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On September 21, 1992, petitioner signed the lockup
agreement. The lockup agreement further provided:
Should I sell these shares I agree that such sale will
be subject to Section 16b of The Securities Act of 1934
(Disgorgement of Insider Short-Swing Profits) and
further I will be subject to any additional damages
incurred by Polyphase Corporation, its directors or
shareholders.
The lockup agreement provided that, after the 2-year period,
petitioner would be allowed to sell his shares if permitted under
rule 144 of the Securities Exchange Act. Additionally, the
lockup agreement provided that the sale restriction could be
altered only by the unanimous action of the board of directors.
The lockup agreement, however, allowed petitioner to use the
shares as collateral if the sale restriction also applied to the
lender.
By December 1992, while owning, directly and indirectly,
approximately 65 percent of Polyphase, petitioner became chairman
of the board, chief executive officer, and president of
Polyphase.
On July 9, 1993, petitioner received a nonstatutory employee
stock option from Polyphase. The stock option agreement gave
petitioner the right to purchase up to 182,000 shares of
Polyphase common stock at an exercise price of 75 cents per
share. The stock option agreement contained several restrictions
upon the exercise of the option: The option would terminate if
petitioner voluntarily terminated his employment with Polyphase;
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