DEFM14A
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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒                            Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to § 240.14a-12

Shutterfly, Inc.

(Name of Registrant as Specified in its Charter)

 

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

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  No fee required.
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  (1)  

Title of each class of securities to which transaction applies:

 

     

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  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

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SHUTTERFLY, INC.

2800 Bridge Parkway

Redwood City, California 94065

July 30, 2019

Dear Stockholder:

You are cordially invited to attend a special meeting of stockholders of Shutterfly, Inc. (“Shutterfly” or “we,” “us,” or “our”) to be held on August 28, 2019, at 10:00 a.m., Pacific Time, at 2800 Bridge Parkway, Redwood City, California 94065.

At the special meeting, you will be asked to consider and vote upon a proposal to adopt the Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), dated as of June 10, 2019, among Photo Holdings, LLC (“Newco”), Photo Holdings Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of Newco, and Shutterfly. Upon the terms and subject to the conditions of the Merger Agreement, if the merger is completed, Merger Sub will merge with and into Shutterfly (the “Merger”), and Shutterfly will continue as the surviving corporation and as a wholly owned subsidiary of Newco.

If the Merger Agreement is adopted with the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon and the Merger is completed, each share of our common stock that you own as of the date of the Merger will be converted into the right to receive $51.00 in cash, without interest and less any applicable withholding taxes (unless you have properly demanded your statutory rights of appraisal with respect to the Merger), which represents a premium of approximately 31% over the closing price of our common stock on April 23, 2019, the last trading day before a media report was published speculating that affiliates of certain funds managed by affiliates of Apollo Global Management, LLC were considering a bid for Shutterfly.

Our board of directors (“Board”) carefully considered a number of factors in evaluating the terms of the Merger Agreement. Based on such consideration, our Board unanimously determined that the terms and conditions of the Merger and the Merger Agreement are advisable, fair to and in the best interests of Shutterfly and our stockholders. Accordingly, our Board has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, and unanimously recommends that you vote (1) “FOR” the proposal to adopt the Merger Agreement, (2) “FOR” the approval, on a non-binding advisory basis, of the compensation that may be paid or become payable to our named executive officers that is based on or otherwise relates to the Merger and (3) “FOR” the proposal to approve the adjournment of the special meeting to a later date or dates, if our Board determines that it is necessary or appropriate and is permitted by the Merger Agreement, to solicit additional proxies if (a) there is not a quorum present or represented by proxy or (b) there are insufficient votes to adopt the Merger Agreement, in each case, at the time of the then-scheduled special meeting, or to give holders of our common stock additional time to evaluate new material information or disclosure.

The enclosed proxy statement provides detailed information about the special meeting, the Merger Agreement, the Merger and the other proposals to be voted on at the special meeting. A copy of the Merger Agreement is attached as Annex A to the proxy statement. We encourage you to read the proxy statement carefully in its entirety.

Your vote is very important, regardless of the number of shares you own. The proposal to adopt the Merger Agreement must be approved by the holders of a majority of the shares of our common stock entitled to vote thereon at the special meeting. Only stockholders who owned shares of our common stock at the close of business on July 26, 2019, the record date for the special meeting, will be entitled to vote at the special meeting.

To vote your shares, you may submit a proxy via the Internet or by telephone, as specified in the Internet and telephone voting instructions on your proxy card, return your proxy card using the postage prepaid envelope


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provided, or attend the special meeting and vote in person. If your shares are held in the name of a brokerage firm, bank, trust or other nominee, you must instruct the brokerage firm, bank, trust or other nominee how to vote your shares or obtain a proxy, executed in your favor, from that record holder in order to vote at the special meeting. Even if you plan to attend the special meeting, we urge you to promptly submit a proxy for your shares via the Internet or by telephone or by completing, signing, dating and returning the enclosed proxy card.

If you fail to submit your proxy via Internet or telephone, return your proxy card, attend the special meeting and vote in person, or give voting instructions to your brokerage firm, bank, trust or other nominee, then your shares will not be counted for determining whether a quorum is present at the special meeting and your decision not to respond will have the same effect as if you voted “AGAINST” the adoption of the Merger Agreement.

If you attend the special meeting and wish to vote in person, you may revoke your proxy and vote in person.

Thank you for your continued support of Shutterfly.

Sincerely,

 

LOGO

William J. Lansing

Chairman of the Board

Redwood City, California

July 30, 2019

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved of the Merger, passed upon the merits or fairness of the Merger Agreement or the Merger or determined if the accompanying proxy statement is accurate or complete. Any representation to the contrary is a criminal offense.

The accompanying proxy statement is dated July 30, 2019 and, together with the enclosed form of proxy card, is first being mailed to our stockholders on or about July 31, 2019.


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SHUTTERFLY, INC.

2800 Bridge Parkway

Redwood City, California 94065

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To the Stockholders of Shutterfly, Inc.:

Shutterfly, Inc., a Delaware corporation (“Shutterfly” or “we,” “us,” or “our”), will hold a special meeting of stockholders at 2800 Bridge Parkway, Redwood City, California 94065, at 10:00 a.m., Pacific Time, on August 28, 2019 to consider and vote upon the following proposals:

 

  1.

To adopt the Agreement and Plan of Merger, dated as of June 10, 2019, among Photo Holdings, LLC, a Delaware limited liability company (“Newco”), Photo Holdings Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Newco, and Shutterfly, as such agreement may be amended from time to time (the “Merger Agreement”). Upon the terms and subject to the conditions of the Merger Agreement, if the merger is completed, Merger Sub will merge with and into Shutterfly (the “Merger”), and Shutterfly will continue as the surviving corporation and as a wholly owned subsidiary of Newco;

 

  2.

To approve, on a non-binding advisory basis, the compensation that may be paid or become payable to our named executive officers that is based on or otherwise relates to the Merger (the “compensation proposal”); and

 

  3.

To approve the adjournment of the special meeting to a later date or dates, if our board of directors (“Board”) determines that it is necessary or appropriate and is permitted by the Merger Agreement, to solicit additional proxies if (a) there is not a quorum present or represented by proxy or (b) there are insufficient votes to adopt the Merger Agreement, in each case, at the time of the then-scheduled special meeting, or to give holders of our common stock additional time to evaluate new material information or disclosure (the “adjournment proposal”).

Only record holders of our common stock at the close of business on July 26, 2019 are entitled to receive notice of, and will be entitled to vote at, the special meeting, including any adjournments or postponements of the special meeting. Your vote is important, regardless of the number of shares of our common stock you own.

The votes required to approve each proposal are as follows:

 

  1.

The Merger Agreement must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon.

 

  2.

The compensation proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

 

  3.

The adjournment proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

If a quorum is not present in person or represented by proxy at the special meeting, it is expected that our Board will recommend adjournment of the special meeting to solicit additional proxies if permitted by the Merger Agreement. If there is not a quorum of stockholders at the special meeting and the vote with respect to the adjournment proposal fails, our Board may set a new record date and meeting date for a special meeting to consider the Merger Agreement, compensation proposal and adjournment proposal, in accordance with the Merger Agreement.

If the Merger is completed, our stockholders who (1) submit a written demand for an appraisal of their shares prior to the stockholder vote on the adoption of the Merger Agreement, (2) do not vote in favor of the


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adoption of the Merger Agreement, (3) take certain actions and meet certain conditions under Delaware law and (4) do not thereafter withdraw their demand for appraisal of their shares of our common stock or otherwise lose their appraisal rights, in each case in accordance with Delaware law, will have the right to have such shares appraised by the Delaware Court of Chancery and to receive payment of the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, as determined by the court. For a more detailed discussion of your appraisal rights, see the section captioned “Proposal 1: Adoption of the Merger—Appraisal Rights” beginning on page 69 of this proxy statement and Annex C to this proxy statement.

You are cordially invited to attend the special meeting in person. Whether or not you expect to attend the special meeting, please submit a proxy via the Internet or by telephone, as specified in the Internet and telephone voting instructions on your proxy card or return your proxy card using the postage prepaid envelope provided as promptly as possible in order to ensure your representation at the special meeting. A return envelope (which is postage prepaid if mailed in the United States) is enclosed for your convenience. Even if you have voted by proxy, you may still vote in person if you attend the special meeting. Please note, however, that if your shares are held in the name of your brokerage firm, bank, trust or other nominee and you wish to vote at the special meeting, you must instruct the brokerage firm, bank, trust or other nominee how to vote your shares or obtain a proxy issued in your name from that record holder.

If you sign, date and return your proxy card or submit a proxy via the Internet or by telephone without indicating how you wish to vote, your proxy will be voted “FOR” the proposal to adopt the Merger Agreement, “FOR” the compensation proposal and “FOR” the adjournment proposal. If you do attend the special meeting and wish to vote in person, you may revoke your proxy and vote in person. You may revoke your proxy in the manner described in the enclosed proxy statement at any time before it has been voted at the special meeting.

Our Board unanimously recommends that you vote “FOR” the proposal to adopt the Merger Agreement, “FOR” the compensation proposal and “FOR” the adjournment proposal.

The Merger is described in the accompanying proxy statement, which we urge you to read carefully. A copy of the Merger Agreement is attached as Annex A to the proxy statement. If you have any questions or need assistance in voting your shares of our common stock, please contact our proxy solicitor, MacKenzie Partners, Inc., via telephone toll-free at (800) 322-2885 or via email at proxy@mackenziepartners.com.

By Order of the Board of Directors,

 

LOGO

Ryan O’Hara

President and Chief Executive Officer 

Redwood City, California

July 30, 2019


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YOUR VOTE IS IMPORTANT

Your vote is very important, regardless of the number of shares you own. The proposal to adopt the Merger Agreement must be approved by the holders of a majority of the shares of our common stock entitled to vote thereon at the special meeting. To vote your shares, you can submit a proxy via the Internet or by telephone, as specified in the Internet and telephone voting instructions on the proxy card, return your proxy card using the postage prepaid return envelope provided, or attend the special meeting and vote in person. We urge you to promptly submit a proxy for your shares via the Internet or by telephone or by completing, signing, dating and returning the enclosed proxy card.

If you fail to submit your proxy via Internet or telephone, return your proxy card, attend the special meeting and vote in person, or give voting instructions to your brokerage firm, bank, trust or other nominee, then your shares will not be counted for determining whether a quorum is present at the special meeting and your decision not to respond will have the same effect as if you voted “AGAINST” the adoption of the Merger Agreement.

If your shares are held in the name of a brokerage firm, bank, trust or other nominee, you must instruct the brokerage firm, bank, trust or other nominee how to vote your shares or obtain a proxy, executed in your favor, from that record holder in order to vote at the special meeting.

REFERENCES FOR ADDITIONAL INFORMATION

If you have any questions about this proxy statement, the special meeting, the Merger or need assistance with voting procedures, you should contact:

MacKenzie Partners, Inc.

1407 Broadway, 27th Floor

New York, New York 10018

(212) 929-5500

(800) 322-2885 (Toll-Free)

Email: proxy@mackenziepartners.com


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SHUTTERFLY, INC.

PROXY STATEMENT

TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     1  

General

     1  

The Special Meeting

     3  

FORWARD-LOOKING INFORMATION

     10  

SUMMARY

     11  

Parties Involved in the Merger

     11  

The Special Meeting

     11  

The Merger

     13  

Treatment of Shutterfly Equity Awards

     13  

Financing of the Merger

     14  

Limited Guarantee

     15  

Conditions to the Closing of the Merger

     15  

Regulatory Approvals Required for the Merger

     16  

Recommendation of our Board

     16  

Fairness Opinion of Morgan Stanley & Co. LLC

     16  

Interests of our Directors and Executive Officers in the Merger

     17  

Appraisal Rights

     18  

Litigation Relating to the Merger

     18  

Material U.S. Federal Income Tax Consequences of the Merger

     19  

Alternative Acquisition Proposals

     19  

Termination of the Merger Agreement

     20  

Termination Fees and Expense Reimbursement

     22  

Market Prices and Dividend Data

     22  

Effect on Shutterfly if the Merger is Not Completed

     22  

PARTIES INVOLVED IN THE MERGER

     23  

THE SPECIAL MEETING

     24  

Date, Time and Place

     24  

Purpose of the Special Meeting

     24  

Record Date; Shares Entitled to Vote; Quorum

     24  

Vote Required

     24  

Voting by our Directors and Executive Officers

     25  

Voting of Proxies

     25  

Revocability of Proxies

     26  

Our Board’s Recommendations

     26  

Effect of Abstentions and Broker  Non-Votes

     26  

Solicitation of Proxies

     27  

Stockholder List

     27  

Anticipated Date of Completion of the Merger

     27  

Householding of Special Meeting Materials

     27  

Other Matters

     27  

PROPOSAL 1: ADOPTION OF THE MERGER AGREEMENT

     28  

General

     28  

Background of the Merger

     28  

Recommendation of our Board and Reasons for the Merger

     38  

Fairness Opinion of Morgan Stanley & Co. LLC

     44  

Financial Projections

     53  

 

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     Page  

Interests of our Directors and Executive Officers in the Merger

     57  

Quantification of Potential Payments and Benefits to our Named Executive Officers

     61  

Financing of the Merger

     64  

Limited Guarantee

     68  

Closing and Effective Time

     69  

Appraisal Rights

     69  

Litigation Relating to the Merger

     75  

Accounting Treatment

     75  

Material U.S. Federal Income Tax Consequences of the Merger

     75  

Regulatory Approvals Required for the Merger

     78  

Effect on Shutterfly if the Merger is Not Completed

     79  

Vote Required and Board Recommendation

     80  

THE MERGER AGREEMENT

     81  

Explanatory Note Regarding the Merger Agreement

     81  

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

     81  

Closing and Effective Time

     82  

Marketing Period

     82  

Merger Consideration

     83  

Exchange and Payment Procedures

     84  

Representations and Warranties

     84  

Conduct of Business Pending the Merger

     87  

Alternative Acquisition Proposals

     91  

Our Board’s Recommendation; Company Board Recommendation Change

     92  

Employee Benefits

     94  

Efforts to Close the Merger

     95  

Indemnification and Insurance

     96  

Other Covenants

     96  

Conditions to the Closing of the Merger

     96  

Termination of the Merger Agreement

     98  

Termination Fees and Expense Reimbursement

     100  

Specific Performance

     101  

Fees and Expenses

     102  

Amendment

     102  

Governing Law

     102  

MARKET PRICES AND DIVIDEND DATA

     103  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     104  

PROPOSAL 2: THE COMPENSATION PROPOSAL

     106  

Compensation Paid to Named Executive Officers in Connection with the Merger

     106  

Effect of Advisory Vote

     106  

Vote Required and Board Recommendation

     106  

PROPOSAL 3: ADJOURNMENT OF THE SPECIAL MEETING

     107  

Adjournment of the Special Meeting

     107  

Vote Required and Board Recommendation

     107  

OTHER MATTERS

     108  

FUTURE STOCKHOLDER PROPOSALS

     108  

WHERE YOU CAN FIND MORE INFORMATION

     109  

INCORPORATION BY REFERENCE

     109  

MISCELLANEOUS

     110  

ANNEX A

     A-1  

ANNEX B

     B-1  

ANNEX C

     C-1  

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

Except as otherwise specifically noted in this proxy statement, “Shutterfly,” “we,” “our,” “us” and similar words in this proxy statement refer to Shutterfly, Inc. In addition, throughout this proxy statement, we refer to Photo Holdings Merger Sub, Inc. as “Merger Sub” and to Photo Holdings, LLC as “Newco.” Merger Sub and Newco are affiliates of certain funds managed by affiliates of Apollo Management IX, L.P., which we refer to as Apollo Management. We refer to Apollo Management, acting on behalf of the Apollo Guarantors (as defined below) as “Apollo.”

The following Questions and Answers About the Special Meeting and the Merger (this “Q&A”) is intended to address some commonly asked questions about the special meeting of stockholders and the merger of Merger Sub with and into Shutterfly (the “Merger”). This Q&A may not address all questions that may be important to you as a Shutterfly stockholder. We urge you to read carefully the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents we refer to in this proxy statement.

General

 

Q:

Why am I receiving this proxy statement?

 

A:

You are receiving this proxy statement because you were a Shutterfly stockholder as of July 26, 2019, the record date for the special meeting. To complete the Merger, our stockholders holding a majority of the shares of our common stock outstanding as of July 26, 2019, the record date for the special meeting, must affirmatively vote to adopt the Agreement and Plan of Merger, dated as of June 10, 2019, among Newco, Merger Sub, and Shutterfly, as such agreement may be amended from time to time (the “Merger Agreement”). A copy of the Merger Agreement is attached as Annex A to this proxy statement.

You are being solicited to vote in favor of the proposals (1) to adopt the Merger Agreement, (2) to approve, on a non-binding advisory basis, the compensation that may be paid or become payable to our named executive officers named in our proxy statement filed with the Securities and Exchange Commission (the “SEC”) on April 5, 2019 (the “named executive officers”) that is based on or otherwise relates to the Merger (the “compensation proposal”) and (3) to approve the adjournment of the special meeting to a later date or dates, if our board of directors (“Board”) determines that it is necessary or appropriate and is permitted by the Merger Agreement, to solicit additional proxies if (a) there is not a quorum present or represented by proxy or (b) there are insufficient votes to adopt the Merger Agreement, in each case, at the time of the then-scheduled special meeting, or to give holders of our common stock additional time to evaluate new material information or disclosure (the “adjournment proposal”) to be voted on at the special meeting.

 

Q:

What will happen to my Shutterfly common stock as a result of the Merger?

 

A:

If the Merger is completed, each share of our common stock that you hold at the effective time of the Merger (the “Effective Time”) will be converted into the right to receive $51.00 in cash, without interest and less any withholding taxes required by applicable law (the “Merger Consideration”). This does not apply to shares of our common stock held by any of our stockholders who have properly demanded their appraisal rights under Delaware law. See the section captioned “Proposal 1: Adoption of the Merger Agreement—Appraisal Rights” beginning on page 69 of this proxy statement.

 

Q:

What will happen to Shutterfly generally as a result of the Merger?

 

A:

If the Merger is completed, we will cease to be a stand-alone public company and will become a wholly owned subsidiary of Newco. As a result, you will no longer have any ownership interest in Shutterfly. Upon completion of the Merger, shares of our common stock will no longer be listed on any stock exchange or quotation system, including The Nasdaq Global Select Market (“Nasdaq”). In addition, following the completion of the Merger, the registration of our common stock and our reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will be terminated.

 

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Q:

What are the U.S. federal income tax consequences of the Merger to me?

 

A:

The receipt of cash in exchange for shares of our common stock pursuant to the Merger generally will be a taxable transaction for U.S. federal income tax purposes. Generally, you will recognize gain or loss equal to the difference between the amount of cash you receive and the adjusted tax basis of your shares of our common stock. If you are a U.S. holder, you generally will be subject to U.S. federal income tax on any gain recognized in connection with the Merger. If you are a non-U.S. holder, you generally will not be subject to U.S. federal income tax on any gain recognized in connection with the Merger unless you have certain connections to the United States. The tax consequences of the Merger to you will depend on your particular circumstances, and you should consult your own tax advisors to determine how the Merger will affect you.

For a more detailed summary of the U.S. federal income tax consequences of the Merger, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 75 of this proxy statement.

 

Q:

Am I entitled to appraisal rights in connection with the Merger?

 

A:

Statutory appraisal rights under Delaware law in connection with the Merger will be available to stockholders who (1) submit a written demand for an appraisal of their shares prior to the stockholder vote on the adoption of the Merger Agreement; (2) do not vote in favor of the adoption of the Merger Agreement; (3) take certain actions and meet certain conditions under Section 262 of the Delaware General Corporation Law (the “DGCL”); and (4) do not thereafter withdraw their demand for appraisal of their shares of our common stock or otherwise lose their appraisal rights, in each case in accordance with the DGCL. For a more detailed discussion of your appraisal rights, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Appraisal Rights” and beginning on page 69 of this proxy statement.

A copy of the full text of Section 262 of the DGCL is included as Annex C to this proxy statement. Failure to precisely follow any of the statutory procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights.

 

Q:

When do you expect the Merger to be completed?

 

A:

We are working toward completing the Merger as quickly as possible and expect the Merger to be completed by early fourth quarter 2019. However, the Merger continues to be subject to various closing conditions, including our stockholder approval and, therefore, we cannot assure you that all conditions to the Merger will be satisfied or, if satisfied, the date by which they will be satisfied.

 

Q:

When will I receive the Merger Consideration for my shares of Shutterfly common stock?

 

A:

After the Merger is completed, you will receive written instructions, including a letter of transmittal that explains how to exchange your shares for the Merger Consideration. When you properly return and complete the required documentation described in the written instructions, you will receive from the payment agent a payment of the Merger Consideration for your shares.

 

Q:

How does the per share Merger Consideration compare to the market price of our common stock prior to the public announcement of the Merger Agreement?

 

A:

The per share Merger Consideration represents a premium of approximately 31% over the closing price of our common stock on April 23, 2019, the last trading day before a media report was published speculating that affiliates of certain funds managed by affiliates of Apollo Management (the “Apollo Funds”) were considering a bid for Shutterfly.

 

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The Special Meeting

 

Q:

When and where will the special meeting of stockholders be held?

 

A:

The special meeting of our stockholders will be held at 2800 Bridge Parkway, Redwood City, California 94065, at 10:00 a.m., Pacific Time, on August 28, 2019.

 

Q:

What are the proposals that will be voted on at the special meeting?

 

A:

You will be asked to consider and vote on (1) a proposal to adopt the Merger Agreement, (2) the compensation proposal, and (3) the adjournment proposal.

 

Q:

How does our Board recommend that I vote on the proposals?

 

A:

Our Board unanimously approved the Merger Agreement and determined that the Merger and the other transactions contemplated by the Merger Agreement are advisable, fair to and in the best interests of Shutterfly and our stockholders and unanimously recommends that you vote:

 

   

FOR” the proposal to adopt the Merger Agreement;

 

   

FOR” the compensation proposal; and

 

   

FOR” the adjournment proposal.

 

Q:

Who is entitled to attend and vote at the special meeting?

 

A:

The record date for the special meeting is July 26, 2019. If you own shares of our common stock as of the close of business on the record date, you are entitled to notice of, and to vote at, the special meeting or any adjournment of the special meeting. As of the record date, there were approximately 34,396,897 shares of our common stock issued and outstanding held collectively by approximately 63 stockholders of record.

Stockholders of record as of the record date of the special meeting and their duly appointed proxy holders may attend the meeting. Stockholders of record should bring the enclosed proxy card as evidence of ownership regardless of whether they intend to vote using such proxy card. Beneficial owners of shares held in “street name” who have not obtained a proxy but who wish to attend the meeting should bring a copy of an account statement reflecting their ownership of our common stock as of the record date and will only be able to vote at the special meeting if they have a “legal proxy,” executed in their favor, from their broker, bank or other nominee of the stockholder of record of their shares, giving them the right to vote the shares at the special meeting. All stockholders and proxyholders should bring valid photo identification (such as a driver’s license or passport).

No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted in the special meeting.

 

Q:

Do I need to attend the special meeting?

 

A:

No. While our stockholders of record may exercise their right to vote their shares in person at the special meeting, it is not necessary for you to attend the special meeting in order to vote your shares of our common stock.

 

Q:

What constitutes a quorum?

 

A:

The presence at the special meeting, in person or by proxy, of the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting shall constitute a quorum. If shares are present at the special meeting in person or by proxy, but are not voted, those shares will count toward determining whether or not a quorum is present for the conduct of business at the special meeting, as will all shares voted “FOR,” “AGAINST” or “ABSTAIN” on a proposal.

 

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Q:

How many votes are required to adopt the Merger Agreement?

 

A:

Under the DGCL, adoption of the Merger Agreement requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon as of the record date on the Merger Agreement.

If you abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement.

 

Q:

How many votes are required to approve the compensation proposal?

 

A:

In accordance with the rules of the SEC, stockholders have the opportunity to cast a non-binding, advisory vote to approve compensation that may be paid or become payable to our named executive officers based upon or otherwise relating to the Merger, as described in the table provided in the section captioned “Proposal 1: Adoption of the Merger Agreement—Quantification of Potential Payments and Benefits to our Named Executive Officers” and the accompanying footnotes and related narrative discussion beginning on page 61 of this proxy statement. The vote to approve the compensation proposal is advisory and therefore will not be binding on us or Newco, nor will it overrule any prior decision or require our Board (or any committee of our Board) to take any action, regardless of whether the Merger is completed. The compensation that may be paid in connection with the Merger is contractual with respect to our named executive officers. Accordingly, if our stockholders adopt the Merger Agreement and the Merger is completed, the compensation based on or otherwise relating to the Merger will be paid to our named executive officers in accordance with the terms of their compensation agreements and arrangements, regardless of whether our stockholders approve the compensation proposal.

Advisory approval of the compensation proposal requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

If you abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have no effect on the vote for the compensation proposal, provided that a quorum is present in person or represented by proxy at the special meeting.

 

Q:

How many votes are required to adopt the adjournment proposal?

 

A:

Approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

If you abstain from voting, fail to cast your vote in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have no effect on the vote for the adjournment proposal, even if a quorum is not present in person or represented by proxy at the special meeting.

 

Q:

Why is my vote important? How are votes counted? What happens if I abstain?

 

A:

If you do not submit a proxy or voting instructions or vote in person at the special meeting, it will be more difficult for us to obtain the necessary quorum to hold the special meeting.

Votes will be counted by the inspector of election appointed for the special meeting, who will separately count “FOR” and “AGAINST” votes and abstentions.

If you abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement but will have no effect on the compensation proposal (provided that a quorum is present) or the adjournment proposal (even if a quorum is not present).

 

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Q:

Do any our directors or executive officers have interests in the Merger that may differ from those of our stockholders?

 

A:

In considering the recommendation of our Board with respect to the Merger Agreement, you should be aware that our directors and executive officers have interests in the Merger that may be different from, or in addition to, those of our stockholders generally. These interests may create potential conflicts of interest. Our Board was aware that these interests existed and considered them, among other matters, when it approved the Merger Agreement and made its recommendation that our stockholders adopt the Merger Agreement. You should read the section of this proxy statement captioned “Proposal 1: Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger” beginning on page 57 of this proxy statement for more information.

 

Q:

What do I need to do now?

 

A:

After carefully reading and considering the information contained in this proxy statement, including the annexes and the other documents referred to in this proxy statement, please vote your shares in one of the manners described below. You have one vote for each share of our common stock you own as of the record date.

 

Q:

How do I vote if I am a stockholder of record?

 

A:

You may vote:

 

   

by following the Internet voting instructions printed on your proxy card;

 

   

by following the telephone voting instructions printed on your proxy card;

 

   

by completing, signing and dating each proxy card you receive and returning it in the enclosed postage-paid envelope; or

 

   

by appearing and casting your vote in person at the special meeting.

If you are voting via the Internet or by telephone, your voting instructions must be received by the date and time indicated on the applicable proxy card(s).

Voting via the Internet, by telephone or by mailing in your proxy card will not prevent you from attending the special meeting in person. You are encouraged to submit a proxy via the Internet, by telephone or by mail even if you plan to attend the special meeting in person, to ensure that your shares of our common stock are present in person or represented at the special meeting.

If you return a properly signed and dated proxy card but do not mark the box showing how you wish to vote, your shares will be voted “FOR” the proposal to adopt the Merger Agreement, “FOR” the compensation proposal and “FOR” the adjournment proposal.

 

Q:

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

A:

If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered, with respect to those shares, to be the “stockholder of record.” If you are a stockholder of record, this proxy statement and your proxy card have been sent directly to you by or on behalf of Shutterfly.

If your shares are held through a brokerage firm, bank, broker or other nominee, you are considered the “beneficial owner” of shares of our common stock held in “street name.” If you are a beneficial owner of shares of our common stock held in “street name,” this proxy statement has been forwarded to you by your bank, broker or other nominee who is considered, with respect to those shares, to be the stockholder of record. As the beneficial owner, you have the right to direct your brokerage firm, bank, broker or other

 

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nominee how to vote your shares by following their instructions for voting. You are also invited to attend the special meeting. However, because you are not the stockholder of record, you may not vote your shares in person by ballot at the special meeting unless you obtain a “legal proxy” from your brokerage firm, bank, broker or other nominee giving you the right to vote your shares at the special meeting.

 

Q:

How do I vote if my shares are held by my brokerage firm, bank, trust or other nominee?

 

A:

If your shares are held in a brokerage account or by another nominee, such as a bank or trust, then the brokerage firm, bank, trust or other nominee is considered to be the stockholder of record with respect to those shares. However, you still are considered to be the beneficial owner of those shares, with your shares being held in “street name.” “Street name” holders generally cannot vote their shares directly and must instead instruct the brokerage firm, bank, trust or other nominee how to vote their shares. Your brokerage firm, bank, trust or other nominee will only be permitted to vote your shares for you at the special meeting if you instruct it how to vote. Therefore, it is important that you promptly follow the directions provided by your brokerage firm, bank, trust or other nominee regarding how to instruct them to vote your shares. If you wish to vote in person at the special meeting, you must bring a proxy from your brokerage firm, bank, trust or other nominee authorizing you to vote at the special meeting and present it to the inspector of elections with your ballot when you vote.

In addition, because any shares you may hold in “street name” will be deemed to be held by a different stockholder than any shares you hold of record, shares held in “street name” will not be combined for voting purposes with shares you hold of record. To be sure your shares are voted, you should instruct your brokerage firm, bank, trust or other nominee to vote your shares that you hold in “street name.” Shares held by a corporation or business entity must be voted by an authorized officer of the entity.

 

Q:

What is a broker non-vote?

 

A:

If you are a beneficial owner of shares held in “street name” and do not provide your broker, bank or nominee with specific voting instructions, the broker, bank or nominee may generally vote on “routine” matters, but cannot vote on “non-routine” matters. The proposal to adopt the Merger Agreement, the compensation proposal and the adjournment proposal are considered “non-routine” matters. If the broker, bank or nominee does not receive instructions from you on how to vote your shares on a non-routine matter, it will inform the inspector of election that it does not have authority to vote on this matter with respect to your shares. This is referred to as a “broker non-vote.”

You should instruct your broker, bank or other nominee how to vote your shares. Under the rules applicable to broker-dealers, your broker, bank or other nominee does not have discretionary authority to vote your shares on any of the proposals scheduled to be voted on at the special meeting. A broker non-vote will have the same effect as a vote “AGAINST” the adoption of the Merger Agreement, but will not have no effect on the vote for the compensation proposal (provided that a quorum is present) and the adjournment proposal (even if a quorum is not present).

 

Q:

What is a proxy?

 

A:

A proxy is your legal designation of another person, referred to as a “proxy,” to vote your shares of our common stock. The written document describing the matters to be considered and voted on at the special meeting is called a “proxy statement.” The document used to designate a proxy to vote your shares of our common stock is called a “proxy card.”

 

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Q:

May I change my vote after I have delivered my proxy?

 

A:

Yes. If you are the stockholder of record of our common stock, you have the right to change or revoke your proxy at any time before the vote being taken at the special meeting:

 

   

by delivering to our Corporate Secretary a signed written notice of revocation bearing a date later than the date of the proxy, stating that the proxy is revoked;

 

   

by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy, so you must vote in person at the meeting to revoke your proxy);

 

   

by signing and delivering a new proxy, relating to the same shares of our common stock and bearing a later date; or

 

   

by submitting another proxy by telephone or via the Internet after the date of your prior proxy and by the date and time indicated on the applicable proxy card(s).

If you are a “street name” holder of our common stock, you should contact your brokerage firm, bank, trust or other nominee to obtain instructions as to how to change or revoke your proxy.

 

Q:

What happens if I return my proxy card but I do not indicate how to vote?

 

A:

If you properly execute and return your proxy card but do not include instructions on how to vote, your shares of our common stock will be voted “FOR” the proposal to adopt the Merger Agreement, “FOR” the approval of the compensation proposal and “FOR” the approval of the adjournment proposal. We do not currently intend to present any other proposals for consideration at the special meeting.

 

Q:

What is the deadline for voting my shares?

 

A:

If you are a stockholder of record, your proxy must be received via the Internet or by telephone by 11:59 p.m., Eastern Time, on August 27, 2019, in order for your shares to be voted at the special meeting. However, if you are a stockholder of record, you may instead mark, sign, date and return the enclosed proxy card, which must be received before the polls close at the special meeting, in order for your shares to be voted at the special meeting. If you are a beneficial owner, please read the voting instructions provided by your bank, broker, trust or other nominee for information on the deadline for voting your shares.

 

Q:

Should I send in my stock certificates now?

 

A:

NO. PLEASE DO NOT SEND IN YOUR CERTIFICATES NOW. After the Merger is completed, you will be sent a letter of transmittal with detailed written instructions for exchanging your shares of our common stock for the Merger Consideration. If your shares are held in “street name” by your brokerage firm, bank, trust or other nominee, you will receive instructions from your brokerage firm, bank, trust or other nominee as to how to effect the surrender of your “street name” shares in exchange for the Merger Consideration.

 

Q:

What happens if I sell my shares of Shutterfly common stock after the record date but before the special meeting?

 

A:

The record date for stockholders entitled to vote at the special meeting is earlier than the date of the special meeting and the Effective Time. If you transfer your shares of our common stock after the record date but before the special meeting, you will, unless special arrangements are made, retain your right to vote at the special meeting but will transfer the right to receive the Merger Consideration to the person to whom you transfer your shares.

In addition, if you sell your shares prior to the special meeting or prior to the Effective Time, you will not be eligible to exercise your appraisal rights in respect of the Merger. For a more detailed discussion of your

 

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appraisal rights and the requirements for properly demanding your appraisal rights, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Appraisal Rights” beginning on page 69 of this proxy statement and Annex C to this proxy statement.

 

Q:

What happens if the proposal to adopt the Merger Agreement is not approved by our stockholders or if the Merger is not completed for any other reason?

 

A:

If the proposal to adopt the Merger Agreement is not approved by our stockholders or if the Merger is not completed for any other reason, our stockholders will not receive any payment for their shares in connection with the Merger. Instead, we will remain a stand-alone public company and our common stock will continue to be listed and traded on Nasdaq. Under specified circumstances, we may be required to pay to Newco a termination fee and to reimburse Newco for certain transaction expenses, as described below under the section of this proxy statement captioned “The Merger Agreement—Termination Fees and Expense Reimbursement” beginning on page 100 of this proxy statement. Upon termination of the Merger Agreement under certain other specified circumstances, Newco may be required to pay us a termination fee, as described below under the section of this proxy statement captioned “The Merger Agreement—Termination Fees and Expense Reimbursement” beginning on page 100 of this proxy statement.

 

Q:

How do our directors and executive officers intend to vote their shares of Shutterfly common stock in respect of the proposal to adopt the Merger Agreement?

 

A:

At the close of business on the record date for the special meeting, our directors and executive officers and their respective affiliates beneficially owned and were entitled to vote 262,390 shares of our common stock at the special meeting, or approximately 0.8% of the shares of our common stock outstanding on such date. Although they are not obligated to do so, our directors and executive officers have informed us that they intend to vote all of their shares of our common stock in favor of the adoption of the Merger Agreement.

 

Q:

What should I do if I receive more than one set of voting materials?

 

A:

You may receive more than one set of voting materials, including multiple copies of this proxy statement and multiple proxy cards or voting instruction cards, if your shares are registered differently or are held in more than one account. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction form for each brokerage account in which you hold shares. If you are a stockholder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please sign, date and return (or grant your proxy electronically over the Internet or by telephone for) each proxy card and voting instruction form that you receive to ensure that all of your shares are voted.

 

Q:

What is householding and how does it affect me?

 

A:

The SEC’s proxy rules permit companies and intermediaries, such as brokers and banks, to satisfy delivery requirements for proxy statements with respect to two or more stockholders sharing an address by delivering a single proxy statement to those stockholders, unless contrary instructions have been received. This procedure reduces the amount of duplicate information that stockholders receive and lowers printing and mailing costs for companies. Certain brokerage firms may have instituted householding for beneficial owners of our common stock held through brokerage firms. If your family has multiple accounts holding common stock, you may have already received a householding notification from your broker. You may decide at any time to revoke your decision to household, and thereby receive multiple copies of proxy materials. If you wish to opt out of this procedure and receive a separate set of proxy materials in the future, or if you are receiving multiple copies and would like to receive only one, you should contact your broker, trustee or other nominee or our Investor Relations Department at the address and telephone number below.

 

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  A separate copy of these proxy materials will be promptly delivered upon request by contacting our Investor Relations Department by (1) mail at Shutterfly, Inc., Attention: Investor Relations, 2800 Bridge Parkway, Redwood City, CA 94065, (2) telephone at 650-730-4040, or (3) e-mail at stabak@shutterfly.com.

 

Q:

Where can I find the voting results of the special meeting?

 

A:

If available, we may announce preliminary voting results at the conclusion of the special meeting. We intend to publish final voting results in a Current Report on Form 8-K to be filed with the SEC following the special meeting. All reports that we file with the SEC are publicly available when filed. For more information, see the section captioned “Where You Can Find More Information,” beginning on page 109 of this proxy statement.

 

Q:

Who can answer further questions?

 

A:

For additional questions about the Merger, assistance in submitting proxies or voting shares of our common stock, or to request additional copies of the proxy statement or the enclosed proxy card, please contact our proxy solicitor at:

MacKenzie Partners, Inc.

1407 Broadway, 27th Floor

New York, New York 10018

(212) 929-5500

(800) 322-2885 (Toll-Free)

Email: proxy@mackenziepartners.com

If your brokerage firm, bank, trust or other nominee holds your shares in “street name,” you should also call your brokerage firm, bank, trust or other nominee for additional information.

 

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FORWARD-LOOKING INFORMATION

This proxy statement contains “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, that are based on our current expectations, assumptions, beliefs, estimates and projections about the proposed Merger, Shutterfly and our industry. The forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “project,” “should,” “could” and similar expressions. Factors that may affect those forward-looking statements include, among other things:

 

   

the parties’ inability to consummate the Merger due to failure to satisfy conditions to the completion of the transaction, including the receipt of stockholder approval or the regulatory approvals required for the transaction, which may not be obtained on the terms expected, on the anticipated schedule or at all;

 

   

the risk that the Merger Agreement may be terminated in circumstances that require us to pay Newco a termination fee of up to $51.2 million in connection therewith;

 

   

the costs, fees, expenses and charges we incur related to the Merger;

 

   

risks arising from the potential diversion of management’s attention from our ongoing business operations while working to implement the Merger;

 

   

the outcome of lawsuits that may be brought by certain purported stockholders seeking to rescind the Merger Agreement or enjoin the consummation of the Merger;

 

   

the effect of the announcement or pendency of the Merger on our ability to effectively recruit and retain our employees, maintain business relationships and operating results and business generally;

 

   

adverse effects on the market price of our common stock and on our operating results because of a failure to complete the Merger;

 

   

the risk that our financial results differ from those set forth in the projections described in this proxy statement; and

 

   

other risks detailed in our filings with the SEC, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which discuss these and other important risk factors concerning our operations.

We caution you that reliance on any forward-looking statement involves risks and uncertainties and that, although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to revise any of these forward-looking statements to reflect future events or circumstances.

 

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SUMMARY

This summary highlights selected information from this proxy statement related to the Merger and may not contain all of the information that is important to you. To understand the Merger more fully and for a more complete description of the legal terms of the Merger, you should read carefully this entire proxy statement, the annexes to this proxy statement and the documents we refer to in this proxy statement. See the section captioned “Where You Can Find More Information” beginning on page 109 of this proxy statement. The Merger Agreement is attached as Annex A to this proxy statement. We encourage you to read the Merger Agreement, which is the legal document governing the Merger. Each item in this summary references another section of this proxy statement with more detailed disclosure about that item. Capitalized terms used in this section but not defined in this proxy statement have the meaning ascribed to them in the Merger Agreement.

Parties Involved in the Merger (see page 23)

Shutterfly

We are a leading retailer and manufacturing platform for personalized products and communications and were incorporated in the state of Delaware in 1999. We have three segments: Shutterfly Consumer, Lifetouch, and Shutterfly Business Solutions (“SBS”). Shutterfly Consumer and Lifetouch help consumers capture, preserve, and share life’s important moments through professional and personal photography, and personalized products. The Shutterfly brand brings photos to life in photo books, gifts, home décor, and cards and stationery. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day,” and also serves families through portrait studios and other partnerships. SBS delivers digital printing services that enable efficient and effective customer engagement through personalized communications.

Newco

Newco is an affiliate of the Apollo Funds. The Apollo Funds are managed by affiliates of Apollo Global Management, LLC (together with its subsidiaries, “AGM”). AGM is a leading global alternative investment manager with offices in New York, Los Angeles, San Diego, Houston, Bethesda, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong, Shanghai and Tokyo. AGM had assets under management of approximately $303 billion as of March 31, 2019 in private equity, credit and real assets funds invested across a core group of nine industries where AGM has considerable knowledge and resources. AGM’s units are listed on the NYSE under the symbol “APO.” Newco was formed on June 7, 2019, solely for the purpose of engaging in the transactions contemplated by the Merger Agreement. Newco has not engaged in any business activities other than in connection with the transactions contemplated by the Merger Agreement.

Merger Sub

Merger Sub, a Delaware corporation and a wholly owned subsidiary of Newco, was formed on June 7, 2019 solely for the purpose of engaging in the transactions contemplated by the Merger Agreement. Merger Sub has not engaged in any business activities other than in connection with the transactions contemplated by the Merger Agreement. Upon completion of the Merger, Merger Sub will merge with and into Shutterfly, and Merger Sub will cease to exist.

The Special Meeting (see page 24)

Date, Time and Place

A special meeting of our stockholders will be held on August 28, 2019, at 10:00 a.m., Pacific Time, at 2800 Bridge Parkway, Redwood City, California 94065.



 

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Record Date; Shares Entitled to Vote

You are entitled to vote at the special meeting if you owned shares of our common stock at the close of business on July 26, 2019, the record date of the special meeting. You will have one vote at the special meeting for each share of our common stock that you owned at the close of business on the record date.

