CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Denali will be party to an amended and restated stockholders agreement with the MD stockholders, the MSD Partners stockholders and the SLP stockholders, referred to as the Denali stockholders agreement. The Denali stockholders agreement, as further described below, will contain specific rights, obligations and agreements of these parties as owners of Denali’s common stock. In addition, the Denali stockholders agreement will contain provisions related to the composition of the Denali board of directors and its committees, which are further discussed under “Management of Denali after the Merger—Board of Directors.”
MD Stockholder and SLP Stockholder Approvals
The Denali stockholders agreement provides that, subject to the Denali certificate, the Denali bylaws and applicable law, Denali and its subsidiaries (other than VMware) shall not take any of the following actions without the approval of the MD stockholders and the SLP stockholders:
| • | amend the organizational documents of Denali or certain of Denali’s subsidiaries, subject to limited exceptions; |
| • | increase or decrease the size of the Denali board of directors or certain of Denali’s subsidiaries or delegate the powers of any such board of directors to a committee, subject to certain exceptions; |
| • | make acquisitions or investments or enter into joint ventures or create any non-wholly owned subsidiaries for aggregate consideration in excess of $500 million in any calendar year, subject to certain exceptions; |
| • | enter into a transaction, commercial agreement or capital investment involving consideration or commitments payable by Denali and its subsidiaries in excess of $500 million; |
| • | enter into any transaction involving a merger, consolidation or other business combination of Denali or its subsidiaries, a sale of Denali common stock or other securities representing a majority of the outstanding voting power of all Denali capital stock, or a sale of all or substantially all of the assets of Denali, other than a change in control of Denali in which the SLP stockholders receive consideration consisting entirely of cash and marketable securities for their shares of DHI Group common stock having an aggregate value that results in the SLP stockholders receiving a return on their investment in DHI Group common stock of at least both two times the amount invested by the SLP stockholders and a 20% internal rate of return; |
| • | sell, transfer or license assets or other rights for aggregate consideration in excess of $500 million in any calendar year, subject to certain exceptions; |
| • | incur, assume or guarantee additional indebtedness in excess of $500 million in the aggregate, subject to certain exceptions; |
| • | create any new class or series of, or sell or issue, any equity securities, debt securities exercisable or exchangeable for, or convertible into equity securities, or any option, warrant or other right to acquire any such equity securities or debt securities, subject to certain exceptions including issuances pursuant to the Denali management equity plan; |
| • | effect an initial public offering of DHI Group common stock except for an initial public offering of Class C Common Stock after October 29, 2013 involving the sale of more than 10% of the outstanding DHI Group common stock to the public after giving effect to such transaction and results in the Class C Common Stock being listed on the NYSE or Nasdaq or any listing of equity securities on a national securities exchange or substantially equivalent market other than Class V Common Stock, subject to certain exceptions; |
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| • | enter into, amend or terminate any transactions with the MD stockholders, the SLP stockholders or any of their respective affiliates, subject to certain exceptions; |
| • | redeem, acquire or reclassify any of Denali’s equity securities, subject to certain exceptions; |
| • | liquidate, dissolve or wind-up the operations of Denali or any of its material subsidiaries; |
| • | adopt, terminate or amend any new employee equity plan or grant any equity award to any directors or members of the Denali executive leadership team, subject to certain exceptions; |
| • | settle or compromise any litigation, governmental investigation or proceeding that would result in a payment by Denali or its subsidiaries in excess of $500 million, that would impose materially adverse limitations on the operations of Denali or any of its subsidiaries or in which any MD stockholder or MSD Partners stockholder or their family members or affiliates has a material interest; |
| • | convert shares of VMware Class B common stock into shares of VMware Class A common stock; |
| • | vote to approve or consent to (1) any matter subject to EMC’s consent rights under the VMware certificate, (2) any action under Article VI of the VMware certificate, (3) any amendment to the VMware certificate or the Amended and Restated Bylaws of VMware, (4) any sale of all or substantially all of the assets of VMware or (5) any other action submitted to a vote of the VMware stockholders other than the ratification of the appointment of VMware’s independent auditors and the election of directors; |
| • | take any action as a stockholder of VMware to remove or appoint (other than to fill vacancies) any directors of VMware other than the reelection of those VMware directors who will be standing for reelection at the 2016 annual meeting of stockholders of VMware; and |
| • | take any other action by written consent as a stockholder of VMware. |
The consent rights of the MD stockholders and the SLP stockholders will terminate on the earliest of (1) the consummation of an initial underwritten public offering of DHI Group common stock on the NYSE or Nasdaq involving the offering and sale of a the number of shares of DHI Group common stock in excess of 10% of the outstanding DHI Group common stock after giving effect to such initial public offering, (2) an initial underwritten public offering of DHI Group common stock that is approved by the MD stockholders and the SLP stockholders and (3) such time as the aggregate number of shares of DHI Group common stock beneficially owned by the MD stockholders (with respect to their consent rights) or the SLP stockholders (with respect to their consent rights) is less than 50% of the Reference Number (as defined under “Comparison of Rights of Denali Stockholders and EMC Shareholders—Definitions”).
