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EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS OF THE POWERS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER
SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS THEREOF
OF
6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
FOR
STEMCELLS, INC.
STEMCELLS, INC., a Delaware corporation (the "Corporation"), pursuant
to the provisions of Section 151 of the General Corporation Law of the State of
Delaware, does hereby make this Certificate of Designations and does hereby
state and certify that pursuant to the authority expressly vested in the Board
of Directors of the Corporation by the Certificate of Incorporation of the
Corporation, the Board of Directors duly adopted the following resolutions,
which resolutions remain in full force and effect as of the date hereof:
RESOLVED, that, pursuant to Article Four of the Certificate of
Incorporation of the Corporation, the Board of Directors hereby authorizes the
issuance of, and fixes the designation and preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions, of a series of Preferred Stock consisting of 2,626
shares, par value $.01, to be designated 6% Cumulative Convertible Preferred
Stock (the "Preferred Shares").
RESOLVED, that subject to the terms and conditions of the Purchase
Agreement (as defined herein), 1,500 Preferred Shares may be issued in one
tranche (the "Initial Tranche") and further subject to the exercise of an option
under the terms of the Purchase Agreement (as defined herein), an additional
1,126 Preferred Shares, in one or more tranches, may be issued (each tranche
being sometimes referred to as a "Tranche").
RESOLVED, that each of the Preferred Shares shall rank equally in all
respects and shall be subject to the following terms and provisions:
1. DESIGNATION. There is hereby created out of the authorized and
unissued shares of preferred stock of the Corporation a series of preferred
stock designated as the 6% Cumulative Convertible Preferred Stock (the
"Preferred Shares"). The number of shares constituting such series shall be
2,626.
2. DIVIDENDS.
(a) CUMULATIVE. The holders of the Preferred Shares shall be entitled
to receive cumulative dividends at the per share rate of six percent (6%) of the
Liquidation Preference (as
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defined below) of each Preferred Share, per annum accruing daily and payable and
compounding quarterly on March 31, June 30, September 30 and December 31 of each
year (each a "Dividend Payment Date") commencing with the first Dividend Payment
Date occurring after the original issuance date of such share, in preference and
priority to any payment of any dividend on the Common Stock (as defined below)
or any other class or series of equity security of the Corporation. Such
dividends shall accrue on any given share from the most recent date on which a
dividend has been paid with respect to such share, or if no dividends have been
paid, from the date of the original issuance of such share, and such dividends
shall accrue from day to day whether or not declared, based on the actual number
of days elapsed. If at any time dividends on the outstanding Preferred Shares at
the rate set forth above shall not have been paid or declared and set apart for
payment with respect to all preceding periods, the amount of the deficiency
shall be fully paid or declared and set apart for payment, but without interest,
before any distribution, whether by way of dividend or otherwise, shall be
declared or paid upon or set apart for the shares of any other class or series
of equity security of the Corporation. For so long as any Preferred Shares are
outstanding, the Corporation shall not pay any dividends on any shares of Common
Stock or any shares of any other capital stock, or repurchase any shares of
Common Stock or capital stock, without having received written consent of
two-thirds in interest of the holders of Preferred Shares, except as otherwise
provided herein or in the Purchase Agreement or Registration Rights Agreement
(as such terms are defined herein) with respect to the Preferred Shares and
Warrants and underlying Common Shares thereof. For purposes of computing any per
diem accrual, calculations shall be made using a 360-day year.
(b) PIK PAYMENT. Any dividend payable on the outstanding Preferred
Shares shall be paid solely by adding the amount thereof to the Liquidation
Preference (as defined below) of such Preferred Shares. Upon the payment of
dividends as required by the immediately preceding sentence, such dividends will
be deemed paid in full.
3. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary, the holders
of the Preferred Shares shall be entitled to receive, out of the assets of the
Corporation available for distribution to stockholders, prior and in preference
to any distribution of any assets of the Corporation to the holders of any other
class or series of equity securities, the amount of $1,000 per share plus (i)
dividends added to the Liquidation Preference in accordance with Section 2(b)
above; (ii) all accrued but unpaid dividends; and (iii) all "Monthly Delay
Payments" payable under the Registration Rights Agreement (as defined below)
(the "Liquidation Preference").
4. ISSUANCE OF PREFERRED SHARES. The Preferred Shares shall be issued by
the Corporation pursuant to a Securities Purchase Agreement, dated on or about
the date hereof ("Purchase Agreement") between the Corporation and the initial
subscriber(s) for the Preferred Shares thereunder (the "Subscriber"), and
holders of Preferred Shares shall enjoy the benefits of the Registration Rights
Agreement, dated the date hereof ("Registration Rights Agreement") between such
parties in connection with the Purchase Agreement.