Purpose

At the special meeting, we will ask stockholders to vote on proposals to (1) adopt the Merger Agreement, (2) approve the compensation proposal, and (3) approve the adjournment proposal.

Quorum

As of the record date, there were 34,396,897 shares of our common stock outstanding and entitled to vote at the special meeting. The holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, will constitute a quorum at the special meeting.

Required Vote

The votes required to approve each proposal are as follows:

 

  1.

The Merger Agreement must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon.

 

  2.

The compensation proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

 

  3.

The adjournment proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

Stock Ownership of Our Directors and Executive Officers

As of the record date of the special meeting, our directors and executive officers and their respective affiliates beneficially owned and were entitled to vote, in the aggregate, 262,390 shares of our common stock, representing approximately 0.8% of the shares of our common stock outstanding on the record date. Although they are not obligated to do so, our directors and executive officers have informed us of their intent to vote all of their shares of our common stock (1) “FOR” the proposal to adopt the Merger Agreement, (2) “FOR” the compensation proposal, and (3) “FOR” the adjournment proposal.

Voting and Proxies

Any stockholder of record entitled to vote may submit a proxy via the Internet or by telephone, as specified in the Internet and telephone voting instructions on your proxy card, return your proxy card using the postage prepaid envelope provided, or may vote in person by appearing at the special meeting. If you are a beneficial owner and hold your shares of our common stock in “street name” through a bank, broker or other nominee, you should instruct your bank, broker or other nominee on how you wish to vote your shares of our common stock using the instructions provided by your bank, broker or other nominee. Under applicable stock exchange rules, banks, brokers or other nominees have the discretion to vote on routine matters. The proposals to be considered at the special meeting are non-routine matters, and banks, brokers and other nominees cannot vote on these proposals without your instructions. Therefore, it is important that you cast your vote or instruct your bank, broker or nominee on how you wish to vote your shares.



 

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If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the special meeting by (1) signing another proxy card with a later date and returning it prior to the special meeting; (2) submitting a new proxy electronically over the Internet or by telephone after the date of the earlier submitted proxy; (3) delivering a written notice of revocation to our Corporate Secretary; or (4) attending the special meeting and voting in person by ballot.

If you hold your shares of our common stock in “street name,” you should contact your bank, broker or other nominee for instructions regarding how to change your vote. You may also vote in person at the special meeting if you obtain a “legal proxy” from your bank, broker or other nominee.

The Merger (see page 28)

Upon the terms and subject to the conditions of the Merger Agreement, if the Merger is completed, Merger Sub will merge with and into Shutterfly, and Shutterfly will continue as the surviving corporation and as a wholly owned subsidiary of Newco (the “Surviving Corporation”). As a result of the Merger, we will cease to be a publicly traded company, all outstanding shares of our stock will be cancelled and converted into the right to receive the Merger Consideration (except for any shares owned by stockholders who are entitled to and who properly exercise appraisal rights under the DGCL), and you will no longer own any shares of the capital stock of the Surviving Corporation.

After the Merger is completed, you will have the right to receive the Merger Consideration, but you will no longer have any rights as a stockholder (except that stockholders who properly exercise their appraisal rights may have the right to receive a payment for the “fair value” of their shares as determined pursuant to an appraisal proceeding as contemplated by Delaware law, as described below under the section of this proxy statement captioned “Proposal 1: Adoption of the Merger Agreement—Appraisal Rights” beginning on page 69 of this proxy statement).

Treatment of Shutterfly Equity Awards (see page 57)

As a result of the Merger, the treatment of our options to purchase shares of our common stock (each, a “Company Option”), restricted stock units covering shares of our common stock (each, a “Company RSU”), performance-based restricted stock units, which are earned and become eligible to vest based on the achievement of certain pre-determined performance criteria during a designated performance period (each, a “Company PSU”) and market-based restricted stock units, which are earned and become eligible to vest based on the achievement of a pre-determined ratio of our total stockholder return relative to that of a specified market index over a designated performance period (each, a “Company MSU”) that are outstanding immediately prior to the Effective Time will be as follows:

Company Options

To the extent not exercised or expired, each Company Option outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive an amount in cash equal to the product of (1) the aggregate number of shares of our common stock subject to such Company Option, multiplied by (2) the excess, if any, of $51.00 over the applicable per share exercise price of such Company Option, subject to the payment conditions described below, without interest and less any required withholding of taxes. Each outstanding Company Option, whether vested or unvested, with an exercise price per share equal to or greater than $51.00, will be cancelled pursuant to the terms and conditions of the Merger Agreement without payment of any consideration.



 

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Company RSUs, Company PSUs and Company MSUs

Each Company RSU that is unexpired, unsettled and outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive $51.00, subject to the payment conditions described below, without interest and less any required withholding of taxes. Each Company PSU and each Company MSU (to the extent earned) that is unexpired, unsettled and outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive $51.00, subject to the payment conditions described below, without interest and less any required withholding of taxes. To the extent that the performance measurement period for any Company PSU has not been completed at the Effective Time, such Company PSU will be earned based on target levels of achievement and pro-rated for a partial performance period ending as of the closing date of the Merger. To the extent that the performance measurement period for any Company MSU has not been completed at the Effective Time, such Company MSU will be earned based on actual achievement determined over a truncated performance period ending as of the closing date of the Merger. Any Company PSUs so earned are subject to the following time-based vesting schedule: (1) one-third will vest at the Effective Time, (2) one-third will vest on the second anniversary of the date of grant and (3) the remaining one-third will vest on the third anniversary of the date of grant, in accordance with its terms. Any Company MSUs so earned will vest over the original performance period, in accordance with its terms. Notwithstanding the foregoing, Company PSUs and Company MSUs, to the extent earned, will be subject to the payment conditions described below in the section captioned “—Payments with Respect to Equity Awards.” Any Company PSUs or Company MSUs that are not earned as described above as of the Effective Time will be cancelled at the Effective Time for no consideration.

Payments with Respect to Equity Awards

The amounts described above with respect to each Company Option, Company RSU, Company PSU (to the extent earned) and Company MSU (to the extent earned) will become payable in accordance with the original vesting schedule applicable to such equity awards, except that (1) amounts payable with respect to any equity awards originally scheduled to vest during calendar years 2020 or 2021 will be paid on January 1 of the respective calendar year; and (2) amounts payable with respect to any equity awards originally scheduled to vest after calendar year 2021 will be paid on July 1, 2021, or in either case, upon the award holder’s earlier qualifying termination by Shutterfly without “cause” or his or her resignation following a “constructive termination” (each as defined in the Merger Agreement). Notwithstanding the foregoing, amounts payable with respect to awards held by non-employee directors will be paid at the closing of the Merger.

Financing of the Merger (see page 64)

We anticipate that the total amount of funds necessary to complete the Merger and the related transactions will be approximately $2.7 billion, which will be funded via equity financing and debt financing as described below and available cash on our balance sheet, if any. This amount includes amounts needed to (1) pay stockholders the amounts due under the Merger Agreement, (2) repay our existing indebtedness and (3) make payments in respect of our outstanding equity-based awards pursuant to the Merger Agreement.

In connection with the Merger, Newco has entered into an equity commitment letter, dated as of June 10, 2019, with Apollo Investment Fund IX, L.P., Apollo Overseas Partners (Delaware) IX, L.P., Apollo Overseas Partners (Delaware 892) IX, L.P., Apollo Overseas Partners IX, L.P. and Apollo Overseas Partners (Lux) IX, SCSp (collectively, the “Apollo Guarantors”) providing for an equity commitment of up to $890 million. For more information, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Financing of the Merger” beginning on page 64 of this proxy statement.

In connection with the Merger, Newco has obtained debt financing commitments from a consortium of financial institutions to provide Merger Sub with (1) a $1,650 million senior secured term facility, $1,425 million



 

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of which will be available to complete the Merger; (2) a $300 million senior secured revolving facility (a portion of which is available to be drawn at closing of the Merger); and (3) a $450 million senior unsecured bridge facility (less the amount of any senior unsecured notes issued as described below).

The debt commitment letter contemplates that Merger Sub will, at its option, either (1) issue senior unsecured notes in a Rule 144A or other private placement on or prior to the closing date of the Merger yielding up to $450 million in aggregate gross cash proceeds and/or (2) if any or all of the senior unsecured notes are not issued on or prior to the closing date of the Merger and the proceeds thereof made available to Merger Sub on the closing date of the Merger, borrow up to such unissued or unavailable amount in the form of senior unsecured bridge loans under the senior unsecured bridge loan facility. For more information, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Financing of the Merger” beginning on page 64 of this proxy statement.

Although the obligation of Newco and Merger Sub to consummate the Merger is not subject to any financing condition, the Merger Agreement provides that, without Newco’s agreement, the closing of the Merger will not occur until the third business day after the expiration of the marketing period (which is described in the section of this proxy statement captioned “The Merger Agreement—Marketing Period” beginning on page 82 of this proxy statement) if the marketing period has not ended at the time of the satisfaction or waiver of the conditions set forth in the Merger Agreement (other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions at the closing).

Limited Guarantee (see page 68)

Subject to the terms and conditions set forth in a limited guarantee, dated June 10, 2019 (the “limited guarantee”), the Apollo Guarantors have guaranteed the due and punctual payment and performance of (1)(x) Newco’s obligation to pay us a termination fee, of $102.5 million (the “Newco Termination Fee”), if, when and as due, pursuant to the Merger Agreement, (y) our out-of-pocket costs and expenses incurred in connection with legal proceedings enforcing the payment of such termination fee (subject to a maximum aggregate amount of $500,000) (the “enforcement expenses”) and (z) the reimbursement obligations of Newco and Merger Sub in connection with any out-of-pocket costs and expenses incurred by us and our subsidiaries in connection with their cooperation with the arrangement of the debt financing pursuant to the Merger Agreement (the “reimbursement obligations”) or (2) all amounts payable (solely to the extent payable pursuant to a final and nonappealable order of a court of competent jurisdiction) as damages as a result of fraud by Newco or Merger Sub on or before the closing of the Merger under and in accordance with the terms of the Merger Agreement.

Conditions to the Closing of the Merger (see page 96)

Our obligations and the obligations of Newco and Merger Sub, as applicable, to consummate the Merger are subject to the satisfaction or waiver of certain conditions, including (among other conditions), the following:

 

   

approval of the Merger Agreement by the affirmative vote of holders of a majority of the outstanding shares of our common stock entitled to vote thereon;

 

   

the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”);

 

   

the consummation of the Merger not being made illegal or otherwise prohibited by any law or order of any governmental authority of competent jurisdiction;

 

   

the accuracy of our representations and warranties and those of Newco and Merger Sub in the Merger Agreement, subject in certain instances to materiality and material adverse effect, as of the closing date of the Merger;



 

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the performance and compliance in all material respects by us, Newco and Merger Sub of each of our respective covenants and obligations under the Merger Agreement at or prior to the Effective Time; and

 

   

since the date of the Merger Agreement, no effect having occurred that, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect (as defined below) on us.

The Merger is not conditioned on Newco’s ability to obtain or successfully syndicate debt financing.

Regulatory Approvals Required for the Merger (see page 78)

Under the Merger Agreement, the Merger cannot be completed until the expiration or early termination of the waiting period under the HSR Act, and the rules promulgated thereunder, following the filing of Premerger Notification and Report Forms with the Federal Trade Commission (the “FTC”), and the Antitrust Division of the Department of Justice (the “Antitrust Division”). Together with Newco, we made the necessary filings with the FTC and the Antitrust Division on June 24, 2019. Early termination of the applicable waiting period under the HSR Act was granted on July 17, 2019, effective immediately.

At any time before or after consummation of the Merger, notwithstanding the termination of the waiting period under the HSR Act, the FTC or the Antitrust Division could take such action under the antitrust laws as it deems necessary under the applicable statutes, including seeking to enjoin the completion of the Merger, seeking divestiture of substantial assets of the parties, or requiring the parties to license, or hold separate, assets or terminate existing relationships and contractual rights. At any time before or after the completion of the Merger, and notwithstanding the termination of the waiting period under the HSR Act, any state could take such action under the antitrust laws as it deems necessary. Such action could include seeking to enjoin the completion of the Merger or seeking divestiture of substantial assets of the parties, or requiring the parties to license, or hold separate, assets or terminate existing relationships and contractual rights. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Merger on antitrust or other regulatory grounds will not be made or, if such a challenge is made, what the result of such challenge will be.

Recommendation of our Board (see page 38)

Our Board, after considering various factors described under the section of this proxy statement captioned “Proposal 1: Adoption of the Merger Agreement—Recommendation of our Board and Reasons for the Merger” has unanimously (1) determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are advisable, fair to and in the best interests of Shutterfly and its stockholders and (2) adopted and approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. Our Board unanimously recommends that you vote (1) “FOR” the proposal to adopt the Merger Agreement, (2) “FOR” the compensation proposal and (3) “FOR” the adjournment proposal.

Fairness Opinion of Morgan Stanley & Co. LLC (see page 44)

In connection with the Merger, Morgan Stanley & Co. LLC (“Morgan Stanley”) rendered to our Board its oral opinion, subsequently confirmed in writing, that as of June 9, 2019, and based on and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of shares of our common stock (other than holders of shares owned (1) directly or indirectly by Shutterfly as treasury stock, (2) directly or indirectly by Newco, Merger Sub, any wholly owned subsidiary of Newco or



 

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Merger Sub or any person that owns, directly or indirectly, all of the outstanding stock of Merger Sub and (3) stockholders who are entitled to and who properly exercise appraisal rights under the DGCL (collectively, the “Excluded Shares”)) pursuant to the Merger Agreement was fair from a financial point of view to such holders of shares of our common stock, as set forth in such opinion as more fully described below in the section captioned “Proposal 1: Adoption of the Merger AgreementFairness Opinion of Morgan Stanley & Co. LLC” beginning on page 44 of this proxy statement.

The full text of the written opinion of Morgan Stanley, dated as of June 9, 2019, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion, is attached to this proxy statement as Annex B and is incorporated by reference in this proxy statement in its entirety. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You are encouraged to read Morgan Stanley’s opinion carefully and in its entirety. Morgan Stanley’s opinion was directed to our Board, in its capacity as such, and addresses only the fairness from a financial point of view of the consideration to be received by the holders of shares of our common stock (other than holders of Excluded Shares) pursuant to the Merger Agreement as of the date of the opinion and does not address the relative merits of the Merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or are available. It was not intended to, and does not, constitute an opinion or a recommendation as to how our stockholders should vote at the stockholders’ meeting to be held in connection with the Merger.

Interests of our Directors and Executive Officers in the Merger (see page 57)

When considering the recommendation of our Board that you vote to approve the proposal to adopt the Merger Agreement, you should be aware that our directors and executive officers may have interests in the Merger that are different from, or in addition to, the interests of stockholders generally. In (1) evaluating and negotiating the Merger Agreement, (2) approving the Merger Agreement and the Merger, and (3) recommending that the Merger Agreement be adopted by stockholders, our Board was aware of and considered the following interests, among other matters:

 

   

certain of our executive officers are party to retention agreements with Shutterfly, which provide for accelerated vesting of equity awards and other severance payments and benefits in the event of certain qualifying terminations of employment following the Merger;

 

   

our President and Chief Executive Officer is entitled to accelerated vesting of a portion of his equity awards upon completion of the Merger pursuant to the terms of his offer letter;

 

   

in connection with his transition agreement with Shutterfly, our former President and Chief Executive Officer, may become entitled to accelerated vesting of his equity awards if the Merger is completed within a specified period of time;

 

   

in connection with the Merger, all outstanding and unvested equity awards held by our non-employee directors will accelerate and become fully vested; and

 

   

our directors and executive officers are entitled to continued indemnification and insurance coverage pursuant to their existing indemnification agreements and the Merger Agreement.

If the proposal to adopt the Merger Agreement is approved, the shares of our common stock held by our directors and executive officers will be treated in the same manner as outstanding shares of our common stock held by all other stockholders. For more information, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger” beginning on page 57 of this proxy statement.



 

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Appraisal Rights (see page 69)

If the Merger is completed, stockholders who do not vote in favor of the adoption of the Merger Agreement and who properly demand appraisal of their shares may be entitled to appraisal rights in connection with the Merger under Section 262 of the DGCL. This means that stockholders may be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment in cash of the “fair value” of their shares of our common stock, exclusive of any elements of value arising from the accomplishment or expectation of the Merger, together with interest to be paid on the amount determined to be fair value, if any, as determined by the court. Due to the complexity of the appraisal process, stockholders who wish to seek appraisal of their shares are encouraged to seek the advice of legal counsel with respect to the exercise of appraisal rights.

Stockholders considering seeking appraisal should be aware that the fair value of their shares as determined pursuant to Section 262 of the DGCL could be more than, the same as or less than the Merger Consideration (see page 69)

To exercise your appraisal rights, you must (1) deliver a written demand for appraisal to us before the vote is taken on the proposal to adopt the Merger Agreement; (2) not submit a proxy or otherwise vote in favor of the proposal to adopt the Merger Agreement; and (3) continue to hold your shares of our common stock through the Effective Time. Additionally, certain other conditions, described further herein, must be met. Your failure to follow exactly the procedures specified under the DGCL may result in the loss of your appraisal rights. The DGCL requirements for exercising appraisal rights are described in further detail in this proxy statement, and the relevant section of the DGCL regarding appraisal rights is reproduced in Annex C to this proxy statement. If you hold your shares of our common stock through a bank, broker or other nominee and you wish to exercise appraisal rights, you should consult with your bank, broker or other nominee to determine the appropriate procedures for the making of a demand for appraisal on your behalf by your bank, broker or other nominee.

Litigation Relating to the Merger (see page 75)

On July 22, 2019, a stockholder complaint was filed in the United States District Court, Northern District of California, against us and the individual members of our Board, captioned Stein v. Shutterfly, Inc., et al., Case No. 4:19-cv-04203 (the “Stein Complaint”). On July 23, 2019, a stockholder complaint was filed in the United States District Court, Southern District of New York, against us and the individual members of our Board, captioned Spurlock v. Shutterfly, Inc., et al., Case No. 1:19-cv-06836 (the “Spurlock Complaint”).

On July 26, 2019, a putative stockholder class action complaint was filed in the United States District Court, District of Delaware, against us and the individual members of our Board, captioned Wolf v. Shutterfly, Inc. et al., Case No. 1:19-cv-01387 (the “Wolf Complaint”). On July 29, 2019, a putative stockholder class action complaint was filed in the United States District Court, Northern District of California, against us and individual members of our Board, captioned Gordon v. Shutterfly, Inc., et al., Case No. 3:19-cv-04335 (the “Gordon Complaint” and collectively with the Stein Complaint, Spurlock Complaint and Wolf Complaint, the “Stockholder Complaints”). Each of the Stockholder Complaints asserts that defendants violated Section 14(a) and 20(a) of the Exchange Act and certain rules and regulations promulgated thereunder by making untrue statements of material fact and omitting certain material facts related to the contemplated merger in the proxy statement.

The Stockholder Complaints seek, among other things, an order enjoining defendants from consummating the merger, money damages and an award of attorneys’ and experts’ fees. We believe that the lawsuits are without merit and intend to vigorously defend those actions. We may become subject to similar litigation relating to the merger in these or other jurisdictions.

See the section captioned “The Merger—Litigation Relating to the Merger” beginning on page 75 of this proxy statement.



 

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Material U.S. Federal Income Tax Consequences of the Merger (see page 75)

For U.S. federal income tax purposes, the receipt of cash by a U.S. Holder (as defined under the section captioned “Proposal 1: Adoption of the Merger Agreement—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 75 of this proxy statement) in exchange for such U.S. Holder’s shares of our common stock in the Merger generally will result in the recognition of gain or loss in an amount measured by the difference, if any, between the amount of cash that such U.S. Holder receives in the Merger and such U.S. Holder’s adjusted tax basis in the shares of our common stock surrendered in the Merger.

A Non-U.S. Holder (as defined under the section captioned “Proposal 1: Adoption of the Merger Agreement—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 75 of this proxy statement) generally will not be subject to U.S. federal income tax with respect to the exchange of our common stock for cash in the Merger unless such Non-U.S. Holder has certain connections to the United States.

For more information, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 75 of this proxy statement. Stockholders should consult their own tax advisors concerning the U.S. federal income tax consequences relating to the Merger in light of their particular circumstances and any consequences arising under the laws of any state, local or foreign taxing jurisdiction.

Alternative Acquisition Proposals (see page 91)

Under the Merger Agreement, after the date of the Merger Agreement until the Effective Time (or the earlier termination of the Merger Agreement in accordance with its terms), we have agreed to: (1) cease (and to cause its Subsidiaries and its and their respective directors, officers and employees, and to use reasonable best efforts to cause its other Representatives (as defined below), to cease) and cause to be terminated any discussions or negotiations with any person with respect to an Acquisition Proposal (as defined under the section captioned “The Merger Agreement—Our Board’s Recommendation; Company Board Recommendation Change” beginning on page 92 of this proxy statement); and (2) terminate any data room access of, any person relating to an acquisition transaction and to request that any person who was furnished non-public information by or on our behalf prior to the date of the Merger Agreement return or destroy all such information.

After the date of the Merger Agreement until the Effective Time (or the earlier termination of the Merger Agreement in accordance with its terms), we and our subsidiaries and our respective directors, officers, accountants, consultants, legal counsel, advisors agents and other representatives (collectively, “Representatives”) will not, and will not authorize or instruct any of our or our subsidiaries’ Representatives to, and will use our reasonable best efforts to cause any of our or our subsidiaries’ Representatives not to, directly or indirectly:

 

   

initiate, solicit, or knowingly facilitate or encourage the making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry (as defined under the section of this proxy statement captioned “The Merger Agreement—Alternative Acquisition Proposals” beginning on page 91 of this proxy statement) or otherwise knowingly assist or participate in the making, submission or announcement of any Acquisition Proposal;

 

   

engage in, participate or continue discussions or negotiations with any person with respect to an Acquisition Proposal or Acquisition Inquiry;

 

   

enter into any merger agreement, letter of intent, term sheet, agreement in principle or other similar agreement constituting or relating to an Acquisition Proposal (other than an acceptable confidentiality agreement) or enter into any contract or agreement requiring us to abandon, terminate or fail to consummate the transactions contemplated by the Merger Agreement;



 

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terminate, waive, amend or modify any provision of, or grant permission under, any confidentiality agreement to which we or our subsidiaries are a party and that contains a “standstill” provision;

 

   

furnish to any person any non-public information relating to us or any of our subsidiaries, or afford access to the business, assets, books or other non-public information or to our personnel, in any such case with the intent to induce the making, submission or announcement of, or to knowingly encourage, facilitate or assist, any Acquisition Proposal or Acquisition Inquiry;

 

   

take any action to make the provisions of any takeover law, or any restrictive provision of our organizational documents, inapplicable to any Acquisition Proposal or person making an Acquisition Proposal; or

 

   

resolve or agree to take any of the foregoing actions.

Notwithstanding these restrictions, under certain circumstances, prior to the adoption of the Merger Agreement by our stockholders, we may provide non-public information to, and engage or participate in discussions or negotiations with, any third party regarding an acquisition proposal if our Board determines in good faith (after consultation with its financial advisor and outside legal counsel) that such proposal is a superior proposal or would reasonably be expected to lead to or result in, a superior proposal and to not do so would be inconsistent with its fiduciary duties. For more information, see the section captioned “The Merger Agreement—Alternative Acquisition Proposals” beginning on page 91 of this proxy statement.

We are not entitled to terminate the Merger Agreement to enter into an agreement for a superior proposal unless it complies with certain procedures in the Merger Agreement, including negotiating with Newco in good faith over a three business day period in order to enable Newco to revise the terms of the Merger Agreement so that any superior proposal no longer constitutes a superior proposal. The termination of the Merger Agreement by Shutterfly in order to accept a superior proposal will result in the payment by Shutterfly of a $51.2 million termination fee to Newco. For more information, see the section captioned “The Merger Agreement—Our Board’s Recommendation; Company Board Recommendation Change” beginning on page 92 of this proxy statement.

Termination of the Merger Agreement (see page 98)

The Merger Agreement may be terminated at any time prior to the Effective Time in the following ways:

 

   

by mutual written consent of Shutterfly and Newco;

 

   

by either Newco or Shutterfly, if:

 

   

the Effective Time has not occurred on or before 5:00 p.m., Pacific Time, on December 10, 2019 (the “outside date”), provided that if the marketing period has commenced but has not been completed as of the outside date, the outside date will automatically be extended to the date that is four business days following the then-scheduled end date of the marketing period, provided further that the right to terminate the Merger Agreement as a result of the occurrence of the termination date will not be available to any party whose failure to perform any of its obligations under the Merger Agreement was the primary cause of the failure of the Effective Time to have occurred on or before the outside date;

 

   

our stockholders fail to adopt the Merger Agreement at the special meeting or any adjournment or postponement thereof; or

 

   

any court of competent jurisdiction or other governmental authority of competent jurisdiction has issued any order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger, and such order has become final and non-appealable (provided, that such right to terminate the Merger Agreement will not be available to any party whose failure to



 

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perform any of its obligations under the Merger Agreement has been the primary cause of, or resulted in such events).

 

   

by Shutterfly if:

 

   

our Board (or any duly authorized committee thereof) determines to accept a superior proposal in accordance with the terms of the Merger Agreement; provided that, such termination will not be effective unless we (1) pay a termination fee of $51.2 million to Newco prior to or concurrently with such termination and (2) promptly (but in any event within 24 hours of receipt by Newco of the termination fee) enters into such alternative acquisition agreement;

 

   

(1) there has been an inaccuracy in any representation or warranty of Newco or Merger Sub contained in the Merger Agreement or a breach of any covenant of Newco or Merger Sub contained in the Merger Agreement, that, individually or in the aggregate, would result in a condition to our obligation to effect the Merger not being satisfied; (2) we have delivered to Newco written notice of such inaccuracy or breach of covenant; and (3) such inaccuracy or breach of covenant is not curable or, if curable, not cured before the earlier of (x) 30 days after since written notice was delivered to Newco and (y) the outside date, provided that the right to terminate the Merger Agreement under this circumstance will not be available if our failure to perform any of its obligations under the Merger Agreement has been the primary cause of or resulted in clauses (1) and (3) above; or

 

   

if (1) the marketing period has ended and (x) all of the conditions applicable to Newco, Merger Sub’s and our obligations to close the Merger and (y) Newco’s and Merger Sub’s obligations to close the Merger have, in each case, been and continue to be satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing of the Merger, but subject to the satisfaction or waiver of such conditions at the closing of the Merger); (2) Newco and Merger Sub fail to consummate the Merger on the date required pursuant to the Merger Agreement; (3) we have irrevocably notified Newco by written notice that it is prepared, willing and able to consummate the Merger; (4) Newco and Merger Sub fail to consummate the Merger by the third business day after the delivery of the notice described in clause (3); and (5) at all times during such three business day period described in clause (4), Shutterfly stood ready, willing and able to consummate the Merger and the other transactions contemplated by the Merger Agreement.

 

   

by Newco if:

 

   

prior to the adoption of the Merger Agreement by the stockholders, our Board (1) effects a Change of Board Recommendation (as defined under the section captioned “The Merger Agreement—Our Board’s Recommendation; Company Board Recommendation Change” beginning on page 92 of this proxy statement) or (2) following the date of receipt of any Acquisition Proposal or any material modification thereto is first made public, sent or given to the stockholders, fails to issue a press release that expressly reaffirms the Company Board Recommendation within two business days following our receipt of Newco’s written request to do so;

 

   

prior to the adoption of the Merger Agreement by our stockholders, we commit a willful breach of any of its obligations under the covenant described in the sections captioned “The Merger Agreement—Alternative Acquisition Proposals” beginning on page 91 of this proxy statement and “The Merger Agreement—Our Board’s Recommendation; Company Board Recommendation Change” beginning on page 92 of this proxy statement; or

 

   

(1) there is an inaccuracy in any of our representations or warranties or a breach of any of our covenants contained in the Merger Agreement such that certain corresponding conditions set forth in the Merger Agreement are not satisfied; (2) Newco has delivered to us written notice of such inaccuracy or breach of covenant; and (3) such inaccuracy or breach of covenant is not capable of



 

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being cured, or is not cured, before the earlier of the termination date or the date that is 30 calendar days following Newco’s delivery of written notice of such breach, provided that the right to terminate the Merger Agreement as described in this bullet point will not be available to Newco if Newco’s failure to perform any of its respective obligations under the Merger Agreement has been the primary cause of or resulted in clauses (1) or (3) above.

Termination Fees and Expense Reimbursement (see page 100)

Except in specified circumstances, whether or not the Merger is completed, we, on the one hand, and Newco and Merger Sub, on the other hand, are each responsible for all of their respective costs and expenses incurred in connection with the Merger and the other transactions contemplated by the Merger Agreement.

We will be required to pay to Newco a termination fee of $51.2 million if the Merger Agreement is terminated under specified circumstances. Upon termination of the Merger Agreement, under certain circumstances, we may be required to reimburse Newco, Merger Sub and their respective affiliates for up to $5.0 million of reasonable and documented out-of-pocket fees and expenses incurred in connection with the enforcement of our obligation to pay the termination fee pursuant to the terms and conditions of the Merger Agreement.

Newco will be required to pay us a termination fee of $102.5 million if the Merger Agreement is terminated under certain other specified circumstances.

For more information on these termination fees, see the section captioned “The Merger Agreement—Termination Fees and Expense Reimbursement” beginning on page 100 of this proxy statement.

Market Prices and Dividend Data (see page 103)

Our common stock is listed on Nasdaq under the symbol “SFLY.” On June 10, 2019, the last full trading day before the public announcement of the Merger, the closing price for our common stock was $50.25 per share, and on July 29, 2019, the latest practicable trading day before the printing of this proxy statement, the closing price for our common stock was $50.63 per share.

We have never paid cash dividends on our common stock.

Effect on Shutterfly if the Merger is Not Completed (see page 79)

If the Merger Agreement is not adopted by stockholders or if the Merger is not completed for any other reason, stockholders will not receive any payment for their shares of our common stock. Instead, we will remain a stand-alone public company, our common stock will continue to be listed and traded on Nasdaq and registered under the Exchange Act, and we will continue to file periodic reports with the SEC. Under specified circumstances, upon the termination of the Merger Agreement, we will be required to pay Newco a termination fee and/or to reimburse Newco up to $5.0 million for expenses related to the transactions contemplated by the Merger Agreement. If Newco has collected any money for expense reimbursements, such amounts will be deducted from the termination fee when the termination fee is paid. For more details, see the section captioned “The Merger Agreement—Termination Fees and Expense Reimbursement” beginning on page 100 of this proxy statement.

In addition, if the Merger is not completed, we expect that management will operate the business in a manner similar to that in which it is being operated today and that stockholders will continue to be subject to the same risks and opportunities to which they are currently subject, including risks related to the highly competitive industry in which we operate and risks related to adverse economic conditions.



 

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PARTIES INVOLVED IN THE MERGER

Shutterfly, Inc.

2800 Bridge Parkway

Redwood City, California 94065

Telephone: (650) 610-5200

We are a leading retailer and manufacturing platform for personalized products and communications and were incorporated in the state of Delaware in 1999. We have three segments: Shutterfly Consumer, Lifetouch, and SBS. Shutterfly Consumer and Lifetouch help consumers capture, preserve, and share life’s important moments through professional and personal photography, and personalized products. The Shutterfly brand brings photos to life in photo books, gifts, home décor, and cards and stationery. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day,” and also serves families through portrait studios and other partnerships. SBS delivers digital printing services that enable efficient and effective customer engagement through personalized communications.

Photo Holdings, LLC

c/o Apollo Global Management, LLC

9 West 57th Street, 43rd Floor

New York, NY 10019

(212) 515-3200

Newco is an affiliate of the Apollo Funds. The Apollo Funds are managed by affiliates of AGM. AGM is a leading global alternative investment manager with offices in New York, Los Angeles, San Diego, Houston, Bethesda, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong, Shanghai and Tokyo. Apollo had assets under management of approximately $303 billion as of March 31, 2019 in private equity, credit and real assets funds invested across a core group of nine industries where AGM has considerable knowledge and resources. AGM’s units are listed on the NYSE under the symbol “APO.” Newco was formed on June 7, 2019, solely for the purpose of engaging in the transactions contemplated by the Merger Agreement. Newco has not engaged in any business activities other than in connection with the transactions contemplated by the Merger Agreement.

Photo Holdings Merger Sub, Inc.

c/o Apollo Global Management, LLC

9 West 57th Street, 43rd Floor

New York, NY 10019

(212) 515-3200

Merger Sub, a Delaware corporation and a wholly owned subsidiary of Newco, was formed on June 7, 2019 solely for the purpose of engaging in the transactions contemplated by the Merger Agreement. Merger Sub has not engaged in any business activities other than in connection with the transactions contemplated by the Merger Agreement. Upon completion of the Merger, Merger Sub will merge with and into Shutterfly, and Merger Sub will cease to exist.

 

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THE SPECIAL MEETING

The enclosed proxy is solicited on behalf of our Board for use at the special meeting of stockholders or at any adjournment or postponement thereof.

Date, Time and Place

We will hold the special meeting at 2800 Bridge Parkway, Redwood City, California 94065, at 10:00 a.m., Pacific Time, on August 28, 2019.

Purpose of the Special Meeting

At the special meeting, we will ask the holders of our common stock to (1) adopt the Merger Agreement; (2) approve, on a non-binding advisory basis, the compensation proposal; and (3) approve the adjournment proposal.

Upon the terms and subject to the conditions of the Merger Agreement, if the Merger is completed, Merger Sub will merge with and into Shutterfly, and Shutterfly will continue as the Surviving Corporation.

Record Date; Shares Entitled to Vote; Quorum

Only holders of record of our common stock at the close of business on July 26, 2019, the record date, are entitled to notice of, and to vote at, the special meeting. On the record date, 34,396,897 shares of our common stock were issued and outstanding and held by approximately 63 holders of record. Holders of record of our common stock on the record date are entitled to one vote per share at the special meeting on each of the proposals.

The presence at the special meeting, in person or by proxy, of the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting shall constitute a quorum. Votes cast at the special meeting, by proxy or in person, will be tabulated by the inspector of elections appointed for the special meeting. If shares are present at the special meeting in person or by proxy, but are not voted, those shares will count toward determining whether or not a quorum is present for the conduct of business at the special meeting, as will all shares voted “FOR,” “AGAINST” or “ABSTAIN” on a proposal.

In the event that a quorum is not present in person or represented by proxy at the special meeting, it is expected that our Board will recommend adjournment of the special meeting to solicit additional proxies if permitted by the Merger Agreement. If there is not a quorum of stockholders at the special meeting and the vote with respect to the adjournment proposal fails, our Board, if permitted by the Merger Agreement, may set a new record date and meeting date for a special meeting to consider the Merger Agreement, compensation proposal and adjournment proposal.

Vote Required

The votes required to approve each proposal are as follows:

 

  1.

The Merger Agreement must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon.

 

  2.

The compensation proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

 

  3.

The adjournment proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal.

 

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Voting by our Directors and Executive Officers

At the close of business on the record date, our directors and executive officers and their respective affiliates beneficially owned and were entitled to vote 262,390 shares of our common stock, which represented approximately 0.8% of the shares of our outstanding common stock on that date. Although they are not obligated to do so, our directors and executive officers have informed us that they intend to vote all of their shares of our common stock “FOR” the proposal to adopt the Merger Agreement, “FOR” the compensation proposal and “FOR” the adjournment proposal.

Certain members of our management and our Board have interests in the Merger that are in addition to those of stockholders generally and may be different from, or in conflict with, your interests as our stockholder. See the section captioned “Proposal 1: Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger” beginning on page 57 of this proxy statement.

Voting of Proxies

If your shares are registered in your name, you may cause your shares to be voted at the special meeting by returning a signed proxy card or voting in person at the meeting. Additionally, you may submit a proxy authorizing the voting of your shares via the Internet or by telephone by following the instructions printed on the proxy card. You must have the enclosed proxy card available, and follow the instructions on the proxy card, in order to submit a proxy via the Internet or by telephone.

If your shares are registered in your name and you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the special meeting. If your shares are registered in your name, you are encouraged to submit a proxy card even if you plan to attend the special meeting in person.

Voting instructions are included on your proxy card. All shares represented by properly executed proxies received in time for the special meeting will be voted at the special meeting in accordance with the instructions of the stockholder. Properly executed proxies that do not contain voting instructions will be voted “FOR” the proposal to adopt the Merger Agreement, “FOR” the approval of the compensation proposal and “FOR” the approval of the adjournment proposal; provided, however, that no proxy that is specifically marked “AGAINST” the proposal to adopt the Merger Agreement will be voted “FOR” the compensation proposal or “FOR” the adjournment proposal unless it is specifically marked “FOR” the compensation proposal or “FOR” the adjournment proposal, respectively.

If your shares are held in “street name” through a brokerage firm, bank, trust or other nominee, you may provide voting instructions by completing and returning the voting form provided by your brokerage firm, bank, trust or other nominee or via the Internet or by telephone through your brokerage firm, bank, trust or other nominee, if such a service is provided. To provide voting instructions via the Internet or telephone, you should follow the instructions on the voting form provided by your brokerage firm, bank, trust or other nominee. If you plan to attend the special meeting, you will need a proxy from your brokerage firm, bank, trust or other nominee in order to be given a ballot to vote the shares. If you do not return your brokerage firm, bank, trust or other nominee’s voting form, provide voting instructions via the Internet or by telephone through your brokerage firm, bank, trust or other nominee or attend the special meeting and vote in person with a proxy from your brokerage firm, bank, trust or other nominee, it will have the same effect as if you voted “AGAINST” the adoption of the Merger Agreement but will have no effect on the compensation proposal or the adjournment proposal.

 

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Revocability of Proxies

Any proxy you give pursuant to this solicitation may be revoked by you at any time before it is voted. Proxies may be revoked as follows:

If you have sent a proxy directly to us, you may revoke it by:

 

   

delivering a written revocation of the proxy or a later dated, signed proxy card, to our Corporate Secretary at 2800 Bridge Parkway, Redwood City, California 94065, on or before the business day prior to the special meeting;

 

   

delivering a new, later dated proxy via the Internet or by telephone until the date set forth in the instructions for voting via the Internet or by telephone;

 

   

delivering a written revocation or a later dated, signed proxy card to us at the special meeting prior to the taking of the vote on the matters to be considered at the special meeting; or

 

   

attending the special meeting and voting in person.

If you have instructed brokerage firm, bank, trust or other nominee to vote your shares, you may revoke your proxy only by following the directions received from your brokerage firm, bank, trust or other nominee to change those instructions.

Your attendance at the special meeting does not alone automatically revoke your proxy. If you have instructed your brokerage firm, bank, trust or other nominee how to vote your shares, the above-described options for revoking your proxy do not apply. Instead, you must follow the directions provided by your brokerage firm, bank, trust or other nominee to change your vote.

Our Board’s Recommendations

Our Board has unanimously approved the Merger Agreement and determined that the Merger Agreement and the Merger are advisable, fair to and in the best interests of Shutterfly and its stockholders. Our Board unanimously recommends that our stockholders (1) vote “FOR” the proposal to adopt the Merger Agreement; (2) vote “FOR” the compensation proposal; and (3) vote “FOR” the adjournment proposal. See the section captioned “Proposal 1: Adoption of the Merger Agreement—Recommendation of our Board and Reasons for the Merger” beginning on page 38 of this proxy statement. Our stockholders should carefully read this proxy statement in its entirety for more detailed information concerning the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger. In addition, our stockholders are directed to the Merger Agreement, which is attached as Annex A to this proxy statement.

Effect of Abstentions and Broker Non-Votes

The Merger Agreement must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote. If you abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement.

The compensation proposal and adjournment proposal must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” each proposal. If you abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have no effect on the vote for the compensation proposal (provided that a quorum is present) and adjournment proposal (even if a quorum is not present).

 

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It is very important that all of our stockholders vote their shares, so please promptly complete and return the enclosed proxy card.

Solicitation of Proxies

This proxy solicitation is being made by Shutterfly on behalf of our Board and will be paid for by us. Our directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. We have also retained MacKenzie Partners, Inc., a proxy solicitation firm, to assist in the solicitation of proxies for a fee of approximately $50,000 plus the reimbursement of out-of-pocket expenses incurred by it on our behalf. In addition, we may reimburse banks, brokers and other nominees representing beneficial owners of shares for their expenses in forwarding soliciting materials to such beneficial owners. You should not send your stock certificates with your proxy card. A letter of transmittal with instructions for the surrender of your stock certificates, if any, will be mailed to our stockholders as soon as practicable after completion of the Merger.

Stockholder List

A list of our stockholders entitled to vote at the special meeting will be available for examination by any of our stockholders at the special meeting. For 10 days prior to the special meeting, this stockholder list will be available for inspection by any stockholder for any purpose germane to the special meeting during ordinary business hours at our corporate offices located at 2800 Bridge Parkway, Redwood City, California 94065.

Anticipated Date of Completion of the Merger

We are working toward completing the Merger as quickly as possible and expect the Merger to be completed by early fourth quarter 2019. However, the Merger continues to be subject to various closing conditions, including our stockholder approval and, therefore, we cannot assure you that all conditions to the Merger will be satisfied or, if satisfied, the date by which they will be satisfied.

Householding of Special Meeting Materials

The SEC’s proxy rules permit companies and intermediaries, such as brokers and banks, to satisfy delivery requirements for proxy statements with respect to two or more stockholders sharing an address by delivering a single proxy statement to those stockholders, unless contrary instructions have been received. This procedure reduces the amount of duplicate information that stockholders receive and lowers printing and mailing costs for companies. Certain brokerage firms may have instituted householding for beneficial owners of our common stock held through brokerage firms. If your family has multiple accounts holding our common stock, you may have already received a householding notification from your broker. You may decide at any time to revoke your decision to household, and thereby receive multiple copies of proxy materials. If you wish to opt out of this procedure and receive a separate set of proxy materials in the future, or if you are receiving multiple copies and would like to receive only one, you should contact your broker, trustee or other nominee or our Investor Relations Department at the address and telephone number below. A separate copy of these proxy materials will be promptly delivered upon request by contacting our Investor Relations Department by (1) mail at Shutterfly, Inc., Attention: Investor Relations, 2800 Bridge Parkway, Redwood City, CA 94065; (2) telephone at 650-730-4040; or (3) e-mail at stabak@shutterfly.com.