The Denali stockholders agreement will also provide that prior to an initial underwritten public offering of DHI Group common stock, as long as Michael S. Dell has not died and is not disabled and the MD stockholders own more than 35% of the outstanding DHI Group common stock or, if less, the number of shares of DHI Group common stock beneficially owned by the SLP stockholders, then (1) removal of the chief executive officer of Denali will require the approval of the holders of a majority of the outstanding shares of Class A Common Stock, voting separately as a class, and (2) unless otherwise consented to by the holders of a majority of the outstanding Class A Common Stock, voting separately as a class, the chief executive officer of Denali will also serve as chairman of the Denali board of directors.
Nominees to the Board of Directors
Prior to an initial public offering of the DHI Group common stock, the Denali stockholders agreement provides the right of the MD stockholders and the SLP stockholders to nominate for election individuals to serve as members of the Denali board of directors. Prior to a Designation Rights Trigger Event with respect to the Class A Common Stock or the Class B Common Stock, respectively, the MD stockholders and the SLP stockholders are jointly entitled to nominate for election as directors three directors who, if elected, will be
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designated the Group I Directors. Additionally, prior to a Designation Rights Trigger Event with respect to the Class A Common Stock, the MD stockholders are entitled to nominate for election as directors up to three directors who, if elected, will be designated the Group II Directors. Further, prior to a Designation Rights Trigger Event with respect to the Class B Common Stock, the SLP stockholders are entitled to nominate for election as directors up to three directors who, if elected, will be designated the Group III Directors.
Following an initial public offering of the DHI Group common stock, each of the MD stockholders and the SLP stockholders shall have the right to nominate a number of individuals for election as directors as is equal to the percentage of the total voting power for the regular election of directors of Denali beneficially owned by the MD stockholders or by the SLP stockholder, as the case may be, multiplied by the number of directors then on the Denali board. Further, so long as the MD stockholders and/or the SLP stockholders each beneficially own at least 5% of all outstanding shares of Denali’s stock entitled to vote generally in the election of directors, each of the MD stockholders and the SLP stockholders, as the case may be, will be entitled to nominate at least one individual for election to the board.
Transfer Restrictions and Registration Rights
The Denali stockholders agreement will include the following provisions relating to the transfer of the shares of DHI Group common stock held by the MD stockholders, the MSD Partners stockholders and the SLP stockholders:
| • | The MD stockholders will generally be prohibited from transferring shares of DHI Group common stock prior to an initial underwritten public offering of DHI Group common stock except (1) in connection with a change in control of Denali in which the SLP stockholders receive consideration consisting entirely of cash and marketable securities for their shares of DHI Group common stock having an aggregate value that results in the SLP stockholders receiving a minimum return on their investment in DHI Group common stock of at least both two times the amount invested by the SLP stockholders and a 20% internal rate of return, (2) to their permitted transferees specified in the Denali stockholders agreement, (3) after October 28, 2018, in any twelve-month period, a number of shares of DHI Group common stock equal to 5% of the number of shares of DHI Group common stock held by the MD stockholders on October 29, 2013, (4) following the death or disability of Michael S. Dell, provided that he or his power of attorney, guardian or comparable person has waived certain rights under the Denali stockholders agreement or (5) with the consent of the SLP stockholders. |
| • | The MSD Partners stockholders will generally be prohibited from transferring shares of DHI Group common stock prior to the earlier of October 29, 2018 or an initial underwritten public offering of DHI Group common stock, except (1) to their permitted transferees specified in the Denali stockholders agreement or (2) with the consent of the MD stockholders and the SLP stockholders; and |
| • | The SLP stockholders will generally be prohibited from transferring shares of DHI Group common stock prior to the earlier of October 29, 2018 or an initial underwritten public offering of DHI Group common stock, except (1) to their permitted transferees specified in the Denali stockholders agreement or (2) with the consent of the MD stockholders. |
The SLP stockholders may require an initial underwritten public offering of DHI Group common stock to be consummated on the NYSE or Nasdaq prior to October 29, 2018, if the offering price implies a return on the SLP stockholders’ investment in DHI Group common stock that satisfies certain minimum thresholds, and at any time on or after October 29, 2018.
