Item 10. Directors, Executive Officers and Corporate Governance.
Information about our Directors and
Executive Officers
Board of Directors
Effective
April 21, 2016, R. Bruce Cameron resigned from his position as an independent director of the Company, and our board of
directors elected John Burke as an independent director of the Company to fill the vacancy created by Mr. Cameron’s
resignation. The following sets forth certain information with respect to our directors as of April 29, 2016:
Name
|
|
Age
|
|
Position Held
|
Christian M. Zugel
|
|
55
|
|
Chief Investment Officer and Chairman of our Board of Directors
|
Michael F. Szymanski
|
|
49
|
|
Chief Executive Officer, President and Director
|
John Burke
|
|
57
|
|
Independent Director
|
Paul B. Guenther
|
|
75
|
|
Independent Director
|
James Zinn
|
|
64
|
|
Independent Director
|
Executive Officers
The
following sets forth certain information with respect to our executive officers as of April 29, 2016:
Name
|
|
Age
|
|
Position Held with the Company
|
Michael F. Szymanski
|
|
49
|
|
Chief Executive Officer, President and Director
|
Christian M. Zugel
|
|
55
|
|
Chief Investment Officer and Chairman of the Board of Directors
|
Howard E. Steinberg
|
|
71
|
|
General Counsel
|
Donna Blank
|
|
55
|
|
Chief Financial Officer
|
Don S. Choe
|
|
48
|
|
Chief Technology Officer
|
Marc D. Galligan
|
|
61
|
|
Chief Risk Officer
|
Gregory Barrett
|
|
49
|
|
Head of Client Relations and Business Development
|
Biographical Information
Directors
Christian M. Zugel
Mr.
Zugel founded ZAIS Group in 1997 and currently serves as the Chairman of our board of directors and as Chief Investment Officer.
Mr. Zugel also serves as Chairman of the board of directors and Chief Investment Officer of ZAIS Financial Corp. (“ZFC REIT”),
a publicly traded real estate investment trust for which a subsidiary of ZAIS Group acts as the external manager. Prior to founding
ZAIS Group, Mr. Zugel was a senior executive with J.P. Morgan Securities Inc., where he led J.P. Morgan’s entry into many
new trading initiatives. At J.P. Morgan, Mr. Zugel also served on the Asia Pacific management-wide and firm-wide market risk committees.
Mr. Zugel received a Masters in Economics from the University of Mannheim, Germany.
Mr.
Zugel is well qualified to serve as a director due to his institutional knowledge with respect to ZAIS Group and his significant
experience in the investment management industry both as a senior executive with J.P. Morgan Securities Inc. and as the founder
of ZAIS Group.
Michael F. Szymanski
Mr.
Szymanski currently serves as our Chief Executive Officer, President and Director and has served as the President of ZAIS Group
since 2011. Mr. Szymanski also serves as Chief Executive Officer, President and Director of ZFC REIT. Prior to joining ZAIS Group,
Mr. Szymanski was Chief Executive Officer of XE Capital Management, LLC, an investment management firm specializing in structured
products, from 2003 to 2008. Prior to that, Mr. Szymanski was Chief Financial Officer of Zurich Capital Markets (“ ZCM”),
a subsidiary of Zurich Financial Group, from 2000 to 2002. At ZCM, Mr. Szymanski managed global finance, accounting, tax, treasury,
and risk management for a business specializing in structured products, including hedge fund linked derivatives and principal investments.
Prior to that, Mr. Szymanski was a Vice President in the Bank and Insurance Strategies Group of Lehman Brothers from 1997 to 2000,
providing capital markets structuring and advisory services to financial institutions and corporations. Prior to that, Mr. Szymanski
spent nine years at Ernst & Young LLP advising financial services clients, leaving as a Senior Manager in the Capital Markets/M&A
Advisory Group in New York. Mr. Szymanski served in E&Y’s National Office-Financial Services Industries Group, providing
internal consultation services to resolve clients’ accounting and regulatory issues, specializing in financial instruments.
Mr. Szymanski also served on the board of directors of the National Stock Exchange from December 30, 2011 to February 19, 2015
and as Chairman of its audit committee from February 10, 2012 to February 19, 2015. Mr. Szymanski is a Certified Public Accountant
and received a B.A. in Business Administration with a concentration in Accountancy from the University of Notre Dame and an Executive
M.B.A. with a concentration in Finance from New York University’s Stern School of Business.
We believe
that Mr. Szymanski’s institutional knowledge with respect to ZAIS Group and his experience as an executive officer in multiple
companies in the investment management industry enhances the breadth of experience of our board of directors.
John Burke
Mr.
Burke joined our board of directors in April 2016. He has been a professor of finance at Monmouth University since 1999. Mr.
Burke founded Rumson Capital, LLC, a hedge fund engaged in quantitative arbitrage based strategies, and served as its
Managing Partner from 1993 until 2008. Prior to founding Rumson Capital, Mr. Burke was a Director at Deutsche Bank, AG from
1991 to 1993, where he served as Co-Head of the Global Structured Products Group and managed the global derivative products
group. From 1983 to 1993, Mr. Burke served in several capacities at PaineWebber, Inc., including as Managing Director of the
Global Equity Derivative Group. Mr. Burke received his M.B.A. with honors from Indiana University with a specialization in finance and
his B.A. in business and economics from State University of New York, College at Brockport.
We believe that Mr. Burke is well qualified
to serve as a director due to his extensive experience in the financial services industry, business leadership and knowledge of
financial markets.
Paul B. Guenther
Mr.
Guenther joined our board of directors upon the closing of the Business Combination in March 2015. From 2002 until 2015, Mr. Guenther
served as a member of the board of directors of The Guardian Life Insurance Company, where he has chaired the audit, investment
and human resources and governance committees. In 2015, Mr. Guenther was elected to the board of directors of Barnes & Noble,
Inc. and as Chairman of its audit committee. Mr. Guenther has also served as chairman of Community and Southern Bank Holding Co.
and as chairman of First National Bank of New York, which merged into Bridgehampton National Bank in 2014. From August 2007 to
November 2010, Mr. Guenther served as a member of the board of directors of Liberty Acquisition Holdings Corp., a publicly traded
blank check company that completed its business combination in November 2010. Mr. Guenther was the President of PaineWebber Group,
Inc. from January 1994 to April 1995. Mr. Guenther began working at Paine Webber Incorporated in 1966 and served as its President
from December 1988 until January 1994. Mr. Guenther also served as Chairman of the New York Philharmonic from September 1996 until
2009, after which he became Chairman Emeritus, and was a member of the board of directors of RS Investments until 2015. Mr. Guenther
serves on several philanthropic boards and is a member of several charitable organizations. Mr. Guenther received his M.B.A. from
Columbia Graduate School of Business and his B.S. in economics from Fordham University and is a CFA charterholder.
Mr.
Guenther is well qualified to serve as a director due to his experience in public and private company governance and his financial
experience and knowledge.
James Zinn
Mr.
Zinn joined our board of directors upon the closing of the Business Combination in March 2015. From 2013 to 2015, Mr. Zinn served
on the board of directors of ZFC REIT, including as Chairman of the audit committee. In connection with the closing of the Business
Combination, Mr. Zinn resigned from the ZFC REIT board of directors and joined our board. Since 2010, Mr. Zinn has served as a
Director and formerly Treasurer of his homeowners association representing over 5,000 residents. From 2008 through 2012, he also
maintained an on-call consultant role with ODIN Technologies, Inc., a radio-frequency identification-engineering firm, which he
helped organize in 2003. From 2003 to 2009, Mr. Zinn served as a director of Vmeals, LLC, an online food sales organization. During
2008, Mr. Zinn also served on the valuation committee of XE Capital Management, LLC, a hedge fund based in New York City. From
1999 to 2006, Mr. Zinn co-founded and served as Chief Financial Officer (until 2002) and a Director of ServerVault, Inc., a secure
web-hosting company. From 1994 to 1999, Mr. Zinn served as the Chief Financial Officer and Senior Vice President of CapitalOne
Financial Corporation, where he was responsible for all financial management and related communications. Prior to that, from 1977
to 1994, Mr. Zinn served in various capacities from staff accountant to Regional Partner for Ernst & Young, LLP, providing
accounting and consultation advice on technical accounting matters to financial services clients. Mr. Zinn received a B.S. in Business
Administration from The Ohio State University in 1975.