Other Matters

At this time, we know of no other matters to be voted on at the special meeting. If any other matters properly come before the special meeting, your shares of our common stock will be voted in accordance with the discretion of the appointed proxy holders.

 

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PROPOSAL 1: ADOPTION OF THE MERGER AGREEMENT

The following discussion describes material aspects of the Merger. While we believe that the following description covers the material terms of the Merger, the description may not contain all of the information that may be important to you. The discussion of the Merger in this proxy statement is qualified in its entirety by reference to the Merger Agreement, which is attached as Annex A to this proxy statement and incorporated by reference into this proxy statement. We encourage you to read carefully this entire proxy statement, including the Merger Agreement, for a more complete understanding of the Merger.

General

If the proposal to adopt the Merger Agreement receives the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon and, upon the terms and subject to the conditions of the Merger Agreement, the Merger is completed, Merger Sub will merge with and into Shutterfly, and Shutterfly will continue as the Surviving Corporation and as a wholly owned subsidiary of Newco.

As a result of the Merger, Shutterfly will become a wholly owned subsidiary of Newco, and our common stock will no longer be publicly traded and will be delisted from Nasdaq. In addition, our common stock will be deregistered under the Exchange Act, and we will no longer file periodic reports with the SEC. If the Merger is completed, you will not own any shares of the capital stock of the Surviving Corporation.

The Effective Time will occur upon the filing of a Certificate of Merger with the Secretary of State of the State of Delaware (or at such later time as Shutterfly and Newco may agree and specify in the Certificate of Merger).

As a result of the Merger, each outstanding share of our common stock (other than the Excluded Shares) will be converted into the right to receive the Merger Consideration. In addition, the treatment of our outstanding equity awards is described in the section captioned “The Merger Agreement—Merger Consideration—Outstanding Equity Awards” beginning on page 83 of this proxy statement.

After the Merger is completed, you will have the right to receive the Merger Consideration, but you will no longer have any rights as a stockholder (except that stockholders who properly exercise their appraisal rights may have the right to receive a payment for the “fair value” of their shares as determined pursuant to an appraisal proceeding before the Delaware Court of Chancery as contemplated by Delaware law, as described below under the section of this proxy statement captioned “Proposal 1: Adoption of the Merger Agreement—Appraisal Rights” beginning on page 69 of this proxy statement).

Background of the Merger

The following is a summary of events, meetings and discussions that are relevant to the decision of our Board to approve the Merger Agreement and recommend that our stockholders adopt the Merger Agreement.

As part of our ongoing consideration and evaluation of our long-term prospects and strategies, our Board and senior management have regularly reviewed and assessed our business plans, objectives and key initiatives, including strategic opportunities and risks to our plans, all with the goal of enhancing value for our stockholders. These reviews have included evaluations of the continued execution of our strategy as a stand-alone company and of various strategic alternatives, including the prospects for the potential sale of Shutterfly to a third party. From time to time, our Board and our management have also held discussions with and received input from our stockholders about our business, operations, financial performance and potential strategic initiatives to maximize stockholder value.

In 2014, we solicited interest in an acquisition of Shutterfly from a number of financial sponsors and strategic parties. This process led to negotiations with a financial sponsor regarding a potential acquisition, but

 

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these negotiations did not result in any proposal that our Board, after discussions with senior management and representatives of Morgan Stanley, viewed as reasonably likely to lead to a transaction that would be in the best interests of Shutterfly and its stockholders, and therefore these negotiations ended in the fourth quarter of 2015.

On October 12, 2017, an existing stockholder of Shutterfly (“Stockholder A”) and a second financial sponsor (“Sponsor B”) submitted an unsolicited nonbinding indication of interest to jointly acquire Shutterfly at a price ranging from $58-$62 per share in cash. Our common stock closed at $48.26 per share on October 11, 2017, the last trading day before the proposal. Following receipt of this indication of interest, our Board authorized senior management to work with Morgan Stanley as a financial advisor based on Morgan Stanley’s experience, expertise, reputation and knowledge of our business and the industry in which we operate. On October 18 and 19, 2017, our Board held a regularly scheduled meeting at which it discussed the joint proposal from Stockholder A and Sponsor B, and authorized us to enter into an engagement letter retaining Morgan Stanley as our financial advisor in connection with a possible sale of Shutterfly. On October 24, 2017, we entered into this engagement letter with Morgan Stanley, and on October 26 and 27, 2017, we entered into confidentiality agreements with Stockholder A and Sponsor B, each of which contained a “standstill” provision that would not terminate upon our announcement of the entry into a definitive written agreement with a third party for an acquisition of Shutterfly but which would allow them to make private proposals to our Board. On November 20, 2017, Sponsor B indicated that it was revising its view of our valuation to a price that was below the price range that it had previously communicated, and wished to pause discussions until after we had announced our results of operations for the fourth quarter of 2017.

On December 4, 2017, at the direction of our Board, representatives of Morgan Stanley contacted two additional financial sponsors (referred to as “Sponsor C” and “Sponsor D”) regarding their potential interest in an acquisition of Shutterfly. These parties were selected based on the belief, following discussion with representatives of Morgan Stanley, that they were familiar with our industry, had the ability to complete such a transaction and could be interested in such a transaction. On December 8 and 14, 2017, we entered into confidentiality agreements with Sponsor C and Sponsor D, respectively, each of which contained a “standstill” provision that was consistent with those in the confidentiality agreements with Stockholder A and Sponsor B. Members of senior management and representatives of Morgan Stanley engaged in preliminary discussions with representatives of Stockholder A and Sponsors B, C and D regarding our business, provided them with additional confidential information, and engaged in discussions with them regarding a potential strategic transaction, but these preliminary discussions did not result in any proposals that our Board, after discussions with senior management and representatives of Morgan Stanley, viewed as reasonably likely to lead to a transaction that would be in the best interests of Shutterfly and its stockholders.

On April 2, 2018, we consummated our acquisition of Lifetouch.

On November 9, 2018, a financial sponsor that had not engaged in the prior strategic transaction discussions (referred to as “Sponsor E”) informally contacted our senior management regarding a potential acquisition of Shutterfly.

On December 13, 2018, our Board held a regularly scheduled meeting, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During this meeting, our Board discussed potential strategic opportunities to maximize stockholder value through a sale of Shutterfly in light of the unsolicited inbound interest from Sponsor E as well as past interest in us from other financial sponsors. Our Board also considered other potential strategic alternatives, including a potential share repurchase transaction. Representatives of Morgan Stanley discussed preliminary views on the valuation of our business and possible approaches to a strategic process to solicit interest in an acquisition of Shutterfly. Following this discussion, our Board determined that we should engage in exploratory discussions with potentially interested parties to determine whether there would be interest in such a transaction, and directed representatives of Morgan Stanley to respond to Sponsor E, and to contact Sponsor B and Sponsor C, to assess their interest in a potential acquisition of Shutterfly. Our Board determined not to contact Stockholder A or Sponsor D at this time, as it did

 

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not believe, based on our previous interaction with them and discussions with our senior management and representatives of Morgan Stanley, that they would have any continued interest in discussing an acquisition of Shutterfly at that time.

During the week of December 17, 2018, we entered into a confidentiality agreement with Sponsor E and new confidentiality agreements with each of Sponsor B and Sponsor C (each of which included a “standstill” that would not terminate upon our announcement of the entry into a definitive written agreement with a third party for an acquisition of Shutterfly but which would allow private proposals to our Board), we provided confidential materials to Sponsor B, Sponsor C and Sponsor E, and members of our management provided each of the three financial sponsors with a presentation regarding our business.

On December 18, 2018, our Board met again, together with members of our senior management and representatives of Morgan Stanley and Fenwick. At this meeting, a representative of Morgan Stanley described discussions with Sponsor B, Sponsor C and Sponsor E following the December 13, 2018 meeting of our Board, and our Board discussed whether to expand the process to include additional private equity firms. Following this discussion, our Board directed the representatives of Morgan Stanley to contact three additional financial sponsors (referred to here as “Sponsor F”, “Sponsor G” and “Sponsor H”) to evaluate their potential interest, and to continue to evaluate the potential interest of Sponsor B, Sponsor C and Sponsor E. These parties were selected by our Board, following discussion with representatives of Morgan Stanley, based on their familiarity with our industry, their scale and our Board’s belief that they might be interested in an acquisition of Shutterfly.

On December 26, 2018, Sponsor E informed representatives of Morgan Stanley that it would no longer pursue an acquisition of Shutterfly due to its belief that it could not offer an attractive price in view of their concerns regarding the performance of our consumer business.

Between December 21, 2018 to January 3, 2019, at the direction of our Board, representatives of Morgan Stanley contacted Sponsor F, Sponsor G and Sponsor H to determine whether these parties would be interested in pursuing a potential acquisition of Shutterfly.

On January 4, 2019, our Board met, together with members of our senior management and representatives of Morgan Stanley and Fenwick. Our Board and the representatives of Morgan Stanley reviewed the discussions with the financial sponsors and discussed Morgan Stanley’s preliminary views on our valuation. Following this discussion, our Board directed representatives of Morgan Stanley to request that each of Sponsor B, Sponsor C, Sponsor F, Sponsor G and Sponsor H provide a non-binding proposal for an acquisition of Shutterfly by January 15, 2019, with each such proposal to target an announcement of a transaction prior to our announcement of our financial results for the fourth quarter of 2018, which was planned for February 5, 2019, and following this meeting, representatives of Morgan Stanley contacted representatives of Sponsors B, C, F, G and H and requested that they each provide such a proposal.

During the week of January 7, 2019, each of Sponsor F, Sponsor G and Sponsor H entered into confidentiality agreements with us (each of which included a “standstill” provision that was consistent with those in the confidentiality agreements entered into with Stockholder A and Sponsors B, C, D and E) and attended due diligence meetings with our senior management team. Following the execution of a confidentiality agreement with us on January 9, 2019, Sponsor G then informed representatives of Morgan Stanley on January 16, 2019 that it would no longer pursue an acquisition of Shutterfly. On the same day, Sponsor B also indicated to representatives of Morgan Stanley that it would not be making a proposal to acquire Shutterfly at that time, citing concerns regarding industry trends and the performance of our consumer business. In addition, on January 14, 2019, Sponsor H indicated to representatives of Morgan Stanley that it would not be making a proposal to acquire Shutterfly at that time, citing concerns regarding trends in the performance of our consumer business.

On January 17, 2019, our Board met, together with members of our senior management and representatives of Morgan Stanley. During the meeting, our Board and representatives of Morgan Stanley reviewed the

 

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discussions that had occurred with the financial sponsors, and our Board discussed whether to publicly announce that we were reviewing strategic alternatives for Shutterfly on the company’s earnings call to be held on February 5, 2019.

On January 18, 2019, Sponsor C informed representatives of Morgan Stanley that it would no longer pursue an acquisition of Shutterfly, citing concerns about our growth profile.

On January 23 and 24, 2019, our Board held a regularly scheduled meeting, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, our Board and representatives of Morgan Stanley reviewed the discussions that had occurred with the financial sponsors, and discussed other strategies to provide value to stockholders, including a possible stock repurchase program. Our Board also discussed the challenges that we faced as an independent company, including trends in our businesses, the ability to expand our customer base and to implement cost reduction measures, the risk of attrition of key employees, and the anticipated departure of Christopher North, our President and Chief Executive Officer. In addition, our Board discussed our results to be reported for the quarter ended December 31, 2018 and noted that they would be below current analyst expectations. Following this discussion, our Board unanimously voted to form a Strategic Review Committee (the “Strategic Review Committee”), comprised of directors Will Lansing, Brian Swette, Thomas D. Hughes, Elizabeth Rafael and Michael Zeisser, to conduct a review of our strategic alternatives, to oversee our strategic process and to advise and consult with our management regarding the evaluation of any potential transaction, and determined that we should publicly announce, concurrently with our fourth quarter 2018 earnings call, to be held on February 5, 2019, that our Board had formed this committee and had retained Morgan Stanley as financial advisor.

Concurrently with its announcement of fourth quarter 2018 earnings on February 5, 2019, we announced that our Board had formed the Strategic Review Committee and retained Morgan Stanley as financial advisor, as it continued an ongoing review of strategic alternatives. The announcement also stated that, in recent months, we were approached by a third party about a potential acquisition and had subsequently engaged with several additional parties regarding a potential acquisition, but no proposals were received. In addition, we announced that Mr. North would be stepping down from his position as our President and Chief Executive Officer and resigning from his position as a member of our Board by the end of August 2019 as a result of Mr. North’s desire to return to the United Kingdom with his family, and that we had engaged an executive search firm to identify candidates to succeed Mr. North.

In February 2019, after the public announcement of the formation of the Strategic Review Committee, representatives of Morgan Stanley received inbound interest for an acquisition of Shutterfly from six additional financial sponsors, including Apollo, and one strategic party.

On February 13, 2019, the Strategic Review Committee met, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, the committee members and representatives of Morgan Stanley reviewed the discussions that had occurred with parties that had indicated interest in reviewing a potential transaction with Shutterfly, and discussed Morgan Stanley’s preliminary views on our valuation and the steps that could be taken in the strategic process. The committee members and representatives of Morgan Stanley then discussed additional parties that should be contacted to ascertain their interest in such a transaction. In addition, the Strategic Review Committee discussed our long-term financial plan.

On February 26, 2019, the Strategic Review Committee met, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, the committee members and members of our senior management reviewed our financial projections for 2019, 2020 and 2021. The Strategic Review Committee then approved those projections for use in our strategic process, including furnishing those projections to interested parties, and for use by Morgan Stanley in its financial analysis. A representative of Morgan Stanley then reviewed the discussions that had occurred with parties that had indicated

 

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interest in reviewing a potential transaction with Shutterfly, and the committee members and representatives of Morgan Stanley discussed potential financial sponsors that might be interested in a possible acquisition of Shutterfly, and discussed potential strategic buyers that might also be interested, either alone or together with a financial sponsor. Following this discussion, the Strategic Review Committee directed representatives of Morgan Stanley to make inquiries of potential strategic buyers as well as financial sponsors to explore their interest. In addition, the Strategic Review Committee and representatives of Morgan Stanley discussed the potential for a third party to make a minority investment in Shutterfly, and informed the representatives of Morgan Stanley that the committee would be open to considering such a transaction.

From February 5, 2019 through March 6, 2019, representatives of Morgan Stanley contacted 13 additional financial sponsors regarding a potential acquisition of Shutterfly, including those that had contacted representatives of Morgan Stanley following the public announcement of the formation of the Strategic Review Committee). Twelve of these parties expressed interest and entered into confidentiality agreements with us, each of which included a “standstill” provision that was consistent with those in the confidentiality agreements entered into with the parties that had previously engaged in discussions with us. Upon their entering into the confidentiality agreements, representatives of Morgan Stanley provided confidential materials regarding Shutterfly to each of such parties. Five financial sponsors (Apollo, and four additional financial sponsors referred to as “Sponsor I”, Sponsor J”, “Sponsor K” and “Sponsor L”) then attended presentations by members of our management regarding our business. Throughout this process, representatives of Morgan Stanley provided the members of the Strategic Review Committee and our senior management with updates on the status of the communications with interested parties.

On March 6, 2019, our Board held an informal meeting, together with members of our senior management and representatives of Morgan Stanley and Fenwick, during which the members of our Board and representatives of Morgan Stanley reviewed the discussions with interested parties and discussed the steps to obtain indications of interest from those parties for an acquisition of Shutterfly. Following this discussion, our Board directed the representatives of Morgan Stanley to provide these parties with the three-year projections that had been approved by the Strategic Review Committee on February 26, 2019, and to inform these parties that Shutterfly was seeking preliminary indications of acquisition interest by March 25, 2019. In addition, our Board directed representatives of Morgan Stanley to develop a list of additional strategic parties to be contacted to ascertain their potential interest in an acquisition of Shutterfly, and, following the review of that list by the members of the Strategic Review Committee, to contact those parties.

Following that meeting, the representatives of Morgan Stanley communicated to the members of the Strategic Review Committee a proposed list of 11 strategic parties to be contacted, and representatives of Morgan Stanley and our senior management then contacted each of those parties. Of the strategic parties that were contacted, three signed confidentiality agreements (each of which contained a standstill provision that was consistent with those in the confidentiality agreements with the financial sponsors), and one met with our senior management, but none of these strategic parties made, or expressed interest in making, a proposal for an acquisition of Shutterfly. In addition, on March 11, 2019, representatives of Morgan Stanley contacted 10 additional financial sponsors, each of which had been previously discussed with the Strategic Review Committee at its meeting on February 26, 2019. Two of these financial sponsors expressed interest and entered into confidentiality agreements with us, each of which included a “standstill” provision that was consistent with those in the confidentiality agreements entered into with the parties that had previously engaged in discussions with us, but none of these additional financial sponsors met with our senior management.

On March 14, 2019, representatives of Morgan Stanley, after consultation with members of the Strategic Review Committee and of our management, informed all of the parties considering a potential acquisition of Shutterfly (including Apollo, Sponsor F, Sponsor I, Sponsor J, Sponsor K, Sponsor L and Strategic Party A) that Shutterfly was seeking preliminary indications of acquisition interest by March 28, 2019.

On March 18 and March 22, 2019, we entered into confidentiality agreements with two additional financial sponsors (referred to as “Sponsor M” and “Sponsor N”) and informed such parties that we were seeking preliminary indications of interest by March 28, 2019.

 

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During the course of our strategic process in 2019, through the execution of the Merger Agreement, no member of our senior management discussed with any potential buyer (including Apollo) the possibility of either (a) continuing his or her employment with Shutterfly following the closing of a potential transaction or (b) rolling over any of his or her shares of our common stock, or otherwise making any equity investment in Shutterfly, in connection with the closing of a potential transaction.

On March 21, 2019, an online data room containing confidential due diligence materials relating to Shutterfly’s business (including financial projections that were consistent with those reviewed by our Strategic Review Committee on February 26, 2019 other than certain immaterial adjustments to our projected balance sheet) was made available to the five parties that had been most actively engaged in discussions with us (Apollo, Sponsor F, Sponsor I, Sponsor J and Sponsor K). Following review of these materials, on March 28, 2019 each of Sponsor F, Sponsor K and Sponsor L verbally indicated to representatives of Morgan Stanley that it would not be providing a proposal for the acquisition of Shutterfly, with all three citing constraints on their ability to pay a price that would be acceptable to us.

On March 28 and March 29, 2019, we received four non-binding preliminary indications of interest for an acquisition of Shutterfly, each from financial sponsors, and one non-binding preliminary indication of interest for a minority investment in Shutterfly from Sponsor N. Apollo proposed an acquisition for $48-$52 per share, Sponsor I proposed an acquisition for $50 per share, Sponsor J proposed an acquisition for $45-$46 per share and Sponsor M proposed an acquisition for $50 per share. Sponsor N proposed to make an investment of $100-$140 million in Shutterfly convertible notes, convertible into common stock representing an approximate 6%-9% equity stake in the company. Strategic Party A did not submit an indication of interest in advance of the March 28, 2019 deadline and informed representatives of Morgan Stanley that it would not be pursuing an acquisition of Shutterfly. At this time, the range of $48.00-$52.00 per share represented a range of premia of 19.2% to 29.1% over our closing stock price on March 28, 2019.

On April 1, 2019, the Strategic Review Committee met, together with another member of our Board, members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, representatives of Morgan Stanley discussed the strategic process, and the discussions with potentially interested parties, since our announcement of the formation of the Strategic Review Committee on February 5, 2019, and then described the non-binding preliminary indications of interest received from Apollo, Sponsor I, Sponsor J, Sponsor M and Sponsor N. After discussion, the Strategic Review Committee directed representatives of Morgan Stanley to inform each of Apollo, Sponsor I and Sponsor M that we would continue discussions with them and provide them with additional due diligence information. Representatives of Morgan Stanley contacted each of those three remaining parties to inform them of the Strategic Review Committee’s decision, and on April 3, 2019, Sponsor M was provided access to the online data room (to which Apollo and Sponsor I had been previously provided access).

On April 4, 2019, representatives of Morgan Stanley provided an update to the Strategic Review Committee on the discussions with Apollo, Sponsor M and Sponsor I. On April 5, 2019, Apollo was granted permission to begin discussions with debt financing sources. On April 7, 2019, each of Sponsor I and Sponsor M was also granted permission to begin discussions with debt financing sources.

On April 9 and April 10, 2019, members of our senior management provided further presentations to Apollo regarding our business. Over the course of the following weeks, Apollo and Sponsor I had numerous separate in-depth due diligence discussions with members of our senior management, and on April 17, 2019, members of our senior management provided Sponsor M with a presentation regarding our business. On April 18, 2019, Apollo conducted a site visit at our facilities in Shakopee, Minnesota.

On April 22, 2019, Sponsor M informed representatives of Morgan Stanley that it would no longer pursue an acquisition of Shutterfly, citing concerns with growth in the Lifetouch business as well as its view that our business provided fewer manufacturing and cost rationalization opportunities than Sponsor M had expected to realize upon a potential acquisition.

 

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On April 23, 2019, our Board held a regularly scheduled in-person meeting, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During this meeting, our Board, members of senior management and representatives of Morgan Stanley reviewed our financial projections through 2021 under both a base case scenario (which was consistent with the projections that had been reviewed by our Strategic Review Committee on February 26, 2019) and a sensitivity case scenario that gave greater weighting to the risk and challenges facing Shutterfly, as described below under the caption “Proposal 1: Adoption of the Merger Agreement—Financial Projections” beginning on page 53 of this proxy statement. Our Board then directed representatives of Morgan Stanley to utilize both the base case projections and the sensitivity case projections in connection with its financial analysis. Representatives of Morgan Stanley then provided an update on the discussions with Apollo, Sponsor I and Sponsor M. Members of our Board and the representatives of Fenwick and Morgan Stanley then discussed the terms of a proposed form of the Merger Agreement, to be provided to Apollo and Sponsor I, that had been provided to the directors, including the ability of Shutterfly and our Board to respond to an unsolicited superior proposal and to terminate the Merger Agreement to enter into a superior transaction, and following this discussion, our Board directed representatives of Fenwick and Morgan Stanley to provide this draft Merger Agreement to Apollo and Sponsor I. Our Board members then discussed perspectives on our valuation, and on our risks and opportunities as an independent company. Our Board also directed representatives of Morgan Stanley to request final bids from Apollo and Sponsor I by May 2, 2019.

On April 24, 2019, representatives of Morgan Stanley sent letters to Apollo and Sponsor I requesting final proposals by May 2, 2019, including their revisions to the form of Merger Agreement (which had been provided to them on April 23, 2019). Later that same day, Bloomberg published an article describing market rumors that Apollo and Cerberus Capital Management were evaluating the acquisition of Shutterfly and discussing financing options with lenders.

On April 26, 2019, Sponsor I informed representatives of Morgan Stanley that it would no longer pursue an acquisition of Shutterfly, indicating that it would not be able to reach a valuation that would be acceptable, and citing concerns regarding management changes and execution risk.

On May 2, 2019, Apollo informed representatives of Morgan Stanley that it would need an additional week to make a final proposal.

On May 3, 2019, the Strategic Review Committee met, together with members of our senior management and representatives of Morgan Stanley. At this meeting, representatives of Morgan Stanley presented an update on the preliminary feedback and discussions with Apollo, and the Strategic Review Committee directed representatives of Morgan Stanley to confirm to Apollo that Apollo could submit a final bid as late as May 10, 2019.

On May 10, 2019, Apollo submitted a written proposal to acquire Shutterfly for $48.00 per share in cash. The proposal also included a markup of the draft Merger Agreement as well as draft commitment letters from three banks for the debt financing of the transaction, and drafts of an equity commitment letter and a limited guarantee from the Apollo Guarantors to support the equity financing of the obligations of Newco under the Merger Agreement. Among other terms, the markup of the Merger Agreement submitted by Apollo increased the breakup fee payable by Shutterfly from 2% to 3.5% of the implied equity value of the transaction, included a reverse breakup fee payable by the Apollo Funds under certain circumstances equal to 5% of the implied equity value, included an obligation of ours to reimburse the Apollo Funds for their transaction expenses (subject to a limit to be agreed) if we terminated the Merger Agreement due to a failure to obtain the requisite stockholder approval or if Newco terminated the Merger Agreement due to our uncured breach, and included covenants related to Apollo’s efforts, and our assistance, in securing the debt financing contemplated by the debt commitment letter.

Later in the day on May 10, 2019, the Strategic Review Committee held a meeting with our senior management and representatives of Morgan Stanley and Fenwick. During this meeting, the representatives of

 

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Morgan Stanley and the members of the Strategic Review Committee discussed the proposal from Apollo. In addition, the representatives of Morgan Stanley and members of the Strategic Review Committee discussed our financial projections, perspectives on our valuation and possible transactions that might be an alternative to a sale of Shutterfly, including a minority investment by a private equity firm or a leveraged recapitalization. Following this discussion, the Strategic Review Committee directed representatives of Morgan Stanley to engage further with Apollo and to indicate that $48 was not a price that our Board would support, but that it would support a price of $52.00 per share, and that our Board would like Apollo to increase its proposed price per share. Following this meeting, representatives of Morgan Stanley spoke with representatives of Apollo and provided this feedback to Apollo.

On May 17, 2019, StreetInsider reported that we were nearing a definitive deal to be acquired in the $55-$57.50 price range by one of Apollo, Cerberus Capital or a third unidentified strategic bidder backed by a financial sponsor. Following that report, Shutterfly’s stock price on May 17, 2019 closed at $47.37, an almost 4% increase from the previous day’s closing price.

On May 21, 2019, representatives of Apollo verbally informed representatives of Morgan Stanley that Apollo would increase its proposed price per share to $48.50 in cash.

On May 22, 2019, the Strategic Review Committee met, together with other members of our Board, members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, representatives of Morgan Stanley provided an update on the revised proposal from Apollo and the discussions between Morgan Stanley and Apollo. In addition, a representative of Morgan Stanley reviewed our stock price performance over recent months and discussed the potential impact on the trading price of our common stock of the announcement of formation of a strategic review committee, and of media reports of rumors regarding a possible acquisition of Shutterfly, including by the Apollo Funds. The representatives of Morgan Stanley, members of the Strategic Review Committee and other Board members then discussed perspectives on our valuation, and the risks and challenges that we face as an independent company. In addition, the representatives of Morgan Stanley, members of the Strategic Review Committee and other Board members discussed other possible transactions, including a minority investment in Shutterfly and a debt-financed stock repurchase or recapitalization. After discussion, the Strategic Review Committee directed representatives of Morgan Stanley to inform Apollo that our Board did not support a transaction with Apollo at a price of $48.50 per share but would support a transaction at a price of $52.00 per share, and to encourage Apollo to continue its due diligence with a view to determining whether it could increase its proposed price. On May 23, 2019, representatives of Morgan Stanley conveyed this response to Apollo.

After further discussions between representatives of Morgan Stanley and Apollo, on May 27, 2019, Apollo submitted a revised written proposal to acquire Shutterfly for $50.00 per share in cash, and a representative of Morgan Stanley notified our Board of this revised proposal.

On May 29, 2019, our Board met, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, our Board members and representatives of Morgan Stanley discussed the revised bid from Apollo. Our Board discussed our strengths, weaknesses, opportunities, risks and challenges as an independent company, and our five-year financial projections prepared by our management under both a base case scenario and a sensitivity case scenario that gave greater weighting to the risk and challenges facing us, as described below under the section captioned “Proposal 1: Adoption of the Merger Agreement—Financial Projections” beginning on page 53 of this proxy statement, and in each of which the first three years were consistent with the three-year projections previously reviewed by our Board at its meeting on April 23, 2019. A representative of Morgan Stanley then discussed Morgan Stanley’s preliminary views on our valuation. Following discussion, our Board directed representatives of Morgan Stanley to inform Apollo that our Board would not support a transaction at $50.00 per share, but that there continued to be support at $52, and that our Board would be willing to proceed to a transaction at a price of $51.00 per share if Apollo were willing to move quickly to a transaction at that price. Following this meeting on May 29, 2019, representatives of Morgan Stanley communicated this response to representatives of Apollo, and on May 31, 2019, representatives of

 

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Apollo advised the representatives of Morgan Stanley that Apollo did not have authorization to increase the purchase price above $50.00 per share.

On June 1, 2019, our Board met again, together with members of our senior management and representatives of Morgan Stanley and Fenwick. During the meeting, our Board members and representatives of Morgan Stanley discussed the response from Apollo, discussed the Apollo proposal, as compared to our prospects, risks, challenges and opportunities as an independent company. Following this discussion, our Board directed the representatives of Morgan Stanley to reiterate to Apollo that our Board continued to be willing to proceed with a transaction at $51.00 per share in cash but would not support a transaction at a lower price per share.

In view of the anticipated departure of Mr. North as our President and Chief Executive Officer, our Board had been evaluating candidates for the position of President and Chief Executive Officer since February 2019 and identified Ryan O’Hara as a candidate for this position in May 2019. At its meeting on June 1, 2019, our Board approved the terms of an employment agreement with Mr. O’Hara. Subsequently on June 1, 2019, Mr. O’Hara accepted the position, we and Mr. O’Hara executed the employment agreement and representatives of Morgan Stanley shared a redacted copy of this employment agreement with Apollo on a confidential, no-names basis.

On June 3, 2019, a representative of Apollo verbally informed a representative of Morgan Stanley that it would revise its proposed price to $50.50 per share in cash. On June 4, 2019, representatives of Morgan Stanley provided an update to our Board describing this revised proposal and Morgan Stanley’s discussions with Apollo. Representatives of Morgan Stanley reiterated to representatives of Apollo that our Board would not support a transaction at a price per share less than $51.00. In addition, on June 4, 2019, representatives of Morgan Stanley provided Apollo with a revised draft of the Merger Agreement that had been prepared by Fenwick and reviewed by the Board. Among other changes, the markup of the Merger Agreement sent to Apollo decreased the breakup fee payable by us from 3.5% to 2.5% of the implied equity value, accepted the proposed reverse breakup fee of 5% of the implied equity value, removed our obligation to reimburse the Apollo Funds for their transaction expenses, and included a customary markup of the covenants related to Apollo’s efforts, and our assistance, to secure the debt financing. Apollo continued its due diligence review through the first week of June 2019.

After further discussion between representatives of Apollo and representatives of Morgan Stanley, on June 7, 2019, Apollo verbally informed the representatives of Morgan Stanley that it would increase its proposed price to $51.00 per share in cash, which it indicated was Apollo’s “best and final” proposal, and indicated its willingness and desire to sign the Merger Agreement and announce the transaction before the opening of the financial markets on June 10, 2019. Also on June 7, 2019, representatives of Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul, Weiss”), counsel to Apollo, provided a revised draft of the Merger Agreement to representatives of Fenwick, Shutterfly and Morgan Stanley. Among other things, this revised draft provided that the vesting of each outstanding unvested Shutterfly stock option, RSU and other equity awards would be converted into the right to receive cash payments on specified payment dates that were earlier than the original vesting schedule (subject to acceleration upon a “qualifying termination” of employment). In addition, the revised draft provided for payment by us of a breakup fee of 3% of the equity value of the transaction upon termination of the merger agreement under certain circumstances, our reimbursement of the Apollo Funds’ expenses (subject to a limit to be agreed) upon a termination of the merger agreement under certain circumstances, and a payment of a reverse breakup fee by the Apollo Funds of 5% of the equity value of the transaction upon termination of the merger agreement under certain circumstances.

Later on June 7, 2019, the Strategic Review Committee met, together with members of our senior management and representatives of Morgan Stanley and Fenwick, and discussed Apollo’s revised proposal. Following discussion, the Strategic Review Committee authorized our senior management and representatives of Morgan Stanley and Fenwick to negotiate definitive agreements with Apollo with a view to signing and announcement of a transaction on June 10, 2019. In addition, the Strategic Review Committee and

 

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representatives of Fenwick and Morgan Stanley discussed the revised draft of the Merger Agreement that had been provided earlier in the day, and the Strategic Review Committee provided guidance as to the positions to be taken in response, directed Fenwick to negotiate the Merger Agreement with Apollo and directed representatives of Fenwick, Morgan Stanley and our management to work with Apollo to enable it to complete its due diligence.

Representatives of Fenwick and representatives of Paul, Weiss then proceeded to negotiate the draft Merger Agreement, equity commitment letter and limited guarantee between June 7 and June 9, 2019, including the amounts of the breakup fee and reverse breakup fee payable by us and the Apollo Funds, the circumstances under which such fees would become payable, the amount of expense reimbursement payable by us and the circumstances under which such amounts would be payable, finalization of the debt financing covenants, and completion of the representations and warranties, interim operating covenants and related disclosures by us. On June 9, 2019, representatives of Apollo contacted representatives of Morgan Stanley and communicated that Apollo intended to simultaneously acquire Snapfish LLC and intended to publicly announce the Snapfish LLC acquisition concurrently with the Merger Agreement. Later the same day, representatives of Fenwick discussed the proposed acquisition of Snapfish LLC with representatives of Paul, Weiss, and further revised the Merger Agreement to provide that Apollo would be required to pay the reverse breakup fee to us due to a failure to obtain antitrust approval for the transactions contemplated by the Merger Agreement, and to modify the provisions relating to the process and level of efforts to be taken by Apollo in obtaining such approval.

On June 9, 2019, our Board met, together with our senior management and representatives of Morgan Stanley and Fenwick. At this meeting, a representative of Fenwick discussed the fiduciary duties of the members of our Board and summarized the principal terms of the Merger Agreement, equity commitment letter, debt commitment letter and limited guarantee. The representative of Fenwick also reviewed with our Board a proposed amendment to our bylaws to provide that certain types of stockholder litigation be brought exclusively in the Delaware Court of Chancery (or, if such court does not have jurisdiction, any other state or federal court in the State of Delaware), in light of the court’s experience in considering matters relating to the duties of corporate officers and directors and the rights of stockholders and the benefit of reducing the potentially inconsistent and conflicting results, and attendant costs, of having litigation proceed in multiple jurisdictions.

A representative of Morgan Stanley then discussed with our Board Morgan Stanley’s financial analysis of the proposed per share consideration of $51.00 in cash. As part of this discussion, the representative of Morgan Stanley described financing services that Morgan Stanley had previously provided to Apollo and its affiliates, none of which were related to the Merger. Following such discussion, Morgan Stanley rendered its oral opinion, which was subsequently confirmed by delivery of a written opinion dated as of June 9, 2019, that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in its written opinion, the merger consideration to be received by the holders of shares of our common stock (other than the holders of the Excluded Shares) pursuant to the Merger Agreement was fair from a financial point of view to such holders of shares of our common stock. See the section captioned “Proposal 1: Adoption of the Merger Agreement—Fairness Opinion of Morgan Stanley & Co. LLC” beginning on page 44 of this proxy statement. After discussion, including consideration of the factors described in the section captioned “Proposal 1: Adoption of the Merger Agreement—Recommendation of Our Board and Reasons for the Merger” beginning on page 38 of this proxy statement, our Board unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair to, advisable and in the best interests of, Shutterfly and its stockholders, (ii) approved the Merger Agreement and the transactions contemplated by the Merger Agreement, including the Merger and (iii) resolved to recommend that our stockholders approve the adoption of the Merger Agreement. Our Board also unanimously approved the amendment of our bylaws to provide that certain types of stockholder litigation be brought exclusively in the Delaware Court of Chancery (or, if such court does not have jurisdiction, any other state or federal court in the State of Delaware).

During the day of June 10, 2019, representatives of Fenwick and Paul, Weiss negotiated and finalized the terms of the Merger Agreement, the equity commitment letter and the limited guarantee and coordinated to complete the preparation of the disclosure schedules to the Merger Agreement, and Apollo and the lenders

 

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providing commitments for debt financing for the transactions contemplated by the Merger Agreement finalized the terms and conditions of the debt commitment letter. Also on the morning of June 10, 2019, Reuters reported that the Apollo Funds were in the lead to purchase the company with a deal value of nearly $2 billion.

Finally, after the close of the financial markets on June 10, 2019, Shutterfly and affiliates of the Apollo Funds executed the Merger Agreement, the Apollo Guarantors and Shutterfly executed the limited guarantee, the Apollo Guarantors and an affiliate of the Apollo Funds executed the equity commitment letter, an affiliate of the Apollo Funds and its lenders executed the debt commitment letter, and Shutterfly and Apollo issued a press release publicly announcing their entry into the Merger Agreement.

Recommendation of our Board and Reasons for the Merger

Recommendation of our Board

Our Board has unanimously (1) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair, advisable to and in the best interest of Shutterfly and our stockholders, and (2) approved the execution, delivery and performance of the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger.

OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE (1) “FOR” THE PROPOSAL TO ADOPT THE MERGER AGREEMENT; (2) “FOR” THE COMPENSATION PROPOSAL AND (3) “FOR” THE ADJOURNMENT PROPOSAL.

Reasons for the Merger

At a meeting of our Board on June 9, 2019, our Board unanimously (1) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are fair, advisable to and in the best interest of Shutterfly and our stockholders, (2) approved the execution, delivery and performance of the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger, and (3) resolved to recommend that our stockholders approve the adoption of the Merger Agreement.

In evaluating the Merger Agreement and the transactions contemplated thereby, our Board consulted with our outside legal counsel, financial advisor and senior management. In recommending that our stockholders vote in favor of adoption of the Merger Agreement, our Board considered numerous significant factors relating to the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, including the following material factors (which factors are not necessarily presented in order of relative importance):

General Business Considerations. Our Board considered our background, recent operating history and current position in the marketplace in its deliberations concerning the Merger and the other transactions contemplated by the Merger Agreement, including the following:

 

   

Our Business and Financial Condition. Our Board considered our business and industry, financial condition, historical and projected financial performance, competitive position and assets and prospects, including our prospects and risks if we were to remain an independent company, such as:

 

   

our ability to successfully integrate Lifetouch into our existing businesses and realize the benefits we expect to receive from the transaction, such as anticipated synergies, increasing revenues and an enhanced financial position;

 

   

the need to make significant investments to develop and improve our mobile and desktop websites, applications and user customer experience, and the risk that any such investments may not be successful or adopted by customers as expected;

 

   

our need to manage recent transitions in our management team, including our Chief Executive Officer transition, and to attract, hire, engage, integrate, retain and motivate qualified executives and other key employees throughout all areas of our business amid intense hiring competition for such qualified individuals, including from larger competitors;

 

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the challenges associated with maintaining and increasing our market share and our Shutterfly Consumer business, including the decline of active customers, enhancing and creating an easy-to-use robust mobile platform, the maturing paper-based products format, extending the Lifetouch experience with Shutterfly products, and improving marketing, pricing and promotion innovation;

 

   

our limited ability to control the costs associated with operating our business, especially those associated with producing and shipping products, acquiring customers, compensating personnel, acquiring equipment and technology, and leasing facilities, which may fluctuate significantly based on external macroeconomic factors;

 

   

our ability to continue to compete with competitors, which include both large and established companies as well as smaller and agile companies, that are frequently improving and enhancing their offerings, including developing, acquiring and expanding mobile and cloud-based products and services;

 

   

our ability to adapt our business, products and services to the rapid evolution of the digital photography, including changing technologies, the ongoing trends towards video consumption, and changes in consumer behavior;

 

   

our ability to compete with new participants that enter the market as industry consolidation further develops;

 

   

the competitive pricing pressures we face, particularly with respect to pricing and shipping, which become more challenging in times of slow or uncertain economic growth and consumer conservatism;

 

   

the operating results of our SBS business which depends on a limited number of customers, long sales cycles, long implementation periods and significant upfront costs, making predicting revenue and operating expenses difficult; and

 

   

other risks and uncertainties discussed in our public filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, which are incorporated herein by reference.

 

   

Broad Outreach. Our Board considered the breadth of our strategic process, in which we and Morgan Stanley contacted 42 parties (30 financial sponsors and 12 strategic parties) beginning in December 2018, and engaged in discussions with potential acquirers over the course of several months preceding the negotiation of the transaction with the Apollo Funds.

 

   

Strategic Alternatives. Our Board considered the potential benefits, risks and uncertainties facing our stockholders associated with possible strategic alternatives to the Merger, and the timing and likelihood of accomplishing such alternatives. Based on the foregoing, and our broad outreach over the course of our strategic process, the Board considered that the Apollo Funds were the only potential acquirer that submitted a final proposal to acquire Shutterfly and that none of the other available options, on a risk-adjusted basis, was reasonably likely to create value for our stockholders greater than the Merger Consideration.

 

   

Management Projections. Our Board considered certain forecasts prepared by and on bases reflecting the best currently available estimates and judgements of our senior management , including both the “base case” and “sensitivity case” projections, which projections (the “Management Projections”) were also made available to representatives of Morgan Stanley for purposes of rendering its fairness opinion to our Board and performing its related financial analyses, as more fully described under the section captioned “Proposal 1: Adoption of the Merger Agreement—Financial Projections” beginning on page 53 of this proxy statement. Our Board also considered that the Management Projections were based on various assumptions made by our senior management, that there are inherent risks and uncertainty in forecasts and related assumptions and that, as a result, our actual financial results in future periods could differ materially from management’s forecasted results, as more fully described under the section captioned “Proposal 1: Adoption of the Merger Agreement—Financial Projections” beginning on page 53 of this proxy statement.

 

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Financial Analyses and Fairness Opinion of Morgan Stanley. Our Board considered the oral opinion of Morgan Stanley, subsequently confirmed in writing, rendered to our Board, that as of June 9, 2019, and based upon and subject to the assumptions made, procedures followed, matters considered, and qualifications and limitations on the scope of the review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of shares of our common stock (other than holders of the Excluded Shares) pursuant to the Merger Agreement was fair from a financial point of view to such holders of shares of our common stock, as set forth in such opinion as more fully described below in the section captioned “Proposal 1: Adoption of the Merger Agreement—Fairness Opinion of Morgan Stanley & Co. LLC” beginning on page 44 of this proxy statement.