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5. CONVERSION. Each holder of the Preferred Shares shall have the right
at any time and from time to time, at the option of such holder, to convert any
or all Preferred Shares held by such holder, for such number of fully paid,
validly issued and nonassessable shares ("Common Shares") of common stock, par
value $0.01, of the Corporation ("Common Stock"), free and clear of any liens,
claims or encumbrances, as is determined by dividing (i) the Liquidation
Preference times the number of Preferred Shares being converted (the "Conversion
Amount"), by (ii) the applicable Conversion Price (determined as hereinafter
provided) in effect on the Conversion Date. Immediately following such
conversion, the rights of the holders of converted Preferred Shares shall cease
and the persons entitled to receive the Common Shares upon the conversion of
Preferred Shares shall be treated for all purposes as having become the owners
of such Common Shares, subject to the rights provided herein to holders.
(a) MECHANICS OF CONVERSION. To convert Preferred Shares into Common
Shares, the holder shall give written notice ("Conversion Notice") to the
Corporation in the form of page 1 of Exhibit A hereto (which Conversion Notice
may be given by facsimile transmission no later than the Conversion Date)
stating that such holder elects to convert the same and shall state therein the
number of Preferred Shares to be converted and the name or names in which such
holder wishes the certificate or certificates for Common Shares to be issued
(the conversion date specified in such Conversion Notice shall be referred to
herein as the "Conversion Date"). Either simultaneously with the delivery of the
Conversion Notice, or within one (1) Trading Day (as defined below) thereafter,
the holder shall deliver (which also may be done by facsimile transmission) page
2 to Exhibit A hereto indicating the computation of the number of Common Shares
to be received. As soon as possible after delivery of the Conversion Notice,
such holder shall surrender the certificate or certificates representing the
Preferred Shares being converted, duly endorsed, at the office of the
Corporation or, if identified in writing to all the holders by the Corporation,
at the offices of any transfer agent for such shares. The Corporation shall,
immediately upon receipt of such Conversion Notice, issue and deliver to or upon
the order of such holder, against delivery of the certificates representing the
Preferred Shares which have been converted, a certificate or certificates for
the number of Common Shares to which such holder shall be entitled (with the
number of and denomination of such certificates designated by such holder), and
the Corporation shall immediately issue and deliver to such holder a certificate
or certificates for the number of Preferred Shares (including any fractional
shares) which such holder has not yet elected to convert hereunder but which are
evidenced in part by the certificate(s) delivered to the Corporation in
connection with such Conversion Notice. The Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless certificates evidencing such shares of the Preferred Stock
being converted are either delivered to the Corporation or its transfer agent or
the holder notifies the Corporation or any such transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
reasonably satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection therewith. The Corporation shall effect such
issuance of Common Shares (and certificates for unconverted Preferred Shares)
within three (3) Trading Days of the Conversion Date and shall transmit the
certificates by messenger or overnight delivery service to reach the address
designated by such holder within three (3) Trading Days after such Conversion
Date ("T+3"). If certificates evidencing the Common Shares are not received by
the holder within five (5) Trading Days of the Conversion Notice, then the
holder will be entitled to revoke and
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withdraw its Conversion Notice, in whole or in part, at any time prior to its
receipt of those certificates. In lieu of delivering physical certificates
representing the Common Shares issuable upon conversion of Preferred Shares,
provided the Corporation's transfer agent is participating in the Depository
Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon
request of the holder, the Corporation shall use its best efforts to cause its
transfer agent to electronically transmit the Common Shares issuable upon
conversion or exercise to the holder, by crediting the account of the holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system. The time periods for delivery described above shall apply to the
electronic transmittals through the DWAC system. The parties agree to coordinate
with DTC to accomplish this objective. The conversion pursuant to this Section 5
shall be deemed to have been made immediately prior to the close of business on
the Conversion Date. The person or persons entitled to receive the Common Shares
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Common Shares at the close of business on the
Conversion Date.
The term "Trading Day" means a day on which there is trading on
the Nasdaq National Market or such other market or exchange on which the Common
Stock is then principally traded.
The Corporation's obligation to issue Common Shares upon
conversion of Preferred Shares shall, except with respect to the holder's
compliance with the notice and delivery requirements set forth above in this
Section 5(a), be absolute, is independent of any covenant of any holder of
Preferred Shares, and shall not be subject to: (i) any offset or defense; or
(ii) any claims against the holders of Preferred Shares whether pursuant to this
Certificate, the Purchase Agreement, the Registration Rights Agreement or
otherwise.
