EXHIBIT 10.34
SHAREHOLDERS AGREEMENT
This Shareholders Agreement ("Agreement") is entered into as of December 31,
1998 by Liquid Audio, Inc., a California corporation with its principal place of
business at 000 Xxxxxxx Xxxxxx, Xxxxxxx Xxxx, Xxxxxxxxxx 00000, X.X.X. ("Liquid
Audio"), SKM Limited, a joint-stock company (chusik-hoesa) organized and
existing under the laws of the Republic of Korea ("Korea") with its principal
place of business at XxxXxxx 0 Xxxxxxxx, 0x, 000 Xxxxxx 0-Xxxx, Xxxxxxx-Xx,
Xxxxx 135-283, Korea ("SKM"), and Liquid Audio Korea Co. Ltd., a joint-stock
company (chusik-hoesa) organized and existing under the laws of Korea with its
principal place of business at 0x, XxxXxxxx Xxxx. 000-00, Xxxxxx-Xxxx, Xxxxxxx-
Xx, Xxxxx, 135-080, Korea ("LAK"). The Parties agree as follows:
1. DEFINITIONS
-----------
For the purpose of this Agreement, the following definitions shall apply:
1.1 "Affiliate" means a Person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is in common control
with, the Person specified. "Control," as used herein, for purposes of defining
an "Affiliate," shall mean the ability to direct the management of a Person,
whether by voting of shares, election of directors, by terms of a contract or
otherwise.
1.2 "Articles" means the Articles of Incorporation of LAK in the form
attached in the English language as Exhibit A, and as hereafter amended. The
Parties agree that among the Parties, the English language version of the
Articles shall be controlling and that if any discrepancies should exist between
the two versions, then the Parties shall take such steps to ensure that the
Korean version of the Articles shall be amended to be in accord with the English
version.
1.3 "Board" means the board of directors of LAK.
1.4 "Change in Control" with respect to a Party means (i) a merger of that
Party with or into another Person, or a sale of all or substantially all of a
Party's assets to another Person, if as a result of the merger or asset sale the
holders of a majority of the Party's voting securities before the transaction
hold less than a majority of the voting securities of the surviving entity (or
its parent), or (ii) the acquisition by a Person or a group acting in concert of
a majority of a Party's voting securities.
1.5 "Code" means the Commercial Code of the Republic of Korea, as amended.
1.6 "Consulting Agreement" means the Consulting Agreement to be entered
into by LAK and Liquid Audio substantially in the form attached hereto as
Exhibit B.
1.7 "Guaranty" means the form of Guaranty to be executed by SKM
substantially in the form attached hereto as Exhibit C.
1.8 "Holder" means Liquid Audio or SKM or their permitted successors and
assigns, as applicable. "Holders" means Liquid Audio and SKM and their permitted
successors and assigns.
1.9 "Party" means Liquid Audio, SKM or LAK, as applicable. "Parties"
means Liquid Audio, SKM and LAK.
1.10 "Person" means a natural individual, partnership, firm, company,
corporation, and any other form of business association.
1.11 "Pro Rata Share" of a Holder means the percentage interest that the
Holder holds in LAK by virtue of those Shares owned by that Holder, after
assuming conversion or exercise of any warrant, stock option and other equity
securities of LAK.
1.12 "Reseller Agreement" means the Reseller Agreement to be entered into
by Liquid Audio and LAK substantially in the form attached hereto as Exhibit D.
1.13 "Shares" means shares of Common Stock of LAK with a par value of [*]
Won per share.
1.14 "Won" means the Republic of Korea Won.
2. SUBSCRIPTION FOR SHARES
-----------------------
2.1 Company Name. The name of LAK shall be "Liquid Audio Korea Co., Ltd."
------------
in English and "Liquid Audio Korea Chusik Hoesa" in Korean.
2.2 Head Office. The head office of LAK shall be located in Seoul, Korea.
-----------
2.3 Articles of Incorporation. Prior to Liquid Audio's subscription for
-------------------------
Shares as set forth in Section 2.5, SKM shall procure that the current Articles
are amended so that they are substantially the same as Exhibit A. If any
discrepancy is found between this Agreement and the Articles, the terms of this
Agreement shall prevail and the Parties shall amend the Articles so as to be in
accord with this Agreement.
2.4 Authorized Capital. Prior to Liquid Audio's subscription for Shares as
------------------
set forth in Section 2.5, the authorized capital of LAK shall be increased to
[*] Won consisting of one single class of [*] shares of common stock with a par
value of [*] Won each.
2.5 Share Subscription. On the fifth Korean banking day ("Closing Date")
------------------
after Liquid Audio's receipt of confirmation of its foreign investment report
from a foreign exchange bank, designated by Liquid Audio, pursuant to the
Foreign Investment Promotion Act, the Holders shall have subscribed for a total
of [*] Shares in LAK as follows and the paid-in capital of the Company after
such subscription shall be [*] Won:
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-2-
(a) SKM and LAK represent and warrant that SKM is currently the sole
shareholder in LAK with [*] Shares, at the aggregate value of [*] Won.
(b) SKM shall subscribe in cash for [*] Shares, the aggregate issue
price of which shall be [*] Won.
(c) Liquid Audio shall subscribe in cash for [*] Shares, the aggregate
issue price of which shall be [*] Won.
2.6 Additional Investment/Loans. SKM shall be responsible for securing any
----------------------------
financing required by LAK beyond that provided for in Section 2.5 hereof. Such
additional financing may be in the form of a third party or shareholder loan,
bearing interest at commercially reasonable rates, or in the form of a capital
investment which shall be in the form of a non-voting, non-participating
preferred stock with a dividend rate equal to the then prevailing rate for
comparable transactions. Notwithstanding the preceding sentence, any such
financing shall require the approval described in Section 3.3(e) hereof.
2.7 Preemptive Rights. Except for the Shares subscribed under Section 2.5,
-----------------
and subject to the pertinent Korean laws, this Agreement and the Articles, each
Holder shall have pre-emptive rights with respect to any new issuance of shares
by LAK in the same ratio as their respective shareholding ratios immediately
prior to such issuance. If any Holder is not permitted by law from exercising
its pre-emptive right to subscribe to new issues of shares, then Holder shall
have the right to transfer its pre-emptive right to a third legally qualified
purchaser who will be able to acquire such Holder's proportion of the new shares
issued by the Company. If any Holder does not wish to exercise its pre-emptive
rights in whole or in part, such Holder shall notify the Board of such intention
within seven (7) days from the day as of which the allocation of the new shares
is to be made. In this case, such Holder shall transfer to the other Holder its
pre-emptive right to such new shares.
2.8 Additional Agreements. Contemporaneously with the execution hereof,
---------------------
SKM and Liquid Audio shall execute and deliver the Guaranty, and LAK and Liquid
Audio shall execute and deliver the Reseller Agreement and Consulting Agreement.
2.9 Covenants. LAK and SKM covenant that from the date of this Agreement
---------
until the Closing Date, (i) LAK shall remain as a dormant company and (ii) no
shares or any other type of securities of LAK shall be issued (other than that
provided under Section 2.5) nor any option or pre-emptive rights be granted to
any party over any shares of LAK.
3. MANAGEMENT OF LAK
-----------------
3.1 Board of Directors.
------------------
(a) Director Positions. The Board shall have [*] authorized
------------------
members. SKM shall have the right to nominate [*] members to the Board, and
Liquid Audio shall have the right to nominate [*] members to the Board. Each
Holder shall have the right to request removal, whether with or without cause,
of any director which such Holder is solely entitled to nominate, at
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-3-
any time effective upon notice to LAK, the director to be removed and to the
other Holder, provided, however, that if such dismissal is without cause, the
Holder proposing the dismissal shall indemnify and hold harmless LAK and the
other Holder from any and all damages and other expenses that may arise from
such action. Each Holder shall vote all of its Shares so as to elect the other
Holder's nominees, remove directors for whom removal has been requested, and
maintain the Board constituency described in this Section 3.1. Any vacancy on
the Board shall be filled pursuant to the nomination procedure described in this
Section 3.1.
