KOS PHARMACEUTICALS
CHANGE IN CONTROL SEVERANCE PLAN
The
Board of Directors (the “ Board ”) of Kos
Pharmaceuticals, Inc. (the “ Company ”)
recognizes the importance to the best interests of the Company and
its shareholders of ensuring that the Company and its subsidiaries
have the continued dedication and leadership of the Company’s
employees, notwithstanding the possibility, threat or occurrence of
a Change in Control (as defined below). The Board recognizes that
the possibility of a Change in Control and the uncertainty it may
create among employees may result in the departure or distraction
of Company personnel to the detriment of the Company and its
shareholders. Therefore, the Board has decided to ratify the
Compensation and Stock Option Committee’s approved this
Change in Control Severance Plan (this “ Plan ”)
in order to encourage the retention of employees and to reduce the
level of uncertainty and distraction that is likely to result from
a Change in Control or a potential Change in Control.
SECTION
1. Definitions. For purposes of this Plan, the following
terms shall have the meanings set forth below:
(a) “
280G Gross-Up Payment ” shall have the meaning set
forth in Section 5(a).
(b) “
Accounting Firm ” shall have the meaning set forth in
Section 5(b).
(c) “
Accrued Rights ” shall have the meaning set forth in
Section 4(a)(iv).
(d) “
Affiliate(s) ” means, with respect to any specified
Person, any other Person that, directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under
common control with, such specified Person.
(e) “
Annual Base Salary ” means, with respect to any
Participant, such Participant’s annual rate of base salary in
effect immediately prior to such Participant’s Termination
Date.
(f) “
Annual Bonus ” means, with respect to any Participant
and as of such Participant’s Termination Date, 110% of the
average of the regular annual cash bonuses (or, in the case of
sales personnel, annual commissions), excluding special or one-time
bonuses or commissions, actually paid to the Participant in each of
the two full years prior to the year in which such
Participant’s Termination Date occurs; provided that
if such Participant has not been employed for a sufficient length
of time to have been eligible for two such bonuses or commissions
(whether or not any bonus or commission was actually paid), “
Annual Bonus ” shall be calculated on the basis of the
average of the regular annual cash bonuses or commissions
(excluding special or one-time bonuses or commissions) actually
paid to other employees of similar position in each of the two full
years prior to the year in which the Participant’s
Termination Date occurs.
(g) “
Cause ” means, with respect to any Participant, the
occurrence of any one of the following:
(i) the
Participant is convicted of, or pleads guilty or nolo
contendere to, (A) a misdemeanor involving moral turpitude
or that involves misappropriation of the assets of the Company or a
Subsidiary or (B) a felony;
(ii) the
Participant commits one or more acts or omissions constituting
negligence, fraud or other misconduct that the Company reasonably
and in good faith determines has a materially detrimental effect on
the Company;
(iii) the
Participant continually and willfully fails, for at least
14 days following written notice from the Company, to perform
substantially the Participant’s employment (other than as a
result of incapacity due to physical or mental illness or after
delivery by the Participant of a Notice of Termination for Good
Reason); or
(iv) the
Participant commits a material violation of any of the
Company’s material policies (including the Company’s
Code of Business Conduct and Ethics, as in effect from time to
time) that the Company reasonably and in good faith determines is
materially detrimental to the best interests of the
Company.
(h) “
Change in Control ” means any corporation or other
entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Exchange Act) other than the Controlling
Shareholders becomes the beneficial owner, directly or indirectly,
of all of the outstanding shares of common stock of the
Company.
(i) “
Change in Control Date ” means the date on which a
Change in Control occurs (if any).
(j) “
Code ” means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated
thereunder.
(k) “
Controlling Shareholders ” means, collectively, the
group of shareholders set forth in the Schedule 13D filed with
the Securities and Exchange Commission on September 12, 2006,
consisting of Michael Jaharis, Mary Jaharis, Wilson Point Holdings,
LP, Cubs Management, LLC, Kos Investments, Inc., Kos Holdings,
Inc., Kathryn Jaharis, Steven Jaharis and Jaharis Holdings, Inc,
LLC.
(l) “
Disability ” means, with respect to any Participant,
that the Participant becomes eligible to receive income replacement
benefits under any long term disability plan covering employees of
the Company or its Subsidiaries.
(m) “
Effective Date ” shall have the meaning set forth in
Section 13.
(n) “
Exchange Act ” means the Securities Exchange Act of
1934, as amended from time to time, or any successor statute
thereto.
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(o) “
Excise Tax ” means the excise tax imposed by
Section 4999 of the Code, together with any interest or
penalties imposed with respect to such tax.
(p) “
Extension Date ” shall have the meaning set forth in
Section 13.
