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Exhibit
10.4
AMENDED AND
RESTATED
EMPLOYMENT
AGREEMENT
This AMENDED AND RESTATED
EMPLOYMENT AGREEMENT (this “Agreement”) is made and
entered into as of February 23, 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 Jay M. Gellert
(“Executive”).
RECITALS
WHEREAS, the Company desires
to continue Executive’s employment in the capacity as
President and Chief Executive Officer; and
WHEREAS, the Company and
Executive are entering into this Agreement to establish the terms
and conditions of the employment relationship; and
WHEREAS, this Agreement is
intended to amend and restate in its entirety the Letter Agreement,
dated August 22, 1997, the Letter Agreement dated
March 2, 2000, the Agreement dated January 1, 2001, and
the Letter Agreement dated October 13, 2002, by and between
Executive and the Company, relating to Executive’s employment
with the Company (collectively, the “Prior Employment
Agreement”).
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 and Chief Executive Officer,
but may be changed at the discretion of the Board of Directors of
the Company (the “Board”) to a title that reflects a
similarly situated senior executive position. Executive shall
report directly to the Board, but Executive’s reporting
relationship may be changed from time to time at the discretion of
the Board. Executive’s duties and responsibilities are to
provide executive leadership and management of the Company, but the
Board 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 an annual base salary of $1,200,000, which salary will
be paid on a pro-rated bi-weekly basis, less applicable
withholdings (“Base Salary”), covering all hours
worked, but the Board may change Executive’s compensation
from time-to-time. Pursuant to the charter of the Compensation
Committee of the Company’s Board of Directors (the
“Committee”), Executive’s Base Salary will be
reviewed annually. Any adjustment to Executive’s compensation
must be made with the approval of the Committee and with the
ratification of the independent directors of the Board.
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 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 Board may
make personnel decisions regarding Executive’s employment,
including, but not limited to, decisions regarding any salary
adjustment, transfer or disciplinary action, up to and including
termination, consistent with the needs of the business of the
Company.
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 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.
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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 will 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.
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.
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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 Board 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 is 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, which shall not be less than 22 days per calendar year
(“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, deferred compensation plan and Supplemental
Executive Retirement 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 is covered by workers’ compensation insurance and
state disability insurance, as required by state law.
C. Financial Counseling
Allowance . Executive is entitled to be reimbursed up to the
amount of $5,000 (net of taxes) 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 is eligible to participate in the Health Net, Inc.
Executive Incentive Plan (“EIP”) in accordance with the
terms of the EIP, which provides Executive with a target
opportunity to earn each plan year up to 125% of Executive’s
Base Salary as additional compensation according to the terms of
the actual EIP documents. 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
guidelines of the EIP.
E. Housing/Relocation
. The Company will provide Executive, at its expense, with housing,
including the use of utilities, in Woodland Hills, California, at a
reasonable monthly cost. Weekend trips to Executive’s
residence in San Francisco will be at the Company’s expense.
Any modification to the housing provided Executive in Woodland
Hills, California, must be approved in advance by the Committee. In
addition, the Committee may review and modify such housing
arrangements in its sole discretion from time to time. Executive
may, at Executive’s option, decide to relocate to Southern
California. Should Executive decide to
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relocate, the Company will provide
Executive with certain benefits to assist Executive in relocating
to Woodland Hills, including: (i) payment for all packing,
shipping and unloading of all Executive’s reasonable
household items upon Executive’s move and up to 60 days
storage of such items; and (ii) assistance with the sale of
Executive’s current home to include payment of up to a 7%
real estate commission, and assistance in the purchase of a new
home to include payment of up to two points with respect to
financing of such home and Federal and state tax gross-ups on the
above items, as allowed by law.
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.
G. Company Car . The
Company will provide Executive with the use of an automobile, the
type and cost of which must be approved by the Committee. All
expenses associated with Executive’s personal use of such
automobile will be deemed to be imputed income to Executive and
will be “grossed-up” for income tax purposes at the
applicable federal and state income tax level.
