ENERGY RECOVERY, INC.
CHANGE IN CONTROL SEVERANCE PLAN
Article 1. Establishment, Term and
Purpose
1.1.
Establishment and Term of the Plan . The Energy Recovery, Inc.
Change in Control Severance Plan (“Plan”) is designed
to provide severance benefits to certain executives and other key
employees of the Company in the event that their employment is
terminated without cause or for good reason as a result of a change
in control of the Company. The Plan will commence on August 4,
2009 (the “Effective Date”) and will end on
December 31, 2010, unless extended as set forth below in
Article 5.
1.2. ERISA
. This Plan is intended to be (i) an employee benefit plan
within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974 (“ERISA”), and (ii) an
unfunded plan maintained by the Company for a select group of
management or highly compensated employees within the meaning of
Sections 201, 301, and 401 of ERISA, and any ambiguities
herein shall be interpreted consistent with such
intentions.
As used in this
Plan, the following capitalized terms will have the meanings set
forth below:
(a)
“Affiliate” means any company Controlled by, or under common
Control with, the Company. “Control” means the
Company’s right to vote 50% or more of the outstanding shares
of the voting stock of the subject company.
(b)
“Cause” means, in the context of employment
termination:
(i) Participant’s performance of any
act which, if Participant were prosecuted, would constitute a
felony or misdemeanor;
(ii) Participant’s failure to carry
out his or her material duties;
(iii) Participant’s dishonesty
towards or fraud upon the Company which is injurious to the
Company;
(iv) Participant’s violation of
confidentiality obligations to the Company or misappropriation of
Company assets; or
(v) Participant’s death or
disability, as defined in the Company long-term disability plan in
which the Participant participates or, if the Participant does not
participate in such a plan, the principal long-term disability plan
that covers the Company’s senior-level executives.
(c)
“Change in Control” means:
(i) an
acquisition of 50% or more of the outstanding common stock or
voting securities of the Company by an person or entity, other than
the Company, a Company employee benefit plan or a corporation
controlled by the Company’s shareholders;
(ii) changes in the composition of the
Company’s Board of Directors (the “Board”) over a
rolling twelve-month period, which changes result in less than a
majority of the directors consisting of Incumbent Directors.
“Incumbent Directors” include directors who are or were
either
(x) members of the Board as of the
Effective Date or
(y) elected, or nominated for election, to
the Board with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination.
Incumbent Directors do not include any individual not otherwise an
Incumbent Director whose election or nomination resulted from an
actual or threatened proxy contest (relating to the election of
directors to the Board); or
(iii) consummation of a complete
liquidation or dissolution of the Company, or a merger,
consolidation or sale of all or substantially all of the
Company’s then existing assets (collectively, a
“Business Combination”), other than a Business
Combination:
(x) in
which the stockholders of the Company immediately prior to the
Business Combination receive 50% or more of the voting stock
resulting from the Business Combination,
(y) through which at least a majority of
the members of the Board are Incumbent Directors; and
(z) after
which no individual, entity or group (excluding any corporation
resulting from the Business Combination or any employee benefit
plan of such corporation or of the Company) owns 50% or more of the
stock of the corporation resulting from the Business Combination
who did not own such stock immediately before the Business
Combination.
(d)
“Company” means Energy Recovery, Inc., a Delaware
corporation.
(e)
“Good Reason” means, the occurrence of any one or more of the
following without the Participant’s express written
consent:
(i) the
termination or material breach of this Plan by the
Company;
(ii) the
failure by the Company to have any successor, or any assignee of
all or substantially all of the Company’s assets, assume this
Plan;
(iii) any
material diminishment in Participant’s title, position,
duties, responsibility or status after the Change in Control,
provided that reporting to a business unit head instead of to the
Chief Executive Officer will not constitute a material diminishment
if the Participant’s duties and responsibilities otherwise
remain substantially the same;
(iv) any
material reduction in, limitation of, or failure to pay or provide
any, compensation provided to the Participant under any agreement
or understanding between the Participant and the Company, or
pursuant to the Company’s policies and past practices, as of
the date immediately prior to the Change in Control;
(v) any
material reduction in the Participant’s base salary or target
bonus opportunity from the amounts in effect immediately prior to
the Change in Control; or
(vi) any
change in the Participant’s place of employment that
increases Participant’s commuting distance by more than 30
miles over his or her commuting distance immediately prior to the
Change in Control.
Good Reason
will only be deemed to exist if the Participant provides notice of
the condition(s) constituting Good Reason within 45 days of
the existence of the condition and gives the Company 45 days from
its receipt of such notice to remedy the condition. If the
condition is remedied, Good Reason will not be deemed to
exist.
(d)
“Participant” means any full-time employee of the Company or
an Affiliate whom the Compensation Committee, in its sole
discretion, makes a participant of the Plan. The Committee or its
delegate also may, from time to time and by written notice to the
affected Participant(s), remove any previously selected
Participant(s) from continued participation in this Plan. Any
removal of a Participant will not be effective until 12 months
after such notice is delivered to the Participant.
Article 3. Change in Control
Benefits
3.1. Protected
Termination. In the event that, within twelve months after a
Change in Control, Participant is terminated without Cause or
terminates his or her employment voluntarily with Good Reason,
Participant will be entitled to the Severance Benefits defined
below.
