LLC Operating Agreement

EXHIBIT 10.1


LIMITED LIABILITY COMPANY OPERATING AGREEMENT


OF


BIORAL NUTRIENT DELIVERY, LLC


January 8, 2003


THE MEMBERSHIP SHARES IN BIORAL NUTRIENT DELIVERY, LLC (THE "SHARES") ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN THIS AGREEMENT AND THE OTHER TERMS AND CONDITIONS OF THIS AGREEMENT. NEITHER THE SHARES NOR ANY PART THEREOF MAY BE OFFERED FOR SALE, PLEDGED, HYPOTHECATED, SOLD, ASSIGNED OR TRANSFERRED AT ANY TIME EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT AND (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER ANY APPLICABLE STATE SECURITIES LAWS OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER SUCH SECURITIES LAWS OR WHICH IS OTHERWISE IN COMPLIANCE WITH SUCH SECURITIES LAWS AND (II) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OR WHICH IS OTHERWISE IN COMPLIANCE WITH THE SECURITIES ACT.


TABLE OF CONTENTS


Page
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ARTICLE I FORMATION; DURATION AND PURPOSES.......................................................................1


Section 1.1 Name..................................................................................1
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Section 1.2 Formation.............................................................................1
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Section 1.3 Principal Business Office.............................................................2
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Section 1.4 Registered Office and Agent...........................................................2
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Section 1.5 Term of the Company...................................................................2
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Section 1.6 Fiscal Year...........................................................................2
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ARTICLE II PURPOSE AND POWERS OF THE COMPANY.....................................................................2


Section 2.1 Purpose...............................................................................2
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Section 2.2 Powers................................................................................2
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ARTICLE III MEMBERS; MEMBERSIP SHARES; RIGHTS DISTRIBUTION PROGRAM...............................................3


Section 3.1 Membership Shares.....................................................................3
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Section 3.2 Percentage Interest...................................................................4
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Section 3.3 Capital Contributions.................................................................4
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Section 3.4 Partition.............................................................................4
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Section 3.5 No Interest on Capital................................................................4
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Section 3.6 Withdrawal............................................................................4
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Section 3.7 Rights Distribution Program...........................................................4
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Section 3.8 Substitute and Additional Members.....................................................6
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Section 3.9 Company Reorganization................................................................6
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Section 3.10 MM Option.............................................................................7
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ARTICLE IV ALLOCATION OF PROFITS AND LOSS; DISTRIBUTIONS.........................................................7


Section 4.1 Allocation of Profits and Loss........................................................7
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Section 4.2 Distributions.........................................................................8
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Section 4.3 Capital Accounts......................................................................8
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Section 4.4 Book/Tax Disparities; Section 754 Elections; etc......................................8
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Section 4.5 Certain Tax-Related Definitions.......................................................9
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Section 4.6 Regulatory Allocations, Qualified Income Offset and Minimum Gain Chargebacks..........9
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ARTICLE V MANAGEMENT ............................................................................................9


Section 5.1 Management by the Board of Directors..................................................9
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Section 5.2 Officers.............................................................................11
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Section 5.3 Class B Share Incentive Plan.........................................................11
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Section 5.4 Reliance by Third Parties............................................................11
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Section 5.5 Other Business Interests.............................................................12
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ARTICLE VI BOOKS AND RECORDS; TAX MATTERS.......................................................................12


Section 6.1 Books, Records and Financial Statements..............................................12
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Section 6.2 Company Audits.......................................................................12
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Section 6.3 Tax Matters Partner..................................................................12
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Section 6.4 Taxation as Partnership..............................................................12
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ARTICLE VII LIABILITY, EXCULPATION AND INDEMNIFICATION..........................................................13


Section 7.1 Liability............................................................................13
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Section 7.2 Exculpation..........................................................................13
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Section 7.3 Indemnification......................................................................13
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Section 7.4 Expenses.............................................................................14
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Section 7.5 Insurance............................................................................14
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ARTICLE VIII TRANSFERS OF MEMBERSHIP INTERESTS..................................................................15


Section 8.1 Transfers of Membership Shares.......................................................15
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Section 8.2 Managing Member Right of First Refusal...............................................16
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ARTICLE IX DISSOLUTION, LIQUIDATION AND TERMINATION.............................................................16