H. Miscellaneous .
Executive is entitled to a (i) Company provided cell phone and
the Company will pay for Executive’s usage of such phone
(ii) fax machine to be installed in Executive’s home and
(iii) reimbursement of the cost of the annual physical exam as
set forth in Section 4 above.
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 and with
the approval of the independent directors of the Board.
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 five times (5x) 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 $1,200,000 and a stock price of $45.3450, 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 132,319 (“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 1B of this Agreement. Any
shares of Company Common Stock that Executive owns, and any
restricted stock units or
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shares of restricted stock 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 and shares of Common Stock gifted to
others do not count toward the Target Amount.
Executive will be notified on
an annual basis of any changes in Executive’s Target
Amount.
C. Stock Plan
Amendments . In accordance with the Agreement dated
January 1, 2001 between Executive and the Company, Executive
previously consented, pursuant to Section 14 of the
Company’s Second Amended and Restated 1991 Stock Option Plan
(the “1991 Plan”), Section 6.2 of the
Company’s 1997 Stock Option Plan, as amended (the “1997
Plan”) and Section 6.2 of the Company’s 1998 Stock
Option Plan, as amended (the “1998 Plan,” and together
with the 1991 Plan and the 1997 Plan, the “Plans”),
that the Plans, as amended by the amendments to the Accelerated
Provisions of the Plans set forth on Exhibit A attached
hereto, shall govern and apply to all of Executive’s
outstanding options under the Plans, regardless of the date such
options were granted. To the extent the option agreements for
Executive’s outstanding options under the Plans state
anything to the contrary, Executive and the Company have agreed
that such option agreement(s) are amended to be consistent with the
foregoing sentence
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. 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) will be paid (in each
case to the extent not theretofore paid) within thirty
(30) days following Executive’s date of termination,
except as provided in Section 9 below, (or such shorter period
that may be required by applicable law): (a) Executive’s
annual Base Salary through the date of termination, (b) any
compensation previously deferred by Executive (together with any
interest and earnings therein), (c) accrued but unused PTO,
(d) reimbursable expenses incurred by Executive prior to the
termination date and (e) amounts under any other compensatory
plan, arrangement or program payment to which Executive may be
entitled. This Agreement constitutes a final and fully binding
integrated agreement with respect to the at-will nature of the
employment relationship.
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 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, in equal monthly installments
beginning at the end of the first month following the termination
of Executive’s employment, provided Executive signs a
Separation Agreement, Waiver and Release of Claims substantially in
the form attached hereto as Exhibit B , which is
incorporated into this Agreement by reference, a lump sum cash
payment equal to $6,000,000.
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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) A 51% change in
beneficial ownership as a result of a single transaction of all
capital stock of Health Net, Inc.; ;
(ii) A change in the majority
of outside directors of the Health Net, Inc. Board of Directors
over two years, which is unapproved by a majority of Health Net,
Inc.’s current Board of Directors;;
(iii) The sale of
substantially all of Health Net, Inc.’s assets to an
unrelated third party; or
(iv) The liquidation or
dissolution of 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, in equal monthly installments beginning at
the end of the first month following the termination of
Executive’s employment, provided Executive signs a Separation
Agreement, Waiver and Release of Claims substantially in the form
attached hereto as Exhibit B , which is incorporated into
this Agreement by reference, (i) a lump sum payment equal to
$6,000,000, and (ii) Executive’s options that vested
prior to the date of Executive’s termination will continue to
remain exercisable for the shorter of, (x) a period of two
years following Executive’s date of termination, or
(y) the options’ general termination date as set forth
in the applicable agreement evidencing the award of such
options.