 

   

Senior Management Turnover. Our Board considered the departure of our President and CEO Christopher North, our retention of Ryan O’Hara to serve as our President and Chief Executive Officer, the contemplated departure of Michael Meek as President and Chief Executive Officer of Lifetouch, and the risk of turnover in other management positions, and the effects of such turnover on our ability to execute on corporate strategies and capitalize on growth opportunities.

 

   

Per Share Merger Consideration. Our Board considered the current and historical market prices of our Common Stock, including the performance of our Common Stock relative to other participants in our industry, including:

 

   

the current and historical market price of our Common Stock, including the fact that the $51.00 price to be paid for each share represents a premium of approximately 31% over the closing price of $38.91 per share on April 23, 2019, the last trading day before a media report was published speculating that Apollo was considering an acquisition of Shutterfly;

 

   

the fact that the Merger Consideration represents a 12.8% premium over the unaffected closing price of $45.22 per share on February 5, 2019, the day we announced financial results for the fourth quarter 2018 and announced the formation of the Strategic Review Committee;

 

   

the fact that the Merger Consideration represents a 9.9% premium over the 30-day volume-weighted average trading price of our Common Stock for the period ended June 9, 2019;

 

   

the fact that the Merger Consideration represents a 17.5% premium over the 60-day volume-weighted average trading price of our Common Stock for the period ended June 9, 2019; and

 

   

the risk that if we did not accept Apollo’s last offer, which was the result of vigorous negotiation, there may not have been another opportunity to do so.

Terms of the Merger Agreement. Our Board considered a number of positive factors in its deliberations concerning the Merger and the other transactions contemplated by the Merger Agreement, including the following:

 

   

Likelihood of Completion; Certainty of Payment. Absent a superior proposal, the Merger represents a transaction that would likely be consummated based on, among other factors:

 

   

the absence of any financing condition to the consummation of the Merger;

 

   

the reputation and financial condition of the Apollo Funds and their proven ability to complete acquisition transactions;

 

   

our ability to request that the Delaware Court of Chancery (or, if the Delaware Court of Chancery declines to accept or does not have jurisdiction over a particular matter, any state other federal court within the State of Delaware) specifically enforce the Merger Agreement, including the consummation of the Merger, under certain circumstances described in the section captioned “The Merger Agreement—Specific Performance” beginning on page 101 of this proxy statement; and

 

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the fact that the consummation of the Merger was not conditioned on the Apollo Funds’ proposed acquisition of Snapfish LLC.

 

   

Certainty of Consideration. Our Board considered the all-cash nature of the consideration to be paid in the Merger, which allows our stockholders to realize immediate value, in cash, for their investment in Shutterfly, while enabling our stockholders to avoid further risk of holding our common stock. Our Board further noted that the equity commitment letter and the debt commitment letter (along with our right to seek specific performance of the Merger Agreement in certain circumstances described in the section captioned “The Merger Agreement—Specific Performance” beginning on page 101 of this proxy statement) provided substantial assurance of a successful closing.

 

   

Other Terms of the Merger Agreement. Our Board considered the terms of the Merger Agreement, which are more fully described under the section captioned “The Merger Agreement” beginning on page 81 of this proxy statement. Certain provisions of the Merger Agreement that our Board considered significant include:

 

   

the scope of the representations, warranties and covenants being made by Merger Sub and Newco;

 

   

the conditions to the consummation of the Merger, including the requirement that the Merger Agreement be approved by a majority of our stockholders;

 

   

our ability, under certain circumstances, to furnish information to and conduct negotiations with third parties regarding unsolicited alternative acquisition proposals and our ability to terminate the Merger Agreement in order to accept a superior proposal, subject to Newco’s ability to match such superior proposal and subject to paying Newco a $51.2 million termination fee (the “Company Termination Fee”);

 

   

our Board’s belief that, if triggered, the Company Termination Fee is consistent with fees payable in comparable transactions and would be unlikely to preclude another party with the financial wherewithal and strategic interest in engaging in a transaction from making a competing proposal;

 

   

Newco’s obligation to pay us a termination fee, of $102.5 million, if the Merger Agreement is terminated by (1) us, if there has been a Newco Breach Termination (as defined below) (and such termination is the primary reason for the failure of the closing of the Merger to be consummated), (2) us, for failure of the Merger to occur on or prior to the outside date if we would then be entitled to terminate the Merger Agreement pursuant to a Newco Breach Termination, (3) us, if (a) the marketing period has ended and (i) all of the conditions applicable to Newco, Merger Sub and our obligations to close the Merger and (ii) Newco and Merger Sub’s obligations to close the Merger have, have been and continue to be satisfied or waived, (b) Newco and Merger Sub have failed to consummate the Merger on the date on which the closing of the Merger should have occurred pursuant to the Merger Agreement, (c) we have provided irrevocable written notice to Newco at least three business days prior to such termination that it is prepared, willing and able to effect the closing of the Merger, and (d) at all times during such three business day period, we stood ready, willing and able to consummate the transactions contemplated by the Merger Agreement, or (4) us or Newco, (a) for failure of the Merger to occur on or prior to the outside date, or because any court of competent jurisdiction or other governmental authority of competent jurisdiction issues an order or promulgates a law permanently restraining, enjoining or otherwise prohibiting the Merger (but solely if the applicable order or law is relating to antitrust laws), and (b) if all of the conditions applicable to Newco, Merger Sub and our obligations to close the Merger and Newco and Merger Sub’s obligations to close the Merger have, have been and continue to be satisfied or waived, except for (i) the condition related to the absence of such order or law restraining, enjoining or otherwise prohibiting, the Merger (but solely if the applicable order or law relates to antitrust laws), (ii) any waiting period under the HSR Act applicable to the transactions contemplated by the Merger Agreement having expired or earlier terminated and (iii) those conditions that, by their nature, are to be satisfied at the closing of the Merger and were

 

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capable of being satisfied as of the date of such termination if the closing of the Merger were to occur on the date of such termination;

 

   

Newco’s commitments in the Merger Agreement to use its reasonable best efforts to consummate the Merger (subject to the terms and conditions of the Merger Agreement); and

 

   

the following “deal protection” terms of the Merger and the Merger Agreement;

 

   

the absence of a financing contingency to Newco’s obligations to close the Merger;

 

   

the delivery by Newco, concurrently with execution of the Merger Agreement, of executed documents evidencing the ability to finance the Merger contemporaneously with the signing of the Merger Agreement, including the fact that we are a specified third-party beneficiary in the equity commitment letter;

 

   

the limited guarantee provided by the Apollo Guarantors of certain of Newco’s obligations under the Merger Agreement, including payment of the Newco Termination Fee;

 

   

the fact that the following items will not be considered a Company Material Adverse Effect, including (1) changes to the general economic or political conditions in the U.S. or any other country or region in the world, (2) changes in trading volume or trading pricing of our Common Stock, (3) changes to the conditions in our industries, (4) changes in national or international political conditions or acts of war, terrorism or sabotage, (5) changes in law or generally accepted accounting principles in the United States, (6) our failure (in and of itself) to achieve projections, (7) stockholder litigation, (8) the public announcement or pendency of the Merger Agreement, the Merger or the transactions contemplated thereby, (9) natural and man-made disasters and similar events, (10) actions taken pursuant to the Merger Agreement or failure to take any action prohibited by the Merger Agreement or (11) actions taken at the request of, or with the prior consent of Newco or Merger Sub following disclosure of all material facts, except, in the case of (1), (3), (4), (5) and (6), to the extent they do not adversely affect us disproportionately to other similarly situated businesses in our industries; and

 

   

the fact that holders of shares of our common stock will be entitled to payment of the appraisal value of such shares if demand is made and pursued in accordance with Section 262 of the DGCL.

Other Considerations. Our Board also considered a number of risks, uncertainties and potentially negative factors in its deliberations concerning the Merger and the other transaction contemplated by the Merger Agreement, including the following:

 

   

No Participation in Our Future. Our Board considered that if the Merger is consummated, our stockholders will receive the per share Merger Consideration in cash and will no longer have the opportunity to participate in our future earnings or growth or benefit from any potential future appreciation in value of our common stock, including any value that could be achieved if we engage in future strategic or other transactions. Moreover, upon the closing of the Merger, our stockholders not voting in favor of the Merger will be required to surrender their shares (other than holders of shares of our common stock who have properly demanded their appraisal rights under Section 262 of the DGCL) in exchange for a price determined by our Board and approved by a majority of our stockholders.

 

   

Trading Prices of Our Common Stock. Our Board considered the fact that the Merger Consideration represents a 48.2% discount to the twelve-month high trading price of our common stock for the period ended June 9, 2019, and represented a 4.2% premium to our closing price on June 7, 2019 (although our Board considered the fact that the closing price on June 7, 2019 reflected our announcement of our strategic process on February 5, 2019, and subsequent speculation, and published rumors, regarding our strategic process).

 

   

No-Shop Period; Termination Fee. Our Board considered that we cannot solicit alternative acquisition proposals and the requirement that we pay Newco the Company Termination Fee if the Merger

 

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Agreement is terminated under certain circumstances, including if our Board terminates the Merger Agreement to accept an unsolicited superior proposal, which may deter others from proposing an alternative transaction that may be more advantageous to our stockholders.

 

   

Risks the Merger May Not Be Completed. Our Board considered the risk that the conditions to the Merger may not be satisfied and that, therefore, the Merger would not be consummated. Our Board also considered the risks and costs to us if the Merger is not consummated, including:

 

   

the possible effects of the pendency of the Merger or termination of the Merger Agreement on our business, operating results, prospects, management, employees, customers, distributors and suppliers, including diversion from day-to-day operations, which effects may be exacerbated the longer the time period between the signing and termination of the Merger Agreement;

 

   

the potential effect on the trading price of our common stock;

 

   

that Newco requires substantial third-party debt financing for the transaction and that in the event that the debt financing sources do not provide the debt financing under the debt commitment letter, we will not be able to specifically enforce Newco’s obligations to consummate the Merger (and would instead in certain circumstances be entitled to payment of the Newco Termination Fee as provided under the Merger Agreement);

 

   

if Newco fails to complete the Merger as a result of a breach of the Merger Agreement, depending upon the reason for not closing, remedies may be limited to the Newco Termination Fee, which may be inadequate to compensate us for the damage caused, and if available, other rights and remedies may be expensive and difficult to enforce, and the success of any such action may be uncertain; and

 

   

the fact that we are subject to various remedies available to Newco should we fail to complete the Merger or breach the Merger Agreement.

 

   

Our Expenses. Our Board considered the fact that if the Merger is not consummated, we will be required to pay our own expenses associated with the Merger Agreement.

 

   

Newco Expenses. Our Board considered the fact that we would be required to reimburse Newco for certain of its reasonable and documented out-of-pocket costs and expenses up to $5,000,000 if the Merger Agreement is terminated because of our breach or because the requisite vote of our stockholders was not obtained.

 

   

Interim Operating Covenants. Our Board considered that the Merger Agreement imposes restrictions on the conduct of our business prior to the consummation of the Merger, requiring us and our subsidiaries to conduct their business in all material respects in the usual, regular and ordinary course in substantially the same manner as conducted prior to signing and to use commercially reasonable efforts, consistent with past practices and policies to preserve intact our business and operations in all material respects, keep available the services of its directors, officers and employees and preserve its current relationship with material customers, suppliers, distributors, licensors, licensees and governmental agencies, and may limit our and our subsidiaries from takings specified actions, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the Merger.

Timing. Our Board also considered the anticipated timing of the consummation of the transactions contemplated by the Merger Agreement as well as the business reputation of AGM and Apollo, its management and the lenders which our Board believed supported the conclusion that the Merger could be completed promptly and in an orderly manner.

The foregoing discussion of the information and factors considered by our Board is not intended to be exhaustive, but includes the material factors considered by our Board. In view of a variety of factors considered

 

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in connection with its evaluation of the Merger, our Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. Our Board did not undertake to make specific determinations as to whether any factor, or any particular aspect of any factor, supported or did not support its ultimate determination. Our Board based its recommendation on the totality of the information presented and concluded that the risks, uncertainties, restrictions and potentially negative factors associated with the Merger were outweighed by the potential benefits of the Merger to our stockholders.

In considering the recommendation of our Board with respect to the proposal to adopt the Merger Agreement, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, yours. Our Board was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the terms of the Merger, and in recommending that the Merger Agreement be adopted by our stockholders. See the section captioned “Proposal 1: The Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger” beginning on page 57 of this proxy statement.

Portions of this explanation of the reasons for the Merger and other information presented in this section are forward-looking in nature and, therefore, should be read in light of the section of this proxy statement captioned “Forward-Looking Information” beginning on page 10 of this proxy statement.

Fairness Opinion of Morgan Stanley & Co. LLC

We retained Morgan Stanley to provide us with financial advisory services and a financial opinion in connection with the possible sale of Shutterfly. Our Board selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation, its knowledge of and involvement in recent transactions in our industry, its knowledge of our business and affairs and its understanding of our business based on its long-standing relationship with us. At the meeting of our Board on June 9, 2019, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of June 9, 2019, and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of shares of our common stock (other than holders of the Excluded Shares) pursuant to the Merger Agreement was fair from a financial point of view to such holders.

The full text of the written opinion of Morgan Stanley, dated as of June 9, 2019, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion, is attached to this proxy statement as Annex B and is incorporated by reference in this proxy statement in its entirety. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You are encouraged to read Morgan Stanley’s opinion carefully and in its entirety. Morgan Stanley’s opinion was directed to our Board, in its capacity as such, and addresses only the fairness from a financial point of view of the consideration to be received by the holders of shares of our common stock (other than holders of the Excluded Shares) pursuant to the Merger Agreement as of the date of the opinion and does not address the relative merits of the Merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or are available. It was not intended to, and does not, constitute advice or a recommendation as to how our stockholders should vote at any stockholders’ meeting that may be held in connection with the Merger or whether the stockholders should take any other action in connection with the Merger. The summary of the opinion of Morgan Stanley set forth below is qualified in its entirety by reference to the full text of the opinion.

 

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In connection with rendering its opinion, Morgan Stanley, among other things:

 

   

reviewed certain publicly available financial statements and other business and financial information of Shutterfly;

 

   

reviewed certain internal financial statements and other financial and operating data concerning Shutterfly;

 

   

reviewed certain financial projections prepared by our management;

 

   

discussed our past and current operations and financial condition and our prospects with our senior executives;

 

   

reviewed the reported prices and trading activity for our common stock;

 

   

compared our financial performance and the prices and trading activity of our common stock with that of certain other publicly traded companies comparable with Shutterfly and their securities;

 

   

reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;

 

   

participated in certain discussions and negotiations among representatives of Shutterfly, Parent and certain other parties and their financial and legal advisors;

 

   

reviewed the draft Merger Agreement in the form of the draft dated June 9, 2019, the draft commitment letters from certain equity and debt financing providers in the form of the drafts dated June 9, 2019 (the “Commitment Letters”) and certain related documents; and

 

   

performed such other analyses, reviewed such other information and considered such other factors as Morgan Stanley deemed appropriate.

In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to it by Shutterfly, and formed a substantial basis for its opinion. With respect to the financial projections, Morgan Stanley assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of our management at the time prepared of our future financial performance. In addition, Morgan Stanley assumed that the Merger will be consummated in accordance with the terms set forth in the Merger Agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that Parent will obtain financing in accordance with the terms set forth in the Commitment Letters and that the definitive Merger Agreement will not differ in any material respect from the draft thereof furnished to Morgan Stanley. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed Merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed Merger. Morgan Stanley is not a legal, tax or regulatory advisor. Morgan Stanley is a financial advisor only and has relied upon, without independent verification, the assessment of Shutterfly and its legal, tax or regulatory advisors with respect to legal, tax or regulatory matters. Morgan Stanley expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of our officers, directors or employees, or any class of such persons, relative to the consideration to be received by the holders of shares of our common stock (other than holders of the Excluded Shares) in the Merger. Morgan Stanley has not made any independent valuation or appraisal of our assets or liabilities, nor has it been furnished with any such valuations or appraisals. Morgan Stanley’s opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley, as of June 9, 2019. Events occurring after June 9, 2019 may affect its opinion and the assumptions used in preparing it, and Morgan Stanley does not assume any obligation to update, revise or reaffirm its opinion.

 

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Summary of Financial Analyses

The following is a brief summary of the material analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion letter dated June 9, 2019 to our Board. The following summary is not a complete description of Morgan Stanley’s opinion or the financial analyses performed and factors considered by Morgan Stanley in connection with its opinion, nor does the order of analyses described represent the relative importance or weight given to those analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before June 7, 2019, the last full trading day prior to the meeting of our Board to approve and adopt the Merger Agreement. Some of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. The analyses listed in the tables and described below must be considered as a whole; considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Morgan Stanley’s opinion.

In performing the financial analysis summarized below and arriving at its opinion, Morgan Stanley used and relied upon certain financial projections provided by our management and referred to below as the Management Case and Management Sensitivity Case Projections. The financial projections are more fully described below under the section captioned “Proposal 1: Adoption of the Merger Agreement—Financial Projections” beginning on page 53 of this proxy statement. In accordance with direction from our Board, Morgan Stanley used the Management Case and Management Sensitivity Case Projections in its valuation analysis. Morgan Stanley also used and relied upon certain financial projections based on certain Wall Street research reports and referred to below as the Street Case.

Public Trading Comparables Analysis

Morgan Stanley performed a public trading comparables analysis, which attempts to provide an implied value of a company by comparing it to similar companies that are publicly traded. Morgan Stanley reviewed and compared certain financial estimates for Shutterfly with comparable publicly available consensus equity analyst research estimates for companies, selected based on Morgan Stanley’s professional judgment and experience, that share similar business characteristics and have certain comparable operating characteristics including, among other things, similarly sized revenue and/or revenue growth rates, market capitalizations, profitability, scale and/or other similar operating characteristics (these companies are referred to herein as the comparable companies).

For purposes of this analysis, Morgan Stanley analyzed the ratio of aggregate value, which Morgan Stanley defined as fully diluted market capitalization plus total debt, plus non-controlling interest, less cash and cash equivalents, to Adjusted EBITDA, which Morgan Stanley defined as net income excluding net interest expense, income tax expense and certain other non-cash and non-recurring items, principally depreciation, amortization and stock-based compensation, as well as the ratio of stock price to free cash flow per share, which Morgan Stanley defined as the ratio of Adjusted EBITDA less (1) capital expenditures and capitalized software (2) taxes, (3) interest expense, and (4) changes in net working capital to fully diluted shares outstanding, for calendar year 2019, of each of these comparable companies based on publicly available financial information compiled by Thomson Reuters for comparison purposes.

 

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These companies and their applicable multiples, as well as the corresponding multiples for Shutterfly based on the Street Case, were the following:

 

Comparable Company

   AV/Adjusted
EBITDA
     Stock Price to
Free Cash Flow
Per Share
 

1-800 FLOWERS.COM, Inc.

     13.0x        26.2x  

Bed Bath & Beyond Inc.

     3.0x        11.9x  

Cimpress N.V.

     10.5x        11.2x  

Dick’s Sporting Goods Inc.

     5.2x        10.3x  

eBay Inc.

     9.8x        15.0x  

Endurance International Group Holdings, Inc.

     7.8x        5.0x  

Expedia Group, Inc.

     9.0x        15.5x  

Groupon, Inc.

     6.7x        12.9x  

The Michaels Companies, Inc.

     4.9x        3.4x  

Party City Holdco Inc.

     5.7x        1.9x  

Qurate Retail, Inc.

     6.4x        5.8x  

Shutterstock, Inc.

     9.7x        15.5x  

Stamps.com Inc

     4.6x        2.6x  

Yelp Inc.

     9.4x        15.0x  

Shutterfly (Street Case)

     7.8x        13.1x  

Based on its analysis of the relevant metrics for each of the comparable companies and upon the application of its professional judgment and experience, Morgan Stanley selected representative ranges of aggregate value to Adjusted EBITDA multiples and of stock price to free cash flow per share multiples and applied these ranges of multiples to the estimated relevant metric for Shutterfly for the Management Case and Sensitivity Case.

Based on the estimated outstanding shares of our common stock on a fully diluted basis as of June 9, 2019 (including outstanding options and restricted stock units) as provided by our management on June 9, 2019, Morgan Stanley calculated the estimated implied value per share of our common stock as of June 9, 2019 as follows:

 

Calendar Year Financial Statistic

   Selected Calendar
Year Multiple
Ranges
     Implied Value
Per Share of Shutterfly
Common Stock ($)
 

Management Case

     

Aggregate Value to Estimated 2019 Adjusted EBITDA

     6.0x – 8.0x        35.05 – 53.82  

Stock Price to Estimated 2019 Free Cash Flow Per Share

     8.0x – 10.0x        42.60 – 53.26  

Management Sensitivity Case

     

Aggregate Value to Estimated 2019 Adjusted EBITDA

     6.0x – 8.0x        31.51 – 49.22  

Stock Price to Estimated 2019 Free Cash Flow Per Share

     8.0x – 10.0x        39.01 – 48.77  

No company utilized in the public trading comparables analysis is identical to Shutterfly. In evaluating the comparable companies, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond our control. These include, among other things, the impact of competition on our business and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Shutterfly and the industry, and in the financial markets in general. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using comparable company data.

Discounted Equity Value Analysis

Morgan Stanley performed a discounted equity value analysis, which is designed to provide insight into the potential future equity value of a company as a function of that company’s estimated Adjusted EBITDA and

 

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estimated free cash flow per share. The resulting equity value is subsequently discounted to arrive at an estimate of the implied present value. In connection with this analysis, Morgan Stanley calculated a range of implied present equity values per share of our common stock on a standalone basis.

To calculate the discounted equity value using our Adjusted EBITDA, Morgan Stanley used calendar year Adjusted EBITDA estimates from our financial projections for 2021. Based upon the application of its professional judgment and experience, Morgan Stanley applied a range of aggregate value to Adjusted EBITDA multiples (based on the range of aggregate value to Adjusted EBITDA multiples for the comparable companies) to these estimates to calculate the aggregate value. Morgan Stanley then subtracted the assumed future amount of net debt from such aggregate value in order to calculate the implied future equity value. Morgan Stanley then applied a discount rate of 10.0%, which rate was selected based on our estimated cost of equity to calculate the discounted equity value.

To calculate the discounted equity value using our free cash flow per share, Morgan Stanley used calendar year free cash flow per share estimates from our financial projections for 2021. Based upon the application of its professional judgment and experience, Morgan Stanley applied a range of stock price to free cash flow per share multiples (based on the range of stock price to free cash flow per share multiples for the comparable companies) to these estimates and applied a discount rate of 10.0%, which rate was selected based on our estimated cost of equity to calculate the discounted equity value.

The following table summarizes Morgan Stanley’s analysis:

 

Calendar Year Financial Statistic

   Selected Calendar
Year Multiple
Ranges
     Implied Value
Per Share of Shutterfly
Common Stock ($)
 

Management Case

     

Aggregate Value to Estimated 2021 Adjusted EBITDA

     6.0x – 8.0x        51.97 – 76.26  

Stock Price to Estimated 2021 Free Cash Flow Per Share

     8.0x –10.0x        55.57 – 69.47  

Management Sensitivity Case

     

Aggregate Value to Estimated 2021 Adjusted EBITDA

     6.0x – 8.0x        38.52 – 58.31  

Stock Price to Estimated 2021 Free Cash Flow Per Share

     8.0x –10.0x        40.74 – 50.93  

Discounted Cash Flow Analysis

Morgan Stanley performed a discounted cash flow analysis, which is designed to provide an implied value of a company by calculating the present value of the estimated future cash flows and terminal value of such company. Morgan Stanley calculated a range of equity values per share for our common stock based on a discounted cash flow analysis to value Shutterfly as a stand-alone entity. Morgan Stanley utilized estimates from the Management Case and the Management Sensitivity Case for purposes of its discounted cash flow analysis, as more fully described below.

Morgan Stanley first calculated the estimated unlevered free cash flow which is defined as Adjusted EBITDA less (1) stock-based compensation expense, (2) taxes, (3) capital expenditures and capitalized software, and (4) changes in net working capital. The Management Case and the Management Sensitivity Case each included estimates prepared by our management through 2024. Morgan Stanley calculated the net present value of free cash flows for Shutterfly for the years 2019 through 2024. Based on perpetual growth rates of 0% to 2% for the Management Case and (1%) to 1% for the Management Sensitivity Case, which Morgan Stanley selected based upon the application of its professional judgment and experience, Morgan Stanley calculated terminal values in the year 2024. The free cash flows and terminal values were discounted to present values as of March 31, 2019 at a discount rate ranging from 7.3% to 8.6%, which discount rates were selected, upon the application of Morgan Stanley’s professional judgment and experience, to reflect an estimate of our weighted average cost of capital.

 

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Based on the outstanding shares of our common stock on a fully diluted basis (including outstanding options and restricted stock units) as provided by our management on June 9, 2019, Morgan Stanley calculated the estimated implied value per share of our common stock as follows:

 

     Implied
Value Per
Share of Shutterfly
Common Stock ($)
 

Management Case

     55.89 – 90.54  

Management Sensitivity Case

     29.83 – 47.99  

Precedent Transactions Analysis

Morgan Stanley performed a precedent transactions analysis, which is designed to imply a value of a company based on publicly available financial terms of selected transactions. Morgan Stanley compared publicly available statistics for mature internet and e-commerce transactions selected based on Morgan Stanley’s professional judgment and experience, which were announced since 2012. Morgan Stanley selected such comparable transactions because they shared certain characteristics with the Merger. The following is a list of the mature internet and e-commerce transactions reviewed:

Selected Mature Internet and e-commerce Transactions (Target / Acquiror):

LSC Communications Inc. / Quad/Graphics, Inc.

Web.com Group, Inc. / Siris Capital Group, LLC

American Greetings Corporation / Clayton, Dubilier & Rice, Inc.

Lifetouch Inc. / Shutterfly, Inc.

WebMD Health Corp. / Internet Brands

BANKRATE, INC. / Red Ventures

Angie’s List, Inc. / InterActiveCorp

RetailMeNot, Inc. / Harland Clarke Holdings Corp.

Yahoo! Inc., Operating Business / Verizon Communications Inc.

Everyday Health, Inc. / Ziff Davis, LLC

Blue Nile, Inc. / Bain Capital Private Equity

Constant Contact, Inc. / Endurance International Group Holdings, Inc.

AOL Inc. / Verizon Communications Inc.

Orbitz Worldwide, Inc. / Expedia, Inc.

American Greetings Corporation / Weiss Family

Ancestry.com LLC / Permira

Morgan Stanley reviewed the transactions above for, among other things, the ratio of the aggregate value of each transaction to each target company’s Adjusted EBITDA for the 12-month period prior to the transaction announcement date (“LTM Adjusted EBITDA”) and each target company’s projected Adjusted EBITDA for the 12-month period following the transaction announcement date (“NTM Adjusted EBITDA”). The following table summarizes Morgan Stanley’s analysis:

 

Precedent Transactions Financial Statistic

   Mean      Median  

Aggregate Value to LTM Adjusted EBITDA

     11.0x        10.2x  

Aggregate Value to Estimated NTM Adjusted EBITDA

     10.9x        9.8x  

Based on its analysis of the relevant metrics and time frame for each of the transactions listed above and upon the application of its professional judgment and experience, Morgan Stanley selected representative ranges

 

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of implied financial multiples of the transactions and applied these ranges of financial multiples to the relevant financial statistic for Shutterfly. The following table summarizes Morgan Stanley’s analysis:

 

Precedent Transactions Financial Statistic

   Representative
Ranges
     Implied Value
Per Share of
Shutterfly Common
Stock ($)
 

Precedent Multiples

     

Aggregate Value to LTM Adjusted EBITDA (Actual)

     6.0x – 10.0x        32.95 – 68.83  

Aggregate Value to Estimated NTM Adjusted EBITDA (Street Case)

     6.0x – 10.0x        31.99 – 67.28  

No company or transaction utilized in the precedent transactions analysis is identical to Shutterfly or the Merger. In evaluating the precedent transactions, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond our control. These include, among other things, the impact of competition on our business and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Shutterfly and the industry, and in the financial markets in general, which could affect the public trading value of the companies and the aggregate value and equity value of the transactions to which they are being compared. The fact that points in the range of implied present value per share of Shutterfly derived from the valuation of precedent transactions were less than or greater than the Merger Consideration is not necessarily dispositive in connection with Morgan Stanley’s analysis of the Merger Consideration, but is one of many factors Morgan Stanley considered.

Other Information

Morgan Stanley observed additional factors that were not considered part of Morgan Stanley’s financial analysis with respect to its opinion, but which were noted as reference data for our Board, including the following information described under the sections captioned “—Premiums Paid Analysis,” “—Historical Trading Ranges” and “—Equity Research Analysts’ Future Price Targets” beginning on pages 50, 51 and 51, respectively, of this proxy statement.

Premiums Paid Analysis

Morgan Stanley considered, based on publicly available transaction information, the premiums paid in certain precedent transactions. Morgan Stanley compared publicly available statistics for technology company transactions that were announced since 2011 with greater than $250 million in transaction value and all-cash consideration (such criteria selected based upon Morgan Stanley’s professional judgement and experience).

Morgan Stanley measured the premiums paid in the transactions described above over: (1) the closing price of the target company’s stock on the day prior to a public announcement related to the transaction or prior to the share price being affected by acquisition rumors or similar merger-related news (the “Unaffected 1-Day Premium”); and (2) the average closing price of the target company’s stock price over the 30 trading days prior to a public announcement related to the transaction or prior to the share price being affected by acquisition rumors or similar merger-related news (the “Unaffected 30-Day Average Premium”). Based on the results of this analysis and its professional judgment and experience, Morgan Stanley applied an Unaffected 1-Day Premium range of 20 percent to 40 percent to our closing share price of $38.91 as of April 23, 2019 (the last full trading day prior to the publication of a media report speculating that affiliates of the Apollo Funds were considering a bid for Shutterfly), resulting in an implied price per share range of $46.69 to $54.47. Based on the results of this analysis and its professional judgment and experience, Morgan Stanley applied an Unaffected 30-Day Average Premium range of 20 percent to 40 percent to our average closing share price over the 30 trading days prior up to and including April 23, 2019 (the last full trading day prior to the publishing of a media report speculating that the affiliates of the Apollo Funds were considering a bid for Shutterfly), resulting in an implied price per share range of $48.42 to $56.49.

 

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No company or transaction utilized in the premiums paid analysis is identical to Shutterfly or the merger. In evaluating the precedent transactions used for the premiums paid analysis, Morgan Stanley made assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond our control. These include, among other things, the impact of competition on our business and the industry generally, industry growth, and the absence of any material change in the financial condition and prospects of Shutterfly and the industry, and in the financial markets in general, which could affect the public trading value of the companies and the aggregate value and equity value of the transactions to which they are being compared. The fact that points in the range of implied value per share of our common stock derived from the premiums paid analysis were less than or greater than the Merger Consideration is not necessarily dispositive in connection with Morgan Stanley’s analysis of the Merger Consideration, but is one of many factors Morgan Stanley considered.

Historical Trading Ranges

Morgan Stanley reviewed the trading range with respect to the historical share prices of our common stock. Morgan Stanley reviewed the range of closing prices of our common stock for various periods ending on June 7, 2019 (the last full trading day prior to the meeting of our Board to approve and adopt the Merger Agreement). Morgan Stanley observed the following:

 

Period Ending June 7, 2019

   Range of Trading Prices ($)  

Last 12 Months

     35.08 – 98.50  

Since January 1, 2019

     38.07 – 49.96  

Morgan Stanley observed that our common stock closed at $38.91 on April 23, 2019, the last full trading day prior to the publication of a media report speculating that the affiliates of the Apollo Funds were considering a bid for Shutterfly. Morgan Stanley noted that the consideration per share of our common stock of $51.00 pursuant to the Merger Agreement reflected a 31 percent premium to the unaffected price per share of our common stock of $38.91 on April 23, 2019, the last full trading day prior to the publishing of a media report speculating that the affiliates of the Apollo Funds were considering a bid for Shutterfly.

Equity Research Analysts’ Future Price Targets

Morgan Stanley reviewed the future public trading price targets for our common stock prepared and published by equity research analysts prior to June 7, 2019 (the last full trading day prior to the meeting of our Board to approve and adopt the Merger Agreement), such equity research analysts being all of the analysts publishing research following the release of our first quarter earnings. These one-year forward targets reflected each analyst’s estimate of the future public market trading price of our common stock. The range of undiscounted analyst price targets for our common stock was $39.00 to $57.00 per share as of June 7, 2019. The range of analyst price targets per share for common stock discounted for one year at a rate of 10.0%, which rate was selected based on our estimated cost of equity, upon the application of Morgan Stanley’s professional judgment, was $35.47 to $51.84 per share as of June 7, 2019.

The public market trading price targets published by equity research analysts do not necessarily reflect current market trading prices for our common stock, and these estimates are subject to uncertainties, including our future financial performance and future financial market conditions.

General

In connection with the review of the Merger by our Board, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any

 

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particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of Shutterfly. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond our control. These include, among other things, the impact of competition on our business and the industry generally, industry growth, and the absence of any adverse material change in our financial condition and prospects and the industry, and in the financial markets in general. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness from a financial point of view of the consideration to be received by the holders of shares of our common stock (other than holders of the Excluded Shares) pursuant to the Merger Agreement and in connection with the delivery of its opinion, dated June 9, 2019, to our Board. These analyses do not purport to be appraisals or to reflect the prices at which shares of our common stock might actually trade.

The consideration to be received by the holders of shares of our common stock (other than the holders of the Excluded Shares) pursuant to the Merger Agreement was determined through arm’s-length negotiations between us and the Apollo Funds and was approved by our Board. Morgan Stanley provided advice to our Board, and the Strategic Review Committee of our Board, during these negotiations but did not, however, recommend any specific consideration to us or our Board, nor did Morgan Stanley opine that any specific consideration constituted the only appropriate consideration for the Merger. Morgan Stanley’s opinion did not address the relative merits of the Merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or are available. Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation as to how our stockholders should vote at any stockholders’ meeting that may be held in connection with the Merger, or whether the stockholders should take any other action in connection with the Merger.

Morgan Stanley’s opinion and its presentation to our Board was one of many factors taken into consideration by our Board to approve and adopt the Merger Agreement. Consequently, the analyses as described above should not be viewed as determinative of the opinion of our Board with respect to the consideration pursuant to the Merger Agreement or of whether our Board would have been willing to agree to different consideration. Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with Morgan Stanley’s customary practice.

Our Board retained Morgan Stanley based on its qualifications, expertise and reputation, its knowledge of and involvement in recent transactions in our industry, its knowledge of our business and affairs and its understanding of our business based on its long-standing relationship with us. Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Its securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading and prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley and its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, finance positions, and may trade or otherwise structure and effect transactions, for their own account or the accounts of its customers, in debt or equity securities or loans of Parent, Shutterfly, the Apollo Related Entities (as defined below) or any other company, or any currency or commodity, that may be involved in the Merger, or any related derivative instrument.

Under the terms of its engagement letter, Morgan Stanley provided us with financial advisory services and a financial opinion, described in this section and attached to this proxy statement as Annex B, in connection with

 

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the Merger, and we have agreed to pay Morgan Stanley a fee of approximately $31 million for its services, $2.5 million of which became due and payable upon the execution of the Merger Agreement and the remainder of which is contingent upon the consummation of the Merger. We have also agreed to reimburse Morgan Stanley for certain of its expenses, including fees of outside counsel and other professional advisors, incurred in connection with its engagement. In addition, we have agreed to indemnify Morgan Stanley and its affiliates, its and their respective directors, officers, agents and employees and each other person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses relating to, arising out of or in connection with Morgan Stanley’s engagement.

In the two years prior to the date of its opinion, Morgan Stanley or its affiliates have provided us with financial advisory and debt financing services, predominantly in connection with our acquisition of Lifetouch, and have received approximately $24 million in fees for such services from us during such time.

In the two years prior to the date of its opinion, Morgan Stanley and its affiliates have been engaged on financial advisory and financing assignments (consisting of debt and equity capital raising activities) for AGM and the majority-controlled portfolio companies owned and controlled by affiliates of funds managed by AGM’s majority-controlled affiliates (collectively, the “Apollo Related Entities”) and have received approximately $60.5 million in underwriting and similar fees for such services from the Apollo Related Entities. Morgan Stanley may seek to provide financial advisory or financing services to Shutterfly, the Apollo Funds or Apollo Related Entities in the future and would expect to receive fees for the rendering of these services.

Financial Projections

We do not as a matter of course make public projections as to future revenues, operating income or other results beyond the current fiscal year. Prospective financial information about Shutterfly (the “Projections”) is included in this proxy statement only because (1) a subset of the Projections was made available to Apollo in connection with the due diligence review of Shutterfly as described above; (2) the Projections were made available to Morgan Stanley for use in connection with its financial analysis as described in the section captioned “Proposal 1: Adoption of the Merger Agreement—Fairness Opinion of Morgan Stanley & Co. LLC” beginning on page 44 of this proxy statement and (3) the Projections were made available to our Board in connection with their consideration of a potential acquisition of Shutterfly and other strategic alternatives available to us. The Projections are not included in this proxy statement to influence any stockholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal rights with respect to the shares of our common stock.

Although the Projections are presented with numerical specificity, they reflect numerous estimates and assumptions made by us with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to our business, all of which are difficult or impossible to predict accurately and many of which are beyond our control. The Projections reflect assumptions as to certain potential business decisions that are subject to change. Without limiting the generality of the foregoing, the Projections include assumptions relating to revenue growth, facility plans, levels of expenditures and capital structure. The Projections cover several years and such information by its nature becomes less reliable with each successive year.

In the view of our management, the information was prepared on a reasonable basis, reflected the best estimates and judgments available to our management at the time and presented, to the best of our management’s knowledge and belief, the expected course of action and our expected future financial performance as of the date such information was prepared. In addition, the Projections did not take into account any circumstances or events occurring after the date they were prepared, including the transactions contemplated by the Merger Agreement or the announcement thereof. Further, these Projections did not take into account the effect of any failure of the Merger to occur, and should not be viewed as applicable or continuing in that context. However, this information is not fact and should not be relied upon as being necessarily indicative of future results. The Projections reflect subjective judgment in many respects and thus are susceptible to multiple interpretations and periodic revisions

 

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based on actual experience and business developments. As such, the Projections constitute forward-looking information and are subject to many risks and uncertainties that could cause actual results to differ materially from the results forecasted in the Projections, including, but not limited to, our performance, industry performance, general business and economic conditions, our ability to expand our customer base and increase sales to existing customers, our ability to meet production requirements, our ability to attract and retain management and other personnel, the impact of seasonality on our business, our ability to develop innovative, new products and services on a timely and cost-effective basis, recent and ongoing restructuring activities, staffing levels, competition, adverse changes in applicable laws, regulations or rules, and the various risks set forth in our reports filed with the SEC. There can be no assurance that the Projections will be realized or that actual results will not be significantly higher or lower than forecast. In addition, the Projections will be affected by our ability to achieve strategic goals, objectives and targets over the applicable periods. The Projections cannot, therefore, be considered a guarantee of future operating results, and this information should not be relied on as such.

The inclusion of the Projections should not be regarded as an indication that we and Morgan Stanley or anyone who received this information then considered, or now considers, them a reliable prediction of future events, and this information should not be relied upon as such. The inclusion of the Projections herein should not be deemed an admission or representation by us that we view such Projections as material information. The inclusion of the Projections in this proxy statement should not be regarded as an indication that the Projections will be necessarily predictive of actual future events given the inherent risks and uncertainties associated with such long-range forecasts. No representation is made by us or any other person regarding the Projections or our ultimate performance compared to such information. The Projections should be evaluated, if at all, in conjunction with the historical financial statements and other information about us contained in our public filings with the SEC. See the section captioned “Where You Can Find More Information beginning on page 109 of this proxy statement” for more information. In light of the foregoing factors, and the uncertainties inherent in the Projections, stockholders are cautioned not to place undue, if any, reliance on the Projections.

The Projections included in this document have been prepared by, and are the responsibility of, our management. PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the accompanying Projections and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. Incorporation by reference of our annual report on Form 10-K for the year ended December 31, 2018 relates to our previously issued financial statements. It does not extend to the Projections and should not be read to do so.

Some of the Projections are “non-GAAP financial measures,” which are financial performance measures that are not calculated in accordance with the published guidelines of the SEC regarding projections or accounting principles generally accepted in the United States (“GAAP”). These non-GAAP financial measures should not be viewed as a substitute for GAAP financial measures, and may be different from non-GAAP financial measures used by other companies. Furthermore, there are limitations inherent in non-GAAP financial measures, because they exclude charges and credits that are required to be included in a GAAP presentation. Accordingly, these non-GAAP financial measures should be considered together with, and not as an alternative to, financial measures prepared in accordance with GAAP.

 

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The following table presents the Management Case selected unaudited prospective financial information for the calendar years ending 2019 through 2024:

 

     2019E      2020E      2021E      2022E      2023E      2024E  
     (in millions)  

Consumer revenue

   $ 1,001      $ 1,041      $ 1,093      $ 1,126      $ 1,149      $ 1,160  

SBS revenue

     252        277        304        320        336        352  

Lifetouch revenue

     934        952        981        1,010        1,030        1,041  

Lifetouch revenue synergies(1)

     33        76        90        100        109        115  

Total revenue

     2,219        2,346        2,469        2,556        2,624        2,668  

Adjusted EBITDA(2)

     345        415        465        477        473        468  

Adjusted EBITDA minus capital expenditures

     220        305        355        357        348        338  

 

(1)

Reflects projected cross-sell revenue resulting from our acquisition of Lifetouch.