In the event that the Corporation disputes the holder's
computation of the number of Common Shares to be received, then the Corporation
shall deliver to the holder the amount of Common Shares not in dispute and shall
seek to mutually agree with the holder in good faith on the correct number of
shares to be received.
(b) DETERMINATION OF CONVERSION PRICE.
The Conversion Price applicable with respect to the Preferred
Shares (the "Conversion Price"), subject to the adjustments set forth
below, shall be as follows:
(i) Beginning on the date of closing of the Purchase Agreement
(the "Closing Date") up until and including the 20th Trading Day
following the Closing Date, the Conversion Price with respect to the
Preferred Shares in the Initial Tranche shall be a price equal to 125% of
the closing bid price of the Common Stock recorded on the Principal
Market (as reported by the Bloomberg financial network or any successor
reporting service) on the Trading Day immediately preceding the Closing
Date (the "Fixed Price");
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(ii)On and after the 21st Trading Day following the Closing Date,
the Conversion Price with respect to the Preferred Shares in the Initial
Tranche shall be a price equal to the lesser of
(A) the Fixed Price or
(B) 85% of the average of the daily weighted average prices
for the Common Stock, using the VAP function provided by
Bloomberg, LP, for the Twenty Trading Days following the day that
the Corporation files with the Securities and Exchange Commission
a report on Form 8-K or Form 10-K disclosing the sale of
Preferred Shares pursuant to the Purchase Agreement (the
"Disclosure Date")
; provided that such resulting Conversion Price shall be at least $3.00
(the "Minimum Price");
(iii) The Conversion Price with respect to the Preferred Shares
contained in the additional Tranches following the Initial Tranche shall
be the Fixed Price.
As used herein, "Principal Market" shall mean Nasdaq National
Market or such other market where the Common Stock is then listed for
trading.
(c) STOCK SPLITS; DIVIDENDS; ADJUSTMENTS.
(i) If the Corporation, at any time while the Preferred Shares
are outstanding, (A) shall pay a stock dividend or otherwise make a
distribution or distributions on any equity securities (including
instruments or securities convertible into or exchangeable for such
equity securities) in shares of Common Stock, (B) subdivide outstanding
Common Shares into a larger number of shares, or (C) combine outstanding
Common Stock into a smaller number of shares, then each Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding before such event and the
denominator of which shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this
Section 5(c)(i) shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend
or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination.
(ii)In the event that the Corporation issues or sells any Common
Stock or securities which are convertible into or exchangeable for its
Common Stock (other than Preferred Shares), or any warrants or other
rights to subscribe for or to purchase or any options for the purchase of
its Common Stock ("Convertible Securities") (other than shares or options
issued or which may be
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issued pursuant to (i) the Corporation's current or future employee,
director or BONA FIDE consultant option plans or shares issued upon
exercise of options, warrants or rights outstanding on the date of the
Purchase Agreement and listed in the Corporation's most recent periodic
report filed under the Securities Exchange Act of 1934, as amended, (ii)
arrangements with the holders of Preferred Shares, (iii) an underwriting
agreement, to one or more underwriters in connection with a bona fide
public offering (as defined herein), (iv) licenses agreements, joint
ventures, strategic partnerships with or acquisitions of other entities
by the Corporation which engage in businesses related or complementary to
the Corporation's business) or (v) upon the exercise of the Preferred
Shares or the Warrants) ("Exempted Issuances") at an effective purchase
price per share (the "Full Dilutive Price") which is less than the
Conversion Price, then in such case, the Conversion Price in effect
immediately prior to such issue or sale or record date, as applicable,
shall be reduced to equal the Full Dilutive Price.
In the event that the Corporation issues or sells any Common
Stock or Convertible Securities (other than Exempted Issuances) at an
effective purchase price per share (the "Partial Dilutive Price") which
is less than the closing market price per share of the Common Stock on
the Principal Market on the Trading Day next preceding such issue or sale
or, in the case of issuances to holders of its Common Stock, the record
date fixed for the determination stockholders entitled to receive such
warrants, rights or options (the "Fair Market Price") but greater than
the Conversion Price, then in each case, the Conversion Price in effect
immediately prior to such issue or sale or record date, as applicable,
shall be reduced effective concurrently with such issue or sale to an
amount determined by multiplying the Conversion Price then in effect by a
fraction, (x) the numerator of which shall be the sum of (1) the number
of shares of Common Stock outstanding immediately prior to such issue or
sale and (2) the number of shares of Common Stock which the aggregate
consideration received by the Corporation for such additional shares
would purchase at the Fair Market Price, and (y) the denominator of which
shall be the number of shares of Common Stock and Convertible Securities
(as defined below) of the Corporation outstanding immediately after such
issue or sale.