Section 9.1 Dissolution..........................................................................16
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Section 9.2 Liquidation..........................................................................16
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Section 9.3 Termination..........................................................................17
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Section 9.4 Claims of the Members................................................................17
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ARTICLE X MISCELLANEOUS.........................................................................................17


Section 10.1 Separability of Provisions...........................................................17
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Section 10.2 Counterparts.........................................................................17
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Section 10.3 Entire Agreement.....................................................................17
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Section 10.4 Governing Law........................................................................17
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Section 10.5 Arbitration..........................................................................17
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Section 10.6 Remedies.............................................................................18
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Section 10.7 No Third Party Beneficiaries.........................................................18
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Section 10.8 Amendments...........................................................................18
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Section 10.9 Interpretation.......................................................................19
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Section 10.10 Captions.............................................................................19
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Section 10.11 Notices. ............................................................................19
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ARTICLE XI DEFINITIONS..........................................................................................19


Section 11.1 Certain Defined Terms. .............................................................19
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SCHEDULES


Schedule A Names, Contact Information and Membership Shares Held by the Members Schedule B 2003 Class B Membership Share Option Plan


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LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF
BIORAL NUTRIENT DELIVERY, LLC


This LIMITED LIABILITY COMPANY OPERATING AGREEMENT (this "Agreement") of Bioral Nutrient Delivery, LLC, a Delaware limited liability company (the "Company") is entered into as of the 8th day of January, 2003, by and among BioDelivery Sciences International, Inc., a Delaware corporation (the "Managing Member") and the Persons listed on Schedule A hereto, which Persons hold Class B Shares (as defined below) in the Company (the "Class B Members" and, collectively with the Managing Member and any future member of the Company admitted in accordance with the provisions of this Agreement, the "Members").


WHEREAS, the Members desire to form the Company as a limited liability company pursuant to the Limited Liability Company Act of the State of Delaware, 6 Del. C. 18-101 et seq., as amended from time to time (the "Act"); and


WHEREAS, the Members desire to enter into this Agreement in order to provide for the operation and management of the Company and the rights and obligations of the Members in connection therewith.


NOW, THEREFORE, in consideration of the foregoing and mutual promises and agreements herein made, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the undersigned Members hereby agree as follows:


ARTICLE I
FORMATION; DURATION AND PURPOSES


Section 1.1 Name. The name of the limited liability company that is the
---- subject of this Agreement shall be Bioral Nutrient Delivery, LLC. Each Member acknowledges that the word "Bioral" is a registered trademark of the Managing Member.


Section 1.2 Formation.
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(a) Pursuant to the Act, the Members hereby form the Company. The Company's existence will commence upon the filing of a certificate of formation of the Company (the "Certificate") by an authorized person (as such term is used in Section 18-201 of the Act) designated by the Managing Member (the "Organizer") in the office of the Delaware Secretary of State. The execution and filing of such Certificate with the Delaware Secretary of State is hereby authorized and approved by the Members. The rights, liabilities and obligations of any Member with respect to the Company shall be determined in accordance with the Act, the Certificate and this Agreement. To the extent anything contained in this Agreement modifies, supplements or otherwise affects any such right, liability, or obligation arising under the Act, this Agreement shall supersede the Act to the extent not restricted thereby.


(b) The Organizer, any Officer (as defined below) and any other Person appointed by the Board of Directors (as defined below) shall hereinafter be authorized to cause the Company to be qualified, or registered under assumed or fictitious name statutes or similar laws, in any jurisdiction in which the


Company transacts business. Such Person, as an authorized person within the meaning of the Act, shall execute, deliver and file any certificates (and any amendments and/or restatements thereof) necessary or desirable for the Company to qualify to do business in any jurisdiction in which the Company may wish to conduct business.


Section 1.3 Principal Business Office. The principal business office of the
------------------------- Company shall be located at c/o UMDNJ - New Jersey Medical School, Administrative Building 4, 185 South Orange Avenue, Newark, New Jersey 07103, or at such other location as may hereafter be determined by the Board of Directors.