(2)

Adjusted EBITDA consists of earnings before interest income/expense, taxes, and depreciation and amortization, excluding the effect of stock-based compensation expense. Adjusted EBITDA is a non-GAAP financial measure and is not intended to represent, or to be used, as a substitute for operating income and net income as a measure of operating performance or for cash flows from operations as a measure of liquidity.

Our management also prepared “sensitivity case” forecasts that represented a downside view that gave greater weighting to the risk and challenges facing Shutterfly as an independent company in order to facilitate scenario planning discussions with our Board at its meeting on May 29, 2019. The sensitivity case forecast assumed declines in our Consumer and Lifetouch revenue beginning in 2021, reflecting more intense competition in our Consumer business than we presently anticipate, and reduced demand for our Lifetouch products due to lower participation among schools than we presently anticipate. The following table presents the Management Sensitivity Case selected unaudited prospective financial information for the calendar years ending 2019 through 2024:

 

     2019E      2020E      2021E      2022E      2023E      2024E  
     (in millions)  

Consumer revenue

   $ 962      $ 962      $ 962      $ 943      $ 924      $ 905  

SBS revenue

     252        277        304        320        336        352  

Lifetouch revenue

     932        932        932        913        895        877  

Lifetouch revenue synergies(1)

     —          20        30        30        30        30  

Total revenue

     2,145        2,190        2,228        2,205        2,184        2,164  

Adjusted EBITDA(2)

     324        352        385        377        365        353  

Adjusted EBITDA minus capital expenditures

     199        242        275        267        255        243  

 

(1)

Reflects projected cross-sell revenue resulting from our acquisition of Lifetouch.

(2)

Adjusted EBITDA consists of earnings before interest income/expense, taxes, and depreciation and amortization, excluding the effect of stock-based compensation expense. Adjusted EBITDA is a non-GAAP financial measure and is not intended to represent, or to be used, as a substitute for operating income and net income as a measure of operating performance or for cash flows from operations as a measure of liquidity.

 

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Projected Unlevered Free Cash Flow—Management Case

As part of the Projections, our management prepared forecasts for projected taxes, projected capital expenditures, projected stock-based compensation and projected decrease (increase) in net working capital and provided the Projections, including such forecasts, to our Board and Morgan Stanley. For purposes of its discounted cash flow analysis, Morgan Stanley has used the information set forth in the Projections in calculating Projected Unlevered Free Cash Flow—Management Case, a non-GAAP measure.

 

     2019E
(Q2-Q4)
    2020E     2021E     2022E     2023E     2024E  
     (in millions)  

Revenue

   $ 1,889     $ 2,346     $ 2,469     $ 2,556     $ 2,624     $ 2,668  

Adjusted EBITDA(1)

     388       415       465       477       473       468  

Taxes

     (56     (47     (59     (61     (65     (65

Capital expenditure and capitalized software

     (89     (110     (110     (120     (125     (130

Decrease (increase) in net working capital

     141       (4     (5     4       4       3  

Stock-based compensation

     (42     (54     (54     (55     (57     (58

Unlevered free cash flow(2)

     343       199       237       245       230       218  

 

(1)

Adjusted EBITDA consists of earnings before interest income/expense, taxes, and amortization and depreciation, excluding the effect of stock-based compensation expense. Adjusted EBITDA is a non-GAAP financial measure and is not intended to represent, or to be used, as a substitute for operating income and net income as a measure of operating performance or for cash flows from operations as a measure of liquidity.

(2)

Unlevered free cash flow consists of Adjusted EBITDA, minus stock-based compensation expense, taxes, capital expenditures and capitalized software, and changes in net working capital. Unlevered free cash flow is a non-GAAP financial measure and is not intended to represent, or to be used, as a substitute for operating income and net income as a measure of operating performance or for cash flows from operations as a measure of liquidity.

Projected Unlevered Free Cash Flow—Management Sensitivity Case

In addition, using the information set forth in the Management Sensitivity Case Projections, Morgan Stanley calculated Projected Unlevered Free Cash Flow—Management’s Sensitivity Case, a non-GAAP measure in its discounted cash flow analysis. Such calculations are summarized in the chart below.

 

     2019E
(Q2-Q4)
    2020E     2021E     2022E     2023E     2024E  
     (in millions)  

Revenue

   $ 1,815     $ 2,190     $ 2,228     $ 2,205     $ 2,184     $ 2,164  

Adjusted EBITDA(1)

     366       352       385       377       365       353  

Taxes

     (50     (31     (39     (38     (40     (39

Capital expenditure and capitalized software

     (89     (110     (110     (110     (110     (110

Decrease (increase) in net working capital

     136       (10     (10     (3     (3     (2

Stock-based compensation

     (42     (54     (54     (55     (57     (58

Unlevered free cash flow(2)

     322       146       172       171       155       144  

 

(1)

Adjusted EBITDA consists of earnings before interest income/expense, taxes, and amortization and depreciation, excluding the effect of stock-based compensation expense. Adjusted EBITDA is a non-GAAP financial measure and is not intended to represent, or to be used, as a substitute for operating income and net income as a measure of operating performance or for cash flows from operations as a measure of liquidity.

(2)

Unlevered free cash flow consists of Adjusted EBITDA, minus stock-based compensation expense, taxes, capital expenditures and capitalized software, and changes in net working capital. Unlevered free cash flow is a non-GAAP financial measure and is not intended to represent, or to be used, as a substitute for operating income and net income as a measure of operating performance or for cash flows from operations as a measure of liquidity.

 

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In addition, the Projections have not been updated or revised to reflect information or results after the date they were prepared or as of the date of this proxy statement, and except as required by applicable securities laws.

WE DO NOT INTEND TO UPDATE OR OTHERWISE REVISE THE PROJECTIONS OR THE SPECIFIC PORTIONS PRESENTED TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE UNDERLYING ASSUMPTIONS ARE SHOWN TO BE IN ERROR.

Interests of our Directors and Executive Officers in the Merger

When considering the recommendation of our Board that you vote to approve the proposal to adopt the Merger Agreement, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, the interests of our stockholders generally, as more fully described below. Our Board was aware of and considered these interests, among other matters, in approving the Merger Agreement and the Merger and recommending that the Merger Agreement be adopted by stockholders. The transactions contemplated by the Merger Agreement will be a “change in control” for purposes of our executive compensation and benefit plans and agreements described below.

Treatment of Shutterfly Equity Awards

As a result of the Merger, the treatment of the Company Options, Company RSUs, Company PSUs, and Company MSUs that are outstanding immediately prior to the Effective Time will be as follows:

Treatment of Company Options

As of July 26, 2019, there were outstanding Company Options to purchase 987,738 shares of our common stock with an exercise price less than $51.00 per share, of which Company Options covering 938,658 shares were held by our executive officers. As of July 26, 2019, none of our non-employee directors hold Company Options.

To the extent not exercised or expired, each Company Option outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive an amount in cash equal to the product of (1) the aggregate number of shares of our common stock subject to such Company Option, multiplied by (2) the excess, if any, of $51.00 over the applicable per share exercise price of such Company Option, subject to the payment conditions described below, without interest and less any required withholding of taxes. Each outstanding Company Option, whether vested or unvested, with an exercise price per share equal to or greater than $51.00, will be cancelled pursuant to the terms and conditions of the Merger Agreement without payment of any consideration.

Treatment of Company RSUs, Company PSUs and Company MSUs

As of July 26, 2019, there were 1,942,248 outstanding Company RSUs (excluding Company PSUs and Company MSUs), 497,739 outstanding Company PSUs (assuming a maximum level of achievement for PSUs for which the applicable performance measurement period has not been completed) and 374,650 outstanding Company MSUs (assuming a maximum level of achievement for MSUs for which the applicable performance measurement period has not been completed), all of which provide for settlement in the form of shares of our common stock, and of which (1) 505,630 Company RSUs were held by our directors and executive officers, and (2) 490,110 Company PSUs and 374,650 Company MSUs held by our executive officers.

Each Company RSU that is unexpired, unsettled and outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive $51.00, subject to the payment conditions described below, without interest and less any required withholding of taxes. Each Company PSU and each Company MSU (to the extent earned) that is unexpired, unsettled and outstanding

 

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as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive $51.00, subject to the payment conditions described below, without interest and less any required withholding of taxes. To the extent that the performance measurement period for any Company PSU has not been completed at the Effective Time, such Company PSU will be earned based on target levels of achievement and pro-rated for a partial performance period ending as of the closing date of the Merger. To the extent that the performance measurement period for any Company MSU has not been completed at the Effective Time, such Company MSU will be earned based on actual achievement determined over a truncated performance period ending as of the closing date of the Merger. Any Company PSUs so earned are subject to the following time-based vesting schedule: (1) one-third will vest at the Effective Time, (2) one-third will vest on the second anniversary of the date of grant and (3) the remaining one-third will vest on the third anniversary of the date of grant, in accordance with its terms. Any Company MSUs so earned will vest over the original performance period, in accordance with its terms. Notwithstanding the foregoing, Company PSUs and Company MSUs, to the extent earned, will be subject to the payment conditions described below in the section of this proxy statement captioned “—Payments with Respect to Equity Awards.” Any Company PSUs or Company MSUs that are not earned as described above as of the Effective Time will be cancelled at the Effective Time for no consideration.

Payments with Respect to Equity Awards

The amounts described above with respect to each Company Option, Company RSU, Company PSU (to the extent earned) and Company MSU (to the extent earned) will be paid in accordance with the original vesting schedule applicable to such equity awards, except that (1) amounts payable with respect to any equity awards originally scheduled to vest during calendar years 2020 or 2021 will be paid on January 1 of the respective calendar year; and (2) amounts payable with respect to any equity awards originally scheduled to vest after calendar year 2021 will be paid on July 1, 2021, or in either case, upon the award holder’s earlier qualifying termination of employment by Shutterfly without “cause” or his or her resignation following a “constructive termination” (each, as defined in the Merger Agreement).

As of July 26, 2019, the assumed effective date of the Merger, the estimated aggregate value of vested Company Options held by our named executive officers is approximately $1,449,718. For an estimate of the amounts that may be paid or become payable to each of our named executive officers with respect to unvested equity awards in connection with the Merger, see the section captioned “Proposal 1: Adoption of the Merger Agreement—Quantification of Potential Payments and Benefits to our Named Executive Officers” beginning on page 61 of this proxy statement. As of July 26, 2019, the assumed effective date of the Merger, the estimated aggregate value of vested Company Options held by our executive officers who are not named executive officers is $234,555 and the estimated aggregate value of unvested equity awards is $17,681,462. The foregoing amounts have been determined using the expected per share Merger Consideration of $51.00, and assuming the performance metrics applicable to the Company PSUs are achieved at target and are pro-rated for the performance period ending July 26, 2019, and the Company MSUs are achieved at 138.00% of target.

Equity Awards Held by Non-Employee Directors

Notwithstanding the foregoing, at the Effective Time of the Merger, all outstanding and unvested Company RSUs held by our non-employee directors will accelerate and become fully vested. Assuming that the Effective Time of the Merger is July 26, 2019, the estimated aggregate amounts that would become payable to the non-employee directors in respect of their outstanding Company RSUs is approximately $9.5 million. Our non-employee directors do not hold any other type of equity awards.

Agreements or Arrangements with our Executive Officers and Directors

Each of our current executive officers is party to an offer letter, retention agreement or transition agreement with us that provides for certain payments and benefits in connection with a change in control or in the event of

 

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certain qualifying terminations of employment following a change in control. The Merger will constitute a change in control for purposes of each of the agreements described below.

Offer Letter with Ryan O’Hara

We entered into an offer letter, dated June 1, 2019, with Ryan O’Hara in connection with his appointment as our President and Chief Executive Officer. The offer letter became effective on June 24, 2019, the date on which Mr. O’Hara commenced employment with us.

Pursuant to the offer letter, upon the closing of a change in control following which we are no longer a publicly traded company, a portion of Mr. O’Hara’s Company RSUs (with an approximate value of $3.0 million as of July 26, 2019) granted in connection with his appointment will accelerate in full. If Mr. O’Hara’s employment is terminated by us without “cause” or if he resigns for “good reason” within the period commencing 90 days prior to, and ending 12 months following a change in control, Mr. O’Hara will become entitled to the following payments and benefits, subject to his execution of a release of claims: (i) a lump-sum payment equal to the sum of (1) 12 months of his then-current base salary and (2) 100% of his target bonus for the then-current fiscal year; and (ii) a lump-sum payment equal to the employer and employee portions of his applicable COBRA premiums for 18 months. In addition, (1) Mr. O’Hara’s Company RSUs will become vested with respect to 100% of the shares subject thereto; and (2) Mr. O’Hara’s Company PSUs and Company MSUs will become vested to the extent earned in accordance with the applicable award agreements.

For purposes of the offer letter “cause” generally means: (1) gross negligence or willful misconduct in the performance of duties; (2) commission of any act of fraud or material dishonesty with respect to Shutterfly; (3) conviction of, or plea of guilty or “no contest” to, a felony or a crime of moral turpitude or dishonesty; (4) material breach of any proprietary information and inventions agreement with us or any other unauthorized use or disclosure of our confidential information or trade secrets; (5) willful violation of our code of conduct, insider trading policy, or other written policies approved by our Board; or (6) repeated or persistent failure to perform duties reasonably assigned, subject certain notice and cure provisions.

For purposes of the offer letter, “good reason” generally means (1) a material reduction in base salary, other than as part of an across-the-board reduction applicable to all of our executives of less than 10%; (2) a material reduction in duties, authority or level or scope of job responsibilities, including any requirement that he report to any person(s) other than our Board, provided that a change in responsibility will not occur solely because (x) he is part of a larger organization, (y) he was nominated for re-election, but not re-elected to our Board or no longer serves on our Board, or (z) we are no longer a publicly traded company; (3) the relocation of our corporate office at which he works by more than 50 miles, which relocation materially increases his commuting distance; or (4) following a change in control where he is no longer the chief executive officer of a publicly traded company, the failure to provide him with an economic opportunity that is, in the aggregate including equity and cash incentive compensation, substantially equivalent to or better than the economic opportunity that was provided by us immediately prior to such change in control, in each case subject to certain notice and cure provisions.

Retention Agreements

Each of our executive officers (other than Messrs. O’Hara, Meek and North) is party to a retention agreement with us. Pursuant to their respective retention agreements, upon a termination of the executive officer’s employment without “cause” or if the executive officer resigns for “good reason” within the 12-month period following the consummation of a change in control of Shutterfly, the executive officer would become entitled to: (1) a lump-sum cash severance payment equal to 12 months’ base salary for the year in which the termination occurs, (2) continued employee benefits whereby Shutterfly or its successor will pay the executive’s COBRA premiums for continued healthcare coverage for up to 12 months; and (3) acceleration of 100% of the executive’s unvested equity awards, in each case subject to the executive officer’s execution of a general release of claims.

 

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For purposes of the retention agreements, “cause” generally means: (1) gross negligence or willful misconduct in the performance of the executive’s duties; (2) commission of any act of fraud or material dishonesty with respect to Shutterfly; (3) conviction of, or plea of guilty or “no contest” to, a felony or a crime of moral turpitude or dishonesty; (4) material breach of any proprietary information and inventions agreement with us or any other unauthorized use or disclosure of our confidential information or trade secrets; or (5) repeated failure to perform duties reasonably assigned to executive.

For purposes of the retention agreements, “good reason” generally means: (1) a material reduction in base salary, other than as part of an across-the-board reduction applicable to all Shutterfly executives of less than 10%; (2) a material reduction in level or scope of job responsibilities (provided that a change in responsibility shall not be deemed to occur solely because the executive is part of a larger organization, of a change in title, or the executive no longer serves on our Board or a committee thereof); or (3) the relocation of our corporate office at which the executive works by more than 50 miles, which relocation materially increases the executive’s commuting distance, subject to certain notice and cure provisions.

Mr. O’Hara’s offer letter and each of the retention agreements described above generally provide that if severance payments and other benefits provided to the executive officer pursuant to his or her applicable agreement or otherwise would be subject to excise taxes imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the executive would be entitled to receive the greater of (1) full payment of such payments and benefits and (2) such lesser amount as would result in no portion of those payments and benefits being subject to the excise tax.

Transition Agreements

On February 4, 2019, we entered into a transition agreement with Christopher North in connection with his resignation as our President and Chief Executive Officer and a member of our Board. Pursuant to the transition agreement, Mr. North will continue to provide certain transition services through a transition period ending on August 31, 2019. Upon completion of the transition period or an earlier termination of his employment without “cause” or his resignation at Shutterfly’s request, Mr. North will become entitled to receive certain cash severance payments and benefits, in each case subject to his execution of a release of claims.

In addition to such payments and benefits, if a change in control occurs during the 90-day period following the earlier of (1) the last day of the transition period (as currently anticipated) and (2) Mr. North’s termination other than for “cause,” or his resignation at Shutterfly’s request, Mr. North’s Company Options granted in 2016 will accelerate in full upon the effective time of the change in control. If the Merger is completed during the transition period and Mr. North continues to provide services through the transition period or experiences an earlier qualifying termination, all of Mr. North’s then-outstanding Company Options and Company RSUs would become fully vested.

On March 29, 2019, we entered into a transition agreement with Michael Meek in connection with his resignation as the President and Chief Executive Officer of Lifetouch. Pursuant to the transition agreement, Mr. Meek shall provide certain transition services through a transition period ending on October 15, 2019. Upon completion of the transition period or an earlier termination of his employment without “cause,” Mr. Meek will be entitled to receive certain cash severance and bonus payments, in each case subject to his execution of a release of claims. In addition to such payments, certain restricted cash awards to which Mr. Meek became entitled at the closing of the Lifetouch acquisition in exchange for certain Lifetouch time-based phantom stock units and Lifetouch performance-based phantom stock units will accelerate in full. Mr. Meek’s equity awards will continue to vest during his transition period, and any unvested equity awards that remain outstanding at the end of the transition period will be cancelled at the end of the transition period for no consideration pursuant to the terms of the transition agreement.

 

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New Arrangements between our Executive Officers and Newco or Apollo

As of the date of this proxy statement none of our executive officers has entered into, or committed to enter to into, any arrangements or other understandings regarding continued employment with or service to Apollo or its subsidiaries or affiliates following the Merger. While it is possible that Apollo may enter into such arrangements in the future, at this time there can be no assurance that Apollo will enter into any employment or other arrangements with our management, or if so, of the terms and conditions of any such arrangements.

Insurance and Indemnification of Directors and Executive Officers

The Merger Agreement provides for indemnification and exculpation rights with respect to liabilities for acts or omissions occurring at or prior to the Effective Time, as well as related advancement of expenses and insurance rights, in favor of the current and former directors and officers of us and our subsidiaries (collectively, “indemnitees”). Specifically, Newco and the Surviving Corporation have agreed to indemnify and advance expenses to the indemnitees to the fullest extent permitted by applicable law with respect to any pending or threatened proceeding arising out of or relating to actions or omissions of such indemnitee is their capacity as an officer, director, employee, fiduciary (including with respect to an employee benefit plan) or relating to the Merger Agreement and the transactions contemplated by the Merger Agreement. For a period of six years from the Effective Time, the certificate of incorporation and bylaws of the Surviving Corporation must contain provisions no less favorable with respect to exculpation, indemnification or advancement of expenses with respect to our present and former directors and officers and our subsidiaries for periods at or prior to the Effective Time than those set forth in our organizational documents as of the date of the Merger Agreement.

The Merger Agreement also provides that, for a period of six years after the Effective Time, the Surviving Corporation will maintain in effect our current insurance coverage with respect to our directors and/or officers. We will, prior to the Effective Time, bind and purchase a tail policy to our current policy of directors’ and officers’ liability insurance for a period of six years from the Effective Time. If the annual premium for such insurance coverage is in excess of 300% of the last annual premium paid prior to the date of the Merger Agreement, the Surviving Corporation will be obligated to obtain as much comparable insurance as possible for an annual premium equal to 300% of the last annual premium paid prior to the date of the Merger Agreement.

Quantification of Potential Payments and Benefits to our Named Executive Officers

In accordance with Item 402(t) of Regulation S-K, the table below sets forth the amount of payments and benefits that each of our named executive officers would or may receive in connection with the Merger. The amounts reported below are based on various assumptions that may or may not actually occur or be accurate on the relevant date, including assumptions described in footnotes to the table. For example, we have assumed, among other things, that (1) the Effective Time of the Merger is July 26, 2019, which is the assumed date of the closing of the Merger solely for the purposes of disclosure in this section; (2) the Company PSUs are achieved at target and are prorated for the performance period ending July 26, 2019, in accordance with the terms of the Merger Agreement; (3) the performance criteria applicable to Company MSUs will be achieved at 138.00% of target levels, measured in accordance with the terms of the Merger Agreement; (4) the employment of each of our executive officers is terminated by us without “cause” or due to the officer’s resignation for “good reason” (as such terms are defined in the relevant plans and agreements), in either case, immediately following the assumed Effective Time of July 26, 2019 (except for Messrs. Meek and North, as noted below); (5) that the number of equity awards held by each named executive officer on July 26, 2019 is the same as the number of equity awards that will be held by each such named executive officer at the Effective Time, such that the equity values in the table below do not take into account any vesting, forfeitures or exercises that may occur between July 26, 2019 and the Effective Time; and (6) no reductions of any payments or benefits would be triggered pursuant to excise tax provisions in any named executive officer’s applicable agreement.

The compensation described below does not include any severance payments or other benefits payable to Mr. North or Mr. Meek pursuant to his respective transition agreement that are not contingent upon the Merger

 

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and the disclosure below assumes that each such individual will continue to provide services through his applicable transition period, as is currently expected. For additional information, please see the section captioned “Proposal 1: Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger—Agreements or Arrangements with our Executive Officers and Directors—Transition Agreements” beginning on page 60 of this proxy statement. The actual amounts payable to our named executive officers will depend on whether the named executive officer experiences a qualifying termination, the date of termination (if any) and the terms of the plans or agreements in effect at such time, and accordingly may differ materially from the amounts set forth below.

 

Named Executive Officer

   Cash ($)(1)      Equity
Awards ($)(2)
     Perquisites/
Benefits ($)(3)
     Total ($)  

Ryan O’Hara

     1,142,466        11,972,148        36,749        13,151,363  

Satish Menon

     585,000        3,893,874        24,499        4,503,373  

Maureen Mericle

     547,500        1,971,405        20,447        2,539,352  

Michael Pope

     675,000        6,910,204        24,499        7,609,703  

Christopher North

     —          1,336,685        —          1,336,685  

Michael Meek

     —          62,067        —          62,067  

 

(1)

Cash. Pursuant to the terms of the Merger Agreement, each employee who continues to provide services following the completion of the Merger will continue to be eligible for an annual bonus pursuant to the terms of our 2019 Performance Plan, based on actual achievement of the applicable performance metrics. If any such employee experiences a “double-trigger” termination (a termination without “cause” as defined in the Merger Agreement) following the Merger but prior to payment of his or her annual bonus, the employee will be entitled to payment of the bonus to the extent that it would have been earned had the employee remained employed through the payment date. For purposes of the foregoing calculations, bonuses were determined assuming achievement at target level and, in the case of Mr. O’Hara, prorated to reflect his mid-year appointment in June 2019. Pursuant to the Merger Agreement and their respective transition agreements, Messrs. North and Meek are not entitled to annual bonuses under the 2019 Performance Plan.

In addition, pursuant to Mr. O’Hara’s offer letter, upon a “double-trigger” termination (a termination without “cause” or his resignation following a “constructive termination”) during the period commencing 90 days prior to the Effective Time and ending 12 months following the consummation of the Merger, Mr. O’Hara will become entitled to a lump-sum cash severance payment consisting of (a) 12 months of his base salary plus (b) 100% of his target bonus (assuming target achievement) for the fiscal year in which the termination occurs, prorated based on his start date. Pursuant to their respective retention agreements, upon a “double-trigger” termination (i.e., a termination without “cause or his or her resignation for “good reason”) within 12 months following the consummation of the Merger, each of Messrs. Pope and Menon and Ms. Mericle would be entitled to a lump-sum payment consisting of 12 months of his or her respective base salary.

 

Named Executive Officer

   2019
Bonus
($)
     Base Salary
Component of
Severance ($)
 

Ryan O’Hara

     392,466        750,000  

Satish Menon

     195,000        390,000  

Maureen Mericle

     182,500        365,000  

Michael Pope

     225,000        450,000  

Christopher North

     —          —    

Michael Meek

     —          —    

 

(2)

Equity. Pursuant to his offer letter, a portion of Mr. O’Hara’s Company RSUs (with an approximate value of $3.0 million) are subject to “single-trigger” acceleration, such that they will accelerate and become vested upon completion of the Merger. In addition, each of the Company PSUs (including those held by each of our named executive officers other than Mr. North and Ms. Mericle, neither of whom was granted Company RSUs in 2019) is subject to partial “single-trigger” acceleration, such that upon the Effective Time of the Merger, each such Company PSU (a) will be deemed earned at target levels and pro-rated for service during

 

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  the performance period ending upon the closing of the Merger and (b) 1/3 of the shares underlying such Company PSU will become vested as of such date. The value associated with such “single-trigger” awards is $101,235 for Mr. O’Hara, $117,938 for Mr. Menon, $167,586 for Mr. Pope and $62,067 for Mr. Meek. The column in the table below entitled “Value of Unvested Company RSUs and Earned MSUs and PSUs” includes the value of the earned Company PSUs and Company MSUs that vest at the Effective Time.

In addition, if Mr. O’Hara experiences a “double-trigger” termination of service, Mr. O’Hara’s Company RSUs will become vested with respect to 100% of the shares subject thereto, and his Company PSUs and Company MSUs will vest to the extent earned (as provided for in the applicable award agreements). If any other named executive officer (other than Messrs. North and Meek) experiences a “double-trigger” termination of service, such executive will become entitled to full acceleration of his or her then-unvested equity awards.

For purposes of the table above, we have assumed that (i) the Merger will be completed during Mr. North’s transition period, ending August 31, 2019, and (ii) Mr. North will continue to provide services until such time, in which case Mr. North’s unvested Company Options and Company RSUs will vest in full upon his termination of employment. If the Merger is completed within the 90-day period following August 31, 2019, or Mr. North’s earlier qualifying termination, then Mr. North will be entitled to acceleration of his unvested Company Options (with a value of $525,938).

In addition, we have assumed that Mr. Meek will remain employed through the last day of his transition period, ending October 15, 2019. If Mr. Meek experiences an earlier qualifying “double-trigger” termination without “cause” or resignation following a “constructive termination” as set forth in the Merger Agreement, Mr. Meek will be entitled to full acceleration of his then-unvested equity awards (with an aggregate value of $3,560,973). Because we expect that Mr. Meek will continue employment through October 15, 2019, the acceleration of such equity awards is not included in the table above.

The following table sets forth the value of each type of unvested equity-based award subject to acceleration that is held by our named executive officers, calculated based on the Merger Consideration of $51.00 per share. For a more detailed description of the treatment of Shutterfly equity awards in connection with the Merger, see the sections captioned “Proposal 1: Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger—Treatment of Shutterfly Equity Awards” beginning on page 57 of this proxy statement and “Proposal 1: Adoption of the Merger Agreement—Interests of our Directors and Executive Officers in the Merger—Agreements or Arrangements with our Executive Officers and Directors” beginning on page 58 of this proxy statement.

 

Named Executive Officer

   Unvested
Company
RSUs
(Excluding
Unearned
PSUs and
MSUs)(*)
(#)
     Earned
Unvested
Company
PSUs and
MSUs(**)
(#)
     Value of
Unvested
Company
RSUs and
Earned
MSUs and
PSUs ($)
     Unvested
Company
Options
(#)
     Value of
Unvested
Company
Options
($)
     Total Value
of Unvested
Company
Equity
Awards ($)
 

Ryan O’Hara

     130,149        104,599        11,972,148        —          —          11,972,148  

Satish Menon

     40,964        32,297        3,736,311        25,210        157,563        3,893,874  

Maureen Mericle

     38,655        —          1,971,405        —          —          1,971,405  

Michael Pope

     77,110        54,563        6,715,323        31,181        194,881        6,910,204  

Christopher North

     15,897        —          810,747        194,792        525,938        1,336,685  

Michael Meek

     —          1,217        62,067        —          —          62,067  

 

  *

Amounts in this column include the number of shares underlying Company PSUs and Company MSUs earned prior to July 26, 2019 (the assumed date of the Merger), that are subject only to time-based vesting.

  **

Amounts in this column represent the number of shares underlying Company PSUs and Company MSUs that will be deemed earned upon the Merger, and subject to acceleration as described above.

 

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(3)

Perquisites/Benefits. Pursuant to their respective offer letters and/or retention agreements, upon a “double-trigger” termination, each of our named executive officers other than Messrs. North and Meek would be entitled to receive payment for continued healthcare coverage premiums. The amounts reflected are calculated based on the applicable named executive officer’s elected level of coverage for the 2019 plan year, with (a) Mr. O’Hara eligible to receive 18 months of COBRA premiums (both the employer and employee portion) and (b) Ms. Mericle and Messrs. Menon and Pope entitled to receive up to 12 months of COBRA premiums (both the employer and employee portion).

Financing of the Merger

We anticipate that the total amount of funds necessary to complete the Merger and the related transactions will be approximately $2.7 billion, which will be funded via equity financing and debt financing as described below, as well as cash on our balance sheet, if any. This amount includes the funds needed to (1) pay stockholders the amounts due under the Merger Agreement, (2) repay our existing indebtedness and (3) make payments in respect our outstanding equity-based awards pursuant to the Merger Agreement.

Although the obligation of Newco and Merger Sub to consummate the Merger is not subject to any financing condition, the Merger Agreement provides that, without Newco’s agreement, the closing of the Merger will not occur until the third business day after the expiration of the marketing period (which is described in the section of this proxy statement captioned “The Merger Agreement—Marketing Period” beginning on page 82 of this proxy statement) if the marketing period has not ended at the time of the satisfaction or waiver of the conditions set forth in the Merger Agreement (other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions at the closing).

Equity Financing

In connection with the Merger, Newco has entered into an equity commitment letter, dated as of June 10, 2019 (the “equity commitment letter”), pursuant to which the Apollo Guarantors have committed, on a several but not joint basis, subject to the conditions and limitations set forth in the equity commitment letter, to provide equity financing in an aggregate amount of up to $890 million, or such lesser amount, together with the debt financing and our and our subsidiaries’ available cash, if any, as may be required by Newco to make the payment of the per share Merger Consideration to our equityholders at the closing of the Merger as set forth in the Merger Agreement on the terms and subject to the conditions set forth therein.

Funding of the equity financing is subject to the conditions and limitations provided in the equity commitment letter, which include: (1) the satisfaction in full or valid waiver, on or before the closing of the Merger, of all of the conditions precedent to Newco and Merger Sub’s obligations to consummate the Merger under the Merger Agreement; (2) the satisfaction in full or valid waiver, on or before the closing of the Merger, of all the conditions precedent to the funding of the debt financing and the concurrent receipt by Newco or Merger Sub of the net cash proceeds of the debt financing (on the terms and subject to the conditions described in the debt commitment letter); and (3) the concurrent consummation of the Merger on the terms and subject to the conditions of the Merger Agreement.

The equity commitment letter and each Apollo Guarantor’s obligation to fund all or any portion of the equity financing will automatically terminate and cease to be of any further force or effect without the need for any further action by any person (at which time the obligations of each Apollo Guarantor under the equity commitment letter will be immediately discharged in full) upon the earliest of (1) the valid termination of the Merger Agreement; (2) the closing of the Merger; (3) the payment by the Apollo Guarantors of their obligations under the limited guarantee; and (4) the assertion, directly or indirectly, by Shutterfly or any of its affiliates, or any of its or their respective representatives, of any claim (whether at law or equity or in tort, contract or otherwise) against any Apollo Guarantor or any of their former, current or future direct or indirect equity holders, controlling persons, general or limited partners, officers, directors, employees, investment professionals,

 

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managers, stockholders, members, agents, affiliates, assignees, financing sources or representatives of any of the foregoing or any of their respective successors or assigns other than Newco or Merger Sub under the Merger Agreement and subject to the terms and conditions therein (each, a “related party”) or any related party of a related party in connection with the equity commitment letter, the Merger Agreement, the debt commitment letter, the limited guarantee, or any other document or instrument delivered in connection therewith or any of the transactions contemplated thereby other than (a) claims by Shutterfly against the Apollo Guarantors solely to the extent expressly provided under the limited guarantee and pursuant to the terms and subject to the conditions thereof or (b) claims by Shutterfly to enforce as a third party beneficiary to the equity commitment letter in the event we are awarded specific performance. Immediately upon valid termination of the equity commitment letter and without the need for any further action by any person, no Apollo Guarantor or any related party of an Apollo Guarantor or any related party of a related party will have any further obligation or liability thereunder. The Apollo Guarantors have no obligation to make any payment or contribution under the equity commitment letter at any time if the closing of the Merger does not occur.

Pursuant to the terms and conditions of the Merger Agreement, Newco and Merger Sub will use their reasonable best efforts to take all actions necessary, proper or advisable to arrange, obtain and consummate the equity financing on the terms and conditions contemplated by the equity commitment letter. In no event will the reasonable best efforts of Newco or Merger Sub be deemed or construed to either require Newco or Merger Sub to pay any fees in excess of those contemplated by the equity commitment letter or seek equity financing from any source other than a counterparty to, or in any amount in excess of that contemplated by, the equity commitment letter.

We are an express third-party beneficiary of the equity commitment letter for the purpose of causing the equity financing to be funded, but solely to the extent that we have been awarded, in accordance with, and subject to, the terms and conditions of the Merger Agreement, specific performance to require Newco to cause the equity financing under the equity commitment letter to be funded. For more information, see the section captioned “The Merger Agreement—Specific Performance” beginning on page 101 of this proxy statement.

Debt Financing

In connection with the Merger, Newco has obtained a debt commitment letter (the “debt commitment letter”) from a consortium of financial institutions (in each case, acting directly or through their respective affiliates or branches, as appropriate, collectively, the “debt commitment parties”) pursuant to which they have committed to provide Merger Sub, severally but not jointly, upon the terms and subject to the conditions set forth in the debt commitment letter, with (1) a $1,650 million senior secured term facility, $1,425 million of which will be available to complete the Merger; (2) a $300 million senior secured revolving facility (a portion of which is available to be drawn at the closing of the Merger); and (3) a $450 million senior unsecured bridge facility (less the amount of any senior unsecured notes issued as described below).

The debt commitment letter contemplates that Merger Sub will, at its option, either (1) issue senior unsecured notes in a Rule 144A or other private placement on or prior to the closing date of the Merger yielding up to $450 million in aggregate gross cash proceeds and/or (2) if any or all of the senior unsecured notes are not issued on or prior to the closing date of the Merger and the proceeds thereof made available to Merger Sub on the closing date of the Merger, borrow up to such unissued or unavailable amount in the form of senior unsecured bridge loans under the senior unsecured bridge loan facility.

The proceeds of the debt financing will be used (1) to finance, in part, the transactions contemplated by the Merger Agreement; (2) to repay our existing indebtedness; (3) to finance, in part, the acquisition of Snapfish LLC, a California limited liability company; and (4) in the case of the senior secured revolving facility, for general corporate purposes.

The obligations of the debt commitment parties to provide the debt financing under the debt commitment letter are subject to a number of conditions, including (1) the execution and delivery of definitive documentation

 

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consistent with the terms of the debt commitment letter; (2) the substantially simultaneous or substantially concurrent consummation of the Merger in accordance with the terms of Merger Agreement (without giving effect to any amendment, waiver, consent or other modification to the Merger Agreement that is materially adverse to the lenders in their capacities as such unless approved by the debt commitment parties); (3) since the date of the Merger Agreement, there not having been a material adverse event (as defined under the section of this proxy statement captioned “The Merger Agreement—Representations and Warranties” beginning on page 84 of this proxy statement); (4) delivery of certain audited, unaudited and pro forma financial statements; (5) as a condition to the availability of the senior unsecured bridge facility, Merger Sub having used commercially reasonable efforts to afford the investment banks a marketing period of at least 15 consecutive days (subject to certain blackout dates) following receipt of a complete customary preliminary prospectus or preliminary offering memorandum or preliminary private placement memorandum, in each case, which includes certain customary financial statements; (6) as a condition to the availability of the senior secured term loan facility and the senior secured revolving facility, Merger Sub having used commercially reasonable efforts to afford the debt commitment parties a marketing period of at least 15 consecutive days (subject to certain blackout dates) following receipt of a customary confidential information memorandum; (7) payment of all applicable fees and reasonable and, to the extent invoiced, documented out-of-pocket expenses; (8) the receipt of all documentation and other information about the borrower and guarantors required by regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations (including the PATRIOT Act); (9) the accuracy in all material respects of specified representations and warranties in the loan documents under which the debt financing will be provided and the accuracy of certain representations and warranties in the Merger Agreement (but only to the extent that Newco has the right to terminate its obligations under the Merger Agreement as a result of a breach of such representations in the Merger Agreement); (10) the execution and delivery of guarantees by certain guarantors and the taking of certain actions necessary to create and perfect a security interest in specified items of collateral; (11) the substantially simultaneous or substantially concurrent consummation of the equity financing; and (12) delivery of a customary solvency certificate and certain other customary closing documents.

The obligations of the debt commitment parties to provide the debt financing under the debt commitment letter will terminate at the earliest of (1) five business days after the outside date (as defined in and, if applicable, extended pursuant to the Merger Agreement and as described in the section of this proxy statement captioned “The Merger Agreement—Termination of the Merger Agreement” beginning on page 98 of this proxy statement) if the closing of the Merger will not have occurred on or prior to such date; (2) the termination of the Merger Agreement without the consummation of the Merger having occurred; or (3) the closing of the Merger occurs (x) in the case of the senior secured term facility and the senior secured revolving facility, without the use of the senior secured term facility or (y) in the case of the senior unsecured bridge facility, without the use of the senior unsecured bridge facility.

The definitive documentation governing the debt financing contemplated by the debt commitment letter has not been finalized and, accordingly, the actual terms of the debt financing may differ from those described in this proxy statement.

Newco and Merger Sub are required under the Merger Agreement to use their respective reasonable best efforts to take (or cause to be taken) all actions necessary, proper or advisable to arrange, obtain and consummate the debt financing in an amount required to consummate the transactions contemplated by the Merger Agreement not later than the closing date of the Merger on the terms and conditions of the debt commitment letter and any related fee letter. In the event any portion of the debt financing in an amount required to consummate the transactions contemplated by the Merger Agreement becomes unavailable on the terms and conditions contemplated in the debt commitment letter and any related fee letter for any reason, Newco is required under the Merger Agreement to use its reasonable best efforts to, as promptly as practicable following the occurrence of such event, notify Shutterfly and to use its reasonable best efforts to take (or cause to be taken) all actions necessary, proper or advisable to arrange to obtain alternative financing on terms and conditions not less favorable to Newco than the terms and conditions contained in the debt commitment letter in an amount sufficient, when added to the portion of the debt financing that is and remains available, the equity financing and

 

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our and our subsidiaries’ available cash, if any, to consummate the transactions contemplated by the Merger Agreement. In no event will the reasonable best efforts of Newco or Merger Sub be deemed to require Newco or Merger Sub to pay any fees in excess of those contemplated by the debt commitment letter. As of the date of this proxy statement, the debt commitment letter remains in effect, and Newco has not notified us of any plans to utilize alternate financing.

Newco’s and Merger Sub’s obligations to consummate the transactions contemplated by the Merger Agreement are not contingent on Newco’s and Merger Sub’s ability to obtain the debt financing (or any alternative financing) or any specific term with respect to such debt financing.

Shutterfly’s Cooperation

We have agreed to use our reasonable best efforts prior to the closing of the Merger to provide, and to cause our subsidiaries and our and their respective representatives to use reasonable best efforts to provide, in each case at Newco’s sole expense, all cooperation as is reasonably requested by Newco to assist Newco in causing the conditions in the debt commitment letter to be satisfied or as is otherwise reasonably requested by Newco or the debt financing sources and is reasonably necessary or customary for financings similar to the debt financing contemplated by the debt commitment letter (provided that such request does not unreasonably disrupt or interfere with the business or operations of Shutterfly or its subsidiaries), including, among other things, using reasonable best efforts to:

 

   

furnish Newco with the required financial information and other information regarding us and our subsidiaries customarily included in marketing materials or offering documents for financings similar to the debt financing contemplated by the debt commitment letter and inform Newco if we have knowledge of any facts as a result of which a restatement of any financial statements (or portion thereof) is probable or under consideration in order for such financial statements (or portion thereof) to comply with GAAP;

 

   

assist in preparation for and participate in marketing efforts and a reasonable number of meetings, conference calls, presentations and roadshows, due diligence sessions, drafting sessions and sessions with rating agencies and assist in obtaining ratings in connection with the debt financing;

 

   

(1) reasonably assist with the timely preparation of materials for rating agency presentations and bank information memoranda, lender presentations, investor presentations, offering documents, prospectuses, memoranda and similar documents for the debt financing and (2) request and facilitate Newco’s obtaining of customary auditors’ consents and reports and customary comfort letters of our independent accountants;

 

   

assist, subject to certain limitations, with the preparation of pro forma financial information and pro forma financial statements to the extent required by SEC rules and regulations or necessary or reasonably requested by Newco or the debt financing sources to be included in certain marketing materials or offering documents;

 

   

provide information required under applicable “know your customer” and anti-money laundering rules and regulations; and

 

   

execute and deliver, as of the closing of the Merger, any guarantee, pledge and security documents and other definitive financing documents or other certificates and otherwise reasonably facilitate the pledging of collateral and the granting of security interests in respect of the debt financing.

