This Severance
Agreement (the “Agreement”) is dated as of the
day of
, 200___, between The Timken Company, an Ohio corporation (the
“Company”), and
(the “Employee”).
WHEREAS, the
Employee is a key employee of the Company and has made and is
expected to continue to make major contributions to the
profitability, growth and financial strength of the
Company;
WHEREAS, the
Company wishes to induce its key employees to remain in the
employment of the Company and to assure itself of stability and
continuity of operations by providing severance protection to those
key employees who are expected to make major contributions to the
success of the Company. In addition, the Company recognizes that a
termination of employment may occur following a change in control
in circumstances where the Employee should receive additional
compensation for services theretofore rendered and for other good
reasons, the appropriate amount of which would be difficult to
ascertain. Hence, the Company has agreed to provide special
severance in the event of a change in control of the Company;
and
WHEREAS, the
Company and the Employee desire to amend the Agreement to update
its provisions in accordance with the American Jobs Creation Act of
2004, the applicable requirements of which are set forth in
Section 409A of the Code and the Treasury Regulations
promulgated thereunder, by virtue of the specific amendments to the
Agreement as set forth below; and
NOW, THEREFORE, in
consideration of the premises provided for in this Agreement,
including the Release provided for in Section 7 hereof, the
Company and the Employee agree as follows:
1.1
Base Salary : The term “Base Salary” shall mean
the Employee’s annual base salary as in effect on the date
this Agreement becomes operative, as the same may be increased from
time to time.
1.2
Board : The term “Board” shall mean the Board of
Directors of the Company.
1.3
Change in Control : “Change in Control” means
the occurrence during the Term of any of the following
events:
(a) any
individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
“Person”) is or becomes the beneficial owner (within
the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 30% or more of the combined voting power of the then-outstanding
Voting Stock of the Company; provided , however ,
that:
(i) for purposes
of this Section 1.3(a), the following acquisitions will not
constitute a Change in Control: (A) any acquisition of Voting
Stock of the Company directly from the Company that is approved by
a majority of the Incumbent Directors, (B) any acquisition of
Voting Stock of the Company by the Company or any Subsidiary,
(C) any acquisition of Voting Stock of the Company by the
trustee or other fiduciary holding securities under any employee
benefit plan (or related trust) sponsored or maintained by the
Company or any Subsidiary, and (D) any acquisition of Voting
Stock of the Company by any Person pursuant to a Business
Transaction that complies with clauses (i), (ii) and
(iii) of Section 1.3(c) below;
(ii) if any Person
is or becomes the beneficial owner of 30% or more of combined
voting power of the then-outstanding Voting Stock of the Company as
a result of a transaction described in clause (A) of
Section 1.3(a)(i) above and such Person thereafter becomes the
beneficial owner of any additional shares of Voting Stock of the
Company representing 1% or more of the then-outstanding Voting
Stock of the Company, other than in an acquisition directly from
the Company that is approved by a majority of the Incumbent
Directors or other than as a result of a stock dividend, stock
split or similar transaction effected by the Company in which all
holders of Voting Stock are treated equally, such subsequent
acquisition shall be treated as a Change in Control;
(iii) a Change in
Control will not be deemed to have occurred if a Person is or
becomes the beneficial owner of 30% or more of the Voting Stock of
the Company as a result of a reduction in the number of shares of
Voting Stock of the Company outstanding pursuant to a transaction
or series of transactions that is approved by a majority of the
Incumbent Directors unless and until such Person thereafter becomes
the beneficial owner of any additional shares of Voting Stock of
the Company representing 1% or more of the then-outstanding Voting
Stock of the Company, other than as a result of a stock dividend,
stock split or similar transaction effected by the Company in which
all holders of Voting Stock are treated equally; and
(iv) if at least a
majority of the Incumbent Directors determine in good faith that a