Section 1.4 Registered Office and Agent. The name and address of the
--------------------------- registered agent of the Company for service of process on the Company in the State of Delaware is National Registered Agents, Inc., 9 East Loockerman Street, Suite 1B, Dover, Delaware, 19901, County of Kent. The name of the registered agent of the Company at such address is National Registered Agents, Inc. At any time, the Board of Directors may designate another registered agent and/or registered office for the Company.


Section 1.5 Term of the Company. The term of the Company shall commence on
------------------- the date of the filing of the Certificate and shall be perpetual, unless the Company is sooner terminated and dissolved pursuant to the terms hereof. No Member may withdraw from the Company without the prior written consent of the other Members, other than as expressly provided in this Agreement.


Section 1.6 Fiscal Year. The fiscal year of the Company shall end on
----------- December 31st of each year.


ARTICLE II
PURPOSE AND POWERS OF THE COMPANY


Section 2.1 Purpose. The Company is formed for the objective and purpose
------- of, and the nature of the business to be conducted and promoted by the Company is, engaging in any lawful act or activity for which limited liability companies may be formed under the Act as may be determined by the Managing Member and engaging in any and all activities necessary, convenient, desirable or incidental to the foregoing. The initial purpose of the Company is to obtain an exclusive world-wide perpetual sub-license to the Managing Member's proprietary encochleation drug delivery technology for non-pharmaceutical use in the processed food and beverage industries for both human and animal consumption.


Section 2.2 Powers. In furtherance of its purposes, the Company shall have
------ the power and is hereby authorized to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purposes set forth in Section 2.1, including, but not limited to, the power to conduct its business, carry on its operations and have and exercise the powers granted to a limited liability company by the Act in any state, territory, district or possession of the United States, or in any foreign country that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company.


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ARTICLE III
MEMBERS; MEMBERSIP SHARES; RIGHTS DISTRIBUTION PROGRAM


Section 3.1 Membership Shares.
-----------------


(a) Generally. The limited liability company interests of the Company shall
--------- be classified in two classes of shares (each such interest in the Company, a "Membership Share" and collectively, the "Membership Shares"): Class A Membership Shares (each, a "Class A Share" and collectively, the "Class A Shares") and Class B Membership Shares (each, a "Class B Share" and collectively, the "Class B Shares"). There shall be no limitation on the number of Membership Shares which may be issued and/or outstanding at any time, subject to the approval of the Board of Directors as to the timing of any such issuance and amount thereof.


(b) Class A Shares. The Class A Shares will be held only by the Managing
-------------- Member and will grant the Managing Member the management and governance rights contained in this Agreement. The Managing Member, as a holder of Class A Shares, will be entitled to its pro rata portion (based on its Percentage Interests) of distributions declared and paid by the Board of Directors.


(c) Class B Shares. The Class B Shares will be held by the Managing Member
-------------- and the Class B Members in accordance with the provisions of this Agreement. The Class B Members will have no management, governance or approval rights whatsoever relating to the business and operations of the Company. Each Class B Member will be entitled to its pro rata portion (based on its Percentage Interests) of distributions declared and paid by the Board of Directors.


(d) Other Securities. The Board of Directors is authorized to issue
---------------- additional Membership Shares, or any other class or type of debt or equity securities of the Company (including options, warrants or rights to receive Class B Shares or any other class or type of debt or equity securities of the Company, including convertible securities) that the Board of Directors designates, at such times and on such terms as the Board of Directors determines. Any such action shall be memorialized, as applicable, in an amendment and/or restatement to this Agreement executed by the Managing Member.


(e) Inclusions to "Membership Shares." For purposes of this Agreement, a
-------------------------------- Member's aggregate "Membership Shares" shall include the entire ownership interest of a Member in the Company at any time, including (a) the rights of such Member to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement, (b) all income, profits, Available Net Cash, fees or payments of whatever nature and all distributions to which any Member would be entitled, now or at any time hereafter, of whatsoever description or character; and (c) all of any Member's present and future rights to and in its Capital Account, whether by way of liquidating distributions or otherwise, and all of such Member's right to receive or share in any surplus of the Company in the event of the dissolution of the Company.


