Item 1.01 Entry into a Material Definitive Agreement.
On December 21, 2017, Drive Shack Inc. (the “Company”) entered into definitive agreements with its external manager, FIG LLC (the “Manager”) to internalize the Company’s management function (the “Internalization”). Since the Company’s inception in 2002, under the supervision of the Company’s board of directors, the Manager has been responsible for managing the Company’s operations. As described in more detail below, on December 21, 2017, the Company agreed with the Manager to terminate the existing management agreement, extend offers of employment to all of the Company’s executive team who are currently employees of the Manager and arrange for the Manager to continue to provide certain services for a transition period. The Internalization will be effective as of January 1, 2018.
The Company’s executive team will remain unchanged following the Internalization. Members of the Company’s executive team, currently employed by the Manager, who will be employed by the Company, include Sarah L. Watterson, Chief Executive Officer and President; Lawrence A. Goodfield, Jr., Chief Financial Officer, Chief Accounting Officer and Treasurer; and Sara A. Yakin, Chief Operating Officer. Wesley R. Edens, who is a Principal and co-founder of Fortress Investment Group LLC, an affiliate of the Manager, will remain the Chairman of the Company’s board of directors.
Each of the agreements described under this Item 1.01, and the transactions contemplated thereby, were negotiated and unanimously approved by a special committee (the “Special Committee”) comprised entirely of independent and disinterested members of the board of directors of the Company, advised by independent counsel.
Termination and Cooperation Agreement
On December 21, 2017, the Company entered into a Termination and Cooperation Agreement (the “Termination and Cooperation Agreement”) with the Manager. The Company has been managed by the Manager pursuant to an Amended and Restated Management and Advisory Agreement, dated January 1, 2017 (the “Management and Advisory Agreement”). Under the Termination and Cooperation Agreement, the Management and Advisory Agreement will terminate effective as of January 1, 2018, except that certain confidentiality, indemnification, expense reimbursement and miscellaneous provisions will survive. In connection with the termination of the Management and Advisory Agreement, the Company will make a one-time cash payment of $10.7 million to the Manager.
As described in the Termination and Cooperation Agreement, the Company has extended offers of employment to thirteen employees currently employed by the Manager or its affiliates. The thirteen employees include the executive officers of the Company whose employment arrangements are further described in Item 5.02 below. Other professionals who provide services on behalf of the Manager will continue to fill similar roles as employees of the Company. The Manager has agreed to be solely responsible for the payment of all compensation payable to such employees with respect to the period prior to January 1, 2018, whether payable prior to or following January 1, 2018, including any discretionary cash bonus payment payable in respect of the 2017 calendar year.
Pursuant to the Termination and Cooperation Agreement, effective as of January 1, 2018, and continuing through the expiration date of the 2017 Drive Shack Inc. Nonqualified Option and Incentive Award Plan (adopted as of April 11, 2017, the “Option Plan”), no “Awards” (as defined in the Option Plan) will be granted or otherwise awarded to the Manager under the Option Plan. In addition, the Company and the Manager agreed to provide that (i) outstanding “Tandem Awards” (as defined in the Option Plan) held by certain employees formerly employed by the Manager will not terminate or be forfeited as a result of the transactions contemplated by the Termination and Cooperation Agreement and (ii) the vesting of such Tandem Awards will relate to the holder’s employment with the Company and its affiliates following January 1, 2018.
The information set forth herein with respect to the Termination and Cooperation Agreement is qualified in its entirety by the full text of the Termination and Cooperation Agreement, which is filed as Exhibit 10.1 hereto and incorporated into this Item 1.01 by reference.
Transition Services Agreement
On December 21, 2017, in connection with the Termination and Cooperation Agreement, the Company entered into a Transition Services Agreement, effective as of January 1, 2018 (the “Transition Services Agreement”), with the Manager. In order to facilitate the transition of the Company’s management of its operations and provide the Company sufficient time to develop such services in-house or to hire other third-party service providers for such services, under the Transition Services Agreement, the Manager will continue to provide to the Company certain services (the “Services”). The Services primarily include information technology, legal, regulatory compliance, tax and accounting services, which were previously provided under the Management and Advisory Agreement, in the same manner previously provided. The Services will be provided for a fee intended to be equal to the Manager’s cost of providing the Services, including the allocated cost of, among other things, overhead, employee wages and compensation and out-of-pocket expenses, and will be invoiced on a monthly basis.
The Transition Services Agreement may be terminated under certain circumstances, including (1) by mutual written consent of the Manager and the Company, (2) by either the Manager or the Company in the event of a material breach by the non-terminating party that is not cured within thirty (30) days following written notification thereof, and (3) by the Manager if the Company fails to pay any sum due and payable for a period of at least thirty (30) days.
Under the Transition Services Agreement, the Manager will provide legal, regulatory compliance, tax and accounting Services until June 30, 2018 and information technology Services until January 1, 2019 (subject to extension by the Company for such information technology Services for an additional six (6) months). If the Company elects to extend any Service, the Company must provide to the Manager not less than sixty (60) days prior written notice of such extension. If the Company elects to terminate any Service prior to its scheduled termination date, the Company must provide to the Manager not less than thirty (30) days prior written notice of such termination unless the Manager otherwise agrees. In connection with any such termination of a Service, in addition to any other costs due, the Company will reimburse the Manager for any actual costs and expenses owed by the Manager with respect to such Service to the extent owed by the Manager in connection with such Service up to the date that such Service would otherwise have been provided (i.e., in the absence of such early termination).
The Transition Services Agreement will terminate on the earliest to occur of (a) the date on which the Transition Services Agreement is terminated pursuant to events described in the paragraph two paragraphs above, (b) the latest date on which any Service is to be provided as set forth in the Transition Services Agreement or (c) the date on which the provision of all Services has been canceled in accordance with the terms of the Transition Services Agreement.
The information set forth herein with respect to the Transition Services Agreement is qualified in its entirety by the full text of the Transition Services Agreement, which is filed as Exhibit 10.2 hereto and incorporated into this Item 1.01 by reference.