Person has acquired beneficial ownership of 30% or more of the
Voting Stock of the Company inadvertently, and such Person divests
as promptly as practicable but no later than the date, if any, set
by the Incumbent Directors a sufficient number of shares so that
such Person
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beneficially
owns less than 30% of the Voting Stock of the Company, then no
Change in Control shall have occurred as a result of such
Person’s acquisition; or
(b) a majority of
the Board ceases to be comprised of Incumbent Directors;
or
(c) the
consummation of a reorganization, merger or consolidation, or sale
or other disposition of all or substantially all of the assets of
the Company or the acquisition of the stock or assets of another
corporation, or other transaction (each, a “Business
Transaction”), unless, in each case, immediately following
such Business Transaction (i) the Voting Stock of the Company
outstanding immediately prior to such Business Transaction
continues to represent (either by remaining outstanding or by being
converted into Voting Stock of the surviving entity or any parent
thereof), at least 51% of the combined voting power of the then
outstanding shares of Voting Stock of the entity resulting from
such Business Transaction (including, without limitation, an entity
which as a result of such transaction owns the Company or all or
substantially all of the Company’s assets either directly or
through one or more subsidiaries), (ii) no Person (other than
the Company, such entity resulting from such Business Transaction,
or any employee benefit plan (or related trust) sponsored or
maintained by the Company, any Subsidiary or such entity resulting
from such Business Transaction) beneficially owns, directly or
indirectly, 30% or more of the combined voting power of the then
outstanding shares of Voting Stock of the entity resulting from
such Business Transaction, and (iii) at least a majority of
the members of the Board of Directors of the entity resulting from
such Business Transaction were Incumbent Directors at the time of
the execution of the initial agreement or of the action of the
Board providing for such Business Transaction; or
(d) approval by
the shareholders of the Company of a complete liquidation or
dissolution of the Company, except pursuant to a Business
Transaction that complies with clauses (i), (ii) and
(iii) of Section 1.3(c).
The Company
shall give the Employee written notice, delivered to the Employee
in the manner specified in Section 9 hereof, of the occurrence
of any event constituting a Change in Control as promptly as
practical, and in no case later than 10 calendar days, after the
occurrence of such event.
1.4
CIC Severance Amount : The term “CIC Severance
Amount” shall mean an amount equal to the sum of:
(a) [Three/One
and one-half] times the greater of (i) the
Employee’s Base Salary in effect immediately prior to the
Employee’s Termination of Employment or (ii) the
Employee’s Base Salary in effect immediately prior to the
Change in Control;
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(b) [Three/One
and one-half] times the greater of (i) the
Employee’s Incentive Pay for the year in which the
Employee’s employment is terminated or (ii) the
Employee’s Incentive Pay for the year in which the Change in
Control occurred;
(c) The Primary
Supplemental Pension Benefit;
(d) The Enhanced
Supplemental Pension Benefit;
(e) The
Supplemental SIP Plan Benefit; and
(f) The Post-Tax
SIP Plan Benefit.
1.5
Code : The term “Code” shall mean the Internal
Revenue Code of 1986, as amended.
1.6
Company Termination Event : The term “Company
Termination Event” shall mean the Termination of Employment
of the Employee by the Company or otherwise in any of the following
events and prior to any Employee Termination Event:
(a) The
Employee’s death;
(b) If the
Employee shall become eligible to receive and begins actually to
receive long-term disability benefits under The Long Term
Disability Program of The Timken Company or any successor plan;
or
(c) For Cause.
Termination of Employment shall be deemed to be for
“Cause” only if based on the fact that the Employee has
done any of the following:
(i) An intentional
act of fraud, embezzlement or theft in connection with his duties
with the Company;
(ii) Intentional
wrongful disclosure of secret processes or confidential information
of the Company or a Company subsidiary; or
(iii) Intentional
wrongful engagement in any Competitive Activity which would
constitute a material breach of the Employee’s duty of
loyalty to the Company.