Mr.
Zinn was selected to serve on our board of directors due to his accounting expertise and industry experience.
Executive Officers
Gregory Barrett
Mr.
Barrett serves as Head of Client Relations and Business Development globally and is responsible for working with the firm’s
Client Relations team, portfolio managers, and Chief Investment Officer to lead and create distribution strategies for ZAIS. Mr.
Barrett is also a member of ZAIS’s Management Advisory Committee. Mr. Barrett joins ZAIS with 23 years of industry experience,
including capital formation, capital introduction, and entrepreneurial start-ups. Prior to joining ZAIS in February of 2016, Barrett
was a Managing Director and a senior member of Dyal Capital Partners, a private equity business within
Neuberger
Berman LLC,
where he co-headed Dyal's Business Services platform from
April 2012 to January 2016. Previously, he was a senior member of Barclays Capital Prime Services Group from 2008 to 2012. During
his tenure at Barclays, he was Global Head of the Capital Solutions Group and responsible for key account coverage oversight of
the Capital Solutions Group. Mr. Barrett holds an M.B.A. in Finance from Fordham University and a B.A. in English and Philosophy
from Franklin and Marshall College.
Biographies
for each of our executive officers other than Gregory Barrett are contained in the discussion entitled “Executive Officers
of the Company” in Item 1 of Part I of the Original Form 10-K.
There
are no familial relationships among any of the members of our board of directors or executive officers.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our outstanding shares of
Common Stock (“10% Holders”) to file with the SEC and the NASDAQ initial reports of ownership and reports of changes
in ownership of our Common Stock and other equity securities. Directors, executive officers and 10% Holders are required by the
SEC’s regulations to furnish us with copies of all Section 16(a) forms and amendments thereto filed during any given year.
Based
on the review of copies of the Section 16(a) reports and amendments thereto furnished to us and/or written representations from
our directors, executive officers and 10% Holders that no other reports were required to be filed, we believe that for the period
from January 1, 2015 through December 31, 2015 our directors, executive officers and 10% Holders complied with all Section 16(a)
filing requirements applicable to them.
Code of Ethics
Our
board of directors has adopted a Code of Ethics (the “Code of Ethics”). Our Code of Ethics applies to our officers,
directors, employees and independent contractors who have access to our systems. Among other matters, our Code of Ethics is designed
to deter wrongdoing and to promote:
|
•
|
honest
and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional
relationships;
|
|
•
|
full,
fair, accurate, timely and understandable disclosure in our public communications;
|
|
•
|
compliance
with applicable governmental laws, rules and regulations;
|
|
•
|
prompt
internal reporting of violations of the Code of Ethics to appropriate persons identified in the Code of Ethics; and
|
|
•
|
accountability
for adherence to the Code of Ethics.
|
Any
waiver of the Code of Ethics for our executive officers or directors may be made only by our board of directors or one of its committees
and will be promptly disclosed if and to the extent required by law or NASDAQ regulations.
The
Code of Ethics is available for viewing on our website at
www.zaisgroupholdings.com
. We will also provide the Code of Ethics,
free of charge, to stockholders who request it. Requests should be directed to ZAIS Group Holdings, Two Bridge Avenue, Suite 322,
Red Bank, New Jersey 07701-1106, Attn: Secretary.
Audit
Committee.
Messrs. Zinn (Chair), Guenther and Burke are the current members of the Audit Committee. Our board
of directors has determined that all of the members of the Audit Committee are independent as required by the NASDAQ listing standards,
SEC rules governing the qualifications of Audit Committee members, our Corporate Governance Guidelines (the “Guidelines”),
the independence standards adopted by our board of directors, as permitted by the Guidelines (the “Independence Standards”)
and the written charter of the Audit Committee. Our board of directors has also determined, based upon its qualitative assessment
of their relevant levels of knowledge and business experience, that Messrs. Zinn, Guenther and Burke are each “financially
literate” as required by the NASDAQ listing standards. In addition, our board of directors has determined that Mr. Zinn qualifies
as an “Audit Committee financial expert” for purposes of, and as defined by, SEC rules and has the requisite accounting
or related financial management expertise required by NASDAQ listing standards. The Audit Committee, among other things, acts on
behalf of our board of directors to discharge our board of directors’ responsibilities relating to our corporate accounting
and reporting practices, the quality and integrity of our consolidated financial statements, our compliance with applicable legal
and regulatory requirements, the performance, qualifications and independence of our external auditors, the staffing, performance,
budget, responsibilities and qualifications of our internal audit function and reviewing its policies with respect to risk assessment
and risk management. The Audit Committee is also responsible for reviewing with management and external auditors our interim and
audited annual financial statements, meeting with officers responsible for certifying our annual report on Form 10-K or any quarterly
report on Form 10-Q and reviewing with such officers disclosures related to any significant deficiencies in the design or operation
of internal controls. The Audit Committee is charged with periodically discussing with our external auditors such auditors’
judgments about the quality, not just the acceptability, of our accounting principles as applied in our consolidated financial
statements. Additional information regarding the responsibilities of the Audit Committee is set forth in its written charter.
Item 11.
Executive Compensation.
Compensation of Independent Directors
We pay
directors’ fees only to those directors who are independent under the NASDAQ listing standards. We pay an annual base director’s
fee of $200,000 to each of our independent directors. Base independent directors’ fees are paid 50% in cash and 50% in restricted
stock awards. We reimburse all members of our board of directors for their travel expenses incurred in connection with their attendance
at full meetings of our board of directors and its committees.
Our
independent directors are also generally eligible to receive restricted stock, restricted stock units (“RSUs”), Class
A Common Stock, options and other equity-based awards under our equity-based ZAIS Group Holdings, Inc. 2015 Stock Incentive
Plan (the “2015 Stock Plan”).
The
following table sets forth the compensation we paid to our independent directors in 2015 (other than Mr. Cameron who served as
Chief Executive Officer of HF2 and whose compensation is shown below, see Executive Compensation — Summary Compensation Table).
2015
Independent Director Compensation
Name
|
|
Fees
Earned or
Paid in
Cash
($)
|
|
|
Stock
Awards
(1)
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
Paul B. Guenther
|
|
$
|
80,000
|
|
|
$
|
98,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
178,500
|
|
James Zinn
|
|
$
|
80,000
|
|
|
$
|
98,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
178,500
|
|
|
(1)
|
Reflects the grant
date fair value of RSUs as determined in accordance with ASC Topic 718. The amounts were calculated based on the number of RSUs
granted multiplied by the closing price per share of our Class A Common Stock on the date of grant. The amounts do not reflect
the actual amounts that may be realized by the directors.
|
Executive
Compensation
Summary
Compensation Table
Our
“named executive officers” consist of Mr. Szymanski, Mr. Steinberg, Ms. Blank and Mr. Cameron. The following table
sets forth certain information with respect to the compensation for the years ended December 31, 2015 and 2014 earned by, awarded
to, or paid to the Company’s named executive officers as well as Mr. Zugel, our Chief Investment Officer, as we anticipate
he will typically be a named executive officer. The table also includes Mr. Cameron who served as the Chief Executive Officer of
HF2 until March 2015 and thereafter served as our director until his resignation on April 21, 2016.