3.2 Severance
Benefits . Upon termination without Cause or with Good Reason
within twelve months after a Change in Control, Participant will
receive all payments required by applicable local law, including
all earned and unpaid salary, any accrued and unused vacation pay
and all earned but unpaid and un-deferred bonus attributable to the
year that ends immediately before the year in which the
Participant’s termination occurs, less deductions required or
permitted by law. Participants will also be entitled to receive the
following additional benefits (“Severance Benefits”) in
exchange for an agreement to release all claims known or unknown
against the Company and for the restrictive covenants set forth in
Article 8:
(a) an
additional payment equal to the sum of:
(i) 12 months’ severance pay determined by
Participant’s regular base rate of pay for work for the
Company and/or Affiliates in effect as of the date of the
employment
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termination and
(ii) 100% of Participant’s target annual bonus under the
Company’s bonus program (or any successor bonus program) for
the fiscal year in which the Change in Control occurs, less
deductions required or permitted by applicable law (the
“Additional Payment”);
(b) immediate
vesting of all unvested equity compensation held by the Participant
as of the date of termination; in the case of unvested equity
compensation where the amount payable is based on the satisfaction
of performance criteria, the amount of unvested equity will be
determined by deeming all performance criteria satisfied at 100% of
target, less deductions required or permitted by applicable law; to
the extent the equity compensation is subject to Section 409A
of the Internal Revenue Code of 1986, as amended (the
“Code”), the vesting acceleration of the equity
compensation shall not cause any distribution or payment under the
equity compensation to be made before the earliest date it may be
made without violating Code section 409A.
(c) if the
Participant timely elects to continue Participant’s medical,
dental, and vision benefits under COBRA (including, if applicable,
continuation of coverage for the Participant’s spouse and
dependents), then, contingent upon the Participant paying his or
her share of the monthly COBRA premium, the Company will pay its
share of the monthly premium under COBRA to the same extent it pays
for coverage under the Company’s group plans for active
employees and their dependents, if applicable, for 12 months
after the Participant’s termination, unless the Participant
becomes eligible for group medical, dental, and vision coverage
through another employer. Participant will have an obligation to
notify the Company upon becoming eligible for group medical, dental
and vision benefits from another employer during the 12 month
period. At the end of any Company-paid period of COBRA coverage,
the Participant may, at his own expense, continue COBRA coverage
for the remainder of the period for which the Participant is
eligible. The preceding provisions will be modified to the extent
medical, dental, and vision benefits are not provided through the
purchase of insurance, but are provided by the Company on a
self-insured basis. In that case, the Participant will be required
to initially pay the entire monthly premium, but will be reimbursed
each month an amount equal to the monthly amount (if any) that the
Company would pay (or would incur as its share of the cost) each
month for an active employee with the same coverage; and
(d) payment
by the Company for the reasonable costs of outplacement services
for the Participant during the six months following termination in
an amount up to $10,000. No payment, however, will be made in lieu
of outplacement services.
3.3 Form and
Timing of Severance Benefits. Participant will receive the
Additional Payment in a single lump sum ten (10) days after
the “Separation from Service” or ten (10) days
after the Company’s receipt of the signed unrevoked release
agreement, whichever is later — unless Participant is a
“Specified Employee” and delayed payment is required to
avoid a prohibited distribution under Code section 409A(a)(2), or
any successor thereto. The terms “Specified Employee”
and “Separation from Service” have the same meanings as
those terms have in Code section 409A and related guidance. In the
event payment must be delayed, it shall be made in accordance with
Section 9.2 hereof.
3.4 Payment
Obligation . Except as otherwise provided, Severance Benefits
under the Plan will not be reduced or affected by any offset,
counterclaim, recoupment, defense or other right which the Company
may have against the Participant or anyone else. Company, however,
reserves all rights to pursue any and all causes of action that it
otherwise might have against the Participant. In addition, any
violation by Participant of Article 8 will result in a
cessation of the Company’s obligation to provide Severance
Benefits and will entitle the Company to seek repayment of any
payments previously made.
3.5 Other
Benefits. Participant will not be required to mitigate the
amount of the Severance Benefits by seeking alternative employment
or other work. With the exception of COBRA payments, the amount of
the Severance Benefits will not be reduced by amounts earned by
Participant as a result of employment by another employer or other
work after the date of termination. All payments, benefits and
amounts provided under this Plan will be in addition to and not in
substitution for any disability, workers’ compensation or
other Company benefit plan distribution that a Participant is
entitled to at his or her date of termination. Notwithstanding the
preceding sentence or anything else contained herein to the
contrary, a Participant’s Severance Benefits under this Plan
shall be reduced by the severance benefits that the Participant may
be entitled to under any applicable laws or any other plan,
program, agreement or other arrangement with the Company or an
Affiliate, including, without limitation, any such benefits
provided for by an employment agreement.
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3.6 General
Release. Any other provision of this Plan notwithstanding,
Section 3.1 above will not apply unless Participant has
executed a general release in a form reasonably satisfactory to the
Company of all known and unknown claims that Participant may then
have against the Company or persons affiliated with the Company and
has expressly agreed in writing not to prosecute any legal action
or other proceeding based on any of such claims. Such release must
be signed and returned within 45 days of the date of the
Participant’s Qualifying Termination (as this term is
hereinafter defined) and remain unrevoked for any revocation
required by applicable law.
3.7 Employment
Status . Unless otherwise provided in another written agreement
between a Participant and the Company or an Affiliate or by
applicable law, the employment of the Participant by the Company is
“at will,” and, prior to the effective date of a Change
in Control, may be terminated by the Company or an Affiliate at any
time, subject to applicable law. Participant’s eligibility
for Severance Benefits under this Plan does not affect the
Company’s continuing right to terminate Participant at any
time or absent a Change in Control, subject to any limitations
imposed by contract or applicable law.
Article 4. Acceleration of Equity Vesting
upon Change in Control.
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