Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 13th day of September, 2010 by and between
SELECT MEDICAL CORPORATION, a Delaware corporation, having an address at 4714
Gettysburg Road, P.O. Box 2034, Mechanicsburg, PA 17055 (“Employer”), and DAVID
S. CHERNOW, an individual, having an address at 7100 E. Crestline Avenue,
Greenwood Village, CO 80111 (“Employee”).
BACKGROUND:
A. Employer is a leading operator of specialty hospitals and outpatient
rehabilitation clinics in the United States. Employer also provides medical
rehabilitation services on a contracted basis to nursing homes, hospitals,
assisted living and senior care centers, schools and work sites. The businesses
operated by Employer and its affiliates (collectively with Employer, the
“Company Group”) now and in the future are hereinafter referred to collectively
as the “Business”.
B. Employer desires to employ Employee in connection with Employer’s operation
of the Business.
C. Employee desires to be employed by Employer to render services in connection
with the Business, on the terms and conditions specified below.
NOW THEREFORE, in consideration of the mutual agreements contained herein and
intending to be legally bound, the parties hereto hereby agree as follows:
Article 1. CAPACITY AND DUTIES
1.01. Employment; Acceptance of Employment. Employer hereby employs Employee,
and Employee hereby accepts employment by Employer, subject to all the terms and
conditions hereafter set forth.
1.02. Capacity. Employee shall serve as President — Chief Strategy Officer of
Employer. Employee shall report to Employer’s Chief Executive Officer, Executive
Chairman or such other executive as Employer’s Board of Directors shall
designate from time to time.

 

 

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1.03. Responsibilities. During the term of this Agreement, Employee shall devote
his full attention and his best efforts to the performance of the customary
duties and responsibilities consistent with Employee’s position as described in
Section 1.02. Employee agrees to perform Employee’s duties diligently and to the
best of Employee’s abilities, and to perform such additional or different duties
and services appropriate to Employee’s position which Employee from time to time
may be reasonably directed to perform by Employer. In carrying out his duties
hereunder, Employee’s office will be located in Mechanicsburg, Pennsylvania or
such other location of Employer’s corporate headquarters from time to time.
1.04. Authority and Control of Employer. Employee shall at all times comply
with, and be subject to, such reasonable policies, procedures, rules and
regulations as Employer or its parent company may establish from time to time,
including Employer’s Code of Conduct, and all work performed by Employee shall
be subject to review and evaluation by Employer.
1.05. Duties; Conflicts. Employee acknowledges and agrees that Employee owes a
duty of loyalty, fidelity and allegiance to act at all times in the best
interests of the Company Group and to do no act which would injure the Company
Group’s business, interests or reputation. Employee shall not, during the Term,
without the prior written consent of Employer, engage in any other business,
investment or activity, directly or indirectly, whether or not such activity is
pursued for gain, profit, or other pecuniary advantage, which interferes with
the performance of Employee’s duties hereunder or is contrary to the interests
of the Company Group. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly commercial
activities, which interest might in any way adversely affect the Company Group,
involves a possible conflict of interest. In keeping with Employee’s fiduciary
duties to Employer, Employee agrees that Employee shall not knowingly become
involved in a conflict of interest with the Company Group, or upon discovery
thereof, allow such a conflict to continue. Employee shall disclose to Employer
any facts which might involve a conflict of interest. Employee shall request the
written consent of Employer prior to accepting a position as a trustee, officer
or director of any outside organization.
1.06. Time Records. Employee shall submit to Employer such time records as
Employer may require from time to time showing the nature of the services
performed by Employee and the time Employee actually spent performing those
services.
Article 2. TERM OF EMPLOYMENT; TERMINATION
2.01. Term. This Agreement shall commence on the date hereof and remain in
effect, unless this Agreement is terminated by either party hereto, or extended
by the written agreement of both parties hereto, until the third anniversary of
the date hereof. Thereafter, this Agreement shall continue in effect for
additional periods of one (1) calendar year each unless either party hereto
shall, at least sixty (60) days prior to the end of the then current term,
notify the other party hereto of its/his decision to terminate this Agreement
effective at the end of the term in which such notice is given (such period,
including extensions thereof, being hereinafter referred to as the “Term”).

 