(q) “
Good Reason ” means, with respect to any Participant
and without such Participant’s express written consent, the
occurrence of any one or more of the following:
(i) a greater than
10% reduction of the Participant’s annual base salary, or any
material reduction in the total cash compensation that the
Participant is eligible to earn, from the level in effect
immediately prior to the Change in Control Date;
(ii) any demotion
or other significant reduction in the job responsibilities held by
the Participant immediately prior to the Change in Control Date or
any significant change to the reporting relationships of the
Participant as in effect immediately prior to the Change in Control
Date; or
(iii) any change
of the Participant’s principal place of employment to a
location more than (i) in the case of Participants who are not
sales personnel, 65 miles from the Participant’s principal
place of employment immediately prior to the Change in Control Date
and (ii) in the case of Participants who are sales personnel,
50 miles from the Participant’s principal residence
immediately prior to the Change in Control Date.
The
Participant’s right to terminate employment for Good Reason
shall not be affected by the Participant’s incapacity due to
physical or mental illness. A termination of employment by the
Participant for Good Reason for purposes of this Plan shall be
effectuated by giving the Company written notice (“ Notice
of Termination for Good Reason ”) of the termination
setting forth in reasonable detail the specific conduct of the
Company that constitutes Good Reason and the specific provisions of
this Plan on which the Participant relied. Unless the parties agree
otherwise, a termination of employment by the Participant for Good
Reason shall be effective on the 30th day following the date when
the Notice of Termination for Good Reason is given, unless the
Company elects to treat such termination as effective as of an
earlier date; provided , however , that so long as an
event that constitutes Good Reason occurs during the Protection
Period, for purposes of the payments, benefits and other
entitlements set forth in Section 4(a), the termination of the
Participant’s employment pursuant thereto shall be deemed to
be a resignation for Good Reason during the Protection
Period.
(r) “
Notice of Termination for Good Reason ” shall have the
meaning set forth in Section 1(q).
(s) “
Participant ” shall have the meaning set forth in
Section 2.
(t) “
Payment ” means any payment, benefit or distribution
(or combination thereof) by the Company, any of its Affiliates or
any trust established by the Company or its Affiliates, to or for
the benefit of a Participant, whether paid, payable,
distributed,
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distributable
or provided pursuant to this Plan or otherwise, including any
payment, benefit or other right that constitutes a “parachute
payment” within the meaning of Section 280G of the
Code.
(u) “
Person ” means a “person” (as such term is
used in Section 13(d) of the Exchange Act.
(v) “
Protection Period ” means the period commencing on the
Change in Control Date and ending on the first anniversary
thereof.
(w) “
Release Effective Date ” shall have the meaning set
forth in Section 4(a)(i).
(x) “
Section 409A Tax ” shall have the meaning set
forth in Section 6.
(y) “
Severance Multiple ” means, with respect to any
Participant, the number indicated on the chart set forth on
Schedule A hereto based on such Participant’s Years of
Service and job classification; provided , however ,
that the Severance Multiple of (i) Participants who are
classified as directors, managers or professionals shall not be
less than 52, (ii) Participants who are classified sales personnel
shall not be less than 39, and (iii) all other Participants
shall not be less than 26.
(z) “
Subsidiary ” means any entity in which the Company,
directly or indirectly, possesses 50% or more of the total combined
voting power of all classes of its stock.
(aa) “
Successor ” shall have the meaning set forth in
Section 10.
(bb) “
Termination Date ” means the date on which the
termination of a Participant’s employment, in accordance with
the terms of this Plan, is effective.
(cc) “
Underpayment ” shall have the meaning set forth in
Section 5(b).
(dd) “
Years of Service ” means, with respect to any
Participant, the number of full years that such Participant has
been an employee of the Company or its Subsidiaries as of such
Participant’s Termination Date. For purposes hereof,
“year” means any period of 12 consecutive calendar
months, without regard to any short-term leave, parental leave or
other approved absence.
SECTION
2. Eligibility. Participants in this Plan (“
Participants ”) are those individuals who are
classified as employees of the Company and its Subsidiaries who are
employed by the Company or its Subsidiaries on or following the
Effective Date, other than any such employee who enters into an
individual change in control severance agreement with the Company;
provided , however , that in the case of any such
employee who is or becomes a Participant prior to the Change in
Control Date but who is not employed by the Company or its
Subsidiaries immediately prior to the Change in Control Date, such
employee shall not be treated as a Participant for purposes of this
Plan.
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SECTION
3. Impact of a Change in Control on Equity Compensation
Awards. Effective as of any Change in Control Date during the
period of this Plan’s effectiveness, notwithstanding any
provision to the contrary in any of the Company’s
equity-based, equity-related or other long-term incentive
compensation plans, practices, policies and programs (including the
Company’s 1996 Stock Option Plan and 2006 Incentive Plan) or
any award agreements thereunder, (a) all outstanding stock
options, stock appreciation rights, restricted shares and similar
rights and awards then held by each Participant that are
unexercisable or otherwise unvested shall automatically become
fully vested and immediately exercisable, as the case may be,
(b) all outstanding equity-based, equity-related and other
long-term incentive awards then held by such Participant that are
subject to performance-based vesting criteria shall automatically
become fully vested and earned at a deemed performance level equal
to the maximum performance level with respect to such awards and
(c) all other outstanding equity-based, equity-related and
long-term incentive awards, to the extent not covered by the
foregoing clause (a) or (b), then held by such Participant
that are unvested or subject to restrictions or forfeiture shall
automatically become fully vested and all restrictions and
forfeiture provisions related thereto shall lapse.
