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Exhibit
10.7
STEPHEN D.
LYNCH
AMENDED &
RESTATED EMPLOYMENT AGREEMENT
This AMENDED &
RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is
made and entered into as of December 11, 2007 (the
“Effective Date”), by and between Health Net, Inc., a
Delaware corporation (the “Company”), with its
principal place of business located at 21650 Oxnard Street,
Woodland Hills, California 91367, and Stephen D. Lynch
(“Executive”).
RECITALS
WHEREAS, the Company and
Executive are party to an Employment Letter Agreement dated as of
January 19, 2005, as amended on January 4, 2006 (as
amended, the “Prior Agreement”);
WHEREAS, the Company and
Executive desire to amend and restate the Prior Agreement to
reflect Executive’s new role with the Company as President of
the Company’s Health Plan Division and to make certain
changes to the Prior Agreement as a result of Executive’s new
role; and
WHEREAS, the Company and
Executive are entering into this Agreement to establish the terms
and conditions of the employment relationship.
NOW, THEREFORE, in
consideration of the following covenants, conditions and promises
contained herein, and other good and valuable consideration, the
Company and Executive hereby agree as follows:
1. Duties and
Salary.
A. Duties .
Executive’s title is President, Health Plan Division, but may
be changed at the discretion of the Company to a title that
reflects a similarly situated senior executive position. Executive
shall report directly to Jay Gellert, President and Chief Executive
Officer of the Company, but Executive’s reporting
relationship may be changed from time to time at the discretion of
the Company. Executive’s duties and responsibilities are to
provide executive leadership for the restructure of the
Company’s health plans (the “Restructuring”),
including identification of market leaders, infrastructure
processes and procedures, establishing integration points with the
Company’s new shared services organization and achievement of
market plans , but the Company reserves the right to assign
Executive other duties as needed and to change Executive’s
duties from time to time on reasonable notice, based on
Executive’s skills and the needs of the Company.
B. Salary . Executive
will be paid a base salary at the annual rate of $600,000, which
salary will be paid on a pro-rated bi-weekly basis, less applicable
withholdings (“Base Salary”), covering all hours
worked. Generally, Executive’s Base Salary will be reviewed
annually, but the Company reserves the right to change
Executive’s compensation from time-to-time. Executive will
not be eligible for an annual merit increase in 2008. Pursuant to
the
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charter of the Compensation Committee of
the Company’s Board of Directors (the
“Committee”), any adjustment to Executive’s
compensation must be made with the approval of the Committee and,
in the event that Executive constitutes one of the top two
(2) highest paid executive officers of the Company, with the
ratification of the Company’s Board of Directors.
C. Disclosure of Personal
Compensation Information . As an “executive
officer” of the Company (as such term is defined in the rules
and regulations of the Securities and Exchange Commission
(“SEC”)), information regarding Executive’s
employment arrangements with the Company, including, among other
things, the terms of this Agreement and any stock option agreement,
restricted stock agreement, restricted stock unit agreement,
performance share agreement and/or severance agreement Executive
enters into with the Company from time to time (collectively,
“Personal Compensation Information”), may be disclosed
in filings with the SEC, the New York Stock Exchange
(“NYSE”) and/or other regulatory organizations upon the
occurrence of certain triggering events. Such triggering events
include, but are not limited to, the execution of this Agreement
and any amendments thereto, changes in Executive’s Base
Salary, any annual incentive payment (whether in the form of cash
or equity) awarded to Executive (in the past or after the date
hereof), and the establishment of performance goals under the
Company’s incentive plans. Executive’s execution of
this Agreement will serve as Executive’s acknowledgement that
Executive’s Personal Compensation Information may be publicly
disclosed from time to time in filings with the SEC, NYSE or
otherwise as required by applicable law.
2. Adjustments and Changes
in Employment Status . Executive understands that the Company
reserves the right to make personnel decisions regarding
Executive’s employment, including, but not limited to,
decisions regarding any promotion, salary adjustment, transfer or
disciplinary action, up to and including Termination (as defined
below), consistent with the needs of the business of the
Company.