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2.02. Termination.
(a) Death and Disability. The employment of Employee under this Agreement shall
immediately terminate (i) upon the death of Employee and (ii) upon the
determination that Employee is “disabled.” For purposes of this Agreement,
“disabled” or “disability” shall mean that (i) Employee is unable to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than twelve (12) months,
(ii) Employee is, by reason of any medically determinable physical or mental
impairment that can be expected to result in death or can be expected to last
for a continuous period of not less than twelve (12) months, receiving income
replacement benefits for a period of not less than three (3) months under an
accident and health plan covering employees of Employer, or (iii) Employee is
determined to be “disabled” under Employer’s long-term disability insurance plan
(provided that the definition of “disability” under such plan complies with the
requirements of Section 409A of the Code and the regulations thereunder). Upon a
termination of employment described in this Section 2.02(a), (i) Employee or his
estate or beneficiaries, as applicable, shall be entitled to receive any base
salary and other benefits earned and accrued under this Agreement prior to the
date of termination, such amount to be paid within seventy five (75) days
following such termination, (ii) any stock options with respect to Employer’s or
Select Medical Holdings Corporation’s (“Holdings”) stock held by Employee at the
time of such termination shall become fully exercisable as of the date of such
termination and shall remain exercisable by Employee or his estate or
beneficiaries, as applicable, until the expiration date of such options,
notwithstanding any contrary vesting schedules otherwise applicable to such
options, and (iii) Employee and his estate and beneficiaries shall have no
further rights to any other compensation or benefits, or any other rights,
hereunder.
(b) Discharge for Cause. The employment of Employee under this Agreement shall
terminate immediately if the Chief Executive Officer or Executive Chairman of
Employer discharges Employee for cause. For purposes of this Agreement, “cause”
shall mean: (i) the willful and continued failure by Employee to substantially
perform his duties hereunder (other than any such failure resulting from
Employee’s incapacity due to physical or mental illness), (ii) the engaging by
Employee in willful or reckless misconduct which is demonstrably and materially
injurious to Employer monetarily or otherwise, or (iii) the conviction of
Employee of a felony involving moral turpitude. For purposes of this
Section 2.02(b), an act, or failure to act, on Employee’s part shall be
considered “willful” or “reckless” only if done, or omitted to be done, by his
not in good faith and without a reasonable belief that his action or omission
was in the best interest of Employer. Employee’s employment shall not be deemed
to have been terminated for cause unless Employer shall have given or delivered
to Employee (i) reasonable notice setting forth the reasons for Employer’s
intention to terminate Employee’s employment for cause, (ii) an opportunity for
Employee to cure any such breach during the 30-day period after Employee’s
receipt of such notice, (iii) a reasonable opportunity, at any time during the
30-day period after Employee’s receipt of such notice, for Employee, together
with his counsel, to be heard before the Board of Directors, and (iv) a Notice
of Termination (as defined in Section 2.02(c)) stating that, in the good faith
opinion of not

 

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less than a majority of the entire membership of the Board of Directors,
Employee was guilty of the conduct set forth in any of clauses (i), (ii) or
(iii) of the second sentence of this Section 2.02(b). If Employer terminates
Employee’s employment for cause pursuant to this Section 2.02(b), (i) Employer
shall pay to Employee, within seventy five (75) days following such termination,
any base salary and other benefits earned and accrued under this Agreement prior
to the termination of employment, excluding any unpaid bonuses, whether or not
earned or accrued, and (ii) Employee shall have no further rights to
compensation or benefits, or any other rights, hereunder.
(c) Notice of Termination. Any termination of Employee’s employment, other than
a termination by reason of death, shall be communicated by Notice of Termination
to the other party hereto. For purposes of this Agreement, a “Notice of
Termination” means a written notice which (i) indicates the specific termination
provision of this Agreement relied upon, (ii) if applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee’s employment under the provision so indicated, and
(iii) specifies the termination date (which date shall, except as otherwise
expressly provided in this Article 2, be not more than fifteen (15) days after
the giving of such Notice). In the event of a termination by Employer for cause,
the Notice of Termination shall not be effective unless preceded by satisfaction
of the procedural requirements set forth in Section 2.02(b) hereof.
(d) Certain Terminations. Employer may terminate Employee’s employment hereunder
at any time for any reason or for no reason by providing a Notice of Termination
in accordance with Section 2.02(c). If Employee’s services are terminated by
Employer for any reason other than for cause as defined in Section 2.02(b)
hereof and other than due to death or disability, except as provided in
Section 5.01: (i) Employer shall pay to Employee any base salary and other
benefits earned and accrued under this Agreement prior the date of termination,
such amount to be paid within seventy five (75) days following such termination,
(ii) Employer will continue to pay Employee on its regular payroll dates, for a
period of twelve (12) months following such termination, his base salary as of
the date of such termination, with such payments to begin on Employer’s first
regular payroll date of the seventh month following such termination of
employment; provided, that, such first payment shall include an amount equal to
Employee’s base salary for the period between the date of termination and the
first regular payroll date of the seventh month following such termination,
(iii) Employee will not continue to accrue employee benefits, such as paid time
off, after Employee’s termination under this Section 2.02(d), and (iv) Employee
shall have no further rights hereunder.
Article 3. COMPENSATION
3.01. Cash Compensation. (a) During the period of Employee’s services hereunder,
as compensation for such services to Employer pursuant to this Agreement,
Employer shall pay to Employee a base salary of $640,000 per year in equal
bi-weekly installments. The Board of Directors of Employer may, in its sole
discretion from time to time, increase the base compensation to be paid to
Employee as provided in this Article 3. Employee will also be eligible to
receive bonus compensation, annual or otherwise, in an amount to be determined
by Employer’s Board of Directors in its sole discretion, with any such bonus to
be paid by March 15th of the year following the year in which it was earned.