Name and principal position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
(1)
|
|
Stock Awards
($)
(2)
|
|
Nonequity
incentive plan
compensation
($)
(3)
|
|
All other
compensation
($)
(4)
(5)
|
|
Total
($)
|
|
Michael Szymanski
Chief Executive Officer and President
|
|
|
2015
|
|
|
|
300,000
|
|
|
|
—
|
|
|
1,583,671
|
|
|
—
|
|
|
|
25,367
|
|
|
|
1,909,038
|
|
|
|
|
2014
|
|
|
|
260,417
|
|
|
|
1,000,000
|
|
|
|
|
|
867,755
|
|
|
|
34,854
|
|
|
|
2,163,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donna Blank
Chief Financial Officer
|
|
|
2015
|
|
|
|
175,000
|
|
|
|
575,000
|
|
|
440,000
|
|
|
—
|
|
|
|
—
|
|
|
|
1,190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard E. Steinberg
General Counsel
|
|
|
2015
|
|
|
|
300,000
|
|
|
|
—
|
|
|
633,468
|
|
|
—
|
|
|
|
1,524
|
|
|
|
934,992
|
|
|
|
|
2014
|
|
|
|
300,000
|
|
|
|
900,000
|
|
|
—
|
|
|
867,755
|
|
|
|
1,446
|
|
|
|
2,069,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christian Zugel
Chief Investment Officer
|
|
|
2015
|
|
|
|
400,000
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
172,072
|
|
|
|
572,072
|
|
|
|
|
2014
|
|
|
|
400,000
|
|
|
|
3,100,000
|
|
|
—
|
|
|
—
|
|
|
|
570,726
|
|
|
|
4,070,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R. Bruce Cameron
Former HF2 Chief Executive Officer
(6)
|
|
|
2015
|
|
|
|
80,000
|
|
|
|
—
|
|
|
98,500
|
|
|
—
|
|
|
|
—
|
|
|
|
178,500
|
|
|
|
|
2014
|
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Reflects
the payment of a signing bonus and a first year guaranteed bonus to Ms. Blank in 2015 and discretionary bonuses to Messrs. Szymanski,
Steinberg and Zugel in 2014.
|
|
(2)
|
Reflects
the grant date fair value of Class B-0 Units in ZGP granted to Mr. Szymanski, Mr. Steinberg and Ms. Blank by ZGP as determined
under ASC Topic 718, disregarding forfeitures. Also reflects the grant date fair value of RSUs determined in accordance
with ASC Topic 718 granted to Mr. Cameron in his capacity as an independent director. The grant date fair value for
each RSU and Class B-0 Unit in ZGP is based on the closing price per share of our Class A Common Stock on the grant date. The
amounts do not reflect the actual amounts that may be realized by the officers or directors.
|
|
(3)
|
Reflects
amounts earned under the ZAIS Group, LLC Income Unit Plan in 2014, which provided participants a designated percentage of ZGP’s
distributable income. This plan was terminated by ZAIS Group effective December 31, 2014.
|
|
(4)
|
Includes
waiver of management and incentive fees payable with respect to investments in certain funds that ZAIS Group manages for Messrs.
Zugel and Szymanski and certain trusts and family members related to these named executive officers. The amount of the waived
fees with respect to Messrs. Zugel and Szymanski for 2015 was $149,531 and $4,445, respectively, and for 2014 was $542,820 and
$9,822, respectively.
|
|
(5)
|
Includes
fees earned by Messrs. Zugel and Szymanski due to service as a director of an entity for which ZAIS Group serves as an investment
advisor. The amount of director fees received by each of them for board service during 2015 and 2014 was $20,110 and $23,783,
respectively. These amounts were paid in Euros and have been converted to U.S. dollars based on the average conversion rate on
the payment date.
|
|
(6)
|
Reflects
compensation received by Mr. Cameron due to his service as an independent director of the Company. Our Compensation Committee
used its discretionary authority under our 2015 Stock Plan to accelerate the vesting date of the 10,000 RSUs previously held by
Mr. Cameron to April 21, 2016, the date of his resignation, from April 30, 2016, the scheduled vesting date.
|
Information
Regarding Summary Compensation Table
ZAIS
Group previously sponsored the ZAIS Group, LLC Income Unit Plan (the “Income Unit Plan”) for a group of its key employees.
The Income Unit Plan was adopted in June 2013 and was terminated as of December 31, 2014. Under the Income Unit Plan, participants
received income units, which represented a contingent right to receive a portion of ZAIS Group’s distributable income for
a plan year. An employee must generally have been employed on the scheduled distribution date to receive payments under the Income
Unit Plan. If there was positive distributable income for a year, 85% of the estimated amount of positive distributable income
earned with respect to a participant’s income units for that year was payable in December. The remainder, if any, was payable
in the following year. No further amounts are payable under the Income Unit Plan.
Under
the terms of an agreement dated February 27, 2012, Mr. Zugel, as managing member of ZAIS Group, is entitled to receive 10% of the
net incentive income with respect to certain ZAIS Managed Entities, after deducting any payments made with respect to certain employee
compensation payments and payments made to external marketers. These payments amounted to $0 for 2015 and $0 for 2014, and no amounts
have been reported in this year’s Summary Compensation Table with respect to this agreement. As of December 31, 2015, there
was one ZAIS Managed Entity for which Mr. Zugel is entitled to future payments under the aforementioned agreement.
ZAIS
Group has entered into incentive agreements, dated December 19, 2013, with Messrs. Zugel and Szymanski, which provide for the cash
payment of $164,000 and $105,000 to Messrs. Zugel and Szymanski, respectively, on each of February 27, 2015, February 29, 2016
and February 28, 2017. Under the terms of a separate incentive agreement between ZAIS Group and Mr. Szymanski, dated February 26,
2013, Mr. Szymanski is entitled to receive a cash payment of $85,000 on the last day of February in 2014, 2015 and 2016. If Messrs.
Zugel or Szymanski’s employment is terminated without “cause” (as defined in the ZAIS Group Employee Handbook),
or in the event of their death or disability on or before the date on which a payment is due under an applicable incentive agreement,
ZAIS Group will be obligated to make the relevant cash payment to the executive or the executive’s estate (in the event of
death). All payments due on or prior to the date of this Amendment under the incentive agreements described above have been made
to Messrs. Zugel and Szymanski. None of these amounts have been reported in this year’s Summary Compensation Table above
consistent with SEC reporting rules.
Outstanding Equity
Awards at 2015 Year-End
The
following table sets forth certain information about unvested equity awards in the form of RSUs granted to Mr. Cameron and Class
B-0 Units in ZGP (“Class B-0 Units”) for the other named executive officers as of December 31, 2015.
|
|
Stock Awards
(1)
|
|
Names
|
|
Number of Shares
or Units of
Stock That
Have Not Vested
(#)
|
|
|
Market Value
of Shares or
Units of
Stock That
Have Not Vested
($)
|
|
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not Vested
(#)
|
|
|
Equity Incentive
Plan Awards:
Market or Payout
Value of Unearned
Shares, Units
or Other
Rights That
Have Not Vested
($)
|
|
Michael Szymanski
|
|
|
163,265
|
(1)
|
|
$
|
1,511,834
|
|
|
|
—
|
|
|
|
—
|
|
Donna Blank
|
|
|
50,000
|
(1)
|
|
|
463,000
|
|
|
|
—
|
|
|
|
—
|
|
Howard E. Steinberg
|
|
|
65,306
|
(1)
|
|
|
604,734
|
|
|
|
—
|
|
|
|
—
|
|
Christian Zugel
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
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R. Bruce Cameron
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10,000
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(2)
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92,600
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—
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—
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(1)
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Messrs. Szymanski, Steinberg and Zugel and Ms. Blank have not received any compensation from us in the form of shares of common stock of ZAIS Group Holdings, Inc. However, Messrs. Szymanski and Steinberg and Ms. Blank have received Class B-0 Units. The Class B-0 Units are subject to a two year cliff-vesting provision, whereby these units will be forfeited if the executive resigns or is terminated prior to the two year anniversary of the grant date. The Class B Units are not entitled to any distributions from ZGP (and thus will not participate in, or be allocated any, income or loss) or other material rights until such Class B Units vest.