For the purposes of the foregoing adjustment, in the case of
the issuance of any Convertible Securities, the maximum number of shares
of Common Stock issuable upon exercise, exchange or conversion of such
Convertible Securities shall be deemed to be outstanding, and the
aggregate consideration received by the Corporation for the issuance or
sale of such Convertible Securities shall be deemed to include any
consideration that would be received by the Corporation in connection
with the exercise, exchange or conversion of such Convertible Securities,
provided that no further adjustment shall be made upon the actual
issuance of Common Stock upon exercise, exchange or conversion of such
Convertible Securities.
(iii) If the Corporation, at any time while the Preferred Shares
are outstanding, shall distribute to all holders of Common Stock
evidences of its indebtedness or assets or cash or rights or warrants to
subscribe for or purchase
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any security of the Corporation or any of its subsidiaries (excluding
those referred to in Sections 5(c)(i) or 5(c)(ii) above), then
concurrently with such distributions to holder of Common Stock, the
Corporation shall distribute to holders of the Preferred Shares, the
amount of such indebtedness, assets, cash or rights or warrants which the
holders of Preferred Shares would have received had they converted all
their Preferred Shares into Common Shares immediately prior to the record
date for such distribution.
(iv)Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i) or (ii) above or the Corporation makes a distribution as
described in Section 5(c)(iii) above, the Corporation shall promptly mail
to each holder of the Preferred Shares a notice setting forth the
Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment, or setting forth a
description of the distribution and the facts surrounding same.
(v) All calculations under this Section 5(c) shall be made to the
nearest cent or to the nearest 1/100th of a share, as the case may be.
(vi) No adjustment in the Conversion Price shall reduce the
Conversion price below the then par value of the Common Stock.
(vii) The Corporation from time to time may reduce the Conversion
Price by any amount for any period of time if the period is at least 20
Trading Days and if the reduction is irrevocable during the period.
Whenever the Conversion Price is reduced, the Corporation shall mail to
the holders of Preferred Shares a notice of the reduction. The
Corporation shall mail, first class, postage prepaid, the notice at least
15 days before the date the reduced Conversion Price takes effect. The
notice shall state the reduced Conversion Price and the period it will be
in effect. A reduction of the Conversion Price does not change or adjust
the Conversion Price otherwise in effect for purposes of Section 5(c)(i),
(ii), or (iii).
(viii) The Conversion Price is also subject to adjustment
pursuant to the terms of the Registration Rights Agreement.
(d) NOTICE OF RECORD DATE. In the event of any taking by the
Corporation of a record date of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any security or right convertible into or
entitling the holder thereof to receive additional Common Shares, or any right
to subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, the
Corporation shall deliver to each holder of Preferred Shares at least 20 days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution,
security or right and the amount and character of such dividend, distribution,
security or right.
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(e) ISSUE TAXES. The Corporation shall pay any and all issue and other
taxes, excluding any income, franchise or similar taxes, that may be payable in
respect of any issue or delivery of Common Shares on conversion of Preferred
Shares pursuant hereto. However, the holder of any Preferred Shares shall pay
any tax that is due because the Common Shares issuable upon conversion thereof
are issued in a name other than such holder's name.
(f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
Common Stock, solely for the purposes of effecting the conversion of the
Preferred Shares, an amount of Common Shares equal to 200% of the number of
shares issuable upon conversion of the Preferred Shares at the then applicable
Conversion Price. The Corporation promptly will take such corporate action as
may, in the opinion of its outside counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including without limitation engaging in best
efforts to obtain the requisite stockholder approval.
(g) FRACTIONAL SHARES. No fractional shares shall be issued upon the
conversion of any Preferred Shares. Instead of any fractional Common Shares
which otherwise would be issuable upon conversion of the Preferred Shares, the
Corporation shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction calculated on the basis of the Fair Market Price. No
cash payment of less than $10.00 shall be required to be given unless
specifically requested by the holder.