(b) Compensation and Expenses. LAK shall reimburse reasonable travel
-------------------------
costs of any director attending a Board meeting. No director of LAK shall be
entitled to any additional compensation, unless such director is also serving in
a management capacity with LAK.
3.2 Quorum of the Board; Approval by Board. A quorum of the Board shall be
--------------------------------------
deemed present at any duly noticed Board meeting if a majority of the directors
are present, including at least one (1) director nominated by Liquid Audio and
one (1) director nominated by SKM. A director may be present at a Board meeting
physically or, to the extent subsequently permitted by applicable Korean law, by
telephone or video conference. Any action or determination by the Board shall
require the affirmative vote of a majority of the Board members present at the
meeting. The meetings of the Board shall be held at least quarterly at times and
places to be determined by the Board.
3.3 Liquid Audio's Approval. So long as Liquid Audio is a shareholder of
-----------------------
LAK, the following actions shall not be taken by LAK without prior approval of
Liquid Audio. Such approval of Liquid Audio shall be considered given upon (a) a
special Board resolution approved by three (3) members of the Board of
Directors, or (b) a special shareholder resolution approved by [*] of the
outstanding shares of LAK.
(a) Making any basic change in the general nature or scope of business
of LAK;
(b) Amending the Articles of LAK, including, without limitation, any
increase or decrease in the number of authorized shares of LAK, any change in
the rights, preferences or privileges of the Shares and any increase or decrease
in the authorized number of directors on the Board;
(c) Removing the directors nominated by Liquid Audio;
(d) Dissolving or liquidating LAK;
(e) Issuing any security of LAK, whether shares securities convertible
into shares, other equity securities or debt securities (except that LAK may
issue shares under Section 2.5 without further approval by Liquid Audio);
(f) Merging or consolidating LAK with another Person, or selling,
leasing, pledging, mortgaging, encumbering or otherwise disposing of all or
substantially all of the assets of LAK, whether in one transaction or a series
of transactions;
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-4-
(g) Establishing a business relationship with any direct competitor of
Liquid Audio;
(h) Investing in any other Person;
(i) Entering into any agreement or transaction (except this Agreement,
the Reseller Agreement and Consulting Agreement) with or for the benefit of any
director or shareholder of LAK or an Affiliate (or any direct lineal descendent
or ancestor, sibling, spouse, mother-in-law, father-in-law, son-in-law or
daughter-in-law) of such director or shareholder;
(j) Amending the business plan of LAK;
(k) Appointment, employment and compensation decisions and scope of
responsibility for officers of LAK, including salary and wages, cash advances
and relocation expenses;
(l) Capital expenditures for single items of 100,000,000 Won or more;
(m) Entering into contracts that have a term in excess of one year or
that require aggregate payments of 100,000,000 Won or more;
(n) Disposition or transfer to a third party of at least 20% of LAK's
assets;
(o) Authorizing loans by LAK, except for payment terms for trade
credits in the ordinary course of business;
(p) Assuming or incurring any debt, loan, guaranty or liability with
an aggregate value of 500,000,000 Won or more;
(q) Change in the outside accountant to LAK;
(r) Creating any lien on LAK's property, except liens incurred in the
ordinary course of business;
(s) Approving LAK's annual budget;
(t) Changing the strategic direction of LAK and approving LAK's long-
range plans;
(u) Approval of annual financial statements;
(v) Opening or closing an account with a bank or financial house in
Korea or overseas; and
(w) Paying any dividend or making any other distribution;
-5-
(x) Approving or amending the internal regulations of LAK relating to
important procedures including, but not limited to, employee regulations,
regulations relating to the issuance or transfer of shares and the issuance or
loss of share certificates, Board regulations and regulations governing meetings
of shareholders.
3.4 Board and Shareholder Meetings. All Board and shareholder meetings
------------------------------
shall be conducted in the English language. The minutes of any such meeting will
be prepared in both the Korean and English languages, and compared for accuracy
by the interpreter. In the event of a conflict in terms, the minutes prepared in
the English language shall control.
3.5 Senior Officers.
---------------
(a) President and Chief Executive Officer of LAK. The Board shall
--------------------------------------------
elect as the President and Chief Executive Officer of LAK the candidate selected
by SKM. The President shall also be the sole representative director.
(b) Chief Financial Officer of LAK. The Board shall elect as the Chief
-------------------------------
Financial Officer of LAK the candidate selected by Liquid Audio. The Chief
Financial Officer shall be responsible for oversight of the finance and
accounting functions of LAK.
(c) Other Officers; Management Structure. The other officers of LAK
------------------------------------
shall be selected by the Board.
3.6 Statutory Auditors. Except as required by applicable law, LAK shall
------------------
have two (2) statutory auditors. Liquid Audio shall nominate one (1) statutory
auditor, and SKM shall nominate one (1) statutory auditor.
3.7 Financial Statements. LAK's financial year shall be January 1 through
--------------------
December 31 of the following year. LAK's auditors shall be an independent
accounting firm acceptable to SKM and Liquid Audio, who shall be responsible for
preparing the annual financial statements of LAK in accordance with Korean
generally accepted accounting principles consistently applied, and corresponding
annual financial statements in the English language in compliance with U.S.
generally accepted accounting principles. LAK shall deliver, and SKM shall cause
LAK to deliver, to all Holders (i) such annual audited financial statements
within three (3) months after the end of each financial year and (ii) promptly
after delivery to any other Holder, other financial and operating reports of LAK
prepared for one or more Holders.
3.8 Right of Inspection. During reasonable office hours of LAK, the
-------------------
Holders shall have full access to all properties, books of account, records and
the like of LAK with the right to make copies at the offices of LAK. Any
information obtained by the Holders through exercising this right shall (i) be
used by such Holder only for purposes which are consistent with its status as an
equity holder in LAK and not for the pursuit of business interests outside LAK
(except to the extent such Holder shall otherwise have rights for access to such
information or to the extent used to determine compliance with this Agreement)
and (ii) be subject to the confidentiality provisions of Section 8.1.
-6-
3.9 Employee Matters. Each employee of LAK, and any employee of another
----------------
entity working for LAK but not a regular employee of LAK, shall sign an
agreement reasonably acceptable to SKM and Liquid Audio providing for
confidentiality of information disclosed by LAK and for ownership by LAK of
inventions or original works of authorship created by such individuals.
3.10 Business Plan. The five-year business plan for LAK has been agreed
-------------
between the Holders and attached as Exhibit E (the "Business Plan"). The Board
-------------
shall discuss and update the Business Plan at least once a year.
4. REPRESENTATIONS
---------------
4.1 Liquid Audio. Liquid Audio represents and warrants as follows to the
------------
other Holders as of the date of this Agreement:
(a) Organization and Good Standing of Liquid Audio. Liquid Audio is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has the corporate power and authority to enter
into this Agreement and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of Liquid Audio
-------------
and Liquid Audio's officers and directors necessary for the authorization,
execution, delivery and performance of this Agreement has been taken. This
Agreement constitutes a valid, legally binding and enforceable obligation of
Liquid Audio, assuming due authorization and delivery hereof by SKM and LAK.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of any governmental or public body or authority is required in
connection with Liquid Audio's execution and delivery of this Agreement or with
the performance by Liquid Audio of its obligations hereunder.
(d) Effect of Agreement. Liquid Audio's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Disclosure. No representation or warranty by Liquid Audio
----------
contained in this Agreement and no writing, certificate, exhibit, list or other
instrument required to be furnished pursuant hereto contains or will contain any
untrue statement of a material fact or omits or will omit
-7-
any material fact necessary in order to make the statements and information
contained therein not misleading.
4.2 SKM. SKM represents and warrants to the other Holders as follows as of
---
the date of this Agreement.
(a) Organization and Good Standing of SKM. SKM is a corporation duly
-------------------------------------
organized, validly existing and in good standing under the laws of the Republic
of Korea and has the corporate power and authority to enter into this Agreement
and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of SKM and its
-------------
officers and directors necessary for the authorization, execution, delivery an
performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of SKM, assuming due
authorization, execution and delivery hereof by Liquid Audio and LAK.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by SKM or with the performance by
SKM of any of its respective obligations hereunder.