None of our or our subsidiaries or our respective directors, officers or employees will be required to enter into or perform any agreement (other than customary representation letters and authorization letters) with respect to the debt financing that is not contingent upon the closing or that would be effective prior to the Effective Time and the directors and managers of our subsidiaries will not be required to adopt resolutions approving the agreements, documents and instruments pursuant to which the debt financing is to be obtained prior to the

 

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Effective Time unless such directors and managers are to remain as directors and managers after the Effective Time and such resolutions are contingent upon, or only effective as of, the Effective Time. Newco will promptly reimburse us, upon our request, for all out-of-pocket fees, costs and expenses incurred by us or our subsidiaries in connection with its cooperation with the debt financing and will indemnify and hold harmless each of us, our subsidiaries and our respective affiliates and representatives against any and all liabilities and losses incurred by us in connection with such cooperation, other than to the extent such liabilities or losses were suffered or incurred as a result of the bad faith, gross negligence or willful misconduct of, or material breach of the Merger Agreement by, us, our subsidiaries or our respective representatives.

Limited Guarantee

Subject to the terms and conditions set forth in the limited guarantee, the Apollo Guarantors have guaranteed the due and punctual payment and performance of (1)(x) the Newco Termination Fee, if, when and as due, pursuant to the Merger Agreement, (y) our enforcement expenses and (z) the reimbursement obligations; or (2) all amounts payable (solely to the extent payable pursuant to a final and non-appealable order of a court of competent jurisdiction) as damages as a result of fraud by Newco or Merger Sub on or before the closing of the Merger under and in accordance with the terms of the Merger Agreement.

The Apollo Guarantors’ obligations under the limited guarantee are subject to a maximum aggregate cap of $103 million.

The limited guarantee will terminate and be of no further force and effect and the Apollo Guarantors will have no further obligation or liability under the limited guarantee, the Merger Agreement, the equity commitment letter or any other document or instrument delivered in connection therewith or in respect of the transactions contemplated thereby (or the termination or abandonment thereof), upon the earliest to occur of: (1) the closing of the Merger; (2) the payment of the guaranteed obligations by the Apollo Guarantors to us pursuant to the limited guarantee; (3) the valid termination of the Merger Agreement in accordance with its terms in any circumstances other than pursuant to which Newco would be required pursuant to the terms and subject to the conditions of the Merger Agreement to make any payment of any guaranteed obligations; (4) the date that is 90 days after the termination of the Merger Agreement if the Merger Agreement is terminated in any of the circumstances pursuant to which Newco would be required pursuant to the terms and conditions of the Merger Agreement to make a payment of the guaranteed obligations, provided that if (x) by such date we will have made a claim in writing with respect to any guaranteed obligation and (y) we have commenced a legal proceeding during such 90-day period against the Apollo Guarantors alleging that Newco is liable for such guaranteed obligation, then the limited guarantee will survive solely with respect to the amounts claimed or alleged to be so owing and, with respect to the immediately preceding proviso, the Apollo Guarantors will not have any further liability or obligation under the limited guarantee from and after the earlier of (i) the entry of a final, non-appealable order of a court of competent jurisdiction and (ii) the execution and delivery of a written agreement between the Apollo Guarantors and Shutterfly, and, in either case, the payment by the Apollo Guarantors to us of all amounts payable by the Apollo Guarantors pursuant to such order or agreement; and (5) the termination of the limited guarantee by mutual written agreement of the Apollo Guarantors and Shutterfly.

We and our related persons’ recourse against the Apollo Guarantors under the limited guarantee (subject to the terms and conditions set forth therein) is the sole and exclusive remedy against the Apollo Guarantors and any related persons of the Apollo Guarantors (and any related person of such related persons), and none of the Apollo Guarantors nor any related person of an Apollo Guarantor (nor any related person of such person) will have any obligation or liability to any person, in each case, in respect of any breaches, losses, damages, liabilities or obligations arising under, or in connection with, the limited guarantee, the Merger Agreement, the equity commitment letter or any other document or instrument delivered in connection therewith or the transactions contemplated thereby (or the termination or abandonment thereof) or otherwise, including in respect of any oral representations made or alleged to be made in connection therewith, except for (1) claims against the Apollo

 

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Guarantors solely to the extent expressly provided under the limited guarantee and solely pursuant to the terms and subject to the conditions thereof; and (2) claims by us pursuant to third-party beneficiary rights under the equity commitment letter to enforce the equity commitment letter solely to the extent expressly provided by the Merger Agreement and solely pursuant to the terms and subject to the conditions thereof.

Closing and Effective Time

The closing of the Merger will take place no later than the third business day after the satisfaction or waiver in accordance with the Merger Agreement of all the conditions to closing of the Merger (as described under the section captioned “The Merger Agreement—Conditions to the Closing of the Merger” beginning on page 96 of this proxy statement), other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions. However, if the marketing period (as described under the section of this proxy statement captioned “The Merger Agreement—Marketing Period” beginning on page 82 of this proxy statement) has not ended at the time of satisfaction or waiver of the conditions set forth in the Merger Agreement (other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions at the closing), the closing of the Merger will occur on the date following the satisfaction or waiver of such conditions that is the earlier to occur of (1) the third business day immediately following the final day of the marketing period and (2) any business day during the marketing period as may be specified by Newco on no less than three business days’ prior written notice to us.

Appraisal Rights

If the Merger is completed, stockholders who do not vote in favor of the adoption of the Merger Agreement, who properly demand appraisal of their shares, who do not withdraw such demand and who continuously hold such shares through the Effective Time of the Merger may be entitled to appraisal rights in connection with the Merger under Section 262 of the DGCL.

The following discussion is not a complete statement of the law pertaining to appraisal rights under the DGCL and is qualified in its entirety by the full text of Section 262, which is attached to this proxy statement as Annex C and incorporated herein by reference. The following summary does not constitute any legal or other advice and does not constitute a recommendation that stockholders exercise their appraisal rights under Section 262. All references in Section 262 of the DGCL and in this summary to a “stockholder” or a “holder of shares” are to the record holder of shares of our common stock unless otherwise noted herein. Only a holder of record of shares of our common stock is entitled to demand appraisal rights for the shares registered in that holder’s name. A person having a beneficial interest in shares of our common stock held of record in the name of another person, such as a bank, broker or other nominee, must act promptly to cause the record holder to follow the steps summarized below properly and in a timely manner to perfect appraisal rights. If you hold your shares of our common stock through a bank, broker or other nominee and you wish to exercise appraisal rights, you should consult with your bank, broker or the other nominee.

Any stockholder contemplating the exercise of such appraisal rights should review carefully the provisions of Section 262, which is attached hereto as Annex C, particularly the procedural steps required to properly demand and perfect such rights. Failure to follow the steps required by Section 262 for demanding and perfecting appraisal rights may result in the loss of such rights.

Under Section 262, holders of shares of our common stock who (1) do not vote in favor of the adoption of the Merger Agreement; (2) continuously are the record holders of such shares through the Effective Time; and (3) otherwise follow the procedures set forth in Section 262 may be entitled to have their shares appraised by the Delaware Court of Chancery and to receive, in lieu of the Merger Consideration, payment in cash of the amount determined by the Delaware Court of Chancery to be the “fair value” of the shares of our common stock, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest to be paid on the amount determined to be fair value, if any, as determined by the court (subject, in the

 

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case of interest payments), to any voluntary cash payments made by the Surviving Corporation pursuant to subsection (h) of Section 262 of the DGCL. However, after an appraisal petition has been filed, the Delaware Court of Chancery will dismiss appraisal proceedings as to all holders of shares of our common stock who asserted appraisal rights unless (x) the total number of shares for which appraisal rights have been pursued and perfected exceeds 1% of the outstanding shares of our common stock as measured in accordance with subsection (g) of Section 262 or (y) the value of the aggregate Merger Consideration in respect of such shares exceeds $1 million. We refer to these conditions as the “ownership thresholds.” Unless the Delaware Court of Chancery, in its discretion, determines otherwise for good cause shown, interest on an appraisal award will accrue and compound quarterly from the Effective Time through the date the judgment is paid at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during such period; provided, however, that at any time before the Delaware Court of Chancery enters judgment in the appraisal proceeding, the Surviving Corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case any such interest will accrue after the time of such payment only on the amount that equals the sum of (1) the difference, if any, between the amount so paid and the “fair value” of the shares as determined by the Delaware Court of Chancery and (2) any interest accrued prior to the time of such voluntary payment, unless paid at such time. The Surviving Corporation is under no obligation to make such voluntary cash payment prior to such entry of judgment. Stockholders considering seeking appraisal should be aware that the fair value of their shares as determined pursuant to Section 262 of the DGCL could be more than, the same as or less than the $51.00 per share consideration payable pursuant to the Merger Agreement if they did not seek appraisal of their shares.

Under Section 262, where a merger agreement is to be submitted for adoption at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, must notify each of its stockholders who was such on the record date for notice of such meeting with respect to shares for which appraisal rights are available that appraisal rights are available and include in the notice a copy of Section 262. This proxy statement constitutes our notice to stockholders that appraisal rights are available in connection with the Merger, and the full text of Section 262 is attached to this proxy statement as Annex C. In connection with the Merger, any holder of shares of our common stock who wishes to exercise appraisal rights or who wishes to preserve such holder’s right to do so should review Annex C carefully. Failure to strictly comply with the requirements of Section 262 in a timely and proper manner may result in the loss of appraisal rights under the DGCL. A stockholder who loses his, her or its appraisal rights will be entitled to receive the Merger Consideration described in the Merger Agreement (without interest). Moreover, because of the complexity of the procedures for exercising the right to seek appraisal of shares of our common stock, we believe that if a stockholder considers exercising such rights, that stockholder should seek the advice of legal counsel. A stockholder who loses their appraisal rights will be entitled to receive the Merger Consideration as described in the Merger Agreement upon surrender of the certificates that formerly represented such shares of our common stock.

Stockholders wishing to exercise the right to seek an appraisal of their shares of our common stock must fully comply with Section 262 of the DGCL, which means doing, among other things, ALL of the following:

 

   

the stockholder must not vote in favor of the proposal to adopt the Merger Agreement;

 

   

the stockholder must deliver to us a written demand for appraisal before the vote on the Merger Agreement at the special meeting;

 

   

the stockholder must continuously hold the shares from the date of making the demand through the Effective Time (a stockholder will lose appraisal rights if the stockholder transfers the shares before the Effective Time); and

 

   

the stockholder or the Surviving Corporation must file a petition in the Delaware Court of Chancery requesting a determination of the fair value of the shares within 120 days after the Effective Time. The Surviving Corporation is under no obligation to file any petition and has no intention of doing so.

In addition, one of the ownership thresholds must be met.

 

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Because a proxy that does not contain voting instructions will, unless revoked, be voted in favor of the Merger Agreement, a stockholder who votes by proxy and who wishes to exercise appraisal rights should not return a blank proxy, but rather must vote against the adoption of the Merger Agreement, abstain or not vote its shares.

Filing Written Demand

Any holder of shares of our common stock wishing to exercise appraisal rights must deliver to us, before the vote on the adoption of the Merger Agreement at the special meeting, a written demand for the appraisal of the stockholder’s shares, and that stockholder must not vote or submit a proxy in favor of the adoption of the Merger Agreement. A holder of shares of our common stock exercising appraisal rights must hold of record the shares on the date the written demand for appraisal is made and must continue to hold the shares of record through the Effective Time. A proxy that is submitted and does not contain voting instructions will, unless timely revoked, be voted in favor of the adoption of the Merger Agreement, and it will constitute a waiver of the stockholder’s right of appraisal and will nullify any previously delivered written demand for appraisal. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the adoption of the Merger Agreement or abstain from voting on the adoption of the Merger Agreement. Neither voting against the adoption of the Merger Agreement nor abstaining from voting or failing to vote on the proposal to adopt the Merger Agreement will, in and of itself, constitute a written demand for appraisal satisfying the requirements of Section 262. The written demand for appraisal must be in addition to and separate from any proxy or vote on the adoption of the Merger Agreement. A proxy or vote against the adoption of the Merger Agreement will not constitute a demand. A stockholder’s failure to make the written demand prior to the taking of the vote on the adoption of the Merger Agreement at the special meeting may constitute a waiver of appraisal rights.

Only a holder of record of shares of our common stock is entitled to demand appraisal rights for the shares registered in that holder’s name. A demand for appraisal in respect of shares of our common stock should be executed by or on behalf of the holder of record and must reasonably inform us of the identity of the holder and state that the person intends thereby to demand appraisal of the holder’s shares in connection with the Merger. If the shares are owned of record in a fiduciary or representative capacity, such as by a trustee, guardian or custodian, such demand must be executed by or on behalf of the record owner, and if the shares are owned of record by more than one person, as in a joint tenancy and tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose that, in executing the demand, the agent is acting as agent for the record owner or owners.

STOCKHOLDERS WHO HOLD THEIR SHARES IN BROKERAGE OR BANK ACCOUNTS OR OTHER NOMINEE FORMS AND WHO WISH TO EXERCISE APPRAISAL RIGHTS SHOULD CONSULT WITH THEIR BANK, BROKER OR OTHER NOMINEES, AS APPLICABLE, TO DETERMINE THE APPROPRIATE PROCEDURES FOR THE BANK, BROKER OR OTHER NOMINEE TO MAKE A DEMAND FOR APPRAISAL OF THOSE SHARES. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BANK, BROKER OR OTHER NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW PROPERLY AND IN A TIMELY MANNER THE STEPS NECESSARY TO PERFECT APPRAISAL RIGHTS.

All written demands for appraisal pursuant to Section 262 should be mailed or delivered to:

Shutterfly, Inc.

Attention: Corporate Secretary

2800 Bridge Parkway

Redwood City, California 94065

 

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Any holder of shares of our common stock who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw his, her or its demand for appraisal and accept the consideration offered pursuant to the Merger Agreement by delivering to us a written withdrawal of the demand for appraisal. However, any such attempt to withdraw the demand made more than 60 days after the Effective Time will require written approval of the Surviving Corporation. No appraisal proceeding in the Delaware Court of Chancery will be dismissed without the approval of the Delaware Court of Chancery, and such approval may be conditioned upon such terms as the Delaware Court of Chancery deems just. However, notwithstanding the foregoing, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw such stockholder’s demand for appraisal and accept the terms offered upon the Merger within 60 days after the Effective Time.

Notice by the Surviving Corporation

If the Merger is completed, within 10 days after the Effective Time, the Surviving Corporation will notify each holder of shares of our common stock who has made a written demand for appraisal pursuant to Section 262 and who has not voted in favor of the adoption of the Merger Agreement that the Merger has become effective and the effective date thereof.

Filing a Petition for Appraisal

Within 120 days after the Effective Time, but not thereafter, the Surviving Corporation or any holder of shares of our common stock who has complied with Section 262 and is entitled to appraisal rights, or a beneficial owner of shares held either in a voting trust or by a nominee on behalf of such person, under Section 262 may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery, with a copy served on the Surviving Corporation in the case of a petition filed by a stockholder, demanding a determination of the fair value of the shares held by all our stockholders entitled to appraisal. The Surviving Corporation is under no obligation, and has no present intention, to file a petition, and holders should not assume that the Surviving Corporation will file a petition or initiate any negotiations with respect to the fair value of the shares of our common stock. Accordingly, any holders of shares of our common stock who desire to have their shares appraised should initiate all necessary action to perfect their appraisal rights in respect of their shares of our common stock within the time and in the manner prescribed in Section 262. The failure of a holder of our common stock to file such a petition within the period specified in Section 262 could nullify the stockholder’s previous written demand for appraisal.

Within 120 days after the Effective Time, any holder of shares of our common stock who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the Surviving Corporation a statement setting forth the aggregate number of shares not voted in favor of the adoption of the Merger Agreement and with respect to which we have received demands for appraisal, and the aggregate number of holders of such shares. The Surviving Corporation must mail this statement to the requesting stockholder within 10 days after receipt of the written request for such a statement or within 10 days after the expiration of the period for delivery of demands for appraisal, whichever is later. A beneficial owner of shares held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file a petition seeking appraisal or request from the Surviving Corporation the foregoing statement. As noted above, however, the demand for appraisal can only be made by a stockholder of record.

If a petition for an appraisal is duly filed by a holder of shares of our common stock and a copy thereof is served upon the Surviving Corporation, the Surviving Corporation will then be obligated within 20 days after such service to file with the Delaware Register in Chancery a duly verified list (the “Verified List”) containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached. Upon the filing of any such petition, the Delaware Court of Chancery may order that notice of the time and place fixed for the hearing on the petition be mailed to the Surviving Corporation and all of the stockholders shown on the Verified List at the addresses stated

 

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therein. Such notice will also be published at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or in another publication determined by the Delaware Court of Chancery. The costs of these notices are borne by the Surviving Corporation.

After notice to the stockholders as required by the court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. The Delaware Court of Chancery may require the stockholders who demanded appraisal of their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings, and if any stockholder fails to comply with the direction, the Delaware Court of Chancery may dismiss that stockholder from the proceedings. The Delaware Court of Chancery will dismiss appraisal proceedings as to all our stockholders who assert appraisal rights unless (1) the total number of shares for which appraisal rights have been pursued and perfected exceeds 1% of the outstanding shares of our common stock as measured in accordance with subsection (g) of Section 262 or (2) the value of the aggregate Merger Consideration in respect of the shares for which appraisal rights have been pursued and perfected exceeds $1,000,000.

Determination of Fair Value

After determining the holders of our common stock entitled to appraisal and that at least one of the ownership thresholds above has been satisfied in respect of our stockholders seeking appraisal rights, the Delaware Court of Chancery will determine the “fair value” of the shares of our common stock subject to appraisal, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the fair value. Unless the court in its discretion determines otherwise for good cause shown, interest from the Effective Time through the date of payment of the judgment will be compounded quarterly and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the Effective Time and the date of payment of the judgment. However, the Surviving Corporation has the right, at any point prior to the Delaware Court of Chancery’s entry of judgment in the proceedings, to make a voluntary cash payment to each stockholder seeking appraisal. If the Surviving Corporation makes a voluntary cash payment pursuant to subsection (h) of Section 262, interest will accrue thereafter only on the sum of (1) the difference, if any, between the amount paid by the Surviving Corporation in such voluntary cash payment and the fair value of the shares as determined by the Delaware Court of Chancery and (2) interest accrued before such voluntary cash payment, unless paid at that time.

In determining fair value, the Delaware Court of Chancery will take into account all relevant factors. In Weinberger v. UOP, Inc., the Supreme Court of Delaware discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Supreme Court of Delaware also stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” In Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017) and DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017), the Delaware Supreme Court declined to adopt a presumption favoring reliance upon the deal price in determining fair value, but noted that the deal price is one of the relevant factors to be considered, and can often be the best evidence of fair value in arm’s-length mergers with a robust sales process.

 

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Stockholders considering seeking appraisal should be aware that the fair value of their shares as so determined by the Delaware Court of Chancery could be more than, the same as or less than the consideration they would receive pursuant to the Merger if they did not seek appraisal of their shares and that an opinion of an investment banking firm as to the fairness from a financial point of view of the consideration payable in a Merger is not an opinion as to, and may not in any manner address, “fair value” under Section 262 of the DGCL. Although we believe that the Merger Consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court of Chancery, and stockholders should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, the Merger Consideration. Neither we nor Newco anticipates offering more than the Merger Consideration to any stockholder exercising appraisal rights, and we and Newco each reserve the right to make a voluntary cash payment pursuant to subsection (h) of Section 262 of the DGCL and to assert, in any appraisal proceeding, that for purposes of Section 262, the “fair value” of a share of our common stock is less than the Merger Consideration. If a petition for appraisal is not timely filed or if neither of the ownership thresholds is met, then the right to an appraisal will cease.

Upon application by the Surviving Corporation or by any stockholder entitled to participate in the appraisal proceeding, the Delaware Court of Chancery may, in its discretion, proceed to trial upon the appraisal prior to the final determination of the stockholders entitled to an appraisal. Any holder of shares whose name appears on the Verified List and, if such shares are represented by certificates and if so required, who has submitted such stockholder’s certificates of stock to the Delaware Register in Chancery, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights or that neither of the ownership thresholds is met. The Delaware Court of Chancery will direct the payment of the fair value of the shares, together with interest, if any, by the Surviving Corporation to the stockholders entitled thereto. Payment will be made to each such stockholder, in the case of holders of uncertificated stock, forthwith, and in the case of holders of shares represented by certificates, upon the surrender to the Surviving Corporation of the certificate(s) representing such stock. The Delaware Court of Chancery’s decree may be enforced as other decrees in such court may be enforced.

The costs of the appraisal proceedings (which do not include attorneys’ fees or the fees and expenses of experts) may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable under the circumstances. Upon application of a stockholder, the Delaware Court of Chancery may also order that all or a portion of the expenses incurred by a stockholder in connection with an appraisal, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all the shares entitled to appraisal. In the absence of such an order, each party bears its own expenses.

If any stockholder who demands appraisal of his, her or its shares of our common stock under Section 262 fails to perfect, or loses or successfully withdraws, such holder’s right to appraisal, the stockholder’s shares of our common stock will be deemed to have been converted at the Effective Time into the right to receive the consideration payable in the Merger, without interest. A stockholder will fail to perfect, or effectively lose or withdraw, the holder’s right to appraisal if no petition for appraisal is filed within 120 days after the Effective Time, if neither of the ownership thresholds is met or if the stockholder delivers to the Surviving Corporation a written withdrawal of the holder’s demand for appraisal and an acceptance of the consideration payable in the Merger in accordance with Section 262 of the DGCL.

From and after the Effective Time, no stockholder who has demanded appraisal rights will be entitled to vote such shares of our common stock for any purpose or to receive payment of dividends or other distributions on the stock, except dividends or other distributions on the holder’s shares of our common stock, if any, payable to stockholders as of a time prior to the Effective Time. If no petition for an appraisal is filed, if neither of the ownership thresholds is met or if the stockholder delivers to the Surviving Corporation a written withdrawal of the demand for an appraisal and an acceptance of the Merger Consideration, either within 60 days after the Effective Time or thereafter with the written approval of the Surviving Corporation, then the right of such

 

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stockholder to an appraisal will cease. Once a petition for appraisal is filed with the Delaware Court of Chancery, however, the appraisal proceeding may not be dismissed as to any stockholder who commenced the proceeding or joined that proceeding as a named party without the approval of the court.

Failure to comply strictly with all of the procedures set forth in Section 262 of the DGCL may result in the loss of a stockholder’s statutory appraisal rights. Consequently, any stockholder wishing to exercise appraisal rights is encouraged to consult legal counsel before attempting to exercise those rights.

Litigation Relating to the Merger

On July 22, 2019, a stockholder complaint was filed in the United States District Court, Northern District of California, against us and the individual members of our Board, captioned Stein v. Shutterfly, Inc., et al., Case No. 4:19-cv-04203 (the “Stein Complaint”). On July 23, 2019, a stockholder complaint was filed in the United States District Court, Southern District of New York, against us and the individual members of our Board, captioned Spurlock v. Shutterfly, Inc., et al., Case No. 1:19-cv-06836 (the “Spurlock Complaint”).

On July 26, 2019, a putative stockholder class action complaint was filed in the United States District Court, District of Delaware, against us and the individual members of our Board, captioned Wolf v. Shutterfly, Inc. et al., Case No. 1:19-cv-01387 (the “Wolf Complaint”). On July 29, 2019, a putative stockholder class action complaint was filed in the United States District Court, Northern District of California, against us and individual members of our Board, captioned Gordon v. Shutterfly, Inc., et al., Case No. 3:19-cv-04335 (the “Gordon Complaint” and collectively with the Stein Complaint, Spurlock Complaint and Wolf Complaint, the “Stockholder Complaints”). Each of the Stockholder Complaints asserts that defendants violated Section 14(a) and 20(a) of the Exchange Act and certain rules and regulations promulgated thereunder by making untrue statements of material fact and omitting certain material facts related to the contemplated merger in the proxy statement.

The Stockholder Complaints seek, among other things, an order enjoining the defendants from consummating the merger, money damages and an award of attorneys’ and experts’ fees. We believe that the lawsuits are without merit and intend to vigorously defend those actions. We may become subject to similar litigation relating to the merger in these or other jurisdictions.

Accounting Treatment

The Merger will be accounted for as a “purchase transaction” for financial accounting purposes.

Material U.S. Federal Income Tax Consequences of the Merger

The following discussion is a summary of material U.S. federal income tax consequences of the Merger that may be relevant to U.S. Holders and Non-U.S. Holders of shares of our common stock whose shares are converted into the right to receive cash pursuant to the Merger. This discussion is based upon the Code, Treasury Regulations promulgated under the Code, court decisions, published positions of the Internal Revenue Service (the “IRS”), and other applicable authorities, all as in effect on the date of this proxy statement and all of which are subject to change or differing interpretations, possibly with retroactive effect. This discussion is limited to holders who hold their shares of our common stock as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment).

This discussion is for general information only and does not address all of the tax consequences that may be relevant to holders in light of their particular circumstances. For example, this discussion does not address:

 

   

tax consequences that may be relevant to holders who may be subject to special treatment under U.S. federal income tax laws, such as, for example, financial institutions; tax-exempt organizations; holders who acquired our common stock through a 401(k), deferred compensation plan or retirement plan; S corporations; any entities or arrangements classified as partnerships or pass-through entities for U.S. federal income tax purposes or investors in such pass-through entities; insurance companies; mutual funds; dealers in stocks and securities; traders in securities that elect to use the mark-to-market method

 

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of accounting for their securities; persons required to conform their tax reporting of income to their financial statements under Section 451(b) of the Code; regulated investment companies; real estate investment trusts; entities that are “controlled foreign corporations” or “passive investment companies” for U.S. federal income tax purposes; Non-U.S. Holders that hold, directly or constructively (or that held, directly or constructively, at any time during the five-year period ending on the date of the merger), 5% or more of our outstanding common stock; or certain former citizens or long-term residents of the United States;

 

   

tax consequences to holders who hold their common stock as part of a hedging, constructive sale or conversion, straddle or other risk reduction transaction;

 

   

tax consequences to holders that received their shares of our common stock pursuant to the exercise of employee options or other compensation arrangements;

 

   

tax consequences to holders exercising appraisal rights;

 

   

tax consequences to holders who own an equity interest, actually or constructively, in Newco or the Surviving Corporation following the Merger;

 

   

tax consequences to U.S. Holders whose “functional currency” is not the U.S. dollar;

 

   

tax consequences to holders who hold their common stock through a bank, financial institution or other entity, or a branch thereof, located, organized or resident outside the United States;

 

   

any U.S. federal estate, gift or alternative minimum tax consequences; or

 

   

any state, local or foreign tax consequences.

If a partnership (including an entity or arrangement, domestic or foreign, treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of shares of our common stock, then the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partner and the partnership. Partnerships holding shares of our common stock and partners therein should consult their tax advisors regarding the consequences of the Merger.

No opinion of counsel or ruling from the IRS has been or will be obtained regarding the U.S. federal income tax consequences of the Merger described below. If the IRS contests a conclusion set forth herein, no assurance can be given that a holder would ultimately prevail in a final determination by a court.

A HOLDER SHOULD CONSULT ITS OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE MERGER IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.

U.S. Holders

For purposes of this discussion, a “U.S. Holder” is a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust (1) that is subject to the primary supervision of a court within the United States and the control of one or more United States persons as defined in Section 7701(a)(30) of the Code; or (2) that has a valid election in effect under applicable Treasury regulations to be treated as a United States person.

 

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The receipt of cash by a U.S. Holder in exchange for shares of our common stock pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. In general, such U.S. Holder’s gain or loss will be equal to the difference, if any, between the amount of cash received and the U.S. Holder’s adjusted tax basis in the shares surrendered pursuant to the Merger. A U.S. Holder’s adjusted tax basis generally will equal the amount that such U.S. Holder paid for the shares. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if such U.S. Holder’s holding period in such shares is more than one year at the time of the completion of the Merger. A reduced tax rate on capital gain generally will apply to long-term capital gain of a non-corporate U.S. Holder (including individuals). The deductibility of capital losses is subject to limitations. If a U.S. Holder acquired different blocks of our common stock at different times or different prices, such U.S. Holder must determine its adjusted tax basis and holding period separately with respect to each block of our common stock.

A surtax of up to 3.8% applies to so-called “net investment income” of certain U.S. citizens and residents, and to undistributed “net investment income” of certain estates and trusts. Net investment income generally includes any gain recognized on the receipt of cash in exchange for shares of our common stock pursuant to the Merger. U.S. Holders should consult their own tax advisors regarding the applicability of this tax to any gain recognized pursuant to the Merger.

Non-U.S. Holders

For purposes of this discussion, the term “Non-U.S. Holder” means a beneficial owner of shares of our common stock that is neither a U.S. Holder nor a partnership for U.S. federal income tax purposes.

Any gain realized by a Non-U.S. Holder pursuant to the Merger generally will not be subject to U.S. federal income tax unless:

 

   

the gain is effectively connected with a trade or business of such Non-U.S. Holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by such Non-U.S. Holder in the United States), in which case such gain generally will be subject to U.S. federal income tax at rates generally applicable to U.S. persons, and, if the Non-U.S. Holder is a corporation, such gain may also be subject to the branch profits tax at a rate of 30% (or a lower rate under an applicable income tax treaty);

 

   

such Non-U.S. Holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year that includes the Merger, and certain other specified conditions are met, in which case such gain generally will be subject to U.S. federal income tax at a rate of 30% (or a lower rate under an applicable income tax treaty); or

 

   

we are or have been a “United States real property holding corporation” as such term is defined in Section 897(c) of the Code (“USRPHC”) at any time within the shorter of the five-year period ending on the date of completion of the Merger or such Non-U.S. Holder’s holding period with respect to the applicable shares of our common stock (the “relevant period”) and, if shares of our common stock are regularly traded on an established securities market (within the meaning of Section 897(c)(3) of the Code), such Non-U.S. Holder owns (or is deemed to own pursuant to certain attribution rules) more than 5% of our common stock at any time during the relevant period, in which case such gain generally will be subject to U.S. federal income tax at rates generally applicable to U.S. persons (as described in the first bullet point above), except that the branch profits tax will not apply. Although no assurances can be given in this regard, we believe that we are not, and have not been, a USRPHC at any time during the five-year period preceding the Merger.

Information Reporting and Backup Withholding

Information reporting and backup withholding (at a rate of 24%) may apply to proceeds received by a holder pursuant to the Merger. Backup withholding generally will not apply to (1) a U.S. Holder that furnishes a correct

 

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taxpayer identification number and certifies that such holder is not subject to backup withholding on IRS Form W-9 (or a substitute or successor form), (2) a Non-U.S. Holder that provides a certification of such holder’s foreign status on the appropriate series of IRS Form W-8 (or a substitute or successor form), or (3) a holder that otherwise establishes an exemption from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against the holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS. Each holder should consult such holder’s own tax advisor regarding the information reporting and backup withholding tax rules.

THE DISCUSSION SET FORTH ABOVE IS NOT A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX CONSEQUENCES RELEVANT TO HOLDERS OF OUR COMMON STOCK. THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER. YOU SHOULD CONSULT YOUR TAX ADVISOR CONCERNING THE U.S. FEDERAL, STATE, LOCAL, NON-U.S. INCOME OR OTHER TAX CONSEQUENCES OF THE MERGER TO YOU.

Regulatory Approvals Required for the Merger

In the Merger Agreement, Newco and Shutterfly agree to use their reasonable best efforts to take all actions necessary, proper or advisable under applicable law to consummate and make effective the transactions contemplated by the Merger Agreement, and to use their respective reasonable best efforts to cause the conditions to each party’s obligation to consummate the transactions contemplated by the Merger Agreement to be satisfied as promptly as practicable (but in no event later than the outside date), including taking all actions necessary to (1) obtain all governmental authorizations required for the consummation of the Merger, (2) effect all necessary registrations and filings with governmental authorities in order to consummate the Merger and the other transactions contemplated by the Merger Agreement, (3) comply with all requirements under applicable law, and (4) avoid, defend or contest any proceedings challenging the Merger Agreement or the consummation of the transactions contemplated by the Merger Agreement.

HSR Act

Under the HSR Act and the rules promulgated thereunder, the Merger cannot be completed until the expiration of a 30-calendar day waiting period, which cannot expire on a Saturday, Sunday or a U.S. federal holiday, following the filing of Premerger Notification and Report Forms with the FTC and the Antitrust Division, unless such waiting period is earlier terminated by the FTC and the Antitrust Division or extended by a request for additional information and documentary materials (a “Second Request”). Shutterfly and Newco made the necessary filings with the FTC and the Antitrust Division of the DOJ on June 24, 2019. Early termination of the applicable waiting period under the HSR Act was granted on July 17, 2019, effective immediately.

At any time before or after consummation of the Merger, notwithstanding the termination of the waiting period under the HSR Act, the FTC or the Antitrust Division could take such action under the antitrust laws as it deems necessary under the applicable statutes, including seeking to enjoin the completion of the Merger, seeking divestiture of substantial assets of the parties, or requiring the parties to license, or hold separate, assets or terminate existing relationships and contractual rights. At any time before or after the completion of the Merger, and notwithstanding the termination of the waiting period under the HSR Act, any state could take such action under the antitrust laws as it deems necessary. Such action could include seeking to enjoin the completion of the Merger or seeking divestiture of substantial assets of the parties, or requiring the parties to license, or hold separate, assets or terminate existing relationships and contractual rights. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Merger on antitrust or other regulatory grounds will not be made or, if such a challenge is made, what the result of such challenge will be.

 

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Other Regulatory Approvals

One or more governmental agencies may impose a condition, restriction, qualification, requirement or limitation when it grants the necessary approvals and consents. Third parties may also seek to intervene in the regulatory process or litigate to enjoin or overturn regulatory approvals, any of which actions could significantly impede or even preclude obtaining required regulatory approvals. There is currently no way to predict how long it will take to obtain all of the required regulatory approvals or whether such approvals will ultimately be obtained and there may be a substantial period of time between the approval by stockholders and the completion of the Merger.

Although we expect that all required regulatory clearances and approvals will be obtained, we cannot assure you that these regulatory clearances and approvals will be timely obtained, obtained at all or that the granting of these regulatory clearances and approvals will not involve the imposition of additional conditions on the completion of the Merger, including the requirement to divest assets, or require changes to the terms of the Merger Agreement. These conditions or changes could result in the conditions to the Merger not being satisfied.

General

In the Merger Agreement, we and Newco agree to use our respective reasonable best efforts to take all actions necessary, proper or advisable under applicable law to consummate and make effective the transactions contemplated by the Merger Agreement, and to use our respective reasonable best efforts to cause the conditions to each party’s obligation to consummate the transactions contemplated by the Merger Agreement to be satisfied as promptly as practicable (but in no event later than the outside date), including taking all actions necessary to (1) obtain all governmental authorizations required for the consummation of the Merger, (2) effect all necessary registrations and filings with governmental authorities in order to consummate the Merger and the other transactions contemplated by the Merger Agreement, (3) comply with all requirements under applicable law, and (4) avoid, defend or contest any proceedings challenging the Merger Agreement or the consummation of the transactions contemplated by the Merger Agreement.

Effect on Shutterfly if the Merger is Not Completed

If the Merger Agreement is not adopted by stockholders or if the Merger is not completed for any other reason, stockholders will not receive any payment for their shares of our common stock. Instead, we will remain a stand-alone public company, our common stock will continue to be listed and traded on Nasdaq and registered under the Exchange Act and we will continue to file periodic reports with the SEC. In addition, if the Merger is not completed, we expect that management will operate the business in a manner similar to that in which it is being operated today and that stockholders will continue to be subject to the same risks and opportunities to which they are currently subject, including risks related to the highly competitive industry in which we operate and risks related to adverse economic conditions.

Furthermore, if the Merger is not completed, and depending on the circumstances that caused the Merger not to be completed, the price of our common stock may decline significantly. If that were to occur, it is uncertain when, if ever, the price of our common stock would return to the price at which it trades as of the date of this proxy statement.

Accordingly, if the Merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of our common stock. If the Merger is not completed, our Board will continue to evaluate and review our business operations, strategic direction and capitalization, among other things, and will make such changes as are deemed appropriate. If the Merger Agreement is not adopted by stockholders or if the Merger is not completed for any other reason, there can be no assurance that any other transaction acceptable to our Board will be offered or that our business, prospects or results of operation will not be adversely impacted.

 

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In addition, we will be required to pay to Newco a termination fee of up to $51.2 million if the Merger Agreement is terminated under specified circumstances. In certain cases where such termination fee is not payable or the Merger Agreement is terminated by Newco due to our breach or failure to perform any of its respective representations, warranties, covenants or other agreements set forth in the Merger Agreement, we will be required to reimburse Newco up to $5.0 million for expenses related to the transactions contemplated by the Merger Agreement. In no case will Newco be due both its termination fee and expense reimbursement. If Newco has collected any money for expense reimbursements, such amounts will be deducted from the termination fee when such termination fee is paid. For more information, please see the section captioned “The Merger Agreement—Termination Fees and Expense Reimbursement” beginning on page 100 of this proxy statement.

Vote Required and Board Recommendation

The Merger Agreement must be approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon. If you abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have the same effect as a vote “AGAINST” the proposal to adopt the Merger Agreement.

Our Board has unanimously approved the Merger Agreement and determined that the Merger Agreement and the Merger are advisable, fair to and in the best interests of Shutterfly and our stockholders.

Our Board unanimously recommends that you vote “FOR” the proposal to approve the Merger Agreement.

 

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THE MERGER AGREEMENT

Explanatory Note Regarding the Merger Agreement

The following summary describes the material provisions of the Merger Agreement. The descriptions of the Merger Agreement in this summary and elsewhere in this proxy statement are not complete and are qualified in their entirety by reference to the Merger Agreement, a copy of which is attached to this proxy statement as Annex A and incorporated into this proxy statement by reference. We encourage you to read the Merger Agreement carefully and in its entirety because this summary may not contain all the information about the Merger Agreement that is important to you. The rights and obligations of the parties are governed by the express terms of the Merger Agreement and not by this summary or any other information contained in this proxy statement. Capitalized terms used in this section but not defined in this proxy statement have the meaning ascribed to them in the Merger Agreement.

The representations, warranties, covenants and agreements described below and included in the Merger Agreement (1) were made only for purposes of the Merger Agreement and as of specific dates; (2) were made solely for the benefit of the parties to the Merger Agreement; and (3) may be subject to important qualifications, limitations and supplemental information agreed to by Shutterfly, Newco and Merger Sub in connection with negotiating the terms of the Merger Agreement. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to reports and documents filed with the SEC and in some cases were qualified by confidential matters disclosed to Newco and Merger Sub by Shutterfly in connection with the Merger Agreement. In addition, the representations and warranties may have been included in the Merger Agreement for the purpose of allocating contractual risk between Shutterfly, Newco and Merger Sub rather than to establish matters as facts, and may be subject to standards of materiality applicable to such parties that differ from those applicable to investors. Stockholders are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties, covenants and agreements or any descriptions thereof as characterizations of the actual state of facts or condition of Shutterfly, Newco or Merger Sub or any of their respective affiliates or businesses. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement. In addition, you should not rely on the covenants in the Merger Agreement as actual limitations on the respective businesses of Shutterfly, Newco and Merger Sub, because the parties may take certain actions that are either expressly permitted in the confidential disclosure letter to the Merger Agreement or as otherwise consented to by the appropriate party, which consent may be given without prior notice to the public. The Merger Agreement is described below, and included as Annex A, only to provide you with information regarding its terms and conditions, and not to provide any other factual information regarding Shutterfly, our business, Newco or Merger Sub. Accordingly, the representations, warranties, covenants and other agreements in the Merger Agreement should not be read alone, and you should read the information provided elsewhere in this document and in our filings with the SEC regarding Shutterfly and our business.

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

The Merger Agreement provides that, subject to the terms and conditions of the Merger Agreement, and in accordance with the DGCL, at the Effective Time, (1) Merger Sub will be merged with and into Shutterfly, with Shutterfly becoming a wholly owned subsidiary of Newco; and (2) the separate corporate existence of Merger Sub will thereupon cease. From and after the Effective Time, the Surviving Corporation will possess all properties, rights, privileges, powers and franchises of Shutterfly and Merger Sub, and all of the debts, liabilities and duties of Shutterfly and Merger Sub will become the debts, liabilities and duties of the Surviving Corporation.

Immediately following the Effective Time, the board of directors of the Surviving Corporation will consist of the directors of Merger Sub at the Effective Time, to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation until their successors are duly elected or appointed and

 

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qualified. From and after the Effective Time, the officers of Merger Sub at the Effective Time will be the officers of the Surviving Corporation, until their successors are duly appointed. At the Effective Time, the certificate of incorporation of Shutterfly as the Surviving Corporation will be amended to read substantially identically to the certificate of incorporation of Merger Sub as in effect immediately prior to the Effective Time, and the bylaws of Merger Sub, as in effect immediately prior to the Effective Time, will become the bylaws of the Surviving Corporation, until thereafter amended.

Closing and Effective Time

The closing of the Merger will take place no later than the third business day after the satisfaction or waiver in accordance with the Merger Agreement of all the conditions to closing of the Merger (as described under the section captioned “The Merger Agreement—Conditions to the Closing of the Merger” beginning on page 96 of this proxy statement), other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions. However, if the marketing period (as described below) has not ended at the time of satisfaction or waiver of the conditions set forth in the Merger Agreement (other than conditions that by their terms are to be satisfied at the closing, but subject to the satisfaction or waiver of such conditions at the closing), the closing will occur on the date following the satisfaction or waiver of such conditions that is the earlier to occur of (1) the third business day immediately following the final day of the marketing period; and (2) any business day during the marketing period as may be specified by Newco on no less than three business days’ prior written notice to us. Concurrently with the closing of the Merger, the parties will file a Certificate of Merger with the Secretary of State for the State of Delaware as provided under the DGCL. The Merger will become effective upon the filing of the Certificate of Merger, or at such later time as is agreed by the parties and specified in the Certificate of Merger.

Marketing Period

Under the Merger Agreement, we have agreed to allow Newco a period of 18 consecutive days (subject to customary blackout dates) to market the debt financing.