SECTION
4. Termination of Employment. (a) Termination During the
Protection Period by the Company Without Cause or by the
Participant for Good Reason. Subject to Section 4(a)(v), if a
Participant’s employment is terminated either (x) by the
Company or its Subsidiaries other than for Cause, death or
Disability or (y) by resignation of the Participant with Good
Reason, in each case during the Protection Period, then the
Participant shall be entitled to the following payments and
benefits:
(i)
Severance Pay. The Company shall pay the Participant an
amount equal to the sum of (A) a number of weeks of the
Participant’s Annual Base Salary (without regard to any
reduction giving rise to Good Reason) equal to the Severance
Multiple and (B) the Participant’s Annual Bonus
multiplied by a fraction the numerator of which is the Severance
Multiple and the denominator of which is 52, which sum shall be
payable in a lump-sum payment on the tenth business day after the
date the release described in Section 4(a)(v) becomes
effective and irrevocable (the “ Release Effective
Date ”); provided , however , that such
amount shall be paid in lieu of, and the Participant hereby waives
the right to receive, any other cash severance payment relating to
salary or bonus continuation the Participant is otherwise eligible
to receive upon termination of employment under any severance plan,
practice, policy or program of the Company or any
Subsidiary.
(ii)
Prorated Annual Bonus. The Company shall pay the Participant
an amount equal to the product of (A) the Participant’s
target annual bonus for the year in which the Termination Date
occurs (assuming all individual and business criteria are met at
target levels) and (B) a fraction, the numerator of which is
the number of days in the current fiscal year through such
Termination Date, and the denominator of which is 365, in a
lump-sum payment on the tenth business day after the Release
Effective Date.
(iii)
Continued Welfare Benefits. The Company shall continue to
provide for a number of weeks equal to the Severance Multiple
medical and welfare benefits to the
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Participant and
the Participant’s spouse and dependents (in each case, as
provided in the applicable plan) at least equal to the levels of
benefits provided by the Company and its Subsidiaries immediately
prior to the Change in Control Date. Nothing in this
Section 4(a)(iii) shall operate to reduce, or be construed as
reducing, the Participant’s group health plan continuation
rights under the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, in any manner.
(iv)
Accrued Rights. The Participant shall be entitled to
(A) payments of any unpaid annual base salary, annual bonus,
commissions or other amounts earned or accrued through the
Participant’s Termination Date and (B) except as
provided in Section 4(a)(i), any payments or benefits
explicitly set forth in any other agreements, benefit plans,
practices, policies, arrangements and programs to which the
Participant is a party or in which the Participant participates
(the rights to such payments, the “ Accrued Rights
”).
(v)
Release of Claims. Notwithstanding any provision of this
Plan to the contrary, the Company shall not be obligated to make
any payments or provide any benefits described in this
Section 4(a), other than payments or benefits in respect of
the Accrued Rights, unless and until such time as the Participant
has executed and delivered a Separation Agreement and Release
substantially in the form of Exhibit A hereto and such release
has become effective and irrevocable in accordance with its
terms.
(b) Other
Termination. If a Participant’s employment is terminated
in any circumstance not described in Section 4(a) (including as a
result of death or Disability), the Participant shall not be
entitled to any compensation or benefits described in Section 4(a)
other than any payments with respect to the Accrued
Rights.
SECTION
5. Certain Additional Payments by the Company.
(a) Notwithstanding anything in this Plan to the contrary and
except as set forth below, in the event it shall be determined that
any Payment that is paid or payable to or for the benefit of a
Participant during the period of this Plan’s effectiveness
would be subject to the Excise Tax, such Participant shall be
entitled to receive an additional payment (a “ 280G
Gross-Up Payment ”) in an amount such that, after payment
by such Participant of all taxes (and any interest or penalties
imposed with respect to such taxes), including any income and
employment taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the 280G Gross-Up
Payment, such Participant retains an amount of the 280G Gross-Up
Payment equal to the Excise Tax imposed upon such Payments. The
Company’s obligation to make 280G Gross-Up Payments under
this Section 5 shall not be conditioned upon a
Participant’s termination of employment and shall survive and
apply after such Participant’s termination of employment. At
the time of any Payment during the period of this Plan’s
effectiveness, the Company shall provide each Participant a written
description of the application of the Excise Tax (if any) to such
Payment.
(b) Subject
to the provisions of Section 5(c), all determinations required
to be made under this Section 5, including whether and when a
280G Gross-Up Payment is required, the amount of such 280G Gross-Up
Payment and the assumptions to be utilized
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in arriving at
such determination, shall be made in accordance with the terms of
this Section 5 by a nationally recognized certified public
accounting firm that shall be designated by the Company (other than
the Company’s regular auditor) (the “ Accounting
Firm ”). The Accounting Firm shall provide detailed
supporting calculations both to the Company and the applicable
Participant within 15 business days of the receipt of notice from
the Participant that there has been a Payment or such earlier time
as is requested by the Company. For purposes of determining the
amount of any 280G Gross-Up Payment, each Participant shall be
deemed to pay Federal income tax at the highest marginal rate
applicable
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