(d) Effect of Agreement. SKM's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. SKM has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Disclosure. No representation or warranty by SKM contained in this
----------
Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained therein not
misleading.
4.3 LAK. LAK and SKM each represent and warrant to Liquid Audio as follows
---
as of the date of this Agreement:
-8-
(a) Organization and Good Standing of LAK. LAK is a corporation duly
-------------------------------------
organized, validly existing and in good standing under the laws of the Republic
of Korea and has the corporate power and authority to enter into this Agreement
and to perform its obligations hereunder.
(b) Authorization. All corporate action on the part of LAK and its
-------------
officers and directors necessary for the authorization, execution, delivery and
performance of this Agreement has been taken. This Agreement constitutes a
valid, legally binding and enforceable obligation of LAK, assuming due
authorization, execution and delivery hereof by the Holders.
(c) Government and Other Consents. Except for approvals contemplated
-----------------------------
by this Agreement, no consent, authorization, license, permit, registration or
approval of governmental or public body or authority is required in connection
with execution and delivery of this Agreement by LAK or with the performance by
LAK of any of its respective obligations hereunder.
(d) Effect of Agreement. LAK's execution and delivery of this
-------------------
Agreement, performance of its obligations hereunder and its consummation of the
transactions contemplated hereby will not, (i) to its knowledge, violate any
provision of any law, statute, rule or regulation to which it is subject; (ii)
violate any judgment, order, writ, injunction or decree of any court applicable
to it; (iii) to its knowledge, have any effect on its compliance with any laws,
statutes, rules, regulations, orders, decrees, licenses, permits or
authorizations which would materially and adversely affect it; (iv) to its
knowledge, result in the breach of, or be in conflict with, any term, covenant,
condition or provision of, or affect the validity, enforceability and
subsistence of any agreement, lease or other commitment to which it is a party
and which would materially and adversely affect it; or (v) to its knowledge,
result in the creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any of its assets.
(e) Brokers, Finders. LAK has not retained any person to act on its
----------------
behalf, nor has any person contended that such person was so retained, to assist
as its broker, finder or agent in connection with this transaction.
(f) Shares. As of the date of this Agreement and immediately prior to
------
the share subscription set forth in Section 2.5, LAK will have authorized
capital of [*] Won divided into [*] Shares, of which [*] Shares have been duly
issued, fully paid and non-assessable, free of all liens, encumbrances and
restrictions other than those specifically set forth in this Agreement. As of
the Closing Date, the issuance of the Shares under Section 2.5 will have been
duly authorized by LAK and, when delivered and paid for pursuant to this
Agreement, will have been duly and validly issued, fully paid and non-
assessable. As of the date of this Agreement and through the date of share
subscription by Liquid Audio, there are no outstanding securities convertible
into or exchangeable for, or warrants, rights or options to purchase from LAK,
or obligations of LAK to issue (other than those set forth under Section 2.5),
any capital stock.
(g) No Operation of LAK or Outstanding Liabilities. Since its
----------------------------------------------
establishment, LAK has been a dormant company with no business activity, other
than those disclosed to Liquid Audio in writing. As of the date of this
Agreement and through the date of share subscription by Liquid Audio, except as
previously disclosed to Liquid Audio in writing, LAK has no debts or
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-9-
liabilities of any kind (including without limitation contingent liabilities)
nor has LAK given any type of Guaranty (including without limitation payment
Guaranties) to any party nor has LAK created or permitted to be created any
charge, lien, pledge, mortgage, or any other encumbrance on its assets nor is
LAK involved in any litigation, arbitration or any quasi-judicial proceeding.
(h) Disclosure. No representation or warranty by LAK contained in this
----------
Agreement and no writing, certificate, exhibit, list or other instrument
required to be furnished pursuant hereto contains or will contain any untrue
statement of a material fact or omits or will omit any material fact necessary
in order to make the statements and information contained therein not
misleading.
5. TERM AND TERMINATION.
--------------------
5.1 Term and Termination. This Agreement shall continue in full force and
--------------------
effect unless and until terminated as provided herein.
(a) Grounds for Termination. This Agreement shall be terminated:
-----------------------
(i) by mutual written agreement of the Parties;
(ii) by a Holder in accordance with this Section 5;
(iii) by Liquid Audio, at its election, effected immediately by
written notice to SKM, upon (A) the permitted termination of the Reseller
Agreement or the Consulting Agreement by Liquid Audio, (B) SKM's failure to pay,
when due, the [*] payable to Liquid Audio pursuant to that certain Consulting
Agreement dated September 30, 1998 between SKM and Liquid Audio, or (C) breach
by SKM of its obligations under the Guaranty;
(iv) by Liquid Audio in the event that any Affiliate of SKM
shall engage in conduct which would, if done by SKM itself, constitute a breach
of Section 7(a) hereof;
(v) at such time as only one Holder remains subject to this
Agreement; or
(vi) otherwise by lawful exercise by a Holder of its rights
under applicable laws.
(vii) by any Party if performance by another party has been
excused pursuant to Section 8.3 by a force majeure condition which has continued
for at least ninety (90) days.
5.2 Termination Upon Bankruptcy or Insolvency of a Holder.
-----------------------------------------------------
(a) Notice of Bankruptcy Event. If any of the following events occurs
--------------------------
with respect to a Holder, such Holder shall immediately notify the other Holders
and LAK of the occurrence of such event:
* Certain information in this Exhibit has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
-10-
(i) Such Holder becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for such Holder,
for commencement of proceedings of bankruptcy, reorganization, composition or
other similar proceedings under the applicable law.
(b) Right to Terminate. If the event is not cured within sixty (60)
------------------
days following the event, the non-affected Holder shall have the right to
terminate this Agreement by giving notice in writing to all other Holders and
LAK.
(c) Right to Purchase. After notice of termination described in
-----------------
Section 5.3, the Holders shall make a reasonable effort to consult in good faith
for sixty (60) days concerning the disposition of their respective interests in
LAK and the future operations of LAK. If the Holders do not sign a written
agreement regarding such matters during such sixty (60) days, then the Holder
which gave notice of termination shall have the option to purchase the Shares of
such bankrupt Holder pursuant to Section 5.6.
5.3 Termination Upon Bankruptcy or Insolvency of LAK.
------------------------------------------------
(a) Right to Terminate. If any of the following events occurs with
------------------
respect to LAK, any Holder shall have the right to terminate the Agreement by
giving notice in writing to all other Holders:
(i) LAK becomes insolvent or unable to pay any or all of its
debts as they mature or ceases to pay any or all of its debts as they mature in
the ordinary course of business.
(ii) Any application or petition is submitted, by or for LAK,
for commencement of proceedings of bankruptcy, reorganization, composition or
other similar proceedings under the applicable law.
(b) Right to Dissolve. After notice of termination, the Holders
-----------------
shall consult in good faith for sixty (60) days concerning the disposition of
their respective interests in LAK and the future operations of LAK. If the
Holders do not sign a written agreement regarding such matters within such sixty
(60) days and if any application or petition is not submitted for the
commencement of any proceedings described in Section 5.3(a)(ii), then each
Holder shall have the option to cause dissolution of LAK under the Code by
giving written notice of dissolution to the other Holders and LAK. Upon such
notice, each Holder and LAK shall take all actions (including voting of Shares
in favor for dissolution) required to dissolve and liquidate LAK in accordance
with applicable laws and regulations.
5.4 Termination Upon Material Breach.
--------------------------------
(a) Right to Terminate. If a Party commits a material breach of this
------------------
Agreement and such breach is not cured within sixty (60) days following notice
thereof to the breaching Party
-11-
by any of the other Parties, the Party sending such notice shall have the right
to terminate this Agreement by giving notice thereof in writing to all other
Parties.
(b) Right to Purchase or Sell Shares. After notice of termination, the
--------------------------------
Holders shall consult in good faith for sixty (60) days concerning the
disposition of their respective interests in LAK and the future operations of
LAK. If the Holders do not resolve such matters in writing within such sixty
(60) days, the non-breaching Holder shall have the option to purchase the Shares
of such breaching Holder pursuant to Section 5.6 or to cause the breaching party
to purchase all of the Shares then held by the non-breaching Holder pursuant to
Section 5.6.