Call and Put Rights; Liquidity Program
Before an initial underwritten public offering of DHI Group common stock or a change in control of Denali, any shares of Class C Common Stock of Denali held by an executive officer (other than Michael S. Dell) are
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subject to post-termination repurchase (call) and sale (put) rights and to an in-service liquidity program. Selected employees of Denali in addition to its executive officers are subject to the call and put rights and are entitled to participate in the liquidity program.
Under the call rights, following the termination of any such executive officer’s employment for any reason, Michael S. Dell has the right (but not the obligation) to repurchase any or all shares of Class C Common Stock then held by the executive (or any of the executive’s permitted transferees) or acquired by the executive as a result of the exercise of stock options or settlement of RSUs after the termination of employment. If Mr. Dell does not exercise his call right with respect to the executive’s shares within 30 days, Denali may exercise the call right. Denali’s call right expires on the nine-month anniversary of the later of (1) the date on which the executive’s employment was terminated, and (2) the date after the employment termination on which the executive acquired shares upon the exercise of options or in settlement of RSUs. If Denali does not exercise its call right, the MD stockholders, the MSD Partners stockholders and the SLP stockholders will each have the right to exercise the call right (based on their respective pro rata ownership of DHI Group common stock at such time), within the 30-day period following the expiration of Denali’s call right. The price for any shares repurchased by any person under the call right will be equal to their fair market value on the date on which the call is exercised unless the executive is terminated for cause, in which case the purchase price for such shares will be equal to the lower of the executive’s cost to acquire the shares or their fair market value on the date on which the call right is exercised.
Under the put rights, any such executive officer may require Denali to repurchase any or all shares of Class C Common Stock held by the executive officer for at least six months. The put period begins on the 30th day following the later of (1) the termination of an executive’s employment for any reason other than for cause and (2) the date after the employment termination on which the executive acquired such shares upon the exercise of the options or in settlement of RSUs, and ends on the six-month anniversary of each such date. The purchase price for any such shares generally will be equal to their fair market value on the date on which the executive exercises the put right. The purchase price will be equal to 80% of such fair market value, however, if the executive resigns without good reason before the later of the fourth anniversary of (a) the closing of the going-private transaction and (b) the date on which the executive began employment with Denali and its affiliates (including in connection with the completion of the merger).
Twice during each calendar year, Denali opens a 30-day liquidity program under which any such executive officer who remains employed in good standing may require that Denali repurchase, at fair market value, any shares of Class C Common Stock that have been held by the executive (and have been vested) for at least six months.
The amount payable by Denali during any fiscal year for repurchases of Class C Common Stock from any executive officer upon the exercise of put rights under the liquidity program is subject to an individual cap. In addition, the total amount payable by Denali during any fiscal year for all repurchases from all employees and for tax withholding upon the exercise of options and the vesting of RSUs is subject to an aggregate cap equal to the lesser of $200 million or the amount of all repurchases and tax withholdings permitted under Denali’s credit facilities to be made during such fiscal year. Denali may waive the aggregate $200 million repurchase cap or any or all of the repurchase caps as they apply to any executive officer and his or her permitted transferees. Given the expected increase in the over-all size of Denali’s employee equity program following the completion of the merger, Denali anticipates that the size of the aggregate fiscal year cap will be increased following the completion of the merger, although no decision has been made as of the date of this proxy statement/prospectus regarding the amount of such increase (if any).
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Other Provisions
The Denali stockholders agreement will provide for a renunciation of corporate opportunities presented to any director or officer of Denali or any of its subsidiaries who is also a director, officer, employee, managing director or other affiliate of MSD Partners or Silver Lake Partners (other than Michael S. Dell for so long as he is an executive officer of Denali or certain of its subsidiaries).
Under the Denali stockholders agreement, Denali will agree, subject to certain exceptions, to indemnify the MD stockholders, the MSD Partners stockholders, the SLP stockholders and various respective affiliated persons from certain losses arising out of the indemnified persons’ investment in, or actual, alleged or deemed control or ability to influence, Denali.