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(2)
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Reflects
compensation received by Mr. Cameron due to his service as an independent director of the Company. Our Compensation Committee
used its discretionary authority under our 2015 Stock Plan to accelerate the vesting date of the 10,000 RSUs previously held by
Mr. Cameron to April 21, 2016, the date of his resignation, from April 30, 2016, the scheduled vesting date.
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Stock Incentive Plan
On
March 9, 2015, the stockholders of the Company approved the 2015 Stock Plan, which is filed as Exhibit 10.6 to our Current
Report on Form 8-K filed on March 23, 2015. The 2015 Stock Plan permits the granting of stock options, restricted and
unrestricted shares of Class A Common Stock, RSUs, stock bonus awards, dividend equivalent rights and other equity-based
awards. As noted above, no equity awards have been made to our named executive officers other than to Mr. Cameron due to his
service as an independent director of the Company.
Except
to the extent otherwise provided in an award agreement, in the event of a change in control (as defined in the 2015 Stock Plan),
then notwithstanding any provision of the 2015 Stock Plan to the contrary, with respect to all or any portion of the participant’s
outstanding award or awards, the Compensation Committee may provide that: (a) the then outstanding options and stock appreciation
rights will become immediately exercisable on the date of the change in control; (b) the period of restriction applicable to awards
will expire as of a time prior to the change in control (including without limitation a waiver of any applicable performance goals);
(c) performance periods in effect on the date the change in control occurs will end on such date, and may (i) determine the extent
to which performance goals with respect to each such performance period have been met based on available information the Compensation
Committee deems relevant and (ii) cause the participant to receive partial or full payment of awards based on the Compensation
Committee’s determination of the degree of attainment of performance goals, or by assuming that the applicable “target”
levels of performance have been attained or on such other basis determined by the Compensation Committee; and (d) all awards that
have been previously deferred to be settled in full as soon as practicable. In addition, if an award under the 2015 Stock Plan
is subject to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), a change in control transaction
may constitute a payment event only if the transaction is also a “change in control event” for purposes of Section
409A of the Code.
Compensation Committee
Interlocks and Insider Participation
During
2015, none of the members of our Compensation Committee was a current or former officer of our Company, except for Mr. Cameron,
who was HF2’s Chairman and Chief Executive Officer prior to the Business Combination. There are no other Compensation Committee
interlocks or insider participation in compensation decisions that are required to be reported under the rules and regulations
of the Exchange Act.
Item 13.
Certain Relationships and Related Transactions and Director Independence.
Review, Approval or
Ratification of Transactions with Related Persons
We do not have a policy
that expressly prohibits our directors, officers, security holders and affiliates from engaging for their own account in business
activities of the types conducted by us. However, our Code of Ethics contains a conflicts of interest policy that prohibits our
directors, officers and employees from engaging in any transaction or actions that involves an actual conflict of interest with
us, unless our chief executive officer or chief compliance officer has approved the act or transaction.
Certain Relationship and Related Transactions
Transactions with HF2’s
Sponsors
In connection
with the formation of HF2, HF2 issued shares of Class A Common Stock (the “Founders’ Shares”) to certain persons.
Prior to HF2’s initial public offering (the “IPO”) on December 5, 2012, a total of 4,255,000 Founders Shares
were sold to certain of HF2’s sponsors (the “Sponsors”) at a price of approximately $0.005875 per share for an
aggregate of $25,000. On February 26, 2013, HF2 repurchased 1,320,707 Founders’ Shares from certain Sponsors at the original
sale price of approximately $0.005875 per share for an aggregate price of $7,760. On the same date, HF2 also sold 1,464,457 Founders’
Shares to certain existing and new Sponsors at the same price of approximately $0.005875 per share for an aggregate price of $8,605.
The
Founders’ Shares are identical to the shares of Class A Common Stock sold in the IPO. However, under letter agreements entered
into with HF2 in connection with the IPO, the Sponsors agreed (A) to vote their Founders’ Shares and any other shares acquired
in or after the IPO in favor of the Business Combination, and (B) not to redeem any Founders’ Shares in connection with a
stockholder vote to approve the Business Combination. Additionally, the Sponsors agreed not to transfer, assign or sell any of
the Founders’ Shares (except to certain permitted transferees) until one year after the date of the consummation of the Business
Combination or earlier if, subsequent to the Business Combination (1) with respect to 50% of the Founders’ Shares, the last
sales price of the Class A Common Stock equals or exceeds $12.50 per share (as adjusted for stock splits, stock dividends, reorganizations
and recapitalizations) for any 20 trading days within any 30-trading day period commencing after the closing of the Business Combination
and, with respect to the remaining 50% of the Founders’ Shares, the last sales price of the Class A Common Stock equals or
exceeds $15.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading
days within any 30-trading day period commencing after the closing of the Business Combination or (2) we consummate a liquidation,
merger, stock exchange or other similar transaction which results in all of our holders of Class A Common Stock having the right
to exchange their shares of Class A Common Stock for cash, securities or other property. In addition, in connection with the Business
Combination, Bruce Cameron agreed not to transfer, assign or sell 116,254 of his Founders’ Shares (except to certain permitted
transferees) until March 17, 2017 (two years after the date of the consummation of the Business Combination) and after such two
year period he may only transfer, assign or sell 25% of such Founders’ Shares in any 12-month period.
On March
22, 2013, the Sponsors purchased an aggregate of 1,414,875 shares of Class A Common Stock at a price of $10.00 per share from HF2
(the “Sponsors’ Shares'). These purchases took place on a private placement basis simultaneously with the consummation
of the IPO. On April 1, 2013, the Sponsors purchased an additional 183,525 Sponsors’ Shares at a price of $10.00 per share
from HF2. These purchases took place on a private placement basis simultaneously with the consummation of the underwriters’
over-allotment option related to the IPO. In connection with such purchases, the Sponsors agreed (A) to vote their Sponsors’
Shares in favor of any proposed initial business combination, and (B) not to redeem any Sponsor Shares in connection with a stockholder
vote to approve the Business Combination. Additionally, the Sponsors agreed not to transfer, assign or sell any of the Sponsors’
Shares (except to certain permitted transferees) until 30 days after the completion of the Business Combination.
In December
2012, Mr. Cameron purchased an aggregate of 20,000,000 shares of Class B Common Stock for an aggregate purchase price of $20.00,
or $0.000001 per share, which is the per share par value. Mr. Cameron contributed the shares of Class B Common Stock to a voting
trust (the “HF2 Class B Voting Trust”). Wilmington Trust, National Association served as administrative trustee of
the HF2 Class B Voting Trust. Shares of Class B Common Stock are entitled to ten votes per share and vote with the holders of Class
A Common Stock, as a single class, on all matters presented to holders of our common stock for a vote. Shares of Class B Common
Stock have no economic rights (other than the right to be redeemed at par value upon a liquidation).
Prior
to the IPO, certain of HF2’s sponsors, officers and directors loaned HF2 an aggregate of $200,000 to cover expenses related
to the IPO. The loans were payable without interest on the earlier of (i) December 5, 2013, (ii) the date on which the IPO was
consummated or (iii) the date on which HF2 determined to not proceed with the IPO. The loans were repaid from the proceeds of the
IPO that were not placed in the trust account that held the proceeds of the IPO (the “Trust Account”).
On
October 23, 2014, Broad Hollow Investors LLC, one of the Sponsors and an affiliate of R. Bruce Cameron, loaned HF2 $300,000
pursuant to an interest-free promissory note. The loan became due and was paid in full upon the closing of the Business
Combination. On December 2, 2014, R. Bradley Forth, our former Executive Vice President and Chief Financial Officer, loaned
HF2 $100,000 pursuant to an interest-free promissory note. The loan became due and was paid in full on upon the closing of
the Business Combination.