(c) Remedies Not Affected. The foregoing shall not limit the ability
---------------------
of any Party to seek such legal and equitable remedies (including damages)
related to a material breach by a Party or the failure of a Party to perform any
other duty or obligation.
5.5 Change in Control.
-----------------
(a) Right to Terminate. If SKM undergoes a Change in Control, Liquid
------------------
Audio shall have the right to terminate this Agreement by giving notice thereof
in writing to all other Holders.
(b) Right to Purchase/Sell. After notice of termination pursuant to
----------------------
Section 5.5(a), the Holders shall consult in good faith for sixty (60) days
concerning the disposition of their respective interests in LAK and the future
operations of LAK. If the Holders do not resolve such matters in writing within
such sixty (60) days, Liquid Audio shall have the option to purchase the Shares
of SKM or to have SKM purchase all of the Shares then held by Liquid Audio,
pursuant to Section 5.6.
5.6 Purchase Procedures.
-------------------
(a) The purchase price for the Shares to be sold pursuant to this
Section shall be the "Fair Market Value" of such Shares.
(b) Fair Market Value per share under this Section 5 shall be
determined as follows:
(i) If the Shares are publicly traded on the Korea Stock Exchange
or KOSDAQ, the Korean OTC market, the value shall be deemed to be the average of
the closing prices of the Shares on such exchange or market, as the case may be,
over the 30-day period ending three (3) business days prior to the closing of
the purchase of the Shares.
(ii) If there is no active public market for the Shares, the value
shall be the fair market value thereof immediately following any act giving rise
to the right to sell or purchase shares under this Section 5, such fair market
value as determined by a good faith negotiation between the Selling Holder or
Holders ("Seller") and the purchasing Holder or Holders ("Purchaser"). If such
negotiation fails to determine the fair market value within forty-five (45) days
after the date of the notice of termination, the fair market value shall be
determined as follows:
-12-
(A) Seller (as a group if Seller is more than one Holder)
and Purchaser (as a group if Purchaser is more than one Holder) shall each
retain at its expense an investment bank expert in the industry. If Seller or
Purchaser does not select an investment bank within fifteen (15) days after the
end of the 45-day good faith negotiation period (the "Negotiation Period")
referred to in subsection (ii) above, such Holder or Holders shall not be
entitled to retain an investment bank and shall present whatever materials it
has available by the deadline regarding the valuation of LAK.
(B) Subject to execution of customary confidentiality
agreements by the investment banks, LAK shall provide or cause to be provided to
each investment bank all material information, including any material changes in
such information, reasonably necessary to value LAK or reasonably requested by
the investment banks.
(C) During the 15-day period after both Seller and Purchaser
have selected an investment bank, or the end of the Negotiation Period if Seller
and/or Purchaser does not select an investment bank, Seller, Purchaser and their
respective investment banks shall meet on at least two occasions to present
their respective views on valuation and shall negotiate in good faith to reach a
written agreement on the fair market value.
(D) If the fair market value has not been agreed to in
writing by the end of the Negotiation Period, Seller and Purchaser shall each
submit a final valuation proposal with a supporting analysis to the other Holder
or Holders and to the "Arbitrator" within ten (10) days after the end of the
Negotiation Period. The "Arbitrator" shall be a Person with expertise in valuing
high technology companies, shall not have a material business relationship with
any Party and shall be reasonably acceptable to both Seller and Purchaser,
provided however that in the event that the Parties are unable to agree upon the
Arbitrator within ten (10) days of the end of the Negotiation Period, then the
Arbitrator shall be determined within an additional ten (10) days by agreement
of the respective investment banks of the Parties, provided further that (x) if
no such investment bank has been selected by a Party, or if such Party's
investment bank does not recommend an Arbitrator, then the selection of the
other Party shall prevail, and (y) if the investment banks are unable to agree
on an Arbitrator, the valuation shall be determined in accordance with the
dispute resolution provisions of Section 8.2 hereof.
(E) If Seller or Purchaser does not submit in a timely
manner a final valuation proposal, then the valuation proposal of the other
Holder or Holders shall be used to establish the fair market value. If the final
proposals differ by less than 10%, then the average of the proposals shall be
the fair market value. If the final proposals differ by 10% or more, then the
Arbitrator shall choose one or the other proposal. The Arbitrator's
determination shall be final and binding on both Seller and Purchase; provided,
however, that the Arbitrator must select one of the final valuation proposals as
submitted.
(c) Each Holder purchasing Shares under this Section 5.6 shall pay in
cash or other immediately available funds the aggregate purchase price for the
Shares to be sold to such Holder upon receipt of the certificate or certificates
for the Shares to be sold to such Holder.
(d) When Holders have the right to purchase their pro rata share of
another Holder's Shares pursuant to this Section 5 and not all of those Holders
exercise their purchase right,
-13-
the Holders exercising their purchase right shall also have the right to
purchase the pro rata share of the Shares of the Holders not exercising their
purchase right (the "Remaining Shares"). If more than one Holder elects to
exercise its purchase right as to the Remaining Shares, each Holder who wishes
to purchase the Remaining Shares shall be entitled to purchase that portion of
the Remaining Shares as the total number of Shares then owned by such Holder
bears to the total number of Shares then owned by all Holders who wish to
purchase the Remaining Shares.
5.7 Continuation of Business. During any period in which a Holder has the
------------------------
right to purchase or is purchasing the Shares of any other Holder, or in which
Liquid Audio has the right to cause the other Holders to purchase its Shares,
pursuant to this Section 5, until the closing of the purchase of the Shares
thereunder:
(a) LAK shall continue its business in the ordinary course. All of the
Holders shall use their best efforts to maintain and preserve the business of
LAK pending the consummation of such purchase.
(b) The Holders shall negotiate in good faith an agreement providing
that employees of such selling Holder working full time for LAK shall be made
available full time to LAK for such period as is reasonably required for up to
six (6) months following the closing of such purchase of Shares to effect an
orderly transition to a new ownership by non-selling Holders, and each Holder
shall use its best efforts to make all such employees available on this basis.
6. PERMITTED TRANSFERS; RIGHT OF FIRST REFUSAL
-------------------------------------------
6.1 Restrictions. Each Holder agrees not to sell or transfer in any manner
------------
any of such Holder's Shares or any right or interest therein except as provided
below in this Section:
(a) No Holder may transfer or otherwise dispose of its Shares without
the prior approval of the Board, which shall not be withheld as long as the
requirements of this Section 6 have been satisfied.
(b) For a period of three (3) years after the effective date of the
incorporation of LAK, such Holder may transfer or otherwise dispose of its
Shares only if a Holder or Holders of a majority of Shares owned by all of other
Holders approve in advance in writing such transfer or disposition.
(c) After three (3) years from the effective date of the incorporation
of LAK,
(i) A Holder which wishes to transfer its Shares shall first give
written notice ("Notice") to all of the other Holders stating its bona fide
intention to transfer, the name of the proposed transferee, the number of
offered Shares and the price, terms and conditions of the proposed sale or
transfer.
(ii) Each other, non-offering Holder shall have the right to
purchase that portion of the Shares offered as the total number of Shares then
owned by such Holder bears to the total number of Shares then owned by all of
the non-offering Holders. Such right shall be
-14-
exercisable by written notice to the offering Holder not later than thirty (30)
days after delivery of the Notice. The price and terms for the non-offering
Holders shall be the price and terms stated in the Notice.
(iii) If all of the non-offering Holders do not exercise their
rights described in paragraph (ii) of Section 6.1(c), the offering Holder shall
so notify in writing ("Second Notice") each Holder which exercised its right
under paragraph (ii) of Section 6.1(c), and each such Holder shall have the
right to purchase all of the remaining Shares offered, which right shall be
exercisable by written notice to the offering Holder within ten (10) days after
delivery of the Second Notice. If more than one Holder elects to purchase such
remaining Shares, each Holder who wishes to purchase such remaining Shares shall
be entitled to purchase that portion of such remaining Shares as the total
number of Shares then owned by such Holder bears to the total number of Shares
then owned by all Holders who wish to purchase such remaining Shares.