(h) REORGANIZATION, MERGER OR GOING PRIVATE. At any time while the
Preferred Shares are outstanding, in case of any reorganization or any
reclassification of the capital stock of the Corporation or any consolidation or
merger of the Corporation with or into any other corporation or corporations or
a sale or transfer of all or substantially all of the assets of the Corporation
to any other person or a "going private" transaction under Rule 13e-3
promulgated pursuant to the Exchange Act, then, as part of such reorganization,
consolidation, merger, or transfer if the holders of shares of Common Stock
receive any publicly traded securities as part or all of the consideration for
such reorganization, consolidation, merger or sale, then it shall be a condition
precedent of any such event or transaction that provision shall be made such
that each Preferred Share shall thereafter be convertible into such new
securities at a conversion price and pricing formula which places the holders of
Preferred Shares in an economically equivalent position as if the Preferred
Shares had been converted immediately prior to such reorganization,
reclassification, consolidation or merger, sale or transfer or going private
transaction. In addition to the foregoing, if the holders of shares of Common
Stock receive any non-publicly traded securities or other property or cash as
part or all of the consideration for such reorganization, consolidation, merger
or sale, then such distribution shall be treated to the extent thereof as a
distribution under Section 5(c) above and such Section shall also apply to such
distribution.
(i) LIMITATIONS ON HOLDER'S RIGHT TO CONVERT.
(i) Notwithstanding anything to the contrary contained herein,
the number of shares of Common Stock that may be acquired by the holder
upon conversion pursuant to the terms hereof shall not exceed a number
that, when added to the total number of shares of Common Stock deemed
beneficially owned by such holder (other than by virtue
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of the ownership of securities or rights to acquire securities that have
limitations on the holder's right to convert, exercise or purchase
similar to the limitation set forth herein), together with all shares of
Common Stock deemed beneficially owned by the holder's "affiliates" (as
defined in Rule 144 of the Act) ("AGGREGATION PARTIES") that would be
aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934 as amended, exists, would
exceed 9.99% of the total issued and outstanding shares of the Common
Stock (the "RESTRICTED OWNERSHIP PERCENTAGE"); PROVIDED that (w) each
holder shall have the right at any time and from time to time to reduce
its Restricted Ownership Percentage immediately upon notice to the
Corporation and (x) each holder shall have the right (subject to waiver)
at any time and from time to time, to increase its Restricted Ownership
Percentage immediately in the event of the announcement as pending or
planned, of a transaction or event referred to in Section 5(m) below.
(ii) Each time (a "COVENANT TIME") the holder or an Aggregation
Party makes a Triggering Acquisition (as defined below) of shares of
Common Stock (the "TRIGGERING SHARES"), the holder will be deemed to
covenant that it will not, during the balance of the day on which such
Triggering Acquisition occurs, and during the 61-day period beginning
immediately after that day, acquire additional shares of Common Stock
pursuant to rights-to-acquire existing at that Covenant Time, if the
aggregate amount of such additional shares so acquired (without reducing
that amount by any dispositions) would exceed (x) 9.99% of the number of
shares of Common Stock outstanding at that Covenant Time (including the
Triggering Shares) minus (y) the number of shares of Common Stock
actually owned by the holder at that Covenant Time (regardless of how or
when acquired, and including the Triggering Shares). A "TRIGGERING
ACQUISITION" means the giving of a Conversion Notice or any other
acquisition of Common Stock by the holder or an Aggregation Party;
PROVIDED, however, that with respect to the giving of such Conversion
Notice, if the associated issuance of shares of Common Stock does not
occur, such event shall cease to be a Triggering Acquisition and the
related covenant under this paragraph shall terminate. At each Covenant
Time, the holder shall be deemed to waive any right it would otherwise
have to acquire shares of Common Stock to the extent that such
acquisition would violate any covenant given by the holder under this
paragraph. Notwithstanding anything to the contrary in the Transaction
Documents, in the event of a conflict between any covenant given under
this paragraph and any obligation of the holder to convert Preferred
Shares pursuant to the Transaction Documents, the former shall supersede
the latter, and the latter shall be reduced accordingly. For the
avoidance of doubt:
(A) The covenant to be given pursuant to this paragraph
will be given at every Covenant Time and shall be
calculated based on the circumstances then in effect.
The making of a covenant at one Covenant Time shall not
terminate or modify any prior covenants.
(B) The holder may therefore from time to time be subject
to multiple such covenants, each one having been made
at a different Covenant Time, and some possibly being
more
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restrictive than others. The holder must comply with
all such covenants then in effect.
(iii) OVERALL LIMIT ON COMMON STOCK ISSUABLE.