The
holders of Founders’ Shares, as well as the holders of Sponsors’ Shares, are entitled to registration rights pursuant
to the Registration Rights Agreements (as defined below). Such holders may invoke their demand registration rights and have certain
“piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of the
Business Combination. We will bear the expenses incurred in connection with the filing of any such registration statements. See
“— Registration Rights Agreements — IPO Registration Rights Agreement.”
Berkshire
Capital Securities LLC, an affiliate of Mr. Cameron, made available to HF2 general and administrative services including office
space, utilities and secretarial support, from the date that HF2’s securities were first listed on NASDAQ through the closing
of the Business Combination. HF2 paid Berkshire Capital Securities LLC $10,000 per month for these services. This arrangement was
terminated upon the closing of the Business Combination.
Business Combination
On March
17, 2015, the Business Combination was consummated pursuant to the Investment Agreement by and among HF2, ZGP and the ZGP Founder
Members, whereby HF2 acquired a 66.5% interest in ZGP and changed its name to ZAIS Group Holdings, Inc. In the Business Combination,
HF2 contributed $78.2 million in cash to ZGP and transferred 20,000,000 shares of our Class B Common Stock to the ZGP Founder Members
which was immediately deposited into a voting trust (the “Class B Voting Trust”), of which Mr. Zugel is the initial
sole trustee. The remaining Class A Units of ZGP not acquired by HF2 are held by the ZGP Founder Members. In his capacity as trustee
of the Class B Voting Trust, Mr. Zugel has voting power over the shares of Class B Common Stock held in the Class B Voting Trust.
Each share of Class B Common Stock is entitled to 10 votes and there are currently 20,000,000 shares of Class B Common Stock outstanding.
Consequently, in his capacity as trustee of the Class B Voting Trust, Mr. Zugel has effective voting control of the Company.
At the
closing of the Business Combination, we also entered into the following agreements, each of which is discussed below: (i) the Amended
and Restated Limited Liability Company Agreement of ZGP, entered into as of March 17, 2015 and amended on March 20, 2015 and July
21, 2015 (the “ZGP LLC Agreement”), (ii) Exchange Agreement, dated as of March 17, 2015, by and among the Company,
ZGP, the Company Unitholders (as defined therein) and Christian M. Zugel, as trustee (solely in his capacity as the trustee) of
the Class B Voting Trust, as amended on July 21, 2015 (the “Exchange Agreement”), (iii) the Registration Rights Agreement
(the “BC Registration Rights Agreement”), dated as of March 17, 2015, by and among the Company and the Holders (as
defined therein), and (iv) the Tax Receivable Agreement, dated as of March 17, 2015, by and among the Company and the parties signatory
thereto, as amended on July 21, 2015 (the “Tax Receivable Agreement”).
ZGP LLC Agreement
Upon
the closing of the Business Combination, we entered into the ZGP LLC Agreement. We serve as the sole managing member of ZGP. Accordingly,
we control ZGP’s and ZAIS Group’s business and affairs and are responsible for the management of ZAIS Group’s
business. Although we are the managing member of ZGP, the ZGP Founder Members have certain consent rights, as described below under
“— Consent Rights.”
Interests
in ZGP are represented by units or other equity securities that we, in our capacity as managing member of ZGP, may establish. There
are two classes of ZGP units outstanding — the Class A Units and the Class B units (the Class B Units together
with the Class A Units, the “Units”). The rights and obligations of the Class A Units and Class B Units are the same,
except that the Class A Units and Class B Units have different forfeiture requirements and the Class B Units are subject to vesting.
Prior to vesting, a Class B Unit will not have any economic participation or other material rights in ZGP.
At the
closing of the Business Combination, the ZGP Founder Members’ interests in ZGP outstanding immediately prior to the closing
were converted into 7,000,000 Class A Units. In addition, during the first five years after the closing of the Business Combination,
ZGP will release up to an additional 2,800,000 Class A Units (the “Additional Founder Units”) to the ZGP Founder Members
if the sum of the average per share closing price over any 20 trading-day period of the Class A Common Stock plus cumulative dividends
paid on the Class A Common Stock between the closing and the day prior to such 20 trading-day period (the “Total Per Share
Value”) meets or exceeds specified thresholds, ranging from $12.50 to $21.50.
The
ZGP LLC Agreement also provides for the grant of up to 6,800,000 Class B Units at any time during the five year period following
the closing of the Business Combination to employees of ZAIS Group subject to vesting conditions. The Class B Units are divided
into five classes: Class B-0 Units, Class B-1 Units, Class B-2 Units, Class B-3 Units and Class B-4 Units. There are 1,600,000
authorized Class B-0 Units, 1,337,486 of which were outstanding as of December 31, 2015, and will vest in full on the later of
the applicable grant date and the second anniversary of the closing of the Business Combination, unless otherwise specified in
the applicable grant agreement. The remainder of the 5,200,000 Class B Units will be granted by a representative of the ZGP Founder
Members so long as the Founder Member Ownership Threshold (as described below under “— Consent Rights”)
is met. When such threshold is no longer met, we, in our capacity as managing member of ZGP, may grant these Class B Units in our
discretion.
The
Class B-1, B-2, B-3 and B-4 Units will vest one-third when the Total Per Share Value meets or exceeds certain thresholds set forth
below, and one-third on each of the first anniversary and second anniversary of such event. The Total Per Share Value thresholds
must be met during the five year period after the closing of the Business Combination. The number of Class B Units subject to grant
and the Total Per Share Values are as follows:
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1,200,000
Class B-1 Units if the Total Per Share Value exceeds $12.50;
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1,200,000
Class B-2 Units if the Total Per Share Value equals or exceeds $15.00;
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1,400,000
Class B-3 Units if the Total Per Share Value equals or exceeds $18.00; and
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1,400,000
Class B-4 Units if the Total Per Share Value equals or exceeds $21.50.
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All
of the Class B Units are subject to forfeiture upon certain events (See “— Class B Restrictive Covenants; Class
B Unit Forfeiture”).
The
Company holds approximately 66.5% of the outstanding equity in ZGP, and the ZGP Founder Members hold approximately 33.5% of the
outstanding equity of ZGP.
Consent Rights
So long
as the ZGP Founder Members hold at least 10% of our capital stock (which includes securities exercisable for or convertible into
our capital stock) whether directly or indirectly through ownership of Units exchangeable or convertible into our capital stock
(the “Founder Member Ownership Threshold”), ZGP cannot take any of the following actions without the consent of the
ZGP Founder Members:
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enter
into any transaction with us that is not arm’s length other than as contemplated in the agreements documenting the Business
Combination;
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convert
ZGP into a corporation or take any other action that would cause ZGP to be treated as a corporation for tax purposes;
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dissolve,
liquidate or otherwise wind up ZGP (other than pursuant to a change of control event);
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enter
into any agreement or otherwise commit to take any of the actions set forth above; or
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borrow
(whether itself or its subsidiaries) from any ZGP member or affiliate of a ZGP member or enter into a guarantee of its indebtedness
with any ZGP member or affiliate of a ZGP member.
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The
ZGP Founder Members also have consent rights or control rights related to certain tax matters, in some instances regardless of
whether the Founder Member Ownership Threshold is then satisfied. Among other things, we, in our capacity as managing member of
ZGP, cannot make any tax elections or other tax related decisions that have a potential material and adverse bearing on any of
the ZGP Founder Members. In addition, a representative of the ZGP Founder Members will control the preparation of ZGP’s tax
return for, and the defense of any tax audit with respect to, the 2015 fiscal year of ZGP.
We also
may not enter into any transaction with Mr. Christian Zugel, any of his family members or their respective affiliates without the
prior consent of a majority of our independent directors. ZAIS Group is a party to a consulting agreement with Tracy Rohan, Mr.