(d) The Shares not purchased by the non-offering Holders pursuant to
Section 6.1(c) may, during ninety (90) days beginning on the expiration of the
last applicable right of the non-offering Holders, be transferred to the
transferee named in the Notice; provided that (i) such sale or transfer is not
at a lower price or on terms more favorable to the transferee than those
specified in the Notice; and (ii) prior to such transfer, such transferee agrees
in writing to become bound by the terms and conditions of this Agreement upon
transfer of such Shares.
(e) Notwithstanding any term or condition of this Section 6, each
Holder may transfer its Shares to an Affiliate of that Holder or in connection
with a merger or sale of all or substantially all of the assets of the Holder
provided that: (i) prior to such transfer, such Affiliate or transferee agrees
in writing to become bound by the terms and conditions of this Agreement upon
transfer of such Shares; (ii) the transferring Holder notifies all of the other
Holders not less than thirty (30) days prior to any such transfer; and (iii) any
such transfer shall not serve to excuse or terminate any of the obligations of
the transferring Holder under this Agreement.
(f) Each Holder which has the right to purchase the Shares under
Section 6.1(c) may designate and assign an Affiliate to exercise all or part of
such Holder's rights under Section 6.1(c).
(g) The restrictions and other provisions of this Section 6 shall
apply to any Shares acquired by a Holder during the term of this Agreement.
(h) Since damages arising from a breach of the obligations under this
Section 6.1 may be difficult to determine with precision, the Holders agree that
any Holder found to have breached the terms of Section 6.1 shall pay to the non-
breaching Holders as liquidated damages a sum equivalent to two times the gross
compensation received by the breaching Holder in the transaction whereby the
breach occurred, or two times the aggregate par value of the transferred shares,
whichever is higher. The Parties have understood that such liquidated damages
are fair and reasonable. Application of this liquidated damage provision shall
not prevent a Party from enforcing its rights or augmenting its protection by
such other remedies as may be available.
-15-
6.2 Legend. The instruments representing the Shares shall bear a legend
------
stating that such Shares are (i) subject to restrictions on transfer and other
provision of this Agreement and (ii) not transferable without the Board's
written approval. Each Holder agrees to cause LAK's Board not to consent to any
transfer or other disposition of any Shares made other than in accordance with
this Agreement.
7. NONCOMPETITION
--------------
(a) SKM agrees that as long as SKM is a shareholder of LAK, SKM will
not engage, either directly or indirectly, as a principal or for its own account
or solely or jointly with others, or as a stockholder in any corporation or
joint stock association (including rights to participate in present or future
profits pursuant to an option or other agreement), in any entity that sells,
resells, or distributes any software product or service that competes with the
sale of the Liquid Audio secure music distribution software carried by LAK, or
in any entity that controls, licenses, distributes or sells pre-recorded music.
(b) If any provision contained in this Section shall for any reason be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality of unenforceability shall not affect any other provisions of this
Section, but this Section shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. It is the intention of
the Parties that if any of the restrictions or covenants contained herein is
held to cover a geographic area or to be for a length of time which is not
permitted by applicable law, or in any way construed to be too broad or to any
extent invalid, such provision shall not be construed to be null, void and of no
effect, but to the extent such provision would be valid or enforceable under
applicable law, a court of competent jurisdiction shall construe and interpret
or reform this Section to provide for a covenant having the maximum enforceable
geographic area, time period and other provisions (not greater than those
contained herein) as shall be valid and enforceable under such applicable law.
(c) SKM acknowledges that Liquid Audio would be irreparably harmed by
any breach or threatened breach of this Section and that there would be no
adequate remedy at law or in damages to compensate Liquid Audio for any such
breach or threatened breach. In recognition of this fact, SKM agrees that, in
the event of such a breach or threatened breach, in addition to any remedies at
law, Liquid Audio, without posting any bond, shall be entitled to obtain
equitable relief in the form of specific performance, temporary restraining
order, temporary or permanent injunction or any other equitable remedy which may
then be available, and SKM consents to the entry thereof.
8. GENERAL PROVISIONS
------------------
8.1 Confidentiality.
---------------
(a) Each Party acknowledges and agrees that certain information it
receives from the other Parties constitutes the confidential and proprietary
trade secrets of the disclosing Party (or of third parties pursuant to
confidentiality agreements between such third parties and the disclosing Party),
and that the receiving Party's protection thereof is essential to this Agreement
and a condition of the receiving Party's use and possession thereof. Each Party
shall retain in strict confidence any and all such confidential information
(collectively "Confidential Information") and use such
-16-
Confidential Information only as expressly authorized herein. A Party will under
no circumstances distribute or in any way disseminate Confidential Information
to third parties without the prior written permission of the disclosing Party.
(b) Notwithstanding the above, Confidential Information shall not
include information which:
(i) was generally known and available in the public domain at the
time it was disclosed or becomes generally known and available in the public
domain through no fault of the receiving Party;
(ii) was known to the receiving Party at the time of disclosure as
shown by the files of the receiving Party in existence at the time of
disclosure;
(iii) was independently developed by the receiving Party without
any use of Confidential Information and by employees or other agents of the
receiving Party who have not been exposed to such Confidential Information;
(iv) becomes known to the receiving Party from a source other than
the disclosing Party without breach of this Agreement by the receiving Party and
otherwise not in violation of the disclosing Party's rights; or
(v) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, that the receiving
Party shall to the extent reasonably practicable, provide prompt, advanced
notice thereof to enable the disclosing Party to seek a protective order or
otherwise prevent such disclosure, and provided that the receiving Party's
disclosure is limited to the extent expressly required by such court,
administrative agency or other governmental body.
(c) Each Party will enter into a confidentiality agreement with each
employee or consultant who is given access to the Confidential Information of
the other Parties which incorporates the protections and restrictions
substantially as set forth herein.
(d) Each Party agrees to notify the other Parties in the event of any
breach of its security under conditions in which it would appear that
Confidential Information was prejudiced or exposed to loss. Each Party shall,
upon request of the disclosing Party, take all other reasonable steps necessary
to recover any compromised Confidential Information disclosed to or placed in
its possession by virtue of this Agreement. The cost of taking such steps shall
be borne solely by the receiving Party.
(e) Each Party acknowledges that any breach of any of its obligations
under this Section 8.1 is likely to cause or threaten irreparable harm to the
other Parties, and, accordingly, each Party agrees that in such event the
disclosing Party shall be entitled to equitable relief to protect its interests,
including but not limited to preliminary and permanent injunctive relief, as
well as money damages.
-17-
(f) Each Party agrees that such Holder shall return, or cause to be
returned, to the disclosing Party Confidential Information disclosed by such
disclosing Party promptly after such Holder ceases to be a shareholder of LAK.
8.2 Arbitration; Forum.
------------------
(a) Except as otherwise provided herein, all disputes, controversies
or claims arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be resolved by one arbitrator under the
Rules of Conciliation and Arbitration of the International Chamber of Commerce
as then in effect ("Rules"). The arbitrator shall be chosen in accordance with
the Rules. The place of arbitration shall be Tokyo, Japan. The language to be
used in the arbitration proceedings shall be English. The arbitrator may be of
any nationality. The arbitral award shall be rendered in writing, state the
reasons for the award and shall be final and binding on the Parties. Judgment on
any award may be entered by any court of competent jurisdiction or application
may be made to such a court for judicial acceptance or recognition of the award
and any appropriate order including enforcement. This arbitration agreement is
intended by the parties to be self-executing. The arbitrator shall have sole
jurisdiction to determine whether (i) a claim is subject to arbitration, (ii)
the arbitration may proceed even if one of the Parties refuses to attend or
participate and (iii) an award against that party may be ordered pursuant to
default or otherwise by the panel. The Parties agree that they will arbitrate
all claims agreed to be arbitrated herein regardless of the existence of any
related dispute, action or special proceeding between any or all of the Parties
hereto and/or any third party.
(b) Notwithstanding the foregoing, each Party may apply to any court
of competent jurisdiction for a temporary restraining order, preliminary
injunction, or other interim or conservatory relief, as necessary, without
breach of this Section, and without any abridgement of the powers of the
arbitrator.