Notwithstanding anything contained herein to the contrary, the number of
shares of Common Stock issuable by the Company and acquirable by the
holders hereunder shall not exceed 3,901,313 shares of Common Stock,
subject to appropriate adjustment for stock splits, stock dividends, or
other similar recapitalizations affecting the Common Stock (the "MAXIMUM
COMMON STOCK ISSUANCE"), unless the issuance of shares hereunder in
excess of the Maximum Common Stock Issuance shall first be approved by
the Company's shareholders in accordance with applicable law and the
By-laws and Articles of Incorporation of the Company. The Company agrees
that if at any point in time (the "Trigger Date") the number of Common
Shares issued pursuant to conversion of the Preferred Shares and exercise
of the Warrants and the number of Common Shares that would then be
issuable by the Company in the event of conversion of all the Preferred
Shares and exercise of all the Warrants then outstanding, would exceed
the Maximum Common Stock Issuance but for this Section 5(i)(iii), then
the Company shall promptly call a shareholders meeting to obtain
shareholder approval for the issuance of Common Shares hereunder in
excess of the Maximum Common Stock Issuance. If such shareholder approval
is not obtained within 60 days of the Trigger Date, then each holder of
Preferred Shares shall have the right to sell to the Company such number
of Preferred Shares and Warrants which cannot be converted or exercised
due to such Maximum Common Stock Issuance limitation at a redemption
price equal to the "Mandatory Repurchase Price" (as defined in the
Registration Rights Agreement).
(j) CERTIFICATE FOR CONVERSION PRICE ADJUSTMENT. The Corporation shall
promptly furnish or cause to be furnished to each holder a certificate prepared
by the Corporation setting forth any adjustments or readjustments of the
Conversion Price pursuant to this Section 5.
(k) SPECIFIC ENFORCEMENT. The Corporation agrees that irreparable
damage would occur in the event that any of the provisions of this Certificate
of Designations were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the holders of Preferred
Shares shall be entitled to specific performance, injunctive relief or other
equitable remedies to prevent or cure breaches of the provisions of this
Certificate of Designations and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which any of them may be
entitled under agreement, at law or in equity.
(l) MANDATORY REPURCHASE. Each holder shall have the unilateral option
and right to compel the Corporation to repurchase any or all of such holder's
Preferred Shares within 3 days of a written notice requiring such repurchase, at
a price per Preferred Share equal to 120% of the Liquidation Preference if any
of the following events involving the Corporation shall have occurred:
(i) A Change in Control Transaction (as defined below);
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(ii)A "going private" transaction under Rule 13e-3 promulgated
pursuant to the Exchange Act; or
(iii) A tender offer by the Corporation under Rule 13e-4
promulgated pursuant to the Exchange Act.
A "Change in Control Transaction" will be deemed to exist if (i)
there occurs any consolidation or merger of the Corporation with or into any
other corporation or other entity or person (whether or not the Corporation is
the surviving corporation), or any other corporate reorganization or transaction
or series of related transactions in which in excess of 50% of the Corporation's
voting power is transferred through a merger, consolidation, tender offer or
similar transaction, (ii) any person (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), together with
its affiliates and associates (as such terms are defined in Rule 405 under the
Securities Act of 1933, as amended (the "Act")), beneficially owns or is deemed
to beneficially own (as described in Rule 13d-3 under the Exchange Act without
regard to the 60-day exercise period) in excess of 50% of the Corporation's
voting power, (iii) there is a replacement of more than one-half of the members
of the Corporation's Board of Directors which is not approved by those
individuals who are members of the Corporation's Board of Directors on the date
thereof, in one or a series of related transactions or (iv) a sale or transfer
of all or substantially all of the assets of the Corporation, determined on a
consolidated basis.
Notwithstanding the foregoing, in the event that the
consideration received by holders of the Corporation's Common Stock in a Change
of Control Transaction consists entirely of common equity securities which: (i)
are registered and freely tradeable and (2) are valued on a per share of Common
Stock basis at less than the then applicable Conversion Price, then the price
per Preferred Share at which the holder may compel the Corporation to repurchase
its Preferred Shares shall be the Liquidation Preference.
(m) MANDATORY CONVERSION.