For purposes of this
Agreement, the capitalized terms “ Termination ”
and “ Terminate ,” shall mean Executive’s
Separation from Service (as defined below) from the Company. A
“ Separation from Service ” shall have the
meaning ascribed to such term in Treasury Regulations promulgated
under Section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”), from time to time and other
publications of the Internal Revenue Service published in the
Internal Revenue Bulletin from time to time.
3. Protection of
Proprietary and Confidential Information . Executive agrees
that Executive’s employment creates a relationship of
confidence and trust with the Company with respect to Proprietary
and Confidential Information (as defined below) of the Company
learned by Executive during Executive’s
employment.
A. Executive agrees not to
directly or indirectly use or disclose any of the Proprietary and
Confidential Information of the Company or any of its affiliates at
any time except in connection with the services Executive provides
to such entities. “ Proprietary and Confidential
Information ” shall mean trade secrets, confidential
knowledge, data or any other proprietary or confidential
information of the Company or any of its affiliates, or of any
customers, members, employees or directors of any of such entities,
but shall not include any information that (i) was publicly
known and made generally available in the public domain prior to
the time of disclosure to Executive by the Company or
(ii) becomes publicly known and made
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generally available after disclosure to
Executive by the Company other than as a result of a disclosure by
Executive in violation of this Agreement. By way of illustration
but not limitation, “Proprietary and Confidential
Information” includes: (i) trade secrets, documents,
memoranda, reports, files, correspondence, lists and other written
and graphic records affecting or relating to any such
entity’s business; (ii) confidential marketing
information including without limitation marketing strategies,
customer and client names and requirements, services, prices,
margins and costs; (iii) confidential financial information;
(iv) personnel information (including without limitation
employee compensation); and (v) other confidential business
information.
B. Executive further agrees
that at all times during Executive’s employment and
thereafter, Executive will keep in confidence and trust all
Proprietary and Confidential Information, and that Executive will
not use or disclose any Proprietary and Confidential Information or
anything related to such information without the written consent of
the Company, except as may be necessary in the ordinary course of
performing Executive’s duties to the Company.
C. All Company property,
including, but not limited to, Proprietary and Confidential
Information, documents, data, records, apparatus, equipment and
other physical property, whether or not pertaining to Proprietary
and Confidential Information, provided to Executive by the Company
or any of its affiliates or produced by Executive or others in
connection with Executive’s providing services to the Company
or any of its affiliates shall be and remain the sole property of
the Company or its affiliates (as the case may be) and shall be
returned promptly to such appropriate entity as and when requested
by such entity. Executive shall return and deliver all such
property upon termination of Executive’s employment, and
Executive may not take any such property or any reproduction of
such property upon such termination.
D. Executive recognizes that
the Company and its affiliates have received and in the future will
receive information from third parties which is private,
proprietary or confidential information subject to a duty on such
entity’s part to maintain the confidentiality of such
information and to use it only for certain limited purposes.
Executive agrees that during Executive’s employment, and
thereafter, Executive owes such entities and such third parties a
duty to hold all such private, proprietary or confidential
information received from third parties in the strictest confidence
and not to disclose it, except as necessary in carrying out
Executive’s work for such entities consistent with such
entities’ agreements with such third parties, and not to use
it for the benefit of anyone other than for such entities or such
third parties consistent with such entities’ agreements with
such third parties.
E. Executive’s
obligations under this Section 3 shall continue after the
Termination of Executive’s employment and any breach of this
Section 3 shall be a material breach of this
Agreement.
4. Physical
Exam.
Executive shall be required, on an
annual basis, to undergo a physical examination and to send
evidence that Executive has undergone such exam (but in no case the
results of such exam) to the Senior Vice President of
Organizational Effectiveness. The Company shall reimburse Executive
for any out-of-pocket expenses relating to the physical examination
that are not otherwise covered by Executive’s health
insurance plan.
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5. Representations and
Warranties of Executive .
A. No Violation; No
Conflicts . Executive represents and warrants to the Company
that the entering into of this Agreement and Executive’s
performance of Executive’s duties hereunder, will not violate
any agreements with, or trade secrets of, any other person or
entity. Executive further represents and warrants that Executive
does not have any relationship or commitment to any other person or
entity that might be in conflict with Executive’s obligations
to the Company under this Agreement, including but not limited to
outside employment, sales broker relationships, investments or
business activities. Executive understands and agrees that while
employed by the Company Executive is expected to refrain from
engaging in any outside activities that might be in conflict with
the business interests of the Company. In addition, Executive
represents and warrants to the Company that Executive has not
shared with or disclosed to, and will not share with or disclose
to, the Company any proprietary or confidential information of
Executive’s previous employers or any other third
party.