The marketing period is the first period of 18 consecutive days after the date of the Merger Agreement throughout and at the end of which (1) Newco has received certain required financial information of Shutterfly and the required information is compliant with specified criteria; (2) the conditions to the obligations of Shutterfly, Newco and Merger Sub to consummate the Merger are satisfied (other than those conditions that by their terms are to be satisfied at the closing of the Merger, but subject to the satisfaction or waiver of such conditions at the closing); and (3) nothing has occurred and no condition exists that would cause the conditions to the obligations of Shutterfly, Newco and Merger Sub to consummate the Merger to fail to be satisfied (other than those conditions that by their nature can only be satisfied at the closing of the Merger, but subject to the satisfaction or waiver of such conditions at the closing), assuming the closing were to be scheduled at any time during such 18 consecutive day period (provided that (x) the marketing period will not be deemed to commence if prior to its expiration (i) our independent accountants have withdrawn their audit opinion with respect to any audited financial statements included in the required financial information, in which case the marketing period will not be deemed to commence until, at the earliest, a new unqualified audit opinion is issued by our independent accountant or another nationally recognized independent public accounting firm reasonably acceptable to Newco, (ii) we publicly announce any intention to, or determine that we must, restate any financial statements or other financial information included in the required financial information or any such restatement is under active consideration, in which case the marketing period will not commence unless and until, at the earliest, such restatement has been completed and the relevant required information has been amended or we announce no such restatement is required in accordance with GAAP, (iii) any required financial information would not be compliant with specified criteria at any time during such 18 consecutive day period or otherwise does not include the required financial information, in which case, the marketing period will not commence unless and until, at the earliest such required financial information is updated or supplemented so that it is compliant and includes all required financial information, or (iv) we have failed to file any report on Form 10-K,

 

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Form, 10-Q or Form 8-K required to be filed with the SEC by the date required under the Exchange Act, in which case (a) in the case of a failure to file a Form 10-K or Form 10-Q, the marketing period will not be deemed to commence unless and until such reports have been filed and (b) in the case of a failure to file a Form 8-K, the marketing period will be tolled until such report has been filed, except that if the failure to file such report occurs during the final five business days of the marketing period, the marketing period will be extended so that the final day of the marketing period will be no earlier than the fifth business day after such report has been filed. The marketing period in any event will end on any earlier date on which the debt financing is consummated.

Merger Consideration

Common Stock

At the Effective Time, each outstanding share of our common stock (other than shares owned (1) directly or indirectly by us; (2) by Newco or Merger Sub, or by any wholly owned subsidiary of Newco or Merger Sub; (3) by any person that, directly or indirectly, owns all of the outstanding stock of Merger Sub and (4) stockholders who are entitled to and who properly exercise appraisal rights under the DGCL) will be converted into the right to receive the Merger Consideration (which is $51.00 per share, without interest and less any applicable withholding taxes). All shares converted into the right to receive the Merger Consideration will automatically be cancelled at the Effective Time.

Outstanding Equity Awards

As a result of the Merger, the treatment of Company Options, Company RSUs, Company PSUs and Company MSUs that are outstanding immediately prior to the Effective Time will be as follows:

Company Options

To the extent not exercised or expired, each Company Option outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and converted into the right to receive an amount in cash equal to the product of (1) the aggregate number of shares of our common stock subject to such Company Option, multiplied by (2) the excess, if any, of $51.00 over the applicable per share exercise price of such Company Option, without interest and subject to the payment conditions described below and any required withholding of taxes. Each outstanding Company Option, whether vested or unvested, with an exercise price per share equal to or greater than $51.00, will be cancelled pursuant to the terms and conditions of the Merger Agreement without payment of any consideration.

Company RSUs, Company PSUs and Company MSUs

Each Company RSU that is unexpired, unsettled and outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive $51.00, without interest and subject to the payment conditions described below and any required withholding of taxes, subject to the payment conditions described below. Each Company PSU and each Company MSU that is unexpired, earned, unsettled and outstanding as of the Effective Time, whether vested or unvested, will be cancelled at the Effective Time and automatically converted into the right to receive $51.00, without interest and subject to the payment conditions described below and any required withholding of taxes. To the extent that the performance measurement period for any Company PSU has not been completed at the Effective Time, such Company PSU will be earned based on target levels of achievement and pro-rated for a partial performance period ending as of the closing date of the Merger. To the extent that the performance measurement period for any Company MSU has not been completed at the Effective Time, such Company MSU will be earned based on actual achievement determined over a truncated performance period ending as of the closing date of the Merger. Any PSUs or RSUs that are not earned as described above as of the Effective Time will be cancelled at the Effective Time for no consideration.

 

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Payments with Respect to Equity Awards

The amounts described above with respect to each Company Option, Company RSU, Company PSU and Company MSU (to the extent earned) will become payable in accordance with the original vesting schedule applicable to such equity awards, except that (1) amounts payable with respect to any equity awards originally scheduled to vest during calendar years 2020 or 2021 will be paid on January 1 of the respective calendar year; and (2) amounts payable with respect to any equity awards originally scheduled to vest after calendar year 2021 will be paid on July 1, 2021, or in either case, upon the award holder’s earlier qualifying termination of employment by Shutterfly without “cause” or his or her resignation following a “constructive termination” (each, as defined in the Merger Agreement).

Exchange and Payment Procedures

Prior to the closing of the Merger, Newco will select Computershare Trust Company, N.A. or another reputable bank or trust company (the “payment agent”) to make payments of the Merger Consideration to stockholders. On the closing date of the Merger, Newco will deposit or cause to be deposited with the payment agent cash sufficient to pay the aggregate Merger Consideration to stockholders.

Prior to the Effective Time (and in any event within three business days), the payment agent will send to each holder of record of shares of our common stock a letter of transmittal and instructions advising stockholders how to surrender stock certificates (if any) and book-entry shares in exchange for their portion of the Merger Consideration. Upon receipt of (1) surrendered certificates (or affidavits of loss in lieu thereof) or a receipt of an “agent’s message” for book-entry shares representing the shares of our common stock and (2) a signed letter of transmittal and such other documents as may be required pursuant to such instructions, the holder of such shares will be entitled to receive their portion of the Merger Consideration in exchange therefor. The amount of any Merger Consideration paid to the stockholders may be reduced by any applicable withholding taxes.

If any cash deposited with the payment agent is not claimed within one year following Effective Time, such cash will be returned to Newco, upon demand, and any holders of our common stock who have not complied with the exchange procedures in the Merger Agreement will thereafter look only to Newco for payment of the Merger Consideration. Any cash deposited with the payment agent that remains unclaimed one year following the Effective Time (or such earlier date as is immediately prior to the time at which such amounts would otherwise become property of a Governmental Authority) will, to the extent permitted by applicable law, become the property of Newco free and clear of any claims or interest of any person previously entitled thereto.

The letter of transmittal will include instructions if a stockholder has lost a share certificate or if such certificate has been stolen or destroyed. In the event any certificates have been lost, stolen or destroyed, then before such stockholder will be entitled to receive the Merger Consideration, such stockholder will have to make an affidavit of the loss, theft or destruction, and if required by Newco or the payment agent, deliver a bond in such amount as Newco or the payment agent may direct as indemnity against any claim that may be made against it with respect to such certificate.

Representations and Warranties

The Merger Agreement contains representations and warranties of Shutterfly, Newco and Merger Sub.

Some of the representations and warranties in the Merger Agreement made by us are qualified as to “materiality” or “Company Material Adverse Effect.” For purposes of the Merger Agreement, “Company Material Adverse Effect” means, with respect to Shutterfly, any change, event development, occurrence, state of facts, circumstance or effect (each, an “effect”) that, individually or in the aggregate with all other effects, (1) materially adversely effects the business, financial condition, assets or results of operations of us and our subsidiaries, taken as a whole; or (2) arose from an action taken by us or any of our subsidiaries that would

 

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prevent or materially delay the consummation of the transactions contemplated by the Merger Agreement past the outside date; provided that solely with respect to the foregoing clause (1), none of the following effects and (and no effect that directly results from or arises in connection with the following) will constitute nor will be taken into account in determining whether there is a Company Material Adverse Effect:

 

   

changes in or affecting general business, economic, regulatory or legislative conditions or securities, financial, credit or capital market conditions (including changes generally in prevailing interest rates, currency exchange rates, credit markets or equity price levels or trading volumes) anywhere in the world in which we and our subsidiaries operate;

 

   

changes in the trading volume or trading price of our common stock (provided that the facts and circumstances giving rise to such changes in such volume or price may be deemed to constitute, and may be taken into account in determining whether there is, a Company Material Adverse Effect);

 

   

changes in the industry in which we and our subsidiaries operate;

 

   

national or international political conditions, acts of war (whether or not declared), the threat, commencement, continuation or escalation of a war, acts of armed hostility, sabotage, terrorism or cyber intrusion, or other international or national calamity or any worsening of such conditions, or any government shutdown;

 

   

changes (or prospective changes) in law or GAAP (or in the interpretation thereof);

 

   

any failure by us to meet its guidance or any published analyst projections, estimates or expectations of our past or projected revenue, earnings or other financial performance or results of operations for any period, in and of itself, and any resulting analyst downgrade of our securities, or any failure by us to meet its internal budgets, plans or forecasts of its revenues, earnings or other financial performance or results of operations, in and of itself (provided that the facts and circumstances giving rise to such failures may be deemed to constitute, and may be taken into account in determining whether there is a Company Material Adverse Effect if such facts and circumstances are not otherwise excluded under this definition);

 

   

any legal or related proceedings made or brought by any of our current or former stockholders (on their own behalf or on behalf of Shutterfly) against Shutterfly or our Board, relating to, in connection with, or arising out of the transactions contemplated by the Merger Agreement, including the proxy statement;

 

   

effects directly or indirectly attributable to the execution, announcement or pendency of the Merger Agreement, the transaction agreement, dated June 10, 2019, by and among Snapfish LLC, Sherwood Parent, L.P. and S&S Venture LLC (the “Snapfish Transaction Agreement”) or the anticipated consummation of the transactions contemplated by the Merger Agreement (including the identity of, or any facts relating to, Newco as the acquirer of Shutterfly) or the transactions contemplated by the Snapfish Transaction Agreement, including the impact thereof on relationships with officers, employees, customers, suppliers, distributors, vendors, licensors, licensees, lenders, investors, governmental authorities, subcontractors or partners (including the exercise or prospective exercise of rights that arise upon a change of control); provided that this limitation will not apply to certain of our representations and warranties regarding the absence of conflicts and necessary consents, and the condition to closing related to the accuracy of our representations and warranties to the extent related thereto;

 

   

fires, epidemics, quarantine restrictions, earthquakes, hurricanes, tornadoes or other natural or man-made disaster or any other national or international calamity, crisis or disaster; and

 

   

any effect resulting from or arising out of (1) the failure by us or any of our subsidiaries to take any action prohibited by the Merger Agreement; or (2) any actions taken by us or any of our subsidiaries as required by the Merger Agreement or with the consent of Newco or Merger Sub after disclosure to Newco of all material facts and information.

 

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provided that, with respect to the first, third, fourth, fifth and ninth bullet above, only to the extent such effect does not adversely affect us and our subsidiaries, taken as a whole, in a disproportionate manner relative to others in the same industry (in which case only the incremental disproportionate impact or impacts may be taken into account in determining whether there has been a Company Material Adverse Effect).

In the Merger Agreement, we have made customary representations and warranties to Newco and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the Merger Agreement. These representations and warranties relate to, among other things:

 

   

due organization, valid existence, good standing and authority and qualification to conduct business with respect to us and our subsidiaries;

 

   

the capital structure of Shutterfly as well as the ownership and capital structure of its subsidiaries;

 

   

our corporate power and authority to enter into and perform the Merger Agreement, and the enforceability of the Merger Agreement;

 

   

the necessary vote of stockholders in connection with the Merger Agreement;

 

   

required consents, approvals and regulatory filings in connection with the Merger Agreement and performance thereof;

 

   

the absence of any conflict, violation or material alteration of any organizational documents, existing contracts, applicable laws to Shutterfly or its subsidiaries or the resulting creation of any lien upon our assets due to the performance of the Merger Agreement;

 

   

the compliance with, and the absence of any violations, by Shutterfly, its subsidiaries or any of their respective representatives of applicable laws, including anti-corruption laws and governmental authorizations;

 

   

the accuracy and required filings of ours and our subsidiaries’ SEC filings and financial statements;

 

   

the absence of any contract relating to the voting of, requiring registration of, or granting any preemptive rights, anti-dilutive rights or rights of first refusal or other similar rights with respect to any securities of Shutterfly;

 

   

our disclosure controls and procedures;

 

   

our internal accounting controls and procedures;

 

   

the absence of specified undisclosed liabilities;

 

   

the conduct of the business of us and our subsidiaries in the ordinary course of business since December 31, 2018 and the absence of a Company Material Adverse Effect since December 31, 2018;

 

   

employee benefit plans;

 

   

legal proceedings and orders;

 

   

our intellectual property;

 

   

tax matters;

 

   

environmental matters;

 

   

personal property of Shutterfly;

 

   

real property owned, leased or subleased by us and our subsidiaries;

 

   

the existence and enforceability of specified categories of our material contracts, and any notices with respect to violation or breach of or default thereunder or intention to terminate or modify those material contracts;

 

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payment of fees to brokers in connection with the Merger Agreement;

 

   

the absence of any transactions, relations or understandings between Shutterfly or any of its subsidiaries and any affiliate or related person;

 

   

the rendering of Morgan Stanley’s fairness opinion to our Board;

 

   

insurance matters;

 

   

the absence of any stockholder rights agreement, “poison pill” or similar anti-takeover agreement or plan;

 

   

the budget of us and our subsidiaries;

 

   

our and our subsidiaries’ significant vendor and customer relationships;

 

   

indemnification agreements entered into by us and our subsidiaries with certain individuals;

 

   

the solvency of us and our subsidiaries; and

 

   

our acknowledgment as to the absence of any other representations or warranties by Newco, Merger Sub or any other person on behalf of Newco or Merger Sub, other than in the case of fraud or as set forth in the Merger Agreement.

In the Merger Agreement, Newco and Merger Sub have made customary representations and warranties to Shutterfly that are subject, in some cases, to specified exceptions and qualifications contained in the Merger Agreement. These representations and warranties relate to, among other things:

 

   

due organization, good standing and authority and qualification to conduct business with respect to Newco and Merger Sub and availability of these documents;

 

   

Newco’s and Merger Sub’s corporate authority to enter into and perform the Merger Agreement, and the enforceability of the Merger Agreement;

 

   

required consents and regulatory filings in connection with the Merger Agreement;

 

   

the absence of litigation;

 

   

matters with respect to Newco’s financing and sufficiency of funds;

 

   

the accuracy of information supplied by or on behalf of Newco or Merger Sub for inclusion in this proxy statement;

 

   

ownership of capital stock of Newco and Merger Sub;

 

   

the absence of stockholder and management arrangements;

 

   

payment of fees to brokers in connection with the Merger Agreement;

 

   

delivery and enforceability of the limited guarantee;

 

   

the solvency of the Surviving Corporation following the consummation of the Merger and the transactions contemplated by the Merger Agreement (subject to certain identified assumptions); and

 

   

reliance upon Newco and Merger Sub’s independent investigation of our business, operations and financial condition and acknowledgment by Newco and Merger Sub as to the absence of any other representations or warranties by Shutterfly or any other person on behalf of Shutterfly, other than in the case of fraud or as set forth in the Merger Agreement.

Conduct of Business Pending the Merger

The Merger Agreement provides that, except as (1) expressly contemplated by the Merger Agreement; (2) as disclosed in the confidential disclosure letter to the Merger Agreement; or (3) approved by Newco (which approval will not be unreasonably withheld, conditioned or delayed), during the period of time between the date

 

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of the Merger Agreement and the Effective Time or such earlier date as the Merger Agreement may be terminated in accordance with its terms, Shutterfly will, and will cause each of its subsidiaries to:

 

   

subject to the restrictions and exceptions in the Merger Agreement, act and carry on its business in all material respects in the ordinary course of business; and

 

   

use commercially reasonable efforts to preserve intact its business organization, and preserve in all material respects its present and future relationships with customers, suppliers, governmental authorities and others with whom it has business relations or regulator relations, in each case, consistent with past practice.

In addition, we have agreed that, except as expressly contemplated by the Merger Agreement, as disclosed in the confidential disclosure letter to the Merger Agreement or as required by applicable law, during the period of time between the date of the signing of the Merger Agreement and the Effective Time, we will not, and will not permit each of its subsidiaries to, among other things:

 

   

declare, set aside or pay any dividend or make any other distribution;

 

   

adjust, combine, reclassify, split, reverse split, consolidate, recapitalize or subdivide any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or any of its other securities; purchase, redeem or otherwise acquire any shares of its capital stock or any other of its securities except for the acquisition of shares (1) from holders of Company Options in full or partial payment of the exercise price payable by such holder upon exercise of Company Options to the extent required or permitted under the terms of such Company Options; or (2) from holders of Company RSUs, Company PSUs or Company MSUs in full or partial payment of any taxes payable by such holder upon the settlement of Company RSUs, Company PSUs or Company MSUs to the extent required or permitted by their terms;

 

   

issue, deliver, sell, pledge, encumber, dispose of, grant, transfer or authorize the issuance, delivery, sale, pledge, encumbrance, disposition or grant of any of our capital stock or any of our subsidiaries of any class, or securities convertible into, or exchangeable or exercisable for, any shares of such capital stock, other than (1) upon the exercise or settlement of Company Options, Company RSUs, Company PSUs and Company MSUs that are outstanding on the date of the Merger Agreement, solely in accordance with their terms as of the date of the Merger Agreement, (2) by a wholly owned subsidiary of such subsidiary’s capital stock to Shutterfly or another wholly owned subsidiary of Shutterfly, (3) grants to new hires, or in connection with any promotion or retention, in the ordinary course of business consistent with past practice, which such awards shall exclusively be in the form of Company RSUs, Company PSUs, or Company MSUs, provided that the dollar value of such awards is substantially similar in grant date value to those awards granted to similarly situated employees, but in no event will exceed 250,000 shares in the aggregate or (4) upon the determination by our Board (or a committee thereof), pursuant to the applicable award agreement(s) and consistent with past practice of making such determinations for similarly structured awards, of whether performance vesting conditions under outstanding PSUs or MSUs have been satisfied;

 

   

amend the organizational documents of Shutterfly or any of its subsidiaries;

 

   

acquire by merger or consolidating with, or by purchasing all or a substantial portion of the assets or any stock of, or by any other manner, or make any investment in, any business or any corporation, partnership, joint venture, limited liability company, association or other business organization or division, thereof;

 

   

sell, lease, license, transfer, abandon, pledge or otherwise dispose of or encumber or subject to any lien, any of our assets or rights, including the capital stock of our subsidiaries with a fair market value in excess of $500,000, other than (1) in the ordinary course of business consistent with past practice; (2) the disposition of obsolete or excess assets; (3) transfers among Shutterfly and its wholly owned subsidiaries; or (4) pursuant to any contract existing as of the date of signing of the Merger Agreement and disclosed in the confidential disclosure letter to the Merger Agreement;

 

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incur, create, issue, syndicate, refinance, assume or otherwise become liable for certain types of indebtedness or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for (whether directly, contingently or otherwise), the obligations of any person (other than any of our wholly owned subsidiaries in the ordinary course of business) for indebtedness or issue or sell options, warrants, calls or other rights to acquire any indebtedness for borrowed money of ours or any of our subsidiaries or grant any liens on the property or assets of Shutterfly or its subsidiaries to secure indebtedness for borrowed money, take any action that would result in any amendment, modification or change of any term of any indebtedness for borrowed money of ours or any of our subsidiaries;

 

   

make any capital expenditures that exceed the amounts set forth in our plan for capital expenditures for the applicable fiscal quarter previously made available to Newco by more than 5% in the aggregate;

 

   

other than as permitted by the Merger Agreement, increase the compensation or benefits payable or to become payable to its directors, officers, employees, or consultants except for (1) increases in base salary or wages in the ordinary course of business as set forth in the confidential disclosure letter to the Merger Agreement; (2) payments of bonuses pursuant to the terms of our bonus plans disclosed in the confidential disclosure letter to the Merger Agreement; (3) pursuant to the terms of any Shutterfly benefit plan or other contract as in effect as of the date of the Merger Agreement; (4) increases of salary, wages and incentive compensation in connection with the promotion or performance reviews of an existing employee in amounts consistent with past practice for such positions; (5) with respect to grants of Company RSUs under the third bullet point of this subsection; or (6) with respect to performance determinations as to PSUs and MSUs permitted under the Merger Agreement;

 

   

grant any rights to severance or termination pay to, or enter into or amend any employment or severance agreement with, any of our directors, officers or employees or any of our subsidiaries (or any of their respective dependents or beneficiaries), other than offer letters that do not provide any severance, retention, change in control or equity award commitments with new non-executive hires that are permitted under the Merger Agreement or arrangements that provide termination benefits only to the extent mandated by applicable law outside of the United States, or establish, adopt, enter into or amend any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee or any of their respective dependents or beneficiaries, or establish, adopt, enter into or amend any plan, program or arrangement that would be a company benefit plan or company equity plan if in existence on the date of the Merger Agreement, except (1) pursuant to our or our subsidiaries’ contracts or policies with respect to severance or termination pay in existence on the date of the Merger Agreement; (2) in connection with new hires, or in connection with any promotion, in the ordinary course of business; (3) in connection with compensation increases that are permitted by the immediately preceding bullet point and the second bullet point above; or (4) as otherwise adopted to comply with applicable law;

 

   

take any action to amend or waive any performance or vesting criteria or accelerate vesting, exercisability or funding under any company benefit plan or company equity plan, except as contemplated in the Merger Agreement or pursuant to the terms any contract (including any company benefit plan) in effect on the date the Merger Agreement;

 

   

(1) terminate the employment of any employee, other than terminations for cause or terminations of employees with a title junior to Vice President, in each case, in the ordinary course of business; (2) effectuate any plant closing or mass layoff that would incur any liability or obligation under the Worker Adjustment and Retraining Notification Act of 1988 except as disclosed in the confidential disclosure letter to the Merger Agreement; or (3) hire any new employees, except employees with a title more junior than Vice President or to fill vacancies occurring after the date of the Merger Agreement, in each case, in the ordinary course of business;

 

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adopt or enter into any collective bargaining agreement or other similar arrangement relating to unions, works councils, similar entities or other organized employees;

 

   

implement or adopt any material change in financial accounting policies, practices or methods, other than as may be required by GAAP or regulatory guidelines;

 

   

subject to certain terms of the Merger Agreement, settle any proceedings if such settlement would require a payment by Shutterfly in excess of $100,000 in any individual case or series of related cases or $250,000 in the aggregate, other than (1) as required by their terms as in effect on the date of the Merger Agreement; or (2) claims reserved against in our financial statements (for amounts not in excess of such reserves); provided that, in the case of each of (1) and (2), the payment, discharge, settlement or satisfaction of such proceeding does not include any obligation (other than the payment of money) to be performed or the admission of wrongdoing by us or any of our subsidiaries or any of their respective officers or directors;

 

   

(1) make (other than on an originally filed tax return), change or rescind any material tax election; (2) change any annual tax accounting period or any material method of tax accounting; (3) file any income or other material tax return relating to us or any of our subsidiaries that has been prepared in a manner that is materially inconsistent with the past practices of Shutterfly or such subsidiary, as applicable; (4) file any amended income or other material tax return that could materially increase the taxes payable by Shutterfly or its subsidiaries; (5) settle, compromise, or abandon any claim, investigation, audit or controversy relating to a material amount of taxes; (6) enter into any closing agreement with respect to any material amount of tax; or (7) fail to timely file any material tax return or pay any material tax when due;

 

   

adopt a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization of us or any of our subsidiaries (other than the Merger);

 

   

enter into, extend or renew or otherwise modify, amend, terminate (other than terminations occurring as a result of the expiration of the term thereof) or waive any material rights or obligations under any material contracts (or any contract that, if entered into prior to the date of the Merger Agreement, would be a material contract) other than a renewal of a contract on terms no less favorable in all material respects in the aggregate, or the entry into, extension, amendment or renewal of certain contracts with customers or vendors in the ordinary course of business;

 

   

engage in certain transactions with, or enter into certain contracts with any of our former or current direct or indirect equity holders, controlling persons, stockholders, directors, officers, employees, agents, affiliates, members, managers, general or limited partners, and such person’s affiliates or immediate family members;

 

   

adopt or implement any stockholder rights agreement, “poison pill” or similar antitakeover agreement or plan;

 

   

sell, assign, transfer, lease, license or allow to lapse any rights in any material intellectual property, except for non-exclusive licenses to customers of Shutterfly or its subsidiaries in the ordinary course of business;

 

   

enter into, renew (or fail to exercise a renewal option under), terminate, or amend or modify in any material respect, a material lease;

 

   

enter into any new line of business (other than any line of business that is reasonably related to and a reasonably foreseeable extension of any line of business existing as of the date of the Merger Agreement) or terminate any line of business existing as of the date of signing of the Merger Agreement;

 

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cancel, terminate or allow to lapse without a commercially reasonable substitute policy therefor, or amend in any material respect or enter into, any insurance policy, other than the renewal of an existing insurance policy or a commercially reasonable substitute therefor; or

 

   

authorize any of, or commit or agree to take any of, the foregoing actions.

Alternative Acquisition Proposals

Under the Merger Agreement, until the Effective Time (or the earlier termination of the Merger Agreement in accordance with its terms), we have agreed to: (1) cease (and to cause our subsidiaries and their respective directors, officers and employees, and to use reasonable best efforts to cause their other Representatives, to cease) and cause to be terminated any discussions or negotiations with any person with respect to an Acquisition Proposal (as defined below), and (2) terminate any data room access of, any person relating to an acquisition transaction and to request that any person who was furnished non-public information by or on our behalf prior to the date of the Merger Agreement return or destroy all such information.

After the date of the Merger Agreement until the Effective Time (or the earlier termination of the Merger Agreement in accordance with its terms), we and our subsidiaries will not (and we will cause our and our subsidiaries’ respective Representatives not to):

 

   

initiate, solicit, or knowingly facilitate or encourage the making, submission or announcement of any Acquisition Proposal (as defined below) or an inquiry, indication of interest or request for non-public information (other than as are made by Newco, Merger Sub or Newco’s affiliates or Representatives) that would reasonably be expected to lead to an Acquisition Proposal (an “Acquisition Inquiry”) or otherwise knowingly assist or participate in the making, submission or announcement of any Acquisition Proposal;

 

   

engage in, participate or continue discussions or negotiations with any person with respect to an Acquisition Proposal or Acquisition Inquiry;

 

   

enter into any merger agreement, letter of intent, term sheet, agreement in principle or other similar agreement constituting or relating to an Acquisition Proposal (an “Alternative Acquisition Agreement”) or enter into any contract or agreement requiring Shutterfly to abandon, terminate or fail to consummate the Transactions;

 

   

terminate, waive, amend or modify any provision of, or grant permission under, any confidentiality agreement to which we or our subsidiaries is a party and that contains a “standstill” provision;

 

   

furnish to any person any non-public information relating to us or any of our subsidiaries, or afford access to the business, assets, books or other non-public information or to any personnel of Shutterfly, in any such case with the intent to induce the making, submission or announcement of, or to knowingly encourage, facilitate or assist, any Acquisition Proposal or Acquisition Inquiry;

 

   

take any action to make the provisions of any takeover law, or any restrictive provision of our organizational documents, inapplicable to any Acquisition Proposal or person making an Acquisition Proposal; or

 

   

resolve or agree to take any of the foregoing actions.

Notwithstanding the restrictions described above, at any time following the date of the Merger Agreement and prior to adoption of the Merger Agreement by our stockholders, if we receive a written Acquisition Proposal that did not result from a breach of the non-solicitation restrictions set forth in the Merger Agreement (a “Qualifying Acquisition Proposal”) and our Board determines in good faith (after consultation with its financial advisor and outside legal counsel) that (1) the Qualifying Acquisition Proposal constitutes, or would reasonably be expected to lead to or result in, a Superior Proposal (defined below) and (2) the failure to take the actions set forth in clauses (x) and (y) below with respect to such Qualifying Acquisition Proposal would be inconsistent

 

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with its fiduciary duties to our stockholders under applicable law, Shutterfly and the Company Representatives may (x) furnish to the person that has made the Qualifying Acquisition Proposal (and such person’s representatives) information relating to us or any of our subsidiaries and/or afford access to the business, properties, assets, books, records or other non-public information, or to any personnel, of Shutterfly or any of our subsidiaries, in each case pursuant to an Acceptable Confidentiality Agreement and (y) engage or participate in discussions or negotiations with the person (or such person’s representatives) that has made the Qualifying Acquisition Proposal.

We have agreed that it will promptly (and in any event within 48 hours) (1) provide Newco written notice of any Acquisition Inquiries or Acquisition Proposals and the identity of the party making such inquiry or proposal (provided that we will not be required to disclose the identity of the person making such Acquisition Proposal if such disclosure is prohibited by the terms of a confidentiality agreement with such person that is in effect on the date of the Merger Agreement), (2) disclose to Newco the material terms of any such Acquisition Proposal, including a copy of all documents and communications received in connection therewith and (3) provide or make available to Newco copies of all material written information concerning Shutterfly or its subsidiaries provided or made available by us, our subsidiaries or any Shutterfly Representative to such person to the extent such written information was not previously provided or made available to Newco. We are also required to keep Newco reasonably informed in all material respects of any material developments with respect to any such Acquisition Inquiry or Acquisition Proposal (and any subsequent amendments or modifications thereto), in each case, as soon as is reasonably practicable and in any event within 24 hours of receipt, provision or occurrence thereof. Shutterfly will, as soon as is reasonably practicable and in any event within 24 hours following a determination by our Board that an Acquisition Proposal is a Superior Proposal, notify Newco of such determination.

Our Board’s Recommendation; Company Board Recommendation Change

As described above, and subject to the provisions described below, our Board has recommended that the holders of shares of our common stock vote “FOR” the proposal to adopt the Merger Agreement. The Merger Agreement provides that our Board will not effect a company board recommendation change except as described below.

Except as permitted by the next paragraph, prior to the adoption of the Merger Agreement by our stockholders, our Board (or any committee of our Board) will not (1) (i) withdraw, change, amend, modify or qualify or publicly propose to do the foregoing in any manner adverse to Newco or Merger Sub, the Company Board Recommendation, (ii) fail to include the Company Board Recommendation in this proxy statement, (iii) recommend the approval or adoption of, or approve or adopt, or publicly propose to recommend, approve or adopt, any Acquisition Proposal, or (iv) fail to recommend, in a Solicitation/Recommendation Statement on Schedule 14D-9 against any Acquisition Proposal subject to Regulation 14D under the Exchange Act within ten business days after commencement of such Acquisition Proposal (actions prohibited by this clause (1) being referred to as a “Change of Board Recommendation”); or (2) approve, recommend, authorize, cause, permit, resolve to allow, or publicly announce an intention to approve or recommend, Shutterfly or any of its subsidiaries to enter into any Alternative Acquisition Agreement.

Notwithstanding the foregoing, our Board may, at any time prior to the adoption of the Merger Agreement by our stockholders, if (1) we have received a Qualifying Acquisition Proposal that our Board determines in good faith (after consultation with its financial advisor and outside legal counsel) is a Superior Proposal; and (2) our Board determines in good faith (after consultation with its outside legal counsel) that its failure to effect a Change of Board Recommendation or terminate the Merger Agreement would be inconsistent with its fiduciary duties to our stockholders under applicable law, then our Board may (i) effect a Change of Board Recommendation and/or (ii) validly terminate the Merger Agreement, in each case only if:

 

   

we have complied with the non-solicitation provisions of the Merger Agreement with respect to such Qualifying Acquisition Proposal, other than de minimis breaches;

 

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we have provided prior written notice to Newco, at least three business days in advance (the “Superior Proposal Notice Period”) of its intention to effect such a Change of Board Recommendation or validly terminate the Merger Agreement to enter into an Alternative Acquisition Agreement with respect to such Superior Proposal, and which notice will provide Newco with the material terms and conditions of the Superior Proposal and the identity of the person or group making such Superior Proposal;

 

   

if requested by Newco, we have negotiated with Newco in good faith during the Superior Proposal Notice Period in order to enable Newco to revise the terms of the Merger Agreement in such a manner that would eliminate the need for taking such action or so that any Superior Proposal no longer constitutes a Superior Proposal;

 

   

following our and our representatives’ negotiation in good faith with Newco during the Superior Proposal Notice Period, and after considering the results of such negotiations and giving effect to any proposals, amendment or modifications made or agreed to by Newco, if any, our Board (after consultation with its financial advisor and outside legal counsel) has determined in good faith, that such Superior Proposal still constitutes a Superior Proposal (it being understood and agreed that any change to the financial or other material terms of an Acquisition Proposal previously subject to notice will require a new notice to Newco, but with any reference to the Superior Proposal Notice Period changed to two business days); and

 

   

in the event of any termination of the Merger Agreement in order to cause or permit Shutterfly or any of its subsidiaries to enter into an Alternative Acquisition Agreement with respect to an Acquisition Proposal, Shutterfly will has validly terminated the Merger Agreement in accordance with its terms, including paying a termination fee of $51.2 million.

Notwithstanding anything in the Merger Agreement to the contrary, our Board may effect a Change of Board Recommendation prior to the adoption of the Merger Agreement by our stockholders if an Intervening Event (as defined below) occurs and our Board determines in good faith (after consultation with its outside legal counsel) that its failure to effect a Change of Board Recommendation would be inconsistent with its fiduciary duties to our stockholders under applicable law; provided that our Board may not effect such Change of Board Recommendation unless:

 

   

we have provided prior written notice to Newco, at least three business days in advance (the “Intervening Event Notice Period”), of its intention to effect such a Change of Board Recommendation, which notice will specify the details of such Intervening Event and the basis upon which our Board intends to effect a Change of Board Recommendation;

 

   

if requested by Newco, we will have negotiated with, and caused our representatives to negotiate with, Newco in good faith during the Intervening Event Notice Period in order to enable Newco to revise the terms of the Merger Agreement so that the failure to make such a Change of Board Recommendation would no longer be inconsistent with the directors’ exercise of their fiduciary duties to our stockholders under applicable law; and

 

   

following our and our representatives’ negotiation in good faith with Newco during the Intervening Event Notice Period and after considering the results of such negotiations and giving effect to any proposals, or modifications made or agreed by Newco, if any, our Board (after consultation with its financial advisor and outside legal counsel) will have determined in good faith that the failure to make such a Change of Board Recommendation would no longer be inconsistent with the directors’ exercise of their fiduciary duties to our stockholders under applicable law (it being understood and agreed that any material changes to the circumstances surrounding the Intervening Event that was previously the subject of a notice will require a new notice to Newco as provided above, but with any reference to the Intervening Event Notice Period changed to two business days).

 

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“Acquisition Proposal” means any proposal or offer (whether written or otherwise) from any person or group (other than Newco or its subsidiaries) relating to, in a single transaction or series of related transactions:

 

   

any (1) direct or indirect acquisition or license of the assets or business of Shutterfly or any of its subsidiaries (including securities of the subsidiaries of Shutterfly) equal to more than 15% of our consolidated assets or to which more than 15% of our revenues or earnings on a consolidated basis are attributable; or (2) any direct or indirect acquisition or issuance (whether by merger, consolidation or otherwise) of more than 15% of any class of voting equity securities of Shutterfly;

 

   

any tender offer or exchange offer, as defined pursuant to the Exchange Act, that if consummated would result, directly or indirectly, in any person or group (or the stockholders of any person or group) beneficially owning 15% or more of the outstanding voting power of Shutterfly;

 

   

any merger, consolidation, business combination, share exchange, recapitalization, liquidation, dissolution or other similar transaction involving Shutterfly which would result in any person or group (or the stockholders of any person or group) beneficially owning, directly or indirectly, more than 15% of the outstanding voting power of Shutterfly or 15% of the voting power of the surviving entity in a merger involving Shutterfly or the resulting direct or indirect parent of Shutterfly or such surviving entity (or any securities convertible into, or exchangeable for, securities representing such voting power);

 

   

a reorganization, recapitalization, liquidation or dissolution of Shutterfly; or

 

   

any other transaction having a similar effect to those described in the above four bullets.

“Superior Proposal” means any bona fide written Acquisition Proposal that did not result from a violation of the non-solicitation provisions of the Merger Agreement, with all of the percentages included in the definition of Acquisition Proposal increased from 15% to 50%, that our Board determines in its good faith judgment (after consultation with our financial advisers and outside legal counsel), and considering such factors as our Board considers to be relevant in good faith, to be (1) more favorable to our stockholders from a financial point of view than the transactions contemplated by the Merger Agreement (including any changes to the terms of the Merger and the Merger Agreement proposed by Newco; and (2) reasonably likely to be timely completed (if accepted) in accordance with its terms, in each case taking into account all financial, regulatory, legal and other aspects of the proposal.

“Intervening Event” means any material event or development or material change in circumstances with respect to us and our subsidiaries taken as a whole that, irrespective of when such event,, development or change occurred, (1) was not known by our Board as of, or prior to, the date of the Merger Agreement, or if known or reasonably foreseeable, the magnitude and consequences of which were not known, understood or reasonably foreseeable by our Board (or any member of our Board) as of the date of the Merger Agreement; and (2) does not relate to any Acquisition Inquiry or Acquisition Proposal, provided that (i) no action taken by Newco to the extent required by certain affirmative covenants of Newco under the Merger Agreement described below under the section of this proxy statement captioned “—Efforts to Close the Merger,” and the consequences of such action, may constitute an Intervening Event, (ii) no change in the market price ,trading volume or ratings of any securities of indebtedness of Shutterfly or any of its subsidiaries will constitute an Intervening Event, provided that the underlying causes of any such change may be considered in determining whether an Intervening Event has occurred.

Employee Benefits

For any employee who remains an employee of Shutterfly or the Surviving Corporation, or any of their respective subsidiaries or affiliates (each, a “Continuing Employee”), for 12 months following the Effective Time, Newco will provide to such Continuing Employees base salary, base hourly wages and cash incentive compensation opportunities (other than equity-based awards or any change in control or retention bonuses) no

 

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less favorable than that provided immediately prior to the Effective Time, employee benefits (other than equity-based awards, change in control or retention benefits and defined benefit or non-qualified arrangements) that are no less favorable in the aggregate to the employee benefits provided immediately prior to the Effective Time and severance benefits no less favorable in the aggregate to the applicable benefit plans or individual agreements in effect immediately prior to the Effective Time or otherwise pursuant to our customary severance practices as described in the confidential disclosure letter to the Merger Agreement. Notwithstanding Newco’s covenant regarding severance benefits described in the immediately preceding sentence, at all times after the Effective Time, Newco will, and will cause the Surviving Corporation to, provide each continuing employee who experiences a termination of employment and who would receive severance or acceleration benefits under such continuing employee’s contracts with Shutterfly that are disclosed in the confidential disclosure letter to the Merger Agreement to receive severance and acceleration benefits no less favorable than those set forth in such contracts.

Efforts to Close the Merger

In the Merger Agreement, we and Newco agree to use their reasonable best efforts to take all actions necessary, proper or advisable under applicable law to consummate and make effective the transactions contemplated by the Merger Agreement, and to use their respective reasonable best efforts to cause the conditions to each party’s obligation to consummate the transactions contemplated by the Merger Agreement to be satisfied as promptly as practicable (but in no event later than the outside date), including taking all actions necessary, to (1) obtain all governmental authorizations required for the consummation of the Merger; (2) effect all necessary registrations and filings with governmental authorities in order to consummate and make effective the Merger and the other transactions contemplated by the Merger Agreement; (3) comply with all requirements under applicable law; and (4) avoid, defend or contest any proceedings challenging the Merger Agreement or the consummation of the transactions contemplated by the Merger Agreement.

In addition, we and Newco agreed to (1) make an appropriate filing of a Premerger Notification and Report Form pursuant to the HSR Act with respect to the Transactions with the FTC and the Antitrust Division and any other filings required under other applicable antitrust laws promptly, and in any event within 10 business days of the date of the Merger Agreement; and (2) make, as soon as practicable, such other necessary filings, notifications or registrations within fifteen (15) business days of the date of the Merger Agreement to obtain all government consents. Newco has also agreed that neither it nor any of its affiliates will file a Premerger Notification and Report Form pursuant to the HSR Act with respect to the acquisition of Snapfish LLC and the transactions contemplated by the Snapfish Transaction Agreement until the first day following the date on which the waiting period (and any extension thereof) under the HSR Act applicable to the transactions contemplated by the Merger Agreement shall have expired or been earlier terminated.

Newco also agreed to, and to cause its subsidiaries to, use its and their reasonable best efforts, and promptly take any and all steps necessary, to avoid or eliminate any concerns on the part of, or to satisfy any conditions imposed by, any governmental authority under any antitrust law or any other person so as to enable the parties to consummate the transactions contemplated by the Merger Agreement as soon as practicable, and in any event prior to the outside date, including (1) proposing, negotiating, offering to commit and effect (and if such offer is accepted, committing to and effecting), by consent decree, hold separate order or otherwise, the sale, divestiture, license or disposition of such assets or businesses of Newco or its subsidiaries and affiliates, now owned or hereafter sought to be acquired; (2) terminating or amending any existing relationships and contractual rights and obligations; and (3) otherwise offering to take or offering to commit to take any action which it is capable of taking, and if the offer is accepted, taking or committing to take, such actions as are necessary, whether or not such actions limit or modify Newco’s rights of ownership in, or ability to conduct the business of, one or more of its operations, divisions, businesses, product lines, customers or assets, including, after the closing of the Merger, our business, in each case as if it is determined that such action is necessary in order to obtain all governmental authorizations necessary to satisfy certain closing conditions prior to the outside date and/or to avoid the entry of, or to effect the dissolution of, any antitrust order which would have the effect of preventing or delaying the

 

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consummation of the Merger and the other transactions contemplated by the Merger Agreement beyond the outside date. Newco will also use its reasonable best efforts to ensure that (x) no requirement for a consent of the FTC, the Antitrust Division, any state attorney general or other governmental authority, (y) no order in any suit or proceeding, and (z) no other matter relating to any antitrust law would preclude consummation of the Merger prior to the outside date. In no event will any party be obligated to undertake or agree to undertake any sale, divestiture, disposition or other remedial measure described above that (i) is not contingent on the consummation of the Merger or (ii) that would, individually or in the aggregate, reasonably be expected to be materially detrimental to the benefits to be derived by Newco as a result of the Merger. In furtherance of the foregoing, each party agreed to keep the other party informed of all material matters, discussions and activities relating to any of the matters contemplated by this paragraph.