(x) Subject to subsection (m)(y) below, the Preferred Shares
shall be automatically converted into Common Shares on the two year
anniversary of the Closing Date, in the case of Preferred Shares issued
in the Initial Tranche and the two year anniversary of the issuance of
THE FIRST SUBSEQUENT TRANCHE, in the case of Preferred Shares issued in
subsequent Tranches (each, a "Mandatory Conversion Date") at a conversion
price equal to the then applicable Conversion Price; provided, however,
that such Mandatory Conversion Date shall be deferred, at the sole option
of a holder of Preferred Shares, for such number of days as is equal to
1.5 times the number of days (A) there is a lack of Effective
Registration (as defined below), but not including the first 120 days
after the Closing; (B) there is not a sufficient amount of Common Stock
available for conversion of all outstanding Preferred Shares and exercise
of the Warrants, (C) for any other reason the Corporation refuses or
announces its refusal to honor conversion of Preferred Shares or exercise
of the Warrants, other than for failure to comply with the notice and
delivery requirements of Section 5(a) above; or (D) for any other reason
there is a suspension, restriction or limitation in the ability of
holders of Preferred Shares or
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<PAGE>
Warrants to sell Common Shares received upon conversion of Preferred
Shares or exercise of the Warrants pursuant to the prospectus included in
the Registration Statement (as defined in the Registration Rights
Agreement).
For purposes of the preceding paragraph, a lack of
Effective Registration shall be deemed to have occurred at any time the
Common Shares issuable upon conversion of the Preferred Shares or
exercise of the Warrants are not capable of being sold on an Approved
Market (as defined in the Purchase Agreement) pursuant to an effective
registration statement and deliverable prospectus.
(y) Notwithstanding the preceding subsection (m)(x), no
holder of Preferred Shares shall be obligated to convert any Preferred
Shares held by such holder on the Mandatory Conversion Date (and there
shall be no automatic conversion) unless and until each of the following
conditions has been satisfied or exists, each of which shall be a
condition precedent to any such forced conversion:
(A) no material default or breach of which the
Corporation has actual knowledge, exists which has not been
cured, and no event shall have occurred which constitutes (or
would constitute with notice or the passage of time or both) a
material default or breach of the Purchase Agreement, the
Registration Rights Agreement, the Warrants, or this Certificate
of Designations, which has not been cured;
(B) none of the events described in clauses (i) through
(iv) of Section 2(b) of the Registration Rights Agreement shall
have occurred and be continuing;
(C) the Registration Statement (as defined in the
Registration Rights Agreement) is effective and holders have
received unlegended certificates representing Common Shares with
respect to all conversions for which Conversion Notices have been
given and with respect to all exercises of Warrants for which
Notices or Exercise have been given; and
(D) the Corporation and its subsidiaries on a
consolidated basis has assets with a net realizable fair market
value exceeding its liabilities and is able to pay all its debts
as they become due in the ordinary course of business, and the
Corporation is not subject to any liquidation, dissolution or
winding up of its affairs, or any bankruptcy, insolvency or
similar proceeding.
(z) Notwithstanding Section 5(m)(x) above, no holder's Preferred
Shares shall be subject to mandatory conversion to the extent such
mandatory conversion would result in the holder of Preferred Shares
exceeding any of the limitations contained in Section 5(i) above. In such
event, the Preferred Shares of such holder shall be converted
12
<PAGE>
in such amount until such limitation is reached, and the remaining
Preferred Shares shall be purchased by the Corporation at the
Mandatory Redemption Price (as defined in the Registration Rights
Agreement).
Such forced conversion shall be subject to and governed by all the
provisions relating to voluntary conversion of the Preferred Shares contained
herein.
6. VOTING RIGHTS. In addition to all other requirements imposed by
Delaware law, and all other voting rights granted under the Corporation's
Certificate of Incorporation, the affirmative vote of a majority in interest of
the Corporation's outstanding Preferred Shares shall be necessary for (i) any
amendment, modification or repeal of this Certificate of Designations (whether
by merger, consolidation or otherwise) or for any merger, reclassification,
consolidation or reorganization, or (ii) any amendment to the Certificate of
Incorporation or by-laws of the Corporation that may amend or change or
adversely affect any of the rights, preferences, or privileges of the Preferred
Shares, provided, however, that holders of Preferred Shares (other than the
Investors under the Purchase Agreement and their affiliates) who are affiliates
of the Corporation (and the Corporation itself) shall not participate in such
vote and the Preferred Shares of such holders shall be disregarded and deemed
not to be outstanding for purposes of such vote.
7. NOTICES. The Corporation shall distribute to the holders of Preferred
Shares copies of all notices, materials, annual and quarterly reports, proxy
statements, information statements and any other documents distributed generally
to the holders of shares of Common Stock of the Corporation, at such times and
by such method as such documents are distributed to such holders of such Common
Stock.