B. Legal Proceedings .
Executive represents and warrants to the Company that Executive has
not been arrested, indicted, convicted or otherwise involved in any
criminal or civil action or legal matter that could affect
Executive’s ability to perform Executive’s duties
hereunder or that may have a negative impact on the Company, its
reputation or its operations. Executive agrees, to the extent
permitted by applicable law, to notify the Company’s Senior
Vice President of Organizational Effectiveness immediately in the
event that Executive becomes party to any criminal or civil action
or other legal matter in the future that could have an affect on
the foregoing representation.
6. Executive Benefits
.
A. Employee Benefit
Programs . Executive shall be eligible to participate in the
Company’s various employee benefit programs and plans in
place from time to time as long as Executive remains employed by
the Company and Executive meets the applicable participation
requirements. These benefit programs and plans include paid time
off (“PTO”), holidays, group medical, dental, vision,
term life, and short and long term disability insurance and
participation in the Company’s 401(k) plan, tuition
reimbursement plan and deferred compensation plan. The Company or
its subsidiaries or affiliates may modify, terminate or amend any
benefit or plan in its discretion, retroactively or prospectively,
subject only to applicable law.
B. Required Insurance
. Executive will be covered by workers’ compensation
insurance and state disability insurance, as required by state
law.
C. Financial Counseling
Allowance . Executive will be entitled to be reimbursed up to
the amount of $5,000 per year for documented costs incurred for
personal financial counseling services provided to Executive,
including tax preparation, as long as Executive remains employed by
the Company.
D. Incentive Bonus .
Executive will be eligible to participate in the Health Net, Inc.
Executive Incentive Plan (“EIP”) in accordance with the
terms of the EIP, which
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provides Executive with a target
opportunity to earn each plan year up to 80% of Executive’s
Base Salary as additional compensation according to the terms of
the EIP. The bonus payment will range from 0% to 200% of target
depending upon the actual results achieved, and specific,
individually tailored measures will be established by the Company
that must be achieved by Executive in order for Executive to be
eligible to receive bonus payments for a given plan year. It is
understood that the Committee and the Company will award bonus
amounts, if any, as it deems appropriate consistent with the EIP.
Executive will not be eligible for an incentive bonus under the EIP
for 2008 and, in lieu thereof, will be entitled to receive a
special performance bonus on the terms set forth in
Section 6(E) below.
E. Special Performance
Bonus . Executive will be eligible to receive a special
performance bonus in the amount of $1,800,000 (the
“Performance Bonus”) if the Company’s Chief
Executive Officer, in consultation with the Company’s Board
of Directors, determines that Executive has successfully completed
the Restructuring by February 28, 2009 (the “Target
Completion Date”). The determination by the Chief Executive
Officer shall occur within ten (10) days of the Target
Completion Date (the “Determination Date”). The
Performance Bonus shall be paid to Executive within thirty
(30) days of the Determination Date as set forth
below:
(i) $500,000 of the
Performance Bonus shall be paid to Executive if the Chief Executive
Officer, in consultation with the Company’s Board of
Directors determines, on the Determination Date, that the
Company’s Health Plan Division has achieved the 2008 market
plans for each of the Company’s commercial health plan
regions;
(ii) $1,300,000 of the
Performance Bonus shall be paid to Executive if the Chief Executive
Officer, in consultation with the Company’s Board of
Directors, determines, on the Determination Date, that Executive
has met his 2008 performance goals.
In the event Executive
voluntarily Terminates his employment with the Company before the
Target Completion Date, Executive shall no longer be eligible to
receive the Performance Bonus and shall not be entitled to
participate in the EIP.
In the event the Company
Terminates Executive before the Target Completion Date for any
reason other than Cause (as defined below), Executive shall be paid
the entire amount of the Performance Bonus within thirty
(30) days of such Termination.
