the following
transactions effecting a change in control or ownership of the Corporation:
(i) a stockholder-approved merger or consolidation in which
the Corporation is merged into or consolidated with any other corporation
or entity and immediately following consummation of the transaction the
persons who held the Corporation's capital stock immediately prior to such
transaction hold less than an aggregate of fifty percent (50%) of the
total combined voting power of the surviving entity's outstanding
securities, or
(ii) a stockholder-approved sale, transfer or other
disposition of all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended)
of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation's
stockholders.
G. CORPORATION shall mean ARTISTdirect, Inc., a Delaware
corporation.
H. EMPLOYEE shall mean the Optionee in his capacity as an
employee of the Corporation (or any Parent or Subsidiary), subject to the
control and direction of the employer entity as to both the work to be performed
and the manner and method of performance.
I. EMPLOYMENT AGREEMENT shall mean that certain Employment
Agreement dated as of September 29, 2003, between Optionee and the Corporation.
J. EXERCISE DATE shall mean the date on which the Option shall
have been exercised in accordance with Paragraph 9 of the Agreement.
K. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.
L. EXPIRATION DATE shall mean the date on which the Option
expires as specified in the Grant Notice.
M. FAIR MARKET VALUE per share of Common Stock on any relevant
date, for purposes of Paragraph 9 only, shall be determined in accordance with
the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National or SmallCap Markets, then the Fair Market Value shall be the
average of the high and low selling prices per share of Common Stock on
the date in question, as such prices are reported by the National
Association of Securities Dealers on the Nasdaq National or SmallCap
Markets (or, if not listed on such market, any other national market) and
published in The Wall Street Journal. If there are no selling prices
quoted for the Common Stock on the date in question, then the Fair Market
Value shall be the average of the high and low selling prices on the last
preceding date for which such quotations exist.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the average high and low
selling prices per share of Common Stock on the date in question on the
Stock Exchange determined by the Compensation Committee to be the primary
market for the Common Stock, as such prices are officially quoted in the
composite tape of transactions on such exchange and published in The Wall
Street Journal. If there are no selling prices quoted for the Common Stock
on the date in question, then the Fair Market Value shall be the average
of the high and low selling prices on the last preceding date for which
such quotations exist.
(iii) If the Common Stock is at the time traded on the
over-the-counter market, then the Fair Market Value shall be the average
of the closing bid prices over the 30-day period prior to the date in
question, as such prices are reported on the Over The Counter Bulletin
Board.
(iv) If the Common Stock is NOT at the time traded on the
over-the-counter market, a Stock Exchange or the Nasdaq National or
SmallCap Markets, then the Fair Market Value shall be as determined in
good faith by the Corporation's Board of Directors.
N. GOOD REASON shall have the meaning given such term in the
Employment Agreement.
X. XXXXX DATE shall mean the date of grant of the Option as
specified in the Grant Notice.
X. XXXXX NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the Option evidenced hereby.
Q. INVOLUNTARY TERMINATION shall mean the termination of
Optionee's Service by reason of:
(i) Optionee's involuntary dismissal or discharge by the
Corporation for reasons other than (X) for Cause or (Y) by reason of death
or Permanent Disability, or
(ii) Optionee's voluntary resignation for Good Reason.
R. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. NOTICE OF EXERCISE shall mean the written notice of exercise
in the form attached hereto as Exhibit 1.
T. OPTION SHARES shall mean the number of shares of Common Stock
subject to the Option as specified in the Grant Notice.
U. OPTIONEE shall mean the person to whom the Option is granted
as specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. PERMANENT DISABILITY shall mean the inability of Optionee to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.
X. SERVICE shall mean the Optionee's performance of services for
the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or an independent consultant.
Y. STOCK EXCHANGE shall mean the American Stock Exchange or the
New York Stock Exchange.
Z. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.