Zugel’s sister-in-law, pursuant to which Ms. Rohan provides services to ZAIS Group relating to event planning, promotion,
web and print branding and related services. Pursuant to the consulting agreement, ZAIS Group paid Ms. Rohan approximately $120,000
in each of 2015, 2014, 2013 and 2012. The consulting agreement is terminable upon 60 days’ notice by either party.
The
ZGP Founder Members also have rights to receive ZGP’s draft fiscal year budgets and audited year-end financial statements.
These information rights will terminate when the Founder Member Ownership Threshold is no longer satisfied.
Distributions and Taxes
Holders
of Units (including us) will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income
of ZGP. Except as otherwise required under Section 704(c) of the Code, including with respect to income generated in respect of
the undistributed eligible accounts, net profits and net losses of ZGP will be generally allocated to its Unit holders (including
us) pro rata in accordance with their respective ownership percentage of the Units. Subject to certain exceptions, ZGP is required
to make quarterly cash distributions to its Unit holders based on the cumulative taxable income of ZGP multiplied by the applicable
highest effective marginal combined federal, state and local income tax rate for an individual resident (or corporate resident,
if greater) in New York, New York, taking into account the character of the associated income, the year in which such income is
recognized and the deductibility of state and local income taxes for federal income tax purposes and any limitations thereon.
ZGP
is also obligated to make special distributions to the ZGP Founder Members in an aggregate amount equal to the undistributed eligible
accounts as amounts attributable to such undistributed eligible accounts are received by the Company.
Holders
of unvested Class B Units are not entitled to receive any distributions with respect to such Class B Units until they are vested.
Other
than tax distributions and the special distributions to the ZGP Founder Members, other distributions are made at our sole discretion,
in our capacity as managing member of ZGP.
Company Expenses
ZGP
pays all costs, fees and expenses incurred by us in connection with the Investment Agreement and the related transaction documents
or in connection with serving as managing member of ZGP. These expenses include costs of our securities offerings, compensation
to our board of directors, costs of complying with our SEC filing obligations, litigation costs and accounting and legal fees.
These expenses do not include our income or franchise tax obligations, other than Delaware franchise taxes or our payment obligations
under the Tax Receivable Agreement.
Transfers of Units
So long
as the Founder Member Ownership Threshold is met, we cannot directly or indirectly transfer any Units without the prior written
consent of the Founder Member Representative (as described under “— Founder Member Representative”), excluding
transfers to a controlled affiliate, a change of control event and other specified exceptions.
Similarly,
no other ZGP member may directly or indirectly transfer any of its Units without our consent other than pursuant to the terms of
the Exchange Agreement and certain permitted transfers to affiliates, family members or in connection with the exercise of a ZGP
Founder Member’s co-sale rights. In addition, any transfer by a ZGP Founder Member will also require the consent of the Required
Independent Directors (as defined in the Investment Agreement). ZGP has the right to redeem the Units held by any ZGP member (other
than the managing member) at a per Unit price of $0.01 if such ZGP member violates these transfer restrictions.
ZGP
members also may not transfer Units if such transfer would violate securities laws or other specified laws, violate loan or debt
instruments of us or ZGP, result in ZGP being taxed as a corporation or result in other specified consequences.
Drag-Along; Co-Sale
Rights
If a
change of control transaction is approved by both us, in our capacity as managing member, and (if the Founder Member Ownership
Threshold is met) by the Founder Member Representative (as defined below), then each ZGP member (other than the managing member)
is required to approve the change of control transaction and take other actions reasonably necessary or desirable to effect the
change of control transaction. These other actions include agreeing to sell such member’s Units or Class A Common Stock on
terms and conditions approved by us and, if applicable, the Founder Member Representative. The proceeds of any such sale will be
allocated among the ZGP members in accordance with the distribution provisions that apply upon a liquidation and dissolution of
ZGP.
If ZGP
does not exercise its drag-along rights with respect to a change of control transaction, each ZGP Founder Member will have a co-sale
right with respect to such transaction. The co-sale right allows a ZGP Founder Member to sell a percentage of its Units equal to
the proportion of our Units that are being sold in such transaction.
Founder Member Representative
The
ZGP Founder Members have appointed Christian Zugel as their representative (the “Founder Member Representative”) under
the ZGP LLC Agreement. The Founder Member Representative may, on behalf of the ZGP Founder Members or any Class B Member, waive
any rights of the ZGP Founder Members or the Class B Members under the ZGP LLC Agreement. Mr. Zugel can be replaced as Founder
Member Representative by vote of the ZGP Founder Members only if Mr. Zugel has died or is incapacitated. If Mr. Zugel breaches
any non-compete, non-solicit or certain other restrictive covenants, the Founder Member Representative will have no further consent
rights under the ZGP LLC Agreement.
Exchange Agreement
The Exchange Agreement entitles each ZGP Founder Member to exchange Class A
Units that it holds for either (at the Company’s option):
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a
number of shares of Class A Common Stock equal to the exchange rate (which initially will be one-to-one, subject to customary
conversion rate adjustments for stock splits, stock dividends, reclassifications and certain other transactions that would cause
the number of outstanding shares of Class A Common Stock to be different than the number of Class A Units),
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cash
in an amount equal to the fair market value of the Class A Common Stock subject to exchange, or
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a
combination of shares of Class A Common Stock and cash, as described above.
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Holders
of Class B Units are also parties to the Exchange Agreement and are entitled to exchange their vested Class B Units (but not unvested
Class B Units) for shares of Class A Common Stock, cash or a combination of the two at the same exchange rate and generally, the
same terms. Exchanges can occur generally only on the first business day of any fiscal quarter.
Generally,
the ZGP Founder Members and the holders of Class B Units are not entitled to exercise their exchange rights until the first fiscal
quarter after the second anniversary of the closing of the Business Combination. In addition, during any 12-month period after
the second anniversary of the closing of the Business Combination, the holders of Units are subject to further limitations on exchange.
During any such 12-month period, a ZGP Founder Member may only exchange up to 25% of the aggregate number of Class A Units it held
as of the first day of such 12-month period in which the exchange occurs. This limitation will expire after the first exchange
date at which such ZGP Founder Member no longer holds Class A Units exceeding 10% of the maximum number of Class A Units previously
held by such ZGP Founder Member. During any such 12-month period, a holder of Class B Units may only exchange a number of vested
Class B Units in an amount not to exceed 25% of an amount equal to (x) the aggregate number of vested Class B Units held by such
Class B Member as of the first day of such 12-month period in which the applicable exchange occurs minus (y) the cumulative number
of Class B Units for which a tax-related exchange exception was provided (as described below). This limitation will expire after
the first exchange date at which time such Class B Member ownership of Class B Units no longer exceeds 10% of an amount equal to
(x) the maximum number of Class B Units previously held by such Class B Member minus (y) the cumulative number of Class B Units
for which a tax-related exchange exception was provided.
The
Exchange Agreement provides for exceptions to these limitations on exchange rights. First, upon the vesting of any Class B Units
or upon the issuance of any immediately vested Class B Units, within 12 months of such date, in the event that the Class B Member’s
tax obligations exceed the net proceeds such Class B Member could receive upon a sale of the shares of Class A Common Stock issuable
in exchange for his or her vested Class B Units, such Class B Member will instead be entitled to immediately exchange a number
of vested Class B Units so that the net proceeds from the sale of the Class A Common Stock into which such newly vested or issued
Class B Units are exchangeable would be sufficient to satisfy his or her tax obligations.
Second,
after the second anniversary of the closing of the Business Combination, the limitations on exchange rights can be waived by the
Compensation Committee of our board of directors (in the case of the ZGP Founder Members’ limitations) or either the Chairman
of our board of directors or the Compensation Committee of our board of directors (in the case of the Class B Members’ limitations).