For purposes of
this Agreement, no act, or failure to act, on the part of the
Employee shall be deemed “intentional” unless done or
omitted to be done, by the Employee not in good faith and without
reasonable belief that his action or omission was in or not opposed
to the best interest of the Company.
1.7 Competitive
Activity : The term “Competitive Activity” shall
mean the Employee’s participation, without the written
consent of an officer of the Company, in the management of any
business enterprise if such enterprise engages in substantial and
direct
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competition
with the Company and such enterprise’s sales of any product
or service competitive with any product or service of the Company
amounted to 25% of such enterprise’s net sales for its most
recently completed fiscal year and if the Company’s net sales
of said product or service amounted to 25% of the Company’s
net sales for its most recently completed fiscal year.
“Competitive Activity” shall not include (a) the
mere ownership of securities in any enterprise and exercise of
rights appurtenant thereto or (b) participation in management
of any enterprise or business operation thereof other than in
connection with the competitive operation of such
enterprise.
1.8
Employee Termination Event : The term “Employee
Termination Event” shall mean the Termination of Employment
of the Employee (including a decision to retire if eligible under
The 1984 Retirement Plan for Salaried Employees of The Timken
Company, or any successor plan (the “Retirement Plan”))
by the Employee in any of the following events:
(a) A
determination by the Employee made in good faith that upon or after
the occurrence of a Change in Control: (i) a material
reduction in the nature or scope of the responsibilities,
authorities or duties of the Employee attached to the
Employee’s position held immediately prior to the Change in
Control has occurred; or (ii) a change of more than 60 miles
has occurred in the location of the Employee’s principal
office immediately prior to the Change in Control;
(b) A material
reduction by the Company in the Employee’s Base Salary upon
or after the occurrence of a Change in Control;
For purposes of
this Agreement, the amount of any reduction in annual base salary
elected by the Employee pursuant to any qualified or non-qualified
salary reduction arrangement maintained by the Company, including,
without limitation, The Timken Company Savings and Investment
Pension Plan (the “SIP Plan”) and The Timken Company
1996 Deferred Compensation Plan (the “Deferred Compensation
Plan”), shall be included in the determination of Base
Salary; or
(c) An action or
inaction that constitutes a material breach by the Company of this
Agreement (including, but not limited to, a breach of
Section 8.1 hereof) upon or after the occurrence of a Change
in Control.
Notwithstanding
the foregoing, no Termination of Employment by the Employee will be
an Employee Termination Event unless (x) the Employee gives
the Company notice of the existence of a condition described in
subsection (a), (b), or (c), above within 90 days of the
initial existence of such condition, and (y) the Company does
not remedy such condition described in clause (a), (b), or
(c) above, as applicable, within 30 days of receiving the
notice described in the preceding clause (x), and (z) the
Employee terminates employment within 2 years after the
initial existence of a condition described in subsection (a), (b),
or (c), above.
1.9
Enhanced Supplemental Pension Benefit : The term
“Enhanced Supplemental Pension Benefit” shall mean
(a) less (b), where:
(a) is the Primary
Supplemental Pension Benefit determined by assuming (i) the
Employee was credited with additional service with the
5
Company equal
to the period of time between the Termination Date and the first to
occur of either (A) the end of the Limited Period or
(B) the end of the Severance Period, provided that for
purposes of the Retirement Plan, the Excess Agreement and the
Supplemental Plan the Employee will only be credited with such
additional service if the Employee was being credited with service
for benefit accrual purposes under such plans immediately prior to
the Termination Date, and (ii) the Employee’s
compensation for purposes of benefit calculation under the
Retirement Plan, the Excess Agreement and the Supplemental Plan
included a period of the Employee’s full-time employment with
the Company equal to the period of time between the Termination
Date and the first to occur of either (A) the end of the
Limited Period or (B) the end of the Severance Period during
which the Employee had Base Salary equal to the greater of
(1) his Base Salary for the calendar year in which the
Employee’s employment is terminated or (2) his Base
Salary for the calendar year in which the Change in Control
occurred, and Incentive Pay equal to the greater of (I) the
Employee’s Incentive Pay for the calendar year in which the
Termination Date occurs or (II) the Employee’s Incentive
Pay for the calendar year in which the Change in Control occurs;
and
(b) is the Primary
Supplemental Pension Benefit.