(c) In case of arbitration, the arbitrator shall award reasonable
attorneys' fees and expenses to any of the parties in such manner and to such
extent as the arbitrators deem equitable. In case of a court proceeding arising
out of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and expenses from the other party(ies).
8.3 Force Majeure. If the performance of this Agreement or any obligations
-------------
hereunder is prevented, restricted or interfered with by reason of fire or other
casualty or accident, strikes or labor disputes, war or other violence, any law,
order, proclamation, regulations, ordinance, demand or requirement of any
government agency, or any other act or condition beyond the reasonable control
of the Parties, the Party so affected upon giving prompt notice to the other
Parties shall be excused from such performance during such prevention,
restriction or interference.
8.4 Governing Law. This Agreement shall be governed by the laws of the
-------------
Republic of Korea.
8.5 Publicity. Prior to issuing any reports, statements, press releases or
---------
other disclosures to third parties regarding this Agreement or the transactions
contemplated herein, the Parties shall exchange copies of such documents and
shall consult with each other regarding their content.
-18-
Except as otherwise required by law, neither Party shall any such disclosure
without the prior approval of the other Party.
8.6 Notices and Other Communications. Every notice by either Party shall
--------------------------------
be in writing and delivered either by personal delivery, or by express mail or
any similar overnight courier service, or by registered or certified mail,
postage prepaid, or by facsimile or electronic mail, addressed to the Party for
whom intended at its address set forth above, or at such other address as the
intended recipient previously shall have designated by written notice to the
other Party. All notices delivered in person shall be deemed to have been
delivered to and received by the addressee and shall be effective on the date of
personal delivery. All notices delivered by express mail or any other similar
overnight courier shall be effective upon the earlier of (i) three days
following the date sent, and (ii) the date received. All notices delivered by
registered or certified mail, or by facsimile or electronic mail, shall be
effective upon receipt.
8.7 Counterparts. This Agreement may be executed in any number of English
------------
language counterparts or duplicate originals, and each such counterpart or
duplicate original shall constitute an original instrument, but all such
separate counterparts or duplicate originals shall constitute one and the same
instrument.
8.8 Written Agreement to Govern. This Agreement sets forth the entire
---------------------------
understanding and supersedes all prior and contemporaneous agreements and
discussions among the Parties relating to the subject matter contained herein
and therein, except for the $850,000 payment obligation of SKM arising pursuant
to that certain Consulting Agreement dated September 30, 1998, between SKM and
Liquid Audio and such agreements as are executed contemporaneously herewith by
the Parties pursuant to the express provisions of this Agreement, and no Party
shall be bound by any definition, condition, representation, warranty, covenant
or provision other than as expressly stated in or contemplated herein or therein
or as subsequently shall be set forth in writing and executed by a duly
authorized representative of the Party to be bound thereby.
8.9 No Waiver of Rights. All waivers hereunder must be made in writing,
-------------------
and failure at any time to require another Party's performance of any obligation
under this Agreement shall not affect the right subsequently to require
performance of that obligation. No waiver of any breach of any provision of this
Agreement shall be construed as a waiver of any continuing or succeeding breach
of such provision or a waiver or modification of such provision.
8.10 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement should be prohibited or
invalid under applicable law, such provisions shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Agreement. In such event, the
Parties agree to negotiate, in good faith, a valid, legal and enforceable
substitute provision which most nearly effects the Parties' intent in entering
into this Agreement.
8.11 Subject Headings. The subject headings of the Sections of this
----------------
Agreement are included for the purposes of convenience only, and shall not
affect the construction or interpretations of any of its provisions.
-19-
8.12 Further Assurances. The Parties shall each perform such acts, execute
------------------
and deliver such instruments and documents, and do all such other things as may
be reasonably necessary to accomplish the transactions contemplated in this
Agreement.
8.13 Expenses and Finder's Fees. The Parties shall each bear their own
--------------------------
costs and expenses (including attorneys' fees) incurred in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby. Each Party shall indemnify the other against
any claim for brokerage or finder's fees arising out of the transactions
contemplated herein by any Person claiming to have been engaged by the
indemnifying Party based upon any action or communication, or any alleged action
or communication, by the indemnifying Party or any of its officers or employees.
8.14 Relationship Between Parties. Each Party will in all matters relating
----------------------------
to this Agreement be and act as an independent contractor. Neither Party will
represent that it has any authority to assume or create any obligation, express
or implied, on behalf of the other Party, or to represent the other Party as
agent, employee, or in any other capacity.
8.15 Language. This Agreement is in the English language only, which
--------
language shall be controlling in all respects, and all versions hereof in any
other language shall be for accommodation only and shall not be binding upon the
Parties. All communications and notices to be made or given pursuant to this
Agreement shall be in the English language.
8.16 Assignment. This Agreement shall inure to benefit of, and shall be
----------
binding upon, the Parties and their respective successors and assigns. No Party
may assign or delegate this Agreement or any of its rights or duties under this
Agreement without the prior written consent of the other Parties except as
expressly set forth herein or to a Person into which it has merged or which has
otherwise succeeded to all or substantially all of the assets of the assignor,
and which has assumed in writing or by operation of law the assignor's
obligations under this Agreement.
8.17 SURVIVAL. The Parties' respective obligations pursuant to Sections 7
--------
and 8 shall survive a termination for any reason.
LIQUID AUDIO, INC. SKM LIMITED
By: /s/ Xxxxxx Xxxxx By: Kyu Xxx Xxx /s/ X X Xxx
----------------
Title: VP Business Development Title: Vice President
----------------------- --------------
Dated: 12/31/98 Dated: 12/31/98
-------- --------
LIQUID AUDIO KOREA CO., LTD.
By: Kyu Xxx Xxx /s/ X X Xxx
-----------
Title: President
---------
Dated: 12/31/98
--------
-20-
EXHIBIT A
ARTICLES OF INCORPORATION
[ENGLISH LANGUAGE]
ARTICLES OF INCORPORATION
OF
LIQUID AUDIO KOREA CO., LTD.
CHAPTER I. GENERAL PROVISIONS
Article 1. Corporate Name
The name of the Company shall be "LIQUID AUDIO KOREA CHUSIK HOESA" in
Korean and "LIQUID AUDIO KOREA CO., LTD." in English.
Article 2. Business Objectives
The business objectives of the Company shall be the following:
(a) to license technology from Liquid Audio, Inc. relating to the
marketing and sale of audio products;
(b) to utilize such technology to host one or more internet based audio
sales and marketing sites;
(c) to resell Liquid Audio, Inc. software and certain related products
for use by end-user sellers of music and other audio products;
(d) to resell Liquid Audio, Inc. products to consumer end-users;
(e) to engage in any and all other conduct, activities or businesses
which are related, directly or indirectly, to the attainment and
continuation of the foregoing purposes.
Article 3. Head Office, Branches, Etc.
3.1 The head office of the Company shall be located in Seoul, the Republic of
Korea ("Korea").
3.2 Branches, other business offices or other agencies may be established,
relocated or closed, as required by resolution of the Board of Directors.
Article 4. Method Of Public Notices
Public notices of the Company shall be given in MAEIL BUSINESS NEWSPAPER, a
daily newspaper of general circulation published in Seoul, Korea.
CHAPTER II. CAPITAL AND SHARES
Article 5. Shares
5.1 The total number of shares that the Company is authorized to issue shall be
Two Hundred Sixty Thousand (260,000) shares of Common Stock.
5.2 The total number of the shares to be issued by the Company at the time of
incorporation shall be Sixty Thousand (60,000) shares of Common Stock.
5.3 Shares to be issued by the Company shall be one class of Common Stock, in
registered form. The shares of Common Stock shall have a par value of Five
Thousand (5,000) Won, with full voting rights.
Article 6. Share Certificates
6.1 The share certificates of the Company shall be numbered, shall set forth
the number and class of shares represented thereby and the holder's name,
and shall be entered in the Register of Shareholders of the Company upon
issuance.
6.2 The share certificates shall be issued in denominations of one (1), ten
(10), fifty (50), one hundred (100), five hundred (500), one thousand
(1000), and ten thousand (10,000) shares or such other denominations as the
shareholders may reasonably request.