In the event that a Change in
Control (as defined below) occurs before the Target Completion
Date, Executive shall be paid the entire amount of the Performance
Bonus within thirty (30) days of consummation of the Change in
Control.
Upon completion of the
Restructuring, regardless of whether all or any portion of the
Performance Bonus was paid, Executive shall be eligible to
participate in the EIP for the duration of his employment with the
Company as set forth in Section 6(D) above.
F. Expenses . Subject
to and in accordance with the Company’s written policies for
business and travel expenses, Executive will receive reimbursement
for all business travel and other out-of-pocket expenses reasonably
incurred by Executive in the performance of Executive’s
duties pursuant to this Agreement.
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7. Equity Grants
.
A. Future Equity
Grants . Any future equity grants made to Executive will be
granted under one of the Company’s Long-Term Incentive Plans,
and will be subject to the terms of such plan and of the agreement
executed in connection with such grant. Any future equity grants to
Executive will be made at the discretion of the
Committee.
B. Company Stock Ownership
Requirement . In accordance with the Executive Officer Stock
Ownership Policy adopted by the Board of Directors of the Company
(the “Executive Stock Ownership Policy”), Executive is
required to own shares of Common Stock of the Company having a
value of three times (3x) Executive’s Base Salary in
effect from time to time pursuant to this Agreement (the
“Stock Ownership Requirement”). The number of shares of
Common Stock Executive is required to own will be calculated based
on the average NYSE closing price per share of the Company’s
Common Stock (as adjusted for stock splits and similar changes to
the Common Stock) for the most recently completed fiscal year of
the Company.
Using Executive’s
current salary of $600,000 and a stock price of $45.34, which is
the average closing price per share of the Company’s Common
Stock as of December 31, 2006, Executive’s current stock
ownership requirement is 39,700shares (“Target
Amount”). The Target Amount is subject to change from time to
time based on (1) changes in the average closing sales price
of the Company’s Common Stock on an annual basis and
(2) any changes in Executive’s Base Salary made pursuant
to and in accordance with Section 1(B) of this Agreement. Any
shares of Company Common Stock that Executive owns, and any
restricted stock units, shares of restricted stock or performance
shares of the Company that Executive owns and have vested count
toward the Target Amount. Stock options, unvested restricted stock
units, unvested shares of restricted stock, unvested performance
shares and shares of Common Stock gifted to others do not count
toward the Target Amount. Under the Executive Stock Ownership
Policy, Executive will have until four years from the Effective
Date to comply with the Stock Ownership Requirement.
The Committee expects that
Executive will make reasonable progress toward Executive’s
Stock Ownership Requirement. Executive will be notified on an
annual basis of any changes in Executive’s Target
Amount.
8. Term of Employment
. Executive’s employment with the Company is at the mutual
consent of Executive and the Company. Nothing in this Agreement is
intended to guarantee Executive’s continuing employment with
the Company or employment for any specific length of time.
Accordingly, either Executive or the Company may terminate the
employment relationship at any time, with or without advance notice
and with or without “Cause” (as defined below). Upon
Termination of Executive’s employment for any reason, in
addition to any other payments that may be payable to Executive
hereunder, Executive (or Executive’s beneficiaries or estate)
shall be paid (in each case to the extent not theretofore paid)
within thirty (30) days following Executive’s date of
Termination (or such shorter period that may be required by
applicable law): (a) Executive’s annual Base Salary
through such date, (b) accrued but unused PTO,
(c) reimbursable expenses incurred by Executive prior to the
Termination date and (d) amounts under any other compensatory
plan, arrangement or program payment to which Executive may then be
entitled. This Agreement constitutes a final and fully binding
integrated agreement with respect to the at-will nature of the
employment relationship.
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9. Termination of
Employment/Severance Pay .