The
calculations of the Enhanced Supplemental Pension Benefit (and its
actuarial equivalence) shall be made, as of the Termination Date,
by Watson Wyatt & Company or such other independent actuary
appointed by the administrator of the Retirement Plan and
acceptable to the Employee (the “Actuary”). The lump
sum of actuarial equivalence shall be calculated using the
applicable mortality table promulgated by the Internal Revenue
Service (“IRS”) under Section 417(e)(3) of the
Code as in effect on the Termination Date and the applicable
interest rates promulgated by the IRS under Section 417(e)(3)
of the Code for the month third preceding the month in which the
Termination Date occurs, and if the IRS ceases to promulgate such
interest rates, an interest rate determined by the
Actuary.
1.10
Incentive Pay : The term “Incentive Pay” shall
mean an annual amount equal to the target annual amount of
Incentive Payments payable to the Employee, without regard to any
reduction thereof elected by the Employee pursuant to any qualified
or non-qualified salary reduction arrangement maintained by the
Company, including, without limitation, the SIP Plan and the
Deferred Compensation Plan; provided , however , for
purposes of Section 4.2 for a Termination of Employment other
than in the Limited Period, Incentive Pay shall mean an amount
equal to the annual incentive amount earned for the calendar year
in which the Termination Date occurs.
1.11
Incentive Payments : The term “Incentive
Payments” shall mean any cash incentive compensation paid
based on an annual performance period (whether pursuant to the
Company’s Management Performance Plan or any successor
similar plan or through any other means).
1.12
Incumbent Directors : The term “Incumbent
Directors” means the individuals who, as of the date hereof,
are Directors of the Company and any individual
6
becoming a
Director subsequent to the date hereof whose election, nomination
for election by the Company’s shareholders, or appointment,
was approved by a vote of at least two-thirds of the then Incumbent
Directors (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee
for director, without objection to such nomination);
provided , however , that an individual shall not be
an Incumbent Director if such individual’s election or
appointment to the Board occurs as a result of an actual or
threatened election contest (as described in Rule 14a-12(c) of
the Exchange Act) with respect to the election or removal of
Directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the
Board.
1.13
Limited Period : The term “Limited Period” shall
mean that period of time commencing on the date of a Change in
Control and continuing for a period of three years.
1.14
Notice of Termination : The term “Notice of
Termination” shall mean a written notice delivered to the
Employee in the manner specified in Section 9 of this
Agreement, which notice indicates the specific termination
provision in this Agreement relied upon and sets forth in
reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Employee’s
employment.
1.15
Post-Tax SIP Plan Benefit : The “Post-Tax SIP Plan
Benefit” shall mean the sum of:
(a) The amount
credited to the Employee’s account under The Timken Company
Post-Tax SIP Plan (the “Post-Tax SIP Plan”) as of the
Termination Date; plus
(b) The amount of
Company contributions that would have been credited to the
Employee’s account under the Post-Tax SIP Plan after the
Termination Date if the Employee had remained in the full-time
employment of the Company until the earlier of (i) end of the
Limited Period or (ii) the end of the Severance Period at the
greater of (I) his Base Salary and Incentive Pay for the
calendar year in which the Employee’s employment is
terminated, or (II) his Base Salary and Incentive Pay for the
calendar year in which the Change in Control occurred, and assuming
the Employee’s contributions to the Post-Tax SIP Plan
following the Termination Date had been at the highest rate at
which such contributions had been made at any time during the
three-year period ending on the Termination Date.