8. REPLACEMENT CERTIFICATES. The certificate(s) representing the
Preferred Shares held by any holder of Preferred Shares may be exchanged by such
holder at any time and from time to time for certificates with different
denominations representing an equal aggregate number of Preferred Shares, as
reasonably requested by such holder, upon surrendering the same. No service
charge will be made for such registration or transfer or exchange. Upon receipt
by the Corporation of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any stock certificate representing the Preferred
Shares and, in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it, or upon surrender and cancellation of such stock certificate
if mutilated, the Corporation will make and deliver a new stock certificate of
like tenor and dated as of such cancellation at no charge to the holder.
9. ATTORNEYS' FEES. In connection with enforcement by a holder of
Preferred Shares of any obligation of the Corporation hereunder, the prevailing
party shall be entitled to recovery of reasonable attorneys' fees and expenses
incurred.
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<PAGE>
10. NO REISSUANCE. No Preferred Shares acquired by the Corporation by
reason of redemption, purchase, conversion or otherwise shall be reissued.
11. SEVERABILITY OF PROVISIONS. If any right, preference or limitation of
the Preferred Shares set forth in this Certificate of Designations (as this
Certificate of Designations may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule or law or public
policy, all other rights, preferences and limitations set forth in this
Certificate of Designations, which can be given effect without the invalid,
unlawful or unenforceable right, preference or limitation shall nevertheless
remain in full force and effect, and no right, preference or limitation herein
set forth be deemed dependent upon any such other right, preference or
limitation unless so expressed herein.
12. LIMITATIONS. Except as may otherwise be required by law and as are
set forth in the Purchase Agreement and the Registration Rights Agreement, the
Preferred Shares shall not have any powers, preference or relative
participating, optional or other special rights other than those specifically
set forth in this Certificate of Designations (as may be amended from time to
time) or otherwise in the Certificate of Incorporation of the Corporation.
Signed on July _____, 2000
STEMCELLS, INC.
By:
-------------------------------------
Name: Iris Brest
Title: Secretary
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<PAGE>
EXHIBIT A
(To be Executed by Holder
in order to Convert Preferred Shares)
CONVERSION NOTICE
FOR
6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The undersigned, as a holder ("Holder") of shares of 6% Cumulative Convertible
Preferred Stock ("Preferred Shares") of StemCells, Inc. (the "Corporation"),
hereby irrevocably elects to convert _____________ Preferred Shares for shares
("Common Shares") of common stock, par value $0.01 per share (the "Common
Stock"), of the Corporation according to the terms and conditions of the
Certificate of Designations for the Preferred Shares as of the date written
below. The undersigned hereby requests that share certificates for the Common
Shares to be issued to the undersigned pursuant to this Conversion Notice be
issued in the name of, and delivered to, the undersigned or its designee as
indicated below. No fee will be charged by the Corporation to the Holder of
Preferred Shares for any conversion. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed thereto in the Certificate of
Designations.
Conversion Date:
----------------------------
Conversion Information: NAME OF HOLDER:
----------------------------
By:
----------------------------------------
Print Name:
--------------------------------
Print Title:
-------------------------------
Print Address of Holder:
-------------------------------------------
-------------------------------------------
Issue Common Stock to:
---------------------
at:
----------------------------------------
-------------------------------------------
IF COMMON SHARES ARE TO BE ISSUED TO A PERSON OTHER THAN HOLDER,
HOLDER'S SIGNATURE MUST BE GUARANTEED BELOW:
SIGNATURE GUARANTEED BY:
THE COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED IS SET FORTH ON PAGE 2
OF THE CONVERSION NOTICE.
PAGE 1 OF CONVERSION NOTICE
<PAGE>
PAGE 2 TO CONVERSION NOTICE DATED FOR:
----------------- ------------------------
(CONVERSION DATE) (NAME OF HOLDER)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
-----------------------------------------------------
Initial Tranche
--------------
Subsequent Tranche
-----------
<TABLE>
<S> <C>
Number of Preferred Shares converted: shares
---------------------
Number of Preferred Shares converted x Liquidation Preference $
TOTAL DOLLAR AMOUNT CONVERTED $
============
CONVERSION PRICE $
Number of Common Shares = TOTAL DOLLAR AMOUNT CONVERTED =
----------------------------- ------------
Conversion Price
NUMBER OF COMMON SHARES =
</TABLE>
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for Common Shares in the following amount(s):
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If the Holder is receiving certificate(s) for Preferred Shares upon the
conversion, please issue and deliver _____ certificate(s) for Preferred Shares
in the following amounts:
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