A. Termination Without
Cause Not Following Change in Control . If Executive’s
employment is Terminated by the Company without “Cause”
(as defined in Section 9(D) below) at any time that is not
within two (2) years after a “Change in Control”
(as defined below) of Health Net, Inc., Executive will be entitled
to receive, within thirty (30) days following the Termination
of Executive’s employment, provided that Executive
signs, prior to the expiration of such (30) day period, a
Separation Agreement, Waiver and Release of Claims substantially in
the form attached hereto as Exhibit A , which is
incorporated into this Agreement by reference, (i) a lump sum
cash payment equal to twelve (12) months of Executive’s
Base Salary in effect immediately prior to the date of
Executive’s Termination, and (ii) the continuation of
Executive’s medical, dental and vision benefits (as
maintained for Executive’s benefit immediately prior to the
date of Executive’s Termination) (the “Benefits”)
for Executive and Executive’s dependents for a period of
twelve (12) months following the effective date of
Executive’s Termination, and (iii) the continuation,
under COBRA, of Executive’s Benefits for Executive and
Executive’s dependents for a period of twelve
(12) months, with premium payments paid by the Company on
Executive’s behalf, provided , that Executive properly
elects to continue those benefits under COBRA.
For purposes of this
Agreement, “ Change in Control ” is defined as
any of the following which occurs subsequent to the effective date
of Executive’s employment:
(i) Any person (as such term
is defined under Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)),
corporation or other entity (other than Health Net, Inc. or any of
its subsidiaries, or any employee benefit plan sponsored by Health
Net, Inc. or any of its subsidiaries) is or becomes the beneficial
owner (as such term is defined in Rule 13d-3 under the Exchange
Act) of securities of Health Net, Inc. representing twenty percent
(20%) or more of the combined voting power of the outstanding
securities of Health Net, Inc. which ordinarily (and apart from
rights accruing under special circumstances) have the right to vote
in the election of directors (calculated as provided in paragraph
(d) of such Rule 13d-3 in the case of rights to acquire Health
Net, Inc.’s securities) (the
“Securities”);
(ii) As a result of a tender
offer, merger, sale of assets or other major transaction, the
persons who are directors of Health Net, Inc. immediately prior to
such transaction cease to constitute a majority of the Board of
Directors of Health Net, Inc. (or any successor corporations)
immediately after such transaction;
(iii) Health Net, Inc. is
merged or consolidated with any other person, firm, corporation or
other entity and, as a result, the shareholders of Health Net,
Inc., as determined immediately before such transaction, own less
than eighty percent (80%) of the outstanding Securities of the
surviving or resulting entity immediately after such
transaction:
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(iv) A tender offer or
exchange offer is made and consummated for the ownership of twenty
percent (20%) or more of the outstanding Securities of Health
Net, Inc.;
(v) Health Net, Inc.
transfers substantially all of its assets to another person, firm,
corporation or other entity that is not a wholly-owned subsidiary
of Health Net, Inc.; or
(vi) Health Net, Inc. enters
into a management agreement with another person, firm, corporation
or other entity that is not a wholly-owned subsidiary of Health
Net, Inc. and such management agreement extends hiring and firing
authority over Executive to an individual or organization other
than Health Net, Inc.
B. Termination Without
Cause or For Good Reason Following Change in Control . If at
any time within two (2) years after a Change in Control of
Health Net, Inc. Executive’s employment is Terminated by the
Company without Cause or Executive Terminates Executive’s
employment for “Good Reason” (as defined below) (by
giving the Company at least fourteen (14) days prior written
notice of the effective date of Termination), then Executive will
be entitled to receive, within thirty (30) days following the
Termination of Executive’s employment, provided that
Executive signs, prior to the expiration of such thirty
(30) day period, a Separation Agreement, Waiver and Release of
Claims substantially in the form attached hereto as Exhibit
A , which is incorporated into this Agreement by reference,
(i) a lump sum payment equal to twenty-four (24) months
of Executive’s Base Salary in effect immediately prior to the
date of Executive’s Termination, and (ii) the
continuation of Executive’s Benefits for six (6) months
following Executive’s date of Termination, and (iii) and
after expiration of such six (6) months Benefits continuation
period, the continuation, under COBRA, of Benefits for Executive
and Executive’s dependents for a period of eighteen
(18) months following the effective date of Executive’s
Termination with premium payments made by the Company on
Executive’s behalf, provided , that Executive properly
elects to continue those benefits under COBRA, and provided
, further , that in the event the Company requests, in
writing, prior to such voluntary Termination by Executive for Good
Reason that Executive continue in the employ of the Company for a
period of time up to 90 days following such
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