1.16
Primary Supplemental Pension Benefit : The term
“Primary Supplemental Pension Benefit” shall mean
(a) less (b), where:
(a) is the sum of
the accrued pension benefits (converted to a lump sum of actuarial
equivalence as of the Termination Date) which the Employee would
have been entitled to receive at or after the Termination Date
under (i) the Retirement Plan, (ii) any annuity
distributed to the Employee as a result of the termination on
October 31, 1984 of the Retirement Plan for Salaried Employees
of The Timken Company (the “Terminated Pension Plan”),
(iii) any Employee
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Excess Benefits
Agreement (“Excess Agreement”), and (iv) the
Supplemental Pension Plan of the Timken Company
(“Supplemental Plan”), assuming for purposes of this
calculation that (A) the Employee’s benefits under the
Retirement Plan, the Excess Agreement and the Supplemental Plan
were vested and non-forfeitable, (B) the Employee satisfied
any other condition under the Retirement Plan, the Excess Agreement
and the Supplemental Plan to his receipt of benefits thereunder,
(C) the Employee’s compensation for purposes of the
Retirement Plan, the Excess Agreement and the Supplemental Plan was
determined without regard to any reduction in compensation elected
by the Employee pursuant to any qualified or non-qualified salary
reduction arrangement maintained by the Company, including without
limitation, the SIP Plan and the Deferred Compensation Plan,
(D) solely for purposes of determining the time at which the
Employee would receive benefits under the Retirement Plan, the
Terminated Pension Plan, the Excess Agreement and the Supplemental
Plan, the Employee had continued his employment with the Company
until such time Employee would have received such benefits, and
(E) the Employee commenced receiving benefits from the
Retirement Plan, the Terminated Pension Plan, the Excess Agreement
and the Supplemental Plan at the point in time when the total of
the lump sums of actuarial equivalence under the Retirement Plan,
the Terminated Pension Plan, the Excess Agreement and the
Supplemental Plan is the greatest; and
(b) is the sum of
the accrued pension benefits (converted to a lump sum of actuarial
equivalence as of the Termination Date) which the Employee is
entitled to receive at or after the Termination Date under
(i) the Retirement Plan, and (ii) any annuity distributed
to the Employee as a result of the termination on October 31,
1984 of the Terminated Pension Plan.
The
calculations of the Primary Supplemental Pension Benefit (and its
actuarial equivalence) shall be made, as of the Termination Date,
by Watson Wyatt & Company or such other independent actuary
appointed by the administrator of the Retirement Plan and
acceptable to the Employee (the “Actuary”). The lump
sum of actuarial equivalence shall be calculated using the
applicable mortality table promulgated by the Internal Revenue
Service (“IRS”) under Section 417(e)(3) of the
Code as in effect on the Termination Date and the applicable
interest rate promulgated by the IRS under Section 417(e)(3)
of the Code for the month third preceding the month in which the
Termination Date occurs, and if the IRS ceases to promulgate such
interest rates, an interest rate determined by the
Actuary.
1.17
Severance Amount : The term “Severance Amount”
shall mean an amount equal to the sum of:
(a) [Two/One
and one-half/One] times the Employee’s Base Salary in
effect immediately prior to the Employee’s termination of
employment; and
(b) [Two/One
and one-half] times the Employee’s Incentive Pay for the
year in which the Employee’s employment is terminated
[Deleted for Grades 12 and 13 and non-EC Officers]
;
8
1.18
Severance Period : The term “Severance Period”
shall mean the period beginning on the Employee’s Termination
Date which precedes a Change in Control and ending on the [three
year/one and one-half year] anniversary of the Termination
Date.
1.19
Subsidiary : The term “Subsidiary” means a
corporation, partnership, joint venture, unincorporated association
or other entity in which the Company directly or indirectly
beneficially owns 50% or more ownership or other equity
interest.