For purposes of this
Agreement, the term “ Good Reason ” means any of
the following which occurs, without Executive’s consent,
subsequent to the effective date of a Change in Control as defined
above:
(i) A material reduction in
the scope of Executive’s position, duties, responsibilities,
salary or status with the Company;
(ii) A relocation of
Executive’s office outside of California; or
(iii) The removal of
Executive from his positions referred in Section 1 above as
determined by the Board of Directors existing as of the date of a
Change of Control, except in connection with the termination of
Executive’s employment for disability, normal retirement or
cause, or by voluntary resignation other than for Good
Reason.
C. Voluntary
Termination . Notwithstanding anything to the contrary in this
Agreement, whether express or implied, Executive may at any time
terminate Executive’s employment for any reason by giving the
Company fourteen (14) days prior written notice of the
effective date of termination. In the event that Executive
voluntarily terminates employment with the Company (except for Good
Reason within two (2) years after a Change in Control of
Health Net, Inc.), then Executive shall not be eligible to receive
any payments or continuation of Benefits set forth in this
Section 9).
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10. Withholding . All
payments required to be made by the Company hereunder to Executive
or Executive’s estate or beneficiaries shall be subject to
the withholding of such amounts relating to taxes as the Company
may reasonably determine should be withheld pursuant to any
applicable law or regulation.
11. Potential Tax
Consequences for “Parachute” Payments .
A. Tax Gross-Up .
Notwithstanding any other provisions of this Agreement, in the
event that (i) any payment or distribution by the Company to
or for Executive’s benefit (whether paid or payable or
distributed or distributable pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the
Company, any person whose actions result in a Change in Control or
any person affiliated with the Company or such person) (all such
payments and distributions, including the severance payments and
benefits provided for in Section 9 hereof (the
“Severance Payments”), being hereinafter called
(“Total Payments”) would be subject (in whole or part)
to the excise tax imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the “Code”), or any
successor provision enacted under the Code or any interest or
penalties are incurred by Executive with respect to such excise tax
(such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the “Excise
Tax”) and (ii) the amount of such Total Payments subject
to such Excise Tax exceeds $50,000, then the Company shall pay to
Executive an additional cash payment (the “Tax
Gross-Up”) so that after receipt of such Tax Gross-Up, the
payment of any additional federal, state and local income taxes on
such Tax Gross-Up amount and the payment of any Excise Taxes,
Executive shall receive such net amount of Total Payments equal to
the amount that Executive would have received if no Excise Tax was
due. If the amount of Total Payments subject to the Excise Tax does
not exceed $50,000, then the Tax-Gross-Up shall not be paid and the
Severance Payments shall be reduced (if necessary, to zero) to the
extent necessary so that no portion of the Total Payments is
subject to the Excise Tax.
B. Accounting Firm
Determination . All determinations required to be made under
this Section 11, including whether and when a Tax Gross-Up is
required and the amount of such Tax Gross-Up and the assumptions to
be utilized in arriving at such determination, shall be made by the
public accounting firm that, immediately prior to the Change in
Control, was the Company’s independent auditor (the
“Accounting Firm”) which shall provide detailed
supporting calculations both to the Company and Executive within
fifteen (15) business days of the receipt of notice from
Executive that Executive has received Total Payments, or such
earlier time as is requested by the Company. All fees and expenses
of the Accounting Firm shall be borne solely by the Company. Any
Tax Gross-Up, as determined pursuant to this Section 11, shall
be paid by the Company to Executive within five (5) days of
the receipt of the Accounting Firm’s determination. If the
Accounting Firm determines that no Excise Tax is payable by
Executive, then the Accounting Firm shall furnish to Executive a
written opinion that failure to report the Excise Tax on
Executive’s applicable federal income tax return would not
result in the imposition of any tax assessment or a negligence or
similar penalty. As a result of any uncertainty in the application
of Section 4999 of the Code at the time of the determination
by the Accounting Firm hereunder, it is possible that Tax Gross-Up
which will not have been made by
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the Company should have been made
(“Underpayment”), or that amount of the Tax Gross-Up
will exceed the amount required under Section 11(A)
(“Overpayment”). In the event that the Accounting Firm
shall determine that an Underpayment or Overpayment has
occurred
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