Holders
of Units also have the right to exchange their Units for Class A Common Stock upon a change of control of the Company, regardless
of when that change of control occurs. A change of control includes a sale, lease or transfer of all or substantially all of the
Company’s assets, including a sale of all Class A Units held by the Company; a person or group of persons (within the meaning
of Section 13(d) of the Exchange Act) becoming the beneficial owner of a majority of the Company’s voting securities (excluding
a group that includes Christian Zugel, his affiliates or the Class B Voting Trust) and a merger after the consummation of which
members of our board of directors do not comprise at least a majority of the board of directors of the resulting entity or the
Company’s voting securities do not represent a majority of the voting securities of the resulting entity.
The
Exchange Agreement also provides that shares of Class B Common Stock held by the Class B Voting Trust will be cancelled once the
ZGP Founder Members’ ownership of our capital stock (which includes securities exercisable for or convertible into our capital
stock) whether directly or indirectly through ownership of Units exchangeable or convertible into our capital stock (the “Founder
Member Ownership Percentage”) falls below certain thresholds. Once the Founder Member Ownership Percentage falls below 20%,
the Class B Voting Trust will surrender a percentage of its shares of Class B Common Stock equal to (x) 20% minus the Founder Member
Ownership Percentage at such time divided by (y) 20%. After such adjustment, if the Founder Member Ownership Percentage decreases,
the Class B Voting Trust will surrender a number of shares of Class B Common Stock equal to (x) the percentage reduction in the
Founder Member Ownership Percentage divided by (y) 20% multiplied by (z) the number of shares of Class B Common Stock outstanding
as of the Closing. When the Founder Member Ownership Percentage falls below 5%, or if certain ZGP Founder Members breach their
non-competition or other specified restrictive covenants in the Investment Agreement, the Class B Voting Trust will surrender all
of its shares of Class B Common Stock to the Company. Any shares of Class B Common Stock surrendered to the Company will be automatically
deemed cancelled.
ZGP
and the exchanging holder of Units will bear their own expenses in connection with the consummation of any exchange. Generally,
ZGP will also bear any transfer taxes, stamp taxes or duties, or other similar taxes as well as any other expenses incurred by
the Company in connection with an exchange.
The
Exchange Agreement also provides that a holder of Units will not have the right to exchange Units if ZGP or the Company reasonably
determines that such exchange would be prohibited by law or regulation or would violate the ZGP LLC Agreement or other agreements
of the Company or ZAIS Group to which the holder of Units may be subject. ZGP or the Company may impose additional restrictions
on exchanges that it determines are necessary or advisable so that ZGP is not treated as a “publicly traded partnership”
for United States federal income tax purposes.
Registration Rights
Agreements
IPO Registration Rights
Agreement
Upon
the closing of the IPO, HF2 entered into a registration rights agreement with Sponsors and holders of Founders’ Shares (the
“IPO Registration Rights Agreement”) pursuant to which HF2 granted registration rights with respect to shares of Class
A Common Stock issued in private placements prior to and concurrently with the IPO.
Under
the IPO Registration Rights Agreement, holders are entitled to make up to two demands that the Company register their Class A Common
Stock for resale, subject to the conditions set forth in the IPO Registration Rights Agreement. A demand registration must be for
securities reasonably expected to result in aggregate gross proceeds in excess of $500,000.
However,
the holders may not exercise their demand registration right more than once in any 12 month period. In addition, the Company will
not be obligated to effect a demand registration within 12 months of the effective date of a registration statement filed by us
or if a qualifying shelf registration statement is effective. The Company may postpone the filing of a registration statement if
the Company determines in good faith judgment that the filing would require disclosure of information that has not been disclosed
to the public and is not otherwise required to be disclosed at that time that would reasonably be expected to materially adversely
affect the Company or would require inclusion in the registration statement of financial statements that are unavailable to the
Company for reasons beyond the Company’s control. The underwriters of any underwritten offering have the right to limit the
number of shares to be included in a registration statement filed in response to the exercise of these demand registration rights.
The Company must pay all expenses, except for underwriters’ fees, fees and disbursements of any counsel retained by the holders
(subject to certain exceptions) and any other expenses not specified in the IPO Registration Rights Agreement that are incurred
by the Company in connection with these demand registration rights.
If the
Company is eligible to file a registration statement on Form S-3, the holders can request that the Company register their shares
for resale on a shelf registration statement. Any registration must be reasonably expected to result in aggregate gross proceeds
of at least $500,000. The holders cannot make more than one demand for an S-3 registration in any 12-month period. The same underwriter
cut-back and ability for the Company to postpone the registration statement filing for demand registrations applies.
In the
last quarter of 2015, we filed a Registration Statement on Form S-3 covering the registration of 5,804,181 Founders’ Shares
and Sponsors’ Shares with the SEC in response to a demand from the holders. This Form S-3 was declared effective by the SEC
on January 15, 2016.
Business Combination
Registration Rights Agreement
Upon
the Closing of the Business Combination, we entered into a registration rights agreement with the ZGP Founder Members (the “BC
Registration Rights Agreement” and, together with the IPO Registration Rights Agreement, the “Registration Rights Agreements”)
pursuant to which the Company granted registration rights to the ZGP Founder Members and other holders of Units that become a party
to the BC Registration Rights Agreement (the “BC Registration Rights Holders”) with respect to shares of Class A Common
Stock to be issued upon exchange of the Class A Units or vested Class B Units pursuant to the Exchange Agreement. Any such securities
registered under any registration statement will be available for sale in the open market unless restrictions apply.
BC Registration
Rights Holders have the right to demand that the Company register their Class A Common Stock for resale, subject to the conditions
set forth in the BC Registration Rights Agreement. A demand registration must be for securities reasonably expected to result in
aggregate gross proceeds in excess of $20 million.
However,
the BC Registration Rights Holders may not exercise their demand registration right more than once in any 12 month period. In addition,
the Company will not be obligated to affect a demand registration within 180 days of the effective date of a registration statement
filed by us or if a qualifying shelf registration statement is effective. The Company may postpone the filing of a registration
statement for a reasonable period of time not in excess of 75 days once in any 12-month period if our board of directors determines
in its good faith judgment that the filing would reasonably be expected to materially adversely affect any bona fide material financing
or any material transaction under consideration by the Company or would require disclosure of information that has not been disclosed
to the public and is not otherwise required to be disclosed at that time that would reasonably be expected to materially adversely
affect the Company. The underwriters of any underwritten offering have the right to limit the number of shares to be included in
a registration statement filed in response to the exercise of these demand registration rights. The Company must pay all expenses,
except for underwriters’ fees, fees and disbursements of any counsel retained by the BC Registration Rights Holders (subject
to certain exceptions) and any other expenses not specified in the BC Registration Rights Agreement that are incurred by the Company
in connection with these demand registration rights.
In addition
to the demand registration rights noted above, if the Company is eligible to file a registration statement on Form S-3, the BC
Registration Rights Holders can request that the Company register their shares for resale on a shelf registration statement. Any
registration must be reasonably expected to result in aggregate gross proceeds of at least $10 million. The Company is not obligated
to effect more than three S-3 registrations on behalf of the BC Registration Rights Holders in any 12-month period. If the Company
is eligible as a “Well Known Seasoned Issuer” under the Securities Act, the requesting holders may request that the
shelf registration statement utilize the automatic shelf registration process under Rule 415 and Rule 462 promulgated under the
Securities Act. The same underwriter cut-back and ability for the Company to postpone the registration statement filing for demand
registrations applies, except the time period that the Company may postpone the filing is 90 days in any 12-month period under
most circumstances.
BC Registration
Rights Holders have the right to “piggyback” on most types of registration statements that the Company files. If the
Company registers any securities for public sale, BC Registration Rights Holders have the right to include their shares in the
registration for resale by the BC Registration Rights Holders, subject to the conditions set forth in the BC Registration Rights
Agreement.