6.3 The share certificates shall bear the following words:
"Transfer of the shares of stock represented by this certificate is subject
to the Shareholders Agreement dated the 31st of December 1998, a copy of
which is on file at the principal office of the Company."
Article 7. Payment For Shares
Unless otherwise decided by the Board of Directors of the Company, payment
for subscribed shares shall be made in cash, payable to a bank or banks
designated by the Company. Only those shares that have been fully paid for
may be issued.
Article 8. Register Of Shareholders
A shareholder desiring an alteration of any entry in the Register of
Shareholders due to the transfer of shares of otherwise, or the
registration of a pledge shall submit an application therefor to the
Company, in the form prescribed by the Company, together with its share
certificates involved and supporting documents as requested by the Company.
Article 9. Transfer Of Shares
9.1 Any transfer of shares in the Company to a non-shareholder must be approved
by the Board of Directors.
2
9.2 The Company may appoint its transfer agent and entrust it with procedures
of change of entry in the Register of Shareholders of the Company.
Article 10. Report of Addresses and Seals
10.1 Shareholders shall report to the Company their names, addresses, seals and
any changes therein; provided, however, that foreigners who customarily use
signatures may use signatures in place of seals.
10.2 Shareholders who reside in foreign countries may, in addition, inform the
Company of their or their agents' provisional addresses in Korea to which
notices may be dispatched.
10.3 An attorney for a shareholder shall submit to the Company a certificate of
his power of attorney in advance before he acts on behalf of such
shareholder.
Article 11. Record Date and Closing of Register of Shareholders
11.1 Subject to the restrictions provided in the applicable law, in order to
determine persons who are entitled to exercise voting rights, pre-emptive
rights to newly issued shares or other rights as shareholders or pledgees,
the Company may suspend entry of alterations in the Register of
Shareholders for a certain period, or the Company may deem any shareholder
or pledgee whose name appears in the Register of Shareholders on a
specified date to be the shareholder or pledgee who is entitled to exercise
the rights enumerated above in connection with such shares.
11.2 In particular, the Company shall treat the shareholders appearing on the
Register of Shareholders as of the 31st of each December as the
shareholders for the payment of dividends and the Company shall suspend
entry of alterations in the Register of Shareholders during the period from
the next day following the last day of the previous fiscal year to the date
on which the Ordinary General Meeting of Shareholders for such fiscal year
is closed.
11.3 The Company shall give public notice of the period or date referred to in
Paragraphs 11.1 and 11.2 at least two (2) weeks in advance of the
commencement of such period or of the occurrence of such date.
Article 12. Reissuance of Share Certificates
12.1 A shareholder desiring reissuance of a share certificate for reason of
partition or amalgamation of shares, or damage or soiling to a share
certificate, shall submit an application therefor to the Company, in the
form prescribed by the Company, together with the share certificate to be
cancelled. When the damage or soiling is so extreme that the share
certificate is not legible, however, it shall be regarded as lost and the
following provision shall apply for its replacement.
12.2 A shareholder desiring issuance of a new share certificate due to loss of
his share certificate shall submit to the Company an application, in the
form prescribed by the Company, together with the original or the certified
copy of a judgement of nullification with respect to the lost share
certificate.
Article 13. Pre-emptive Rights
3
Each shareholder shall be entitled to subscribe to new shares issued by the
Company in proportion to its shareholding ratio. If any shareholder is not
permitted by law to exercise its pre-emptive right to subscribe to new
issues of shares, then such shareholder shall have the right to transfer
its pre-emptive right to a third legally qualified purchaser who will be
able to acquire such shareholder's proportion of the new shares issued by
the Company. If any shareholder does not wish to exercise its pre-emptive
rights in whole or in part, such shareholder shall notify the Board of
Directors of such intention at least seven (7) days prior to the day as of
which the allocation of the new shares is to be made. In this case, the
Board shall transfer to the other shareholder(s) such pre-emptive right to
such unsubscribed new shares.
Article 14. Other Matters relating to Shares
All questions and procedures relating to the registration of a transfer of
shares, registration of a pledge or cancellation thereof, indication of
trust property, reissuance of share certificates and other similar matters
and the fees therefor shall be governed by the Share Handling Regulations
to be established by the Board of Directors.
CHAPTER III. GENERAL MEETINGS OF SHAREHOLDERS
Article 15. Types of General Meetings
15.1 Genera Meetings of the Shareholders of the Company shall be of two types:
ordinary and extraordinary.
15.2 The Ordinary General Meeting of Shareholders shall be held within three (3)
months following the last day of each fiscal year.
15.3 An Extraordinary General Meeting of Shareholders may be convened at any
time in compliance with a resolution of the Board of Directors and
applicable laws.
Article 16. Convening of General Meetings
16.1 All General Meetings of Shareholders shall be convened by the
Representative Director upon the resolution of the Board of Directors or
upon the request in writing of one or more shareholders representing at
least five percent (5%) of the issued shares of the Company. The place for
convening each General Meeting of Shareholders shall be the head office of
the Company unless otherwise decided by the Board of Directors.
16.2 Each General Meeting of Shareholders shall be called by the Board of
Directors giving thirty (30) days' prior notice, stating in the English
language the date, time, place and agenda of the meeting and dispatched via
registered mail to the shareholders who are residents of Korea and via
registered airmail, facsimile transmission or telex to all other
shareholders. The notice requirement may be waived by the unanimous written
consent of all shareholders at the meeting. The General Meeting of
Shareholders may not resolve matters other than those stated in the notice
of the meeting, unless all the shareholders entitled to vote, whether
present or not, unanimously agree otherwise.
Article 17. Presiding Officer
4
The Representative Director shall preside at all General Meetings of
Shareholders. If the Representative Director is absent or fails to serve as
presiding officer at a General Meeting of Shareholders, the Director
designated by the Board of Directors shall preside at such meeting in his
place.
Article 18. Resolution Requirement
18.1 Except as otherwise provided by applicable mandatory requirements of Korean
law or by these Articles of Incorporation, all resolutions of each General
Meeting of Shareholders shall be adopted by the affirmative vote of the
shareholders who hold shares representing more than one-half (1/2) of the
shares of the Company present at the meeting, provided that such
affirmative vote represents at least one-fourth (1/4) of the total shares
issued and outstanding. Notwithstanding the foregoing, the following
matters shall require the vote of more than two-thirds (2/3) of the total
shares issued and outstanding, or such higher rate as is required by the
applicable law:
(a) Any change to the Articles of Incorporation or by-laws of the Company;
(b) A reduction of the paid-in capital of the Company and the manner
thereof;
(c) The liquidation of the Company or its merger into, or consolidation or
amalgamation with any other company;
(d) Transfer or pledge of the whole or a substantial part of the assets or
undertakings of the Company or the acquisition by the Company of the
whole or part of the undertaking of any other person or entity, or the
capital stock of the Company, or entry by the Company into any joint
venture or partnership;
(e) Removal of a director from office; or
(f) Any other matters the adoption of which requires a special resolution
of the shareholders at a General Meeting under the laws of Korea.
Article 19. Voting
19.1 Each shareholder shall have one (1) vote for each share registered in its
name.
19.2 A shareholder may exercise its vote by proxy. In that case, the proxy
holder must file with the Company a document evidencing his proper
authority at each General Meeting of Shareholders at which he acts as
proxy.
Article 20. Minutes of General Meeting
The proceedings and conclusions of each General Meeting of Shareholders
shall be held in the English language and recorded in minutes in the
English and Korean languages, which minutes shall bear the names and the
signatures and/or seals of the presiding officer and of the Directors
present at the meeting, and shall be preserved at the Company's head
office. If any discrepancy should arise between the two versions of the
minutes, the English language version shall be controlling.
CHAPTER IV. DIRECTORS, STATUTORY AUDITOR, BOARD OF DIRECTORS AND OFFICERS
Article 21. Number of Directors and Auditor
5
The Company shall have at least four (4) Directors and at least two (2)
Statutory Auditors.
Article 22. Election
The Directors and Statutory Auditors shall be elected at and by the General
Meeting of Shareholders, and any such vacancies may be filled at a General
Meeting of Shareholders.