Denali Registration Rights Agreement
Denali will be a party to an amended and restated registration rights agreement with certain holders of DHI Group common stock (and other securities convertible into or exchangeable or exercisable for shares of DHI Group common stock), referred to as the Denali registration rights agreement. Pursuant to the Denali registration rights agreement, certain of Denali’s security holders, their affiliates and certain of their transferees, will have the right, under certain circumstances and subject to certain restrictions, to require Denali to register for resale the shares of Class C Common Stock (including shares of Class C Common Stock issuable upon conversion of Class A Common Stock, Class B Common Stock and Class D Common Stock) to be sold by them.
Following an initial public offering of DHI Group common stock, certain holders will each have the right to demand that Denali register Class C Common Stock to be sold by them. Subject to certain exceptions, such registration demands are limited in number and each registration demand must be expected to result in aggregate net cash proceeds to the participating registration rights holders in excess of $100 million. In certain circumstances, Denali may postpone the filing of a registration statement for up to 90 days once in any 12 month period.
In addition, following an initial public offering of DHI Group common stock, Denali will be required to use reasonable best efforts to register the sale of shares of Class C Common Stock on Form S-3 or Form F-3, or on Form S-1 or Form F-1 permitting sales of shares of Class C Common Stock into the market from time to time over an extended period and certain holders will have the right to request that Denali do the same. Subject to certain limitations, at any time when Denali has an effective shelf registration statement, certain holders each shall have the right to make no more than two marketed underwritten shelf takedowns during any 12 month period.
Certain holders will also have the ability to exercise certain piggyback registration rights in respect of shares of Class C Common Stock to be sold by them in connection with registered offerings requested by certain other holders or initiated by Denali.
Transactions with Michael S. Dell and Related Persons
Pursuant to a Dell policy, Mr. Dell, Denali’s Chairman and Chief Executive Officer, is required to fly privately when traveling. Mr. Dell owns a private aircraft through a wholly-owned limited liability company. For Mr. Dell’s business flights, Dell leases the plane from the limited liability company and engages a third-party flight services company to act as its agent, including operating the aircraft and providing flight personnel. Dell pays the flight services company a fee attributable to Mr. Dell’s business travel on the aircraft. During fiscal 2016, Dell paid approximately $1.1 million for Mr. Dell’s business travel through these arrangements. Mr. Dell directly pays one hundred percent of the costs of operating the aircraft for all personal flights.
Entities affiliated with MSD Capital, L.P., the investment firm that exclusively manages the capital of Mr. Dell and his family, purchase services or products from Dell on standard commercial terms available to comparable unrelated customers. These entities paid Dell approximately $700,000 for services and products in fiscal 2016.
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Mr. Dell reimburses Dell for costs related to his or his family’s personal security protection. Reimbursements for this purpose in Fiscal 2016 totaled approximately $1.9 million.
Mr. Dell also holds a non-controlling equity interest in, and appoints a representative to serve on the board of, a landscaping services company. During Fiscal 2016, Dell’s third-party facilities maintenance vendor subcontracted its landscaping obligations to the landscaping services company. The landscaping services company was paid approximately $513,295 in Fiscal 2016 for landscaping services to Dell. Future annual payments are expected to be a minimum of $741,662.
Review, Approval or Ratification of Transactions with Related Persons
Pursuant to existing arrangements between Denali, the MD stockholders and the SLP stockholders, certain transactions between Denali and its subsidiaries, on the one hand, and Michael S. Dell and his affiliates, on the other hand, must be approved by the Denali directors appointed by the SLP stockholders. Similarly, certain transactions between Denali and its subsidiaries, on the one hand, and Silver Lake and its affiliates, on the other hand, must be approved by the Denali directors appointed by the MD stockholders. In addition to these approval requirements, in connection with the completion of the merger the Denali board intends to adopt a written policy setting forth procedures for the review and approval or ratification of related transactions. The policy will cover, with various exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which Denali was or is to be a participant, where the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including transactions between Denali and its subsidiaries and Mr. Dell, SLP or their respective affiliates. Denali’s audit committee will be responsible for reviewing and approving transactions with related persons.
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The validity of the shares of Class V Common Stock issuable pursuant to the merger will be passed upon for Denali by Simpson Thacher & Bartlett LLP.