Tax Receivable Agreement
We
are party to the Tax Receivable Agreement with the ZGP Founder Members and holders of Class B Units which requires us to pay to
the ZGP Founder Members and holders of vested Class B Units that exchange such Units for Class A Common Stock of the Company 85%
of the amount of savings, if any, in U.S. federal, state and local income tax that the Company actually realizes (or is deemed
to realize in the case of an early termination payment by the Company, or a change in control) as a result of the increases in
tax basis and certain other tax benefits related to the exchange of Class A Units or the exchange of vested Class B Units for Class
A Common Stock. This is our obligation, and not that of ZGP. We would retain the remaining 15% of cash savings, if any, realized.
In addition,
under the Tax Receivable Agreement, in the event that the ZGP Founder Members are required to recognize income or gain as a result
of the release of Additional Founder Units to the ZGP Founder Members, we will be required to make a payment to the ZGP Founder
Members in an amount equal to 100% of any tax refunds or reductions in taxes otherwise payable that we actually realize as a result.
Our obligation to make this additional payment does not terminate as a result of an early termination or change of control under
the Tax Receivable Agreement.
Estimating
the amount of payments that we may be required to make under the Tax Receivable Agreement is imprecise by its nature, because the
actual increase in our share of ZGP’s tax basis, as well as the amount and timing of any payments under the Tax Receivable
Agreement, will vary depending upon a number of factors, including:
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the
timing of exchanges of Class A Units or Class B Units for shares of Class A Common Stock — for instance, the
increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable
and amortizable assets of ZGP at the time of the exchanges;
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the
price of Class A Common Stock at the time of exchanges of Class A Units or Class B Units — the increase in our
share of the basis in the assets of ZGP, as well as the increase in any tax deductions, will be related to the price of Class
A Common Stock at the time of these exchanges;
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the
extent to which these exchanges are taxable — if an exchange is not taxable for any reason, increased deductions
will not be available;
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the
tax rates in effect at the time we use the increased amortization and depreciation deductions; and
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the amount and timing of
our income — we will be required to make payments with respect to 85% of the tax savings covered by the Tax Receivable
Agreement, as and when realized, if any. If we do not have taxable income, we generally will not be required to make payments under
the Tax Receivable Agreement for that taxable year because no tax savings will have been actually realized.
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We expect that, as
a result of the size of the increases in our share of the tax basis of the tangible and intangible assets of ZGP attributable to
our interest therein, and assuming that there are no material changes in the relevant tax law, and that we earn sufficient taxable
income to realize the full tax benefit of the increased depreciation and amortization of our assets, the payments that we make
under the Tax Receivable Agreement will likely be substantial and could have a material adverse effect on our financial condition.
In addition,
the Tax Receivable Agreement provides that, upon certain mergers, asset sales, other forms of business combinations, liquidations,
other changes of control, or early terminations of the Tax Receivable Agreement our (or our successors’) obligations under
the Tax Receivable Agreement with respect to Class A Units or Class B Units (whether exchanged or acquired before or in certain
cases after such transaction) would be based on certain assumptions, including without limitation that we would have sufficient
taxable income to fully use the deductions arising from the increased tax deductions and tax basis and other benefits related to
entering into the Tax Receivable Agreement.
Decisions
made by the continuing members of ZGP, including Christian Zugel who also controls a majority of our outstanding voting power in
his capacity as trustee of the Class B Voting Trust, in the course of running our business, such as with respect to mergers, asset
sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are
received by an exchanging or selling party under the Tax Receivable Agreement. For example, the earlier disposition of assets following
an exchange or acquisition transaction will generally accelerate payments under the Tax Receivable Agreement and increase the present
value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s
tax liability without giving rise to any rights of a party to receive payments under the Tax Receivable Agreement. Were the IRS
to successfully challenge the tax basis increases described above, we would not be reimbursed for any payments previously made
under the Tax Receivable Agreement. As a result, in certain circumstances, we could make payments under the Tax Receivable Agreement
in excess of our actual cash savings in income tax. The accelerated timing of payments and the increase in our tax liability without
reimbursement could affect the cash available to us and could impact our ability to pay dividends.
The Class B Voting Trust
Agreement
In
connection with the closing of the Business Combination, the ZGP Founder Members and the Company entered into a voting
agreement for the Class B Voting Trust (the “Voting Trust Agreement”). The Voting Trust Agreement established the
Class B Voting Trust. All of the outstanding shares of Class B Common Stock were transferred from the HF2 Class B Voting
Trust to the ZGP Founder Members and immediately deposited with the Class B Voting Trust. The Voting Trust Agreement provides
that the trustee has the sole power to vote the shares of Class B Common Stock in its sole discretion and also to surrender
shares of Class B Common Stock in accordance with the Exchange Agreement. In his capacity as trustee of the Class B Voting
Trust, Mr. Zugel has voting control over approximately 93.5% of the voting power of our outstanding common stock. Mr. Zugel
is the sole trustee of the Class B Voting Trust until his death or legal incompetency. If either of these events occurs
within eighteen months of the closing of the Business Combination, then R. Bruce Cameron will become the trustee. If either
of these events occurs after eighteen months of the closing, or if Mr. Cameron fails or ceases to act as trustee, Sonia Zugel
(Mr. Zugel’s spouse) will become the sole trustee. If Mrs. Zugel is unable or unwilling to act as trustee or fails or
ceases to act as a trustee, a successor trustee will be appointed by majority vote of Michael Szymanski, Mark Mahoney and
Howard Steinberg. The Voting Trust Agreement is irrevocable.
Ramsey Agreements
On March
4, 2015, ZGP entered into an ag
r
eement with Neil A. Ramsey, an affiliate of NAR Special Global, LLC and of dQuant Special
Opportunities Fund, L.P. (together, the “Ramsey Investors”), and one of our significant stockholders, pursuant to which
ZGP paid Mr. Ramsey $3.4 million in consideration of Mr. Ramsey causing the Ramsey Investors to purchase from stockholders who
had tendered their shares of Class A Common Stock for redemption such number of shares of Class A Common Stock as was necessary
to meet the closing condition that there was at least $65 million in the Trust Account after giving effect to redemptions and other
expense payments.
ZGP
also entered into a two-year Consulting Agreement (the “Consulting Agreement”) with Mr. Ramsey through RQSI Ltd, an
entity controlled by Mr. Ramsey, under the terms of which, among other things, Mr. Ramsey provides consulting services to ZGP,
its senior management team and ZAIS Group, as requested by us, from time to time during the 24 month period beginning on the closing
of the Business Combination. Mr. Ramsey may not compete against ZGP during the term of the Consulting Agreement, and for two years
following its termination. In consideration for his undertakings under the Consulting Agreement, ZGP will pay Mr. Ramsey a consulting
fee of $500,000 per annum payable in monthly installments and reimburse RQSI for any out-of-pocket business travel expenses incurred
in connection with performing the consulting services. ZGP may terminate the Consulting Agreement for cause, as defined in the
Consulting Agreement.
ZAIS
Group has entered into a month to month license agreement with an affiliate of RQSI, Ltd permitting such affiliate to occupy its
UK office in exchange for a fee, in an amount as may be agreed upon between the parties. The total value of the agreement is approximately
$15,000 per month. The agreement is terminable upon 30 days notice. In addition, ZAIS Group has agreed to use certain statistical
data generated by RQSI, Ltd. models. ZAIS Group will utilize this information for trading futures in one of the ZAIS Managed Entities.
Director Independence
Current directors John Burke, Paul
B. Guenther and James Zinn are independent directors pursuant to NASDAQ listing standards for independence. In making
this independence determination, our board of directors reviewed relationships and transactions between each director and
his affiliates, on the one hand, and the Company and its subsidiaries and affiliates, on the other hand. Our board of
directors considered relevant facts and circumstances pertaining to such relationships and transactions, including, with
respect to Mr.
Burke, investments made in the past by Rumson Capital Management LLC and its affiliates in ZAIS Group and ZAIS Managed
Funds. Mr. Burke controls Rumson Capital Management LLC. Based on this review, our board of directors determined that under
the criteria established by NASDAQ, Messrs. Burke, Guenther and Zinn are independent.