Indemnification and Insurance

The Merger Agreement provides that for a period of six years from and after the Effective Time, the Surviving Corporation will indemnify and hold harmless each of our present or former directors or officers or any of our subsidiaries (to the extent acting in such capacity) against any costs and expenses (including reasonable and documented legal fees and expenses), judgments, fines, losses, claims, damages, liabilities and settlement amounts paid in connection with any pending or threatened proceeding (whether arising before or after the Effective Time), whether civil, criminal, administrative or investigative, arising out of or relating to any action or omission in their capacity as an officer, director, employee, fiduciary (including with respect to an employee benefit plan) on or prior to the Effective Time, or relating to the Merger Agreement and the transactions contemplated by the Merger Agreement, in each case to the fullest extent that we would have been permitted under applicable law or pursuant to any indemnification agreements with us and any of our subsidiaries in effect as of the Effective Time. The Merger Agreement also provides that Surviving Corporation will, pay all expenses (including reasonable and documented legal fees and expenses) of each indemnified person in defense of any proceeding unless it is ultimately determined in accordance with applicable law that such indemnified person is not entitled to indemnification.

The Merger Agreement also provides that all existing rights to exculpation, indemnification or advancement of expenses to which our present directors and officers are entitled that are contained in our organizational documents prior to the Effective Time will survive the Merger and will be observed by the Surviving Corporation to the fullest extent permitted by applicable law for a period of six years from the Effective Time.

The Merger Agreement also provides that, for a period of six years after the Effective Time, the Surviving Corporation will maintain in effect our current insurance coverage with respect to our directors and/or officers. We will, prior to the Effective Time, bind and purchase a tail policy to our current policy of directors’ and officers’ liability insurance for a period of six years from the Effective Time. If the annual premium for such insurance coverage is in excess of 300% of the last annual premium paid prior to the date of the Merger Agreement, the Surviving Corporation will be obligated to obtain as much comparable insurance as possible for an annual premium equal to 300% of the last annual premium paid prior to the date of the Merger Agreement.

Other Covenants

The Merger Agreement contains other customary covenants, including, but not limited to, covenants relating to notices of certain events, public announcements, access to information, and confidentiality.

Conditions to the Closing of the Merger

Each party’s respective obligation to effect the Merger under the Merger Agreement is subject to the satisfaction of various conditions, including the following:

 

   

the Merger Agreement has been approved by the affirmative vote of the holders of a majority of the shares of our common stock outstanding and entitled to vote thereon at the special meeting;

 

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the consummation of the Merger has not been restrained, enjoined or prohibited by any order of a U.S. court of competent jurisdiction or any other governmental authority of competent jurisdiction and there is not in effect any law by any governmental authority of competent jurisdiction which prevents the consummation of the Merger; and

 

   

any waiting period (and any extension thereof) under the HSR Act applicable to the transactions contemplated by the Merger Agreement will have expired or been earlier terminated.

In addition, Newco and Merger Sub are not obligated to consummate the Merger under the Merger Agreement unless the following conditions are satisfied at or prior to the Effective Time:

 

   

our representations and warranties regarding the absence of a Company Material Adverse Effect are true and correct in all respects as of the Effective Time;

 

   

our representations and warranties regarding certain elements of our capitalization are true and correct as of the date of the Merger Agreement, except, in each case, for such failures to be true and correct that, individually or in the aggregate, would not reasonably be expected to have more than a de minimis increase in the aggregate amounts payable by Merger Sub or Newco in the transactions contemplated by the Merger Agreement;

 

   

our representations and warranties regarding certain elements of our corporate existence, certain elements of our capitalization, our corporate authority, the absence of broker’s and finder’s fees and the opinion of our financial advisor are true and correct in all respects as of immediately prior to the Effective Time to the extent qualified by materiality or “Company Material Adverse Effect” (except for such representations or warranties that relate to a specific date or time, which need only be true and correct as of such date or time) and all such representations and warranties to the extent not qualified by materiality or “Company Material Adverse Effect” will be true and correct in all material respects as of immediately prior to the Effective Time except for such representations and warranties that relate to a specific date or time (which need only be true and correct as of such date or time);

 

   

our other representations and warranties set forth in the Merger Agreement (other than those noted in the preceding three bullet points) (without giving effect to any “materiality,” “material adverse effect” or similar qualifications therein), are true and correct as of immediately prior to the Effective Time as if made on and as of such date (except for such representations and warranty that relate to a specific date or time, which need only be true and correct in all material respects as of such date or time), in each case, except for such failures to be so true and correct, individually and in the aggregate, as have not had a Company Material Adverse Effect;

 

   

we have performed in all material respects all obligations and agreements contained in the Merger Agreement to be performed or complied with by us prior to or on the Effective Time;

 

   

since the date of the Merger Agreement, there has not occurred any effect that, individually or in the aggregate has had or would reasonably be expected to have a Company Material Adverse Effect; and

 

   

Newco has received a certificate executed by our Chief Executive Officer or Chief Financial Officer certifying that the conditions described in the preceding bullet points have been satisfied.

Further, we are not obligated to effect the Merger under the Merger Agreement unless the following conditions are satisfied at or prior to the Effective Time:

 

   

the representations and warranties of Newco and Merger Sub regarding their corporate existence and corporate authority to the extent qualified by materiality or “Newco Material Adverse Effect” will be true and correct in all respects as of immediately before the Effective Time except for such representations and warranties that relate to a specific date or time (which need only be true and correct as of such date or time), and all such representations and warranties to the extent not qualified by materiality or “Newco Material Adverse Effect” will be true and correct in all material respects as of immediately before the Effective Time except for such representations and warranties that relate to a specific date or time (which need only be true and correct as of such date or time);

 

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the other representations and warranties of Newco and Merger Sub set forth in the Merger Agreement (other than those noted in the preceding bullet point) (without giving effect to any materiality or “Newco Material Adverse Effect” qualifications therein), will be true and correct as of immediately before the Effective Time except for such representations and warranties that relate to a specific date or time (which need only be true and correct in all material respects as of such date or time), in each case, except for such failures to be true and correct, individually and in the aggregate, as have not had a Newco Material Adverse Effect;

 

   

Newco and Merger Sub have performed in all material respects all obligations and agreements contained in the Merger Agreement to be performed or complied with by each of them prior to or on the closing date of the Merger; and

 

   

we have received a certificate executed by the Chief Executive Officer, the Chief Financial Officer or other officer of Newco and Merger Sub certifying that the conditions described in the preceding three bullet points have been satisfied.

Neither Shutterfly nor Newco and Merger Sub may rely, either as a basis for not consummating the Merger or terminating the Merger Agreement and abandoning the Merger, on the failure of any of the preceding conditions listed in this section to be satisfied if such failure was primarily caused by such party’s breach in any material respect of the Merger Agreement.

The Merger is not conditioned on Newco’s ability to obtain or successfully syndicate debt financing or on the consummation of the transactions contemplated by the Snapfish Transaction Agreement.

Termination of the Merger Agreement

The Merger Agreement may be terminated and the transactions contemplated by the Merger Agreement may be abandoned at any time prior to the Effective Time:

 

   

by mutual written consent of Newco and us, by action of their and our respective boards of directors.

By either Newco or us, if:

 

   

the Effective Time has not occurred on or before the outside date, provided that if the marketing period has commenced but has not been completed as of the outside date, the outside date will automatically be extended to the date that is four business days following the then-scheduled end date of the marketing period, provided further that the right to terminate the Merger Agreement as a result of the occurrence of the termination date will not be available to any party whose failure to perform any of its obligations under the Merger Agreement was the primary cause of the failure of the Effective Time to have occurred on or before the outside date;

 

   

if the approval of the Merger Agreement by our stockholders has not been obtained at the special meeting or at any adjournment or postponement thereof at which a vote on the approval of the Merger Agreement was taken; or

 

   

any court of competent jurisdiction or other governmental authority has issued an order or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger, and such order shall have become final and non-appealable; provided that the right to terminate the Merger Agreement will not be available to any party whose failure to perform any of its obligations under the Merger Agreement has been the primary cause of, or resulted in, the events described in this bullet point.

By Newco, if:

 

   

prior to obtaining the approval of the Merger Agreement by our stockholders, (1) our Board (or committee thereof) has (x) effectuated a Change of Board Recommendation or (y) following the date of

 

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receipt of any Acquisition Proposal or any material modification thereto is first made public, sent or given to our stockholders, failed to issue a press release that expressly reaffirms the Company Board Recommendation within two Business Days following our receipt of Newco’s written request to do so or (2) we have committed willful breach of any of its obligations under the applicable non-solicitation provisions of the Merger Agreement (a “Board Recommendation Termination”); or

 

   

(1) there has been an inaccuracy in any of our representations or warranties contained in the Merger Agreement or a breach of any covenant of Shutterfly contained in the Merger Agreement such that the conditions regarding the accuracy of our representations and warranties and compliance with its agreements and covenants under the Merger Agreement would not be satisfied; (2) Newco has delivered to us written notice of such inaccuracy or breach; and (3) either such inaccuracy or breach is not capable of cure or such inaccuracy or breach has not been cured within the earlier of (x) at least 30 days since the date of delivery of such written notice to Shutterfly and (y) the outside date, provided that Newco is not permitted to terminate the Merger Agreement as described in this bullet point if Newco or Merger Sub’s failure to perform any of their respective obligations under the Merger Agreement has been the primary cause of, or resulted in, clauses (1) or (3) above (a “Shutterfly Breach Termination”).

By Shutterfly, if:

 

   

our Board (or a committee thereof) determines to accept a Superior Proposal and enter into the Alternative Acquisition Agreement subject to, and in accordance with the applicable non-solicitation provisions of the Merger Agreement with respect to such Superior Proposal, provided that such termination will not be effective unless we have (1) paid the termination fee of $51.2 million to Newco prior to or concurrently with such termination and (2) promptly, but in any event within 24 hours of receipt by Newco of the termination fee, enters into such Alternative Acquisition Agreement;

 

   

(1) there has been an inaccuracy in any representation or warranty or breach of any covenant of Newco or Purchaser contained in the Merger Agreement (in each case without regard to any qualifications or exceptions contained therein as to materiality or Newco Material Adverse Effect), in any case, that would reasonably be expected to have a Newco Material Adverse Effect; (2) we have delivered to Newco written notice of such inaccuracy or breach; and (3) either such inaccuracy or breach of covenant is not capable of cure or such inaccuracy or breach of covenant has not been cured within the earlier of (x) at least 30 days since the date of delivery of such written notice to Newco and (y) the outside date; provided that we will not be permitted to terminate the Merger Agreement as described in this bullet point if our failure to perform any of its obligations under the Merger Agreement has been the primary cause of, or resulted in, clauses (1) or (3) above (a “Newco Breach Termination); or

 

   

(1) the marketing period has ended and (x) all of the conditions applicable to Newco, Merger Sub and our obligations to close the Merger and (y) Newco and Merger Sub’s obligations to close the Merger have, have been and continue to be satisfied or waived, (2) Newco and Merger Sub have failed to consummate the Merger on the date on which the closing of the Merger should have occurred pursuant to the Merger Agreement, (3) we have provided irrevocable written notice to Newco at least three Business Days prior to such termination that it is prepared, willing and able to effect the closing of the Merger and (4) at all times during such three business day period, we stood ready, willing and able to consummate the transactions contemplated by the Merger Agreement; provided that no party will be permitted to terminate the Merger Agreement during any such three business day period by reason of the closing of the Merger not having occurred on or prior to the outside date.

In the event that the Merger Agreement is terminated pursuant to the termination rights above, the Merger Agreement will be of no further force or effect without liability of any party to the other parties (or their representatives), as applicable, except certain sections of the Merger Agreement will survive the termination of the Merger Agreement in accordance with their respective terms, including terms relating to termination fees. Notwithstanding the foregoing, nothing in the Merger Agreement will relieve (1) us from any liability resulting

 

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from fraud or willful breach of the Merger Agreement or (2) Newco from any liability resulting from fraud prior to such valid termination of this Merger Agreement). In addition, no termination of the Merger Agreement will affect the rights or obligations of any party pursuant to the confidentiality agreement between us and Apollo Management and the limited guarantee, which rights, obligations and agreements will survive the termination of the Merger Agreement in accordance with their respective terms.

Termination Fees and Expense Reimbursement

Termination Fee Payable by Shutterfly

We will be required to pay Newco a termination fee in the following circumstances:

 

   

if the Merger Agreement is validly terminated (1) by Newco based on a Board Recommendation Termination or (2) by us (prior to the adoption of the Merger Agreement by our stockholders) to accept a Superior Proposal, made in compliance with the non-solicitation restrictions described above, we are required to pay Newco $51.2 million prior to or concurrently with such termination, in the case of a termination by Shutterfly or within two business days thereafter, in the case of a termination by Newco; or

 

   

if the Merger is validly terminated by (1) (i) either party for failure of the Merger to occur on or prior to the outside date (other than as a result of the failure to satisfy the condition relating to the waiting period under the HSR Act, or the condition relating to the absence of orders or laws prohibiting or enjoining the Merger to the extent relating to antitrust law), or (ii) either party if the Merger Agreement is not approved by our stockholders at the special meeting or at any adjournment or postponement thereof at which a vote on the approval of the Merger Agreement was taken, or (iii) by Newco upon our uncured material breach of or material failure to perform any representation, warranty, covenant or agreement in the Merger Agreement that would cause certain conditions to closing to fail, and (2) (x) at any time after the date of the Merger Agreement and prior to the Merger Agreement being approved by our stockholders at the special meeting or at any adjournment or postponement thereof at which a vote on the approval of the Merger Agreement is taken, an Acquisition Proposal is publicly known or announced and (y) within 12 months after such termination, Shutterfly enters into a definitive agreement with respect to any Acquisition Proposal, or consummates any Acquisition Proposal (which need not be the same Acquisition Proposal that was made, announced or publicly known prior to the termination hereof), then Shutterfly is required to pay Newco $51.2 million concurrently with entering into a definitive agreement with respect to any Acquisition Proposal or the consummation of any Acquisition Proposal provided that for purposes of this termination fee trigger, each reference in the definition of “Acquisition Proposal” to “15%” is deemed to be a reference to “50%”. Any Newco Expenses (defined below) paid by Shutterfly to Newco pursuant to the Merger Agreement will be credited against and reduce the amount of the termination fee that Shutterfly would otherwise be required to pay to Newco pursuant to the Merger Agreement.

If the agreement is terminated (1) by either party because the Merger Agreement is not approved by our stockholders at the special meeting or at any adjournment or postponement thereof at which a vote on the approval of the Merger Agreement was taken; or (2) by Newco due to our material breach of or material failure to perform any representation, warranty, covenant or agreement in the Merger Agreement that would cause certain conditions to closing to fail, then we are required to reimburse Newco, Merger Sub and their respective affiliates for all fees and expenses incurred in connection with the Merger Agreement and the transactions contemplated by the Merger Agreement up to $5.0 million (the “Newco Expenses”).

Termination Fee Payable by Newco

Newco will be required to pay us the Newco Termination Fee in the event that the Merger Agreement:

 

   

is validly terminated by us if there has been a Newco Breach Termination (and such termination is the primary reason for the failure of the closing of the Merger to be consummated);

 

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is validly terminated by us for failure of the Merger to occur on or prior to the outside date if Shutterfly would then be entitled to terminate the Merger Agreement pursuant to a Newco Breach Termination;

 

   

is validly terminated by us if (1) the marketing period has ended and (i) all of the conditions applicable to Newco, Merger Sub and our obligations to close the Merger and (ii) Newco and Merger Sub’s obligations to close the Merger have, have been and continue to be satisfied or waived; (2) Newco and Merger Sub have failed to consummate the Merger on the date on which the closing of the Merger should have occurred pursuant to the Merger Agreement; (3) we have provided irrevocable written notice to Newco at least three business days prior to such termination that it is prepared, willing and able to effect the closing of the Merger; and (4) at all times during such three business day period, we stood ready, willing and able to consummate the transactions contemplated by the Merger Agreement; or

 

   

is (1) validly terminated by either party for failure of the Merger to occur on or prior to the outside date, or because any court of competent jurisdiction or other governmental authority of competent jurisdiction issues an order or promulgates a law permanently restraining, enjoining or otherwise prohibiting the Merger (but solely if the applicable order or law is relating to antitrust laws); and (2) all of the conditions applicable to Newco, Merger Sub and our obligations to close the Merger and Newco and Merger Sub’s obligations to close the Merger have, have been and continue to be satisfied or waived, except for (x) the condition related to the absence of such order or law restraining, enjoining or otherwise prohibiting, the Merger (but solely if the applicable order or law relates to antitrust laws), (y) any waiting period under the HSR Act applicable to the transactions contemplated by the Merger Agreement having expired or earlier terminated and (z) those conditions that, by their nature, are to be satisfied at the closing of the Merger and were capable of being satisfied as of the date of such termination if the closing of the Merger were to occur on the date of such termination.

Specific Performance

The parties have agreed in the Merger Agreement that irreparable damage would occur in the event that any of the provisions of the Merger Agreement were not performed in accordance with their specific terms or were otherwise breached and that money damages or other legal remedies would not be an adequate remedy for any such damage. The parties have agreed that, prior to any valid termination of the Merger Agreement in accordance with its terms, they will be entitled to an injunction or injunctions to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement, in addition to any other remedy to which they are entitled at law or in equity. Furthermore, the parties have agreed (1) not to raise any objections (including the defense of adequacy of a remedy at law) to the granting of an injunction, specific performance or other equitable relief to prevent or restrain breaches or threatened breaches of the Merger Agreement by us or Newco and/or Merger Sub and the specific performance of the terms and provisions of the Merger Agreement, (2) that neither party will be required to obtain, furnish or post any bond or similar instrument in connection with or as a condition to obtaining an injunction, specific performance or other equitable relief and (3) that a party’s pursuit of specific performance will not be deemed an election of remedies or waiver of their right to pursue any other right or remedy, including the right to pursue remedies for liabilities or damages incurred or suffered by such party in the case of a breach of the Merger Agreement involving fraud or willful breach, in each case, subject to the terms, conditions and limitations set forth in the Merger Agreement.

Notwithstanding the foregoing or anything to the contrary in the Merger Agreement, we will be entitled to seek specific performance to cause Newco and Merger Sub to cause the equity financing to be funded and to consummate the Merger or the other transactions contemplated by the Merger Agreement or any other transaction document unless and only if:

 

   

all of the conditions applicable to Newco, Merger Sub and our obligations to close the Merger and Newco and Merger Sub’s obligations to close the Merger have been and continue to be satisfied or waived;

 

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the debt financing has been (or will concurrently be) received by Newco in full in accordance with the terms thereof or the debt financing sources have irrevocably confirmed in writing to the parties that the debt financing will be funded in full at the closing of the Merger if the equity financing is funded at the closing, provided that Newco and Merger Sub will not be required to draw down the equity commitment letter or consummate the closing if the debt commitment letter is not in fact funded at the closing;

 

   

Newco and Merger Sub have failed to consummate the Merger on the date on which the closing of the Merger should have occurred pursuant to the Merger Agreement; and

 

   

we have irrevocably confirmed in writing to Newco that, if specific performance is granted and the equity financing and the debt financing are funded, then the closing would occur, substantially simultaneously with the drawdown of the equity financing and the debt financing (and we have not revoked, withdrawn, modified or conditioned such confirmation), we are prepared, willing and able to effect the closing and the other transactions contemplated by the Merger Agreement in accordance with the terms of the Merger Agreement and Newco and Merger Sub fail to complete the closing within three business days after delivery of such written confirmation by us, provided that we remain ready, willing and able to consummate the closing during such three business day period.

Notwithstanding the foregoing or anything to the contrary in the Merger Agreement, for the avoidance of doubt and subject to the terms and limitation of the Merger Agreement, we will under no circumstances be permitted or entitled to receive, directly or indirectly (1) both a grant of specific performance to cause the equity financing to be funded (whether under the Merger Agreement or the equity commitment letter) or other equitable relief, on the one hand, and/or the payment of all or any portion of the Newco Termination Fee and/or any amount, if any, on the other hand, or (2) both payment of any monetary damages whatsoever, on the one hand, and payment of any of the Newco Termination Fee and/or any amount, if any, on the other hand.

The parties have also agreed to waive the defense of adequacy of a remedy at law in any proceeding for specific performance.

Fees and Expenses

Except in specified circumstances, whether or not the Merger is completed, we, on the one hand and Newco and Merger Sub, on the other hand, are each responsible for all of their respective costs and expenses incurred in connection with the Merger and other transactions contemplated by the Merger Agreement.

Amendment

Subject to the provisions of applicable law, the Merger Agreement may be amended by the parties at any time prior to the Effective Time. The Merger Agreement may only be so amended by written agreement, executed and delivered by duly authorized officers of the respective parties with certain exceptions related to the financing.

Governing Law

The Merger Agreement is governed by Delaware law.

 

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MARKET PRICES AND DIVIDEND DATA

Our common stock is listed on Nasdaq under the symbol “SFLY.” As of July 26, 2019, we had 34,396,897 shares outstanding and 63 holders of record.

The following table sets forth the closing price per share of our common stock, as reported on Nasdaq on June 10, 2019, the last full trading day before the public announcement of the Merger, and on July 29, 2019, the latest practicable trading day before the printing of this proxy statement:

 

     Common
Stock
Closing
Price
 

June 10, 2019

   $ 50.25  

July 29, 2019

   $ 50.63  

You are encouraged to obtain current market quotations for our common stock in connection with voting your shares of our common stock. If the Merger is consummated, there will be no further market for our common stock and our common stock will be delisted from Nasdaq and deregistered under the Exchange Act.

We have never paid cash dividends on our common stock. In the event that the Merger is not consummated, we would expect to retain earnings, if any, to fund the development and growth of our business and would not anticipate paying cash dividends on our common stock in the foreseeable future. In the event that the Merger is not consummated, our payment of any future dividends would be at the discretion of our Board after taking into account various factors, including our financial condition, operating results, cash needs and growth plans.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information with respect to the beneficial ownership of our common stock as of July 26, 2019, for:

 

   

each beneficial owner of more than 5% of our outstanding common stock;

 

   

each of our named executive officers named for the year ended December 31, 2018 and named in our proxy statement filed with the SEC on April 5, 2019;

 

   

our current President and Chief Executive Officer who joined Shutterfly on June 24, 2019;

 

   

each of our directors; and

 

   

all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as indicated by footnote, to our knowledge, the persons and entities named in the table have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them, subject to applicable community property laws. Securities that may be acquired within 60 days of July 26, 2019, including shares subject to stock options that may be exercised, and Company RSUs or Company PSUs that may vest and settle, are deemed to be beneficially owned by the person or entity holding such securities for the purpose of computing beneficial ownership, but are not treated as outstanding for the purpose of computing the ownership of any other person or entity. The information as to beneficial ownership presented in the table below does not take into account any accelerated vesting that may occur in connection with the closing of the Merger. The applicable percentages of beneficial ownership are based on 34,396,897 shares of our common stock outstanding as of July 26, 2019.

Unless otherwise indicated, the address of each of the individuals named below is: c/o Shutterfly, Inc., 2800 Bridge Parkway, Redwood City, California 94065.

 

     Shares Beneficially Owned  

Name of Beneficial Owner

   Number      Percentage  

Directors and Executive Officers

     

Christopher North(1)

     585,174        1.7

Ryan O’Hara(2)

     —              

Michael Pope(3)

     70,448            

Michael Meek(4)

     2,140            

Satish Menon(5)

     21,260            

Maureen Mericle(6)

     —              

Thomas D. Hughes

     10,400            

William J. Lansing

     30,430            

Eva Manolis

     9.386            

Ann Mather

     6,328            

Elizabeth S. Rafael

     7,916            

Elizabeth Sartain

     9,240            

H. Tayloe Stansbury

     8,425            

Brian T. Swette

     31.600            

Michael P. Zeisser

     23,996            

All Executive Officers and Directors as a Group (21 persons)(7)

     959,579        2.8

5% Stockholders:

     

PRIMECAP Management Company(8)

     4,876,282        14.2

BlackRock, Inc.(9)

     4,828,099        14.0

The Vanguard Group(10)

     3,394,883        9.9

 

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*

Represents beneficial ownership of less than 1% of the shares of our common stock.

(1)

Mr. North is our former President and Chief Executive Officer. Includes 520,625 shares Mr. North has the right to acquire pursuant to outstanding options exercisable within 60 days of July 26, 2019 and 3,975 RSUs eligible for vesting within 60 days of July 26, 2019.

(2)

Mr. O’Hara is our President and Chief Executive Officer.

(3)

Mr. Pope is our Senior Vice President and Chief Financial Officer. Includes 45,646 shares Mr. Pope has the right to acquire pursuant to outstanding options exercisable within 60 days of July 26, 2019.

(4)

Mr. Meek is our President and Chief Executive Officer, Lifetouch.

(5)

Dr. Menon is our Senior Vice President and Chief Technology Officer. Includes 21,260 shares Dr. Menon has the right to acquire pursuant to outstanding options exercisable within 60 days of July 26, 2019.

(6)

Ms. Mericle is our Senior Vice President and Chief Marketing Officer.

(7)

Includes 693,214 shares subject to options exercisable within 60 days of July 26, 2019 and 3,975 RSUs eligible for vesting within 60 days of July 26, 2019.

(8)

PRIMECAP Management Company stated in its Schedule 13G/A filed with the SEC on February 8, 2019 that, of the 4,876,282 shares beneficially owned by it, it has (a) sole voting power over 4,219,227 shares, and (b) sole dispositive power over 4,876,282 shares. According to the Schedule 13G/A filing, the address of the principal office of PRIMECAP Management Company is 177 E. Colorado Blvd., 11th Floor, Pasadena, CA 91105.

(9)

BlackRock, Inc. stated in its Schedule 13G/A filed with the SEC on January 31, 2019 that, of the 4,828,099 shares beneficially owned by it, it has (a) sole voting power over 4,754,502 shares and (b) sole dispositive power over 4,828,099 shares. According to the Schedule 13G/A filing, the address of the principal office of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.

(10)

The Vanguard Group, Inc. stated in its Schedule 13G/A filed with the SEC on February 11, 2019 that, of the 3,394,883 shares beneficially owned by it, it has (a) sole voting power over 69,095 shares, (b) shared voting power over 4,518 shares, (c) sole dispositive power over 3,324,070 shares, and (d) shared dispositive power over 70,813 shares. According to the Schedule 13G/A filing, the address of the principal office of The Vanguard Group Inc. is 100 Vanguard Blvd., Malvern, PA 19355.

 

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PROPOSAL 2: THE COMPENSATION PROPOSAL

Compensation Paid to Named Executive Officers in Connection with the Merger

In accordance with Section 14A of the Exchange Act, we are providing our stockholders with the opportunity to cast an advisory (non-binding) vote on the Merger-related compensation that may be paid or become payable to our named executive officers in connection with the proposed Merger. For more detailed information regarding these amounts, please see the section captioned “Proposal 1: Adoption of the Merger Agreement—Quantification of Potential Payments and Benefits to our Named Executive Officers” and the accompanying footnotes and related narrative disclosure beginning on page 61 of this proxy statement. As required by those rules, we are asking our stockholders to adopt the following resolution:

RESOLVED, that the stockholders of Shutterfly hereby APPROVE, on an advisory basis, the compensation that may be paid or become payable to Shutterfly’s named executive officers in connection with the Merger, in each case pursuant to Item 402(t) of Regulation S-K, described in the table in the section captioned “Proposal 1: Adoption of the Merger Agreement—Quantification of Potential Payments and Benefits to our Named Executive Officers” and the accompanying footnotes and related narrative discussion beginning on page 61 of Shutterfly’s proxy statement for its special meeting of stockholders to be held on August 28, 2019.

Effect of Advisory Vote

The vote on this proposal is a vote separate and apart from the votes on the proposal to adopt the Merger Agreement and the proposal to approve adjournment of the special meeting. Accordingly, you may vote to approve either of the other proposals and vote not to approve this proposal, and vice versa. Approval of this proposal is not a condition to completion of the Merger.

Because the vote on this proposal is only advisory in nature, it will not be binding on either Shutterfly or Newco regardless of whether the proposed Merger is completed. Accordingly, as the Merger-related compensation described herein is contractual with respect to the executives, regardless of the outcome of this advisory vote, such compensation will be payable, subject only to the conditions applicable thereto, if the proposed Merger is completed.

Vote Required and Board Recommendation

Approval of the compensation proposal requires the affirmative vote of a majority of the shares of our common stock outstanding and entitled to vote that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal. If an executed proxy is returned and a stockholder has specifically abstained from voting on any matter, the shares represented by such proxy will be considered present at the meeting for purposes of determining a quorum, but will not be considered to have voted “FOR” or “AGAINST” such matter. As such, an abstention will have no effect on the vote for the adjournment proposal.

Our Board unanimously recommends that you vote “FOR” the compensation proposal.

 

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PROPOSAL 3: THE ADJOURNMENT PROPOSAL

Adjournment of the Special Meeting

In the event that a quorum is not present or represented by proxy at the special meeting, it is expected that our Board will recommend adjournment of the special meeting to solicit additional proxies if permitted by the Merger Agreement. In addition, we may move to adjourn the special meeting in order to give holders of our common stock additional time to evaluate new material information or disclosure. In either event, we will ask our stockholders to vote only upon the adjournment proposal and not on the other proposals discussed in this proxy statement.

Vote Required and Board Recommendation

Approval of the adjournment proposal requires the affirmative vote of a majority of the shares of our common stock entitled to vote on the matter that are present in person or represented by proxy at the special meeting and voted “FOR” or “AGAINST” the proposal. If an executed proxy is returned and a stockholder has specifically abstained from voting on any matter, the shares represented by such proxy will be considered present at the meeting for purposes of determining a quorum, but will not be considered to have voted “FOR” or “AGAINST” such matter. As such, an abstention will have no effect on the vote for the adjournment proposal.

Our Board unanimously recommends that you vote “FOR” the adjournment proposal.

 

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OTHER MATTERS

No business may be transacted at the special meeting other than the matters set forth in this proxy statement.

FUTURE STOCKHOLDER PROPOSALS

If the Merger is completed, we will have no public stockholders and there will be no public participation in any of our future stockholder meetings. However, if the Merger is not completed, our public stockholders will continue to be entitled to attend and participate in our stockholders’ meetings and we will hold an annual meeting of stockholders in 2020.

If the Merger is not completed, then under our bylaws, our stockholders who intend to present proposals for action, or to nominate directors, at our 2020 annual meeting of stockholders must give written notice of the proposal or nomination to our Corporate Secretary in accordance with our bylaws. Our bylaws require that any such notice be given not less than 75 days nor more than 105 days prior to the first anniversary of the prior year’s annual meeting of stockholders. To be timely for the 2020 annual meeting of stockholders (if the Merger is not completed and such meeting occurs), a stockholder’s notice must be received by us between January 31, 2020 and March 1, 2020. Such proposal should be delivered or mailed to the attention of our Corporate Secretary at our principal executive offices, which are c/o Shutterfly, Inc., 2800 Bridge Parkway, Redwood City, California 94065. Additional requirements apply under our bylaws for stockholders who intend to include a proposal in our proxy statement and proxy card for the 2020 annual meeting pursuant to Rule 14a-8 under the Exchange Act. Any such stockholder proposals would have to be received by our Corporate Secretary no later than December 6, 2019, satisfy the conditions established by the SEC for stockholder proposals, and comply with the deadlines and other procedures in our bylaws.

If the date of the 2020 annual meeting is more than 30 days before or more than 60 days after the first anniversary of the 2019 annual meeting, in order for a notice to be timely, it must be delivered no earlier than 105 days prior to and no later than 75 days prior to the 2020 annual meeting date or, if later, the close of business on the 10th day after we publicly announce the date of the 2020 annual meeting.

These stockholder notices must contain information required by our bylaws. We reserve the right to reject, rule out of order or take other appropriate action with respect to any proposal that does not comply with these and other applicable requirements. If a matter is properly brought before our next annual meeting under the procedures outlined in this paragraph, the proxy holders named by our Board will have the discretion to vote on such matter without having received directions from stockholders delivering proxies to them for such meeting, provided that our proxy statement for our next meeting briefly describes the matter and how the proxy holders intend to vote on it.

 

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WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Exchange Act, and file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings through the Internet at the SEC’s website at www.sec.gov.

You may obtain any of the documents we file with the SEC, without charge, visiting the SEC Filings page of our website at http://ir.shutterfly.com/financial-information/sec-filings. The information included on our website is not incorporated by reference into this proxy statement. You may also request copies from us at the following address or phone number:

Shutterfly, Inc.

2800 Bridge Parkway

Redwood City, California 94065

Attn: Corporate Secretary

(650) 610-5200

If you request any documents from us, we will mail them to you by first class mail, or another equally prompt method, promptly after we receive your request. If you would like to request documents from us, please do so by August 5, 2019 to receive them before the Special Meeting.

INCORPORATION BY REFERENCE

We are allowed to “incorporate by reference” information that we file with the SEC into this proxy statement, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this proxy statement. Information in this proxy statement supersedes information incorporated by reference that we filed with the SEC prior to the date of this proxy statement, while information that we file later with the SEC will automatically update and supersede the information in this proxy statement. We incorporate by reference into the proxy statement the documents listed below, and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act (other than Current Reports on Form 8-K containing only information furnished under Item 2.02 or Item 7.01 of Form 8-K, unless otherwise indicated therein) after the date of this proxy statement but prior to the date of the special meeting:

 

   

our Annual Report on Form 10-K for the year ended December 31, 2018;

 

   

our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019;

 

   

our definitive Proxy Statement on Schedule 14A filed with the SEC on April 8, 2019; and

 

   

our Current Reports on Form 8-K filed with the SEC on April 2, 2018, February 5, 2019 (solely with respect to Item 5.02), April 4, 2019 (Film Numbers 19732919 and 19732935), May 16, 2019, June 10, 2019 (Film Numbers 19889359 and 19889365), June 24, 2019, June 26, 2019 and July 19, 2019.

We will make these documents available to you without charge upon your oral or written request. Requests should be directed to us at the address above under “Where You Can Find More Information.” All of these documents are also available through the SEC Filings page of our website at http://ir.shutterfly.com/financial-information/sec-filings. The information included on our website is not incorporated by reference into this proxy statement.

 

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MISCELLANEOUS

Your vote is important. You may vote by submitting a proxy via the Internet or by telephone, as specified in the Internet and telephone voting instructions on your proxy card, returning your proxy card using the postage prepaid envelope provided, or attending the special meeting and voting in person. If you have any questions about this proxy statement, the special meeting or the Merger or need assistance with voting procedures, you should contact:

MacKenzie Partners, Inc.

1407 Broadway, 27th Floor

New York, New York 10018

(212) 929-5500

(800) 322-2885 (Toll-Free)

Email: proxy@mackenziepartners.com

Please note, however, that if your shares are held of record by a brokerage firm, bank, trust or other nominee and you wish to vote at the special meeting, you must instruct the brokerage firm, bank, trust or other nominee how to vote yours shares or obtain a proxy issued in your name from that record holder.

You should not send in your Shutterfly stock certificates, if any, until you receive the transmittal materials from the payment agent with instructions for the surrender of your stock certificates. Our record stockholders who have further questions about their share certificates or the exchange of our common stock for cash should contact the payment agent.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT TO VOTE ON THE PROPOSALS DESCRIBED HEREIN. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED JULY 30, 2019. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE (OR AS OF AN EARLIER DATE IF SO INDICATED IN THIS PROXY STATEMENT). NEITHER THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS NOR THE ISSUANCE OF CASH IN THE MERGER CREATES ANY IMPLICATION TO THE CONTRARY. THIS PROXY STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE A PROXY SOLICITATION.

 

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Annex A

EXECUTION COPY

 

 

 

AGREEMENT AND PLAN OF MERGER

among

PHOTO HOLDINGS, LLC,

a Delaware limited liability company,

PHOTO HOLDINGS MERGER SUB, INC.,

a Delaware corporation, and

SHUTTERFLY, INC.,

a Delaware corporation

 

 

Dated as of June 10, 2019

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ARTICLE I DESCRIPTION OF TRANSACTION

     A-1  

Section 1.1

     The Merger      A-1  

Section 1.2

     Effects of the Merger      A-2  

Section 1.3

     Closing; Effective Time      A-2  

Section 1.4

     Governing Documents; Directors and Officers      A-2  

Section 1.5

     Conversion of Shares; Company Options, Company RSUs, Company PSUs and Company MSUs      A-2  

Section 1.6

     Dissenting Shares      A-4  

Section 1.7

     Closing of the Company’s Transfer Books      A-5  

Section 1.8

     Exchange of Certificates      A-5  

Section 1.9

     Further Action      A-6  

ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     A-7  

Section 2.1

     Corporate Existence      A-7  

Section 2.2

     Capitalization      A-8  

Section 2.3

     Corporate Authority      A-8  

Section 2.4

     Governmental Approvals and Consents; Non-Contravention      A-9  

Section 2.5

     Compliance with Laws; Governmental Authorizations      A-10  

Section 2.6

     SEC Filings      A-11  

Section 2.7

     Financial Statements; Undisclosed Liabilities; Internal Controls      A-11  

Section 2.8

     Absence of Certain Changes or Events      A-12  

Section 2.9

     Employees; Employee Benefits      A-12  

Section 2.10

     Material Contracts      A-14  

Section 2.11

     Litigation      A-16  

Section 2.12

     Intellectual Property      A-16  

Section 2.13

     Tax Matters      A-18  

Section 2.14

     Environmental Matters      A-20  

Section 2.15

     Real Property; Personal Property      A-20  

Section 2.16

     Company Information      A-21  

Section 2.17

     Finders; Brokers      A-21  

Section 2.18

     Related Person Transactions      A-21  

Section 2.19

     Opinion of Financial Advisor      A-21  

Section 2.20

     Insurance Policies      A-21  

Section 2.21

     No Rights Agreement      A-22  

Section 2.22

     Budget      A-22  

Section 2.23

     Vendors and Customers      A-22  

Section 2.24

     Indemnification Agreements      A-22  

Section 2.25

     Solvency      A-22  

Section 2.26

     Independent Investigation      A-22  

ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

     A-23  

Section 3.1

     Corporate Existence      A-23  

Section 3.2

     Corporate Authority      A-23  

Section 3.3

     Governmental Approvals and Consents; Non-Contravention      A-23  

Section 3.4

     Litigation      A-24  

Section 3.5

     Financing      A-24  

Section 3.6

     Merger Sub      A-25  

Section 3.7

     Parent Information      A-25  

Section 3.8

     Stockholder and Management Arrangements      A-25  

 

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Table of Contents

Section 3.9

     Ownership of Shares      A-26  

Section 3.10

     Operations of Merger Sub      A-26  

Section 3.11

     Finders; Brokers      A-26  

Section 3.12

     Guarantee      A-26  

Section 3.13

     Solvency      A-26  

Section 3.14

     Independent Investigation      A-26  

ARTICLE IV CERTAIN COVENANTS

     A-27  

Section 4.1

     Covenants of the Company      A-27  

Section 4.2

     Access to Information; Confidentiality      A-30  

Section 4.3

     Company Stockholder Approval      A-31  

Section 4.4

     No Solicitation of Transactions      A-34  

Section 4.5

     Appropriate Action; Consents; Filings      A-37  

Section 4.6

     Public Announcements      A-40  

Section 4.7

     Employee Benefit Matters      A-40  

Section 4.8

     Indemnification of Directors and Officers      A-42  

Section 4.9

     State Takeover Laws      A-44  

Section 4.10

     Section 16 Matters      A-44  

Section 4.11

     Merger Sub and Surviving Corporation Compliance      A-44  

Section 4.12

     Stockholder Litigation; Notification of Certain Matters      A-44  

Section 4.13

     Delisting; De-registration      A-45  

Section 4.14

     Parent Vote      A-45  

Section 4.15

     No Control of the Other Party’s Business      A-45  

Section 4.16

     Financing      A-45  

Section 4.17

     Financing Assistance      A-48  

Section 4.18

     Treatment of Company Indebtedness      A-50  

Section 4.19

     IP-Related Corrective Actions      A-51  

ARTICLE V CONDITIONS TO CONSUMMATION OF THE MERGER

     A-51  

Section 5.1

     Conditions Precedent to Obligations of Each Party to Under This Agreement      A-51  

Section 5.2

     Additional Parent and Merger Sub Conditions      A-51  

Section 5.3

     Additional Company Conditions      A-52  

Section 5.4

     Frustration of Closing Conditions      A-52  

ARTICLE VI TERMINATION, AMENDMENT AND WAIVER

     A-53  

Section 6.1

     Termination      A-53  

Section 6.2

     Effect of Termination      A-54  

Section 6.3

     Termination Fees      A-55  

ARTICLE VII MISCELLANEOUS PROVISIONS

     A-57  

Section 7.1

     Non-Survival of Representations and Warranties      A-57  

Section 7.2

     Fees and Expenses      A-57  

Section 7.3

     Notices      A-57  

Section 7.4

     Severability      A-58  

Section 7.5

     Entire Agreement      A-58  

Section 7.6

     Assignment; Third-Party Beneficiaries      A-59  

Section 7.7

     Specific Performance      A-59  

Section 7.8

     Governing Law      A-60  

Section 7.9

     Consent to Jurisdiction        A-60  

Section 7.10

     WAIVER OF JURY TRIAL      A-61  

Section 7.11

     Counterparts      A-61  

Section 7.12

     Amendment      A-61  

 

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Table of Contents

Section 7.13

     Waiver      A-61  

Section 7.14

     Rules of Construction      A-61  

Section 7.15

     Financing Parties      A-62