Article 23. Term of Office
23.1 The term of office of a Director shall be three (3) years; provided,
however, that the term of office shall be extended until the close of the
Ordinary General Shareholders Meeting convened in respect of the last
fiscal year which ended in their term of office.
23.2 The term of office of a Statutory Auditor shall commence from the date of
acceptance of office and expire at the close of the Ordinary General
Meeting of Shareholders convened with respect to the last fiscal year
within three (3) years from the date of acceptance of office.
23.3 The term of office of a Director or a Statutory Auditor elected to fill a
vacancy shall be the remainder of the term of office of his predecessor.
Article 24. Board of Directors, Representative Director and Officers
24.1 The Board shall decide by resolution all important matters relative to the
management of the Company except as otherwise required by law or the
Articles of Incorporation.
24.2 The Board of Directors shall elect from among its members one (1)
Representative Director, who shall serve as the President of the Company.
The Representative Director/President shall represent the Company and shall
manage the day-to-day business of the Company under the control and
supervision of the Board of Directors. The Representative
Director/President shall have authority to execute contracts on behalf of
the Company within limitations established by the Board of Directors.
24.3 Other officers may be elected or appointed by the Board of Directors. All
such officers' service with the Company shall be on such basis as is
determined by the Board of Directors.
Article 25. Meetings of Board of Directors
25.1 Meetings of the Board of Directors may be convened from time to time by
three (3) directors or the Representative Director/President when he deems
the same to be necessary or advisable. Each Board meeting shall be called
by the Representative Director/President giving at least fourteen (14)
days' prior notice in the English language, stating the date, time and
place of the meeting, to each Director and Statutory Auditor and stating
the agenda of the meeting. The notice requirement may be waived with the
written consent of all Directors and Statutory Auditors.
6
25.2 Board meetings shall be held at the Company's head office, unless the Board
of Directors may determine otherwise.
25.3 The Representative Director shall preside at all meetings of the Board of
Directors. If the Representative Director is absent or fails to serve as
presiding officer of any meeting, the Director designated by the Board of
Directors shall preside at such meeting in his place.
Article 26. Adoption of Resolutions
A quorum at any Board meeting shall consist of at least a majority of the
directors then in office. Unless otherwise required by applicable laws or
the Articles of Incorporation , any actions and resolutions taken at a
Board meeting shall be adopted by the affirmative vote of at least a
majority of the directors then in office. Notwithstanding the foregoing,
the following matters shall be for the exclusive authority of the Board,
other than those that require ratification by the general shareholders
meeting under the applicable law, and shall be decided upon the vote of at
least three directors:
(a) Making any basic change in the general nature or scope of business of
the Company;
(b) Issuing any security of the Company, whether shares or securities
convertible into shares, other equity securities or debt securities;
(c) Merging or consolidating the Company with another party, or selling,
leasing, pledging, mortgaging, encumbering or otherwise disposing of
all or substantially all of the assets of the Company, whether in one
transaction or a series of transactions;
(d) Establishing a business relationship with any direct competitor or
shareholder;
(e) Investing in any other party;
(f) Entering into any agreement or transaction with or for the benefit of
any director or shareholder of the Company or an affiliate (or any
direct lineal descendent or ancestor, sibling, spouse, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-
in-law) of such director or shareholder;
(g) Amending the business plan of the Company;
(h) Appointment, employment and compensation decisions and scope of
responsibility for officers of the Company, including salary and
wages, cash advances and relocation expenses;
(i) Capital expenditures for single items of 100,000,000 Won or more;
(j) Entering into contracts that have a term in excess of one year or that
require aggregate payments of 100,000,000 Won or more;
(k) Disposition or transfer to a third party of at least 20% of the
Company's assets;
(l) Authorizing loans by the Company, except for payment terms for trade
credits in the ordinary course of business;
(m) Assuming or incurring any debt, loan, guaranty or liability with an
aggregate value of 500,000,000 Won or more;
(n) Change in the outside accountant to the Company;
(o) Creating any lien on the Company's property, except liens incurred in
the ordinary course of business;
(p) Approving the Company's annual budget;
(q) Changing the strategic direction of the Company and approving the
Company's long-range plans;
(r) Approval of annual financial statements;
7
(s) Opening or closing an account with a bank or financial house in Korea
or overseas; and
(t) Paying any dividend or making any other distribution.
Article 27. Minutes of Meetings of the Board of Directors
The proceedings and conclusions of each meeting of the Board of Directors
shall be held in the English language and recorded in minutes in the
English and Korean languages, which minutes shall bear the names and the
signatures and/or seals of the presiding officer and all other Directors
and Statutory Auditor in attendance at the meeting and shall be preserved
at the Company's head office. If any discrepancy should arise between the
two versions of the minutes, the English language version shall be
controlling.
Article 28. Compensation
28.1 The compensation of the Directors and Statutory Auditor of the Company
shall be determined by resolution of a General Meeting of Shareholders.
28.2 Severance allowances for the Directors and Statutory Auditor shall be paid
in accordance with the regulations of the Company adopted by resolution of
a General Meeting of Shareholders.
CHAPTER V. ACCOUNTING
Article 29. Fiscal Year
29.1 The fiscal year of the Company shall commence on the 1st of January and end
on the 31st of December each year.
29.2 Notwithstanding the foregoing Paragraph 29.1, the first fiscal year of the
Company shall commence on the date of incorporation of the Company and end
on the following 31st of December.
Article 30. Approval of Financial Statements, etc.
30.1 The Representative Director/President shall submit to the Statutory
Auditors at least six (6) weeks before each Ordinary General Meeting of
Shareholders the following documents, after obtaining approval of such
documents from the Board of Directors in connection with the subject
Ordinary General Meeting of Shareholders:
(a) A balance sheet;
(b) A profit and loss statement;
(c) A statement of disposition of retained earnings or deficit;
(d) Supplementary schedules for (a), (b) and (c) above; and
(e) A business report.
8
30.2 The Statutory Auditors shall submit an audit report thereof to the
Representative Director/President, within four (4) weeks of receipt of the
documents described in Paragraph 30.1 above.
30.3 The Representative Director/President shall, without delay, give public
notice of the balance sheet approved by the Ordinary General Meeting of
Shareholders.
Article 31. Disposition of Profit
Subject to Korean laws and regulations, profit for each fiscal year shall
be disposed of in the following order of priority:
(a) Establishment of any reserves required by law;
(b) Establishment of such other reserves as may be decided by a General
Meeting of Shareholders; and
(c) Payment of all or a portion of the remainder of such profit as
dividends to shareholders in accordance with the resolution of a
General Meeting of Shareholders.
Article 32. Payment of Dividends
32.1 Dividends, if declared, shall be determined by the General Meeting of
Shareholders, and paid to the shareholders of the Company who were duly
entered in the Register of Shareholder as of the end of the subject fiscal
year.
32.2 Dividends shall be paid within thirty (30) days after the declaration of
dividends, unless otherwise resolved by a General Meeting of Shareholders.
CHAPTER VI. SUPPLEMENTARY PROVISIONS
Article 33. By-laws
The Company may adopt, with the approval of the Board of Directors, by-laws
and other regulations as may be required for the administration of the
affairs of the Company.
Article 34. Execution of Agreements with Representative Director
All agreements, including employment agreements, between the Company and
its Representative Director/President shall be executed or countersigned by
another Director designated in a resolution of the Board of Directors.
Article 35. Other Matters
Matters not specifically provided for herein shall be determined in
conformity with resolutions adopted by the Board of Directors or the
General Meeting of Shareholders of the Company, or with relevant provisions
of the Korean Commercial Code, as the case may be.
9
EXHIBIT B
CONSULTING AGREEMENT
(Filed as Exhibit 10.36)
EXHIBIT C
GUARANTY
(Filed as Exhibit 10.38)
EXHIBIT D
RESELLER AGREEMENT
(Filed as Exhibit 10.35)
EXHIBIT E
FIVE YEAR BUSINESS PLAN
[*]
Page 1
* Certain information in this Page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 1
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 2
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 1
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 2
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 1
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 2
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 1
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 2
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 1
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
[ * ]
Page 2
* Certain information in this page has been omitted and filed
separately with the Commission. Confidential treatment has been
requested with respect to the omitted portions.