1.20
Supplemental SIP Plan Benefit : The “Supplemental SIP
Plan Benefit” shall mean:
(a) The amount of
the Company Matching Contributions and Core Contributions (as such
terms are defined in the SIP Plan) that would have been made to the
SIP Plan by the Company and allocated to the Employee’s
account thereunder as if the Employee had remained in the full-time
employment of the Company until the earlier of (i) the end of
the Limited Period or (ii) the end of the Severance Period, at
the greater of (I) his Base Salary for the calendar year in
which the Employee’s employment is terminated, or
(II) his Base Salary immediately prior to the Change in
Control, and the greater of (y) the Employee’s Incentive
Pay for the calendar year in which the Termination Date occurs and
(z) the Employee’s Incentive Pay for the calendar year
in which the Change in Control occurred, and assuming the
Employee’s salary deferral was at the maximum permissible
level; less
(b) The amount of
the Company Matching Contributions and Core Contributions made to
the SIP Plan by the Company and allocated to the Employee’s
account thereunder as of the Termination Date.
1.21
Termination Date : The term “Termination Date”
shall mean the effective date of the Employee’s Termination
of Employment with the Company.
1.22
Termination of Employment : The term “Termination of
Employment” means termination of employment within the
meaning of Treasury
Regulation Section 1.409A-1(h)(1)(ii).
1.23
Voting Stock : The term “Voting Stock” means
securities entitled to vote generally in the election of
directors.
2.
Operation of Agreement : This Agreement shall be effective
immediately upon its execution.
3.
Conditions During the Limited Period : During the Limited
Period:
(a) the Employee
shall remain in the same or better office and position in the
Company (or a successor thereto) or any Subsidiary that the
Employee held immediately prior to the Change in
Control;
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(b) if the
Employee was a Director of the Company or a Subsidiary immediately
prior to a Change in Control, the Employee shall remain a Director
of the Company (or a successor thereto) or a Director of such
Subsidiary;
(c) Employee shall
be entitled to receive Incentive Payments equal to or in excess the
Employee’s average Incentive Pay for the previous three
calendar years; and such amounts will be paid in the calendar year
following the calendar year in which the amounts are earned but in
no event later than 2 1 / 2
months after the end of the calendar
year following the calendar year in which such amounts are
earned;
(d) (i) the
Company shall continue in effect without a material negative change
to any compensation or benefit plan in which the Employee
participated immediately prior to the Change in Control and, as
applicable, the Company shall continue Employee’s
participation in any such compensation or benefit plan;
(ii) neither the Company nor its Subsidiaries shall take any
action that would directly or indirectly materially reduce any of
the benefits of any compensation or benefit plan enjoyed by the
Employee at the time of the Change in Control; (iii) the
Employee shall continue to be entitled to no less than the same
number of paid vacation days to which the Employee was entitled
immediately prior to the Change in Control, based on years of
service with the Company or its Subsidiaries in accordance with the
normal vacation policy, in effect immediately prior to the Change
in Control, of the Company or any of its Subsidiaries that employ
Employee immediately prior to the Change in Control, and
(iv) neither the Company nor any of its Subsidiaries shall
take any other action which would materially adversely change the
conditions or prerequisites of the Employee’s employment as
in effect immediately prior to the Change in Control;
and
(e) the
termination of Employee’s employment by the Company or its
Subsidiaries shall only be effected pursuant to a Notice of
Termination satisfying the requirements of Section 1.14 of
this Agreement.
Employee
acknowledges that if the Company fails to fulfill any of its
obligations under this Section 3, Employee’s only
recourse is to cause such failure to be considered an Employee
Termination Event if the breach is considered a material breach of
this Agreement and Employee’s damages will be limited to the
payments provided for in Section 4, as applicable.
4.
Severance Compensation :
4.1
Severance Compensation :
(a) If the
Employee experiences a Termination of Employment during the Limited
Period because the Company terminated the Employee’s
employment during the Limited Period other than pursuant to a
Company Termination Event, or because the Employee voluntarily
terminated his employment during the Limited
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