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Section 3.2 Percentage Interest. A Member's percentage interest of the
------------------- outstanding Membership Shares (the "Percentage Interest") shall be calculated by dividing the number of Membership Shares held by such Member (regardless of class) by the aggregate number of Membership Shares outstanding (regardless of class). The number and class of Membership Shares and the resulting Percentage Interest of the Members is reflected on Exhibit A hereto. Exhibit A hereto shall
--------- --------- be amended from time to time to reflect the issuance of additional Membership Shares and the admission of new Members, in each case in accordance with the provisions of this Agreement.


Section 3.3 Capital Contributions. No Member shall be obligated to make
--------------------- contributions of cash or other property to the Company (each, a "Capital Contribution"). A Member may make a Capital Contribution or loan funds to the Company with the prior written consent of the Managing Member, which consent may be granted or withheld in the sole discretion of the Managing Member, for any reason or no reason.


Section 3.4 Partition. Each Member waives any and all rights that it may
--------- have to maintain an action for partition of the Company's property.


Section 3.5 No Interest on Capital. No Member shall be entitled to any
---------------------- interest on any capital, if any, contributed by it to the Company.


Section 3.6 Withdrawal.
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(a) Except in connection with a Transfer to a Permitted Transferee (each as defined in Section 8.1 below) or a Transfer to which the Managing Member consents pursuant to Section 8.1 hereof in which the transferee has been admitted as a Substitute Member (as defined below) and has assumed the obligations of a Member or as otherwise described herein, no Member shall have the right to withdraw from the Company without the prior written consent of the Managing Member (which consent may be withheld in Managing Member's sole discretion, for any reason or no reason). Effective on the date of a permitted withdrawal, such withdrawing Member shall be deemed to have withdrawn from the Company and shall no longer be a Member for purposes of this Agreement. From and after the effective date of such withdrawal, the withdrawing Member shall not be entitled to receive any distributions from the Company unless the withdrawing Member was a Member on the record date therefor.


(b) If a Member withdraws from the Company in violation of Section 3.6(a), such Member shall not be entitled to any distribution or payment with respect to his, her or its Membership Shares in the Company and shall be liable to the Company for breach of this Agreement.


Section 3.7 Rights Distribution Program.
---------------------------


(a) As of the date hereof, the Managing Member holds 8,600,000 Class B Shares and has the right to acquire, from time to time in the future, 4,000,000 Class B Shares underlying the MM Option (as defined in Section 3.10 below) (such 12,600,000 Class B Shares, collectively, the "MM Class B Shares"). Notwithstanding any provision of this Agreement to the contrary (and assuming the exercise, from time to time, of the MM Option as provided for herein), the MM Class B Shares will be available to be distributed by the Managing Member to


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current and/or future stockholders of the Managing Member upon the exercise of Rights (as defined below), including, upon the exercise of such instruments, holders of the Managing Member's Class A warrants and holders of options entitling such holders to purchase shares of the Managing Member's common stock.


(b) The Managing Member shall have the right, from time to time and on such terms as the Managing Member may determine in its sole discretion, to distribute as a dividend to its stockholders rights ("Rights") to purchase MM Class B Shares held by the Managing Member. At the request of the Managing Member, the Company shall register both the Rights and Class B Shares issuable upon the exercise thereof (in this context, collectively, the "Registrable Securities") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder, the "Securities Act"), it being understood and agreed that neither the MM Class B Shares nor any other debt or equity securities of the Company shall, without the approval of the Managing Member in its sole discretion, be listed on any public market or exchange.


(c) The Members agree that, in connection with any such registration of the Registrable Securities under the Securities Act, the Company shall:


(i) File with the SEC a registration statement with respect to such
Registrable Securities (a "Registration Statement") and use its reasonable
best efforts to cause that Registration Statement to become effective as
soon as possible;


(ii) When required by the Managing Member, and as expeditiously as
possible, prepare and file with the SEC any amendments and supplements to
the Registration Statement and the prospectus included in the Registration
Statement (the "Prospectus") as may be necessary to comply in all material
respects with the provisions of the Securities Act (including the
anti-fraud provisions thereof) and to keep the Registration Statement
effective for so long as the Managing Member may require;


(iii) When required by the Managing Member, and as expeditiously as
possible, furnish to the Managing Member such reasonable numbers of copies
of the Prospectus, including any preliminary prospectus, in conformity with
the requirements of the Securities Act, and such other documents as the
Managing Member may reasonably reque ...