 

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(b) Employer will pay Employee, within thirty (30) days following the
commencement of the Term, a one-time relocation bonus in the gross amount of
$150,000 (the “Relocation Bonus”). The Relocation Bonus will be repaid by
Employee in full in the event that Employee does not remain continuously
employed by Employer during the first full year of the Term.
(c) All cash compensation paid to Employee will be subject to tax and payroll
withholdings and deductions.
3.02. Employee Benefits. During the Term, in addition to the compensation paid
to Employee pursuant to Section 3.01 above, Employee shall be entitled to any
employment and fringe benefits under Employer’s employment policies and employee
benefit plans, as they may exist from time to time, and which are made available
by Employer to other similarly situated employees, it being understood that
Employee shall be required to make the same contributions and payments in order
to receive any of such benefits as may be required of such similarly situated
employees. Nothing in this Agreement shall be construed to obligate Employer to
institute, maintain, or refrain from changing, amending or discontinuing any
incentive compensation or employee benefit program or plan, so long as such
actions are similarly applicable to covered employees generally. Employer shall
have no obligation to secure or otherwise fund any of the aforesaid benefits and
arrangements, and each shall instead constitute an unfunded and unsecured
promise to pay money in the future exclusively from the general assets of
Employer.
3.03. Paid Time Off. During the Term, Employee shall be entitled to paid time
off in accordance with Employer’s paid time off policies in effect from time to
time. Vacation schedules will be coordinated and approved by Employer so as to
facilitate the steady ongoing operation of the Business.
3.04. Income and Employment Taxes. Employee shall be an employee of Employer for
all purposes. Employer shall withhold amounts from Employee’s compensation in
accordance with the requirements of applicable law for federal and state income
tax, FICA, FUTA, and other employment or payroll tax purposes. It shall be
Employee’s responsibility to report and pay all federal, state, and local taxes
arising from Employee’s receipt of compensation hereunder.
3.05. Expenses. Employer shall pay or reimburse Employee for all ordinary and
reasonable out-of-pocket expenses actually incurred (and, in the case of
reimbursement, paid) by Employee in the performance of Employee’s services under
this Agreement; provided that Employee submits proof of such expenses, with the
properly completed forms as prescribed from time to time by Employer in
accordance with Employer’s policies and procedures. Employer shall also pay or
reimburse Employee for the reasonable cost of moving his family’s household
furniture, furnishings and goods from Colorado to Pennsylvania.

 

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Article 4. CERTAIN COVENANTS
4.01. Non-Competition. (a) Employee acknowledges that the services to be
rendered by Employee to Employer are of a special and unique character. Employee
agrees that, in consideration of his employment hereunder, Employee shall not,
prior to two (2) years following the date of termination of Employee’s
employment by any member of the Company Group (i) engage, whether as principal,
agent, investor, distributor, representative, stockholder, employee, consultant,
volunteer or otherwise, with or without pay, in any activity or business
venture, anywhere within 50 miles of Employer’s facilities or any other Company
Group facility or customer in which, or to whom, Employer has provided services
hereunder during the twelve (12) months prior to the date of termination, which
is competitive with the business conducted by the Company Group on the date of
termination; (ii) solicit or entice or endeavor to solicit or entice away any of
the clients, referral sources or payors or customers of any member of the
Company Group, either on such Employee’s own account or for any other person,
firm, corporation or organization; (iii) employ any person who was a director,
officer or employee of any member of the Company Group or any person who is or
may be likely to be in possession of any confidential information or trade
secrets relating to the business of any member of the Company Group; or (iv) at
any time, take any action or make any statement the effect of which would be,
directly or indirectly, to impair the goodwill of any member of the Company
Group or the business reputation or good name of any member of the Company Group
or the business reputation or good name of any member of the Company Group, or
be otherwise detrimental to the Company Group, including any action or statement
intended, directly or indirectly, to benefit a competitor of any member of the
Company Group.
(b) The two (2) year restrictive period above shall be deemed tolled during any
period in which Employee is in violation of Employee’s obligations under this
Section 4.01. Employee agrees that, in any action to enforce Employee’s
obligations, the Company Group shall be entitled to a full two (2) year period
of protection, which two (2) year period shall be determined without including
any period of Employee’s breach.
4.02. Confidentiality. Employee covenants and agrees that he will not, to the
detriment of Employer, at any time during or after the termination of his
employment hereunder, reveal, divulge or make known to any person (other than
Employer or its officers, employees or agents who need to know such information,
or as a result of legal process) or use for his own account or the account of
any other person any confidential or proprietary records, data, trade secrets,
customer lists or any other confidential or proprietary information whatsoever
(the “Confidential Information”) used by Employer and made known (whether or not
with the knowledge and permission of Employer, and whether or not developed,
devised or otherwise created in whole or in part by the efforts of Employee) to
Employee by reason of his association with Employer. Employee further covenants
and agrees that he shall retain all such knowledge and information which he
shall acquire or develop respecting such Confidential Information in trust for
the sole benefit of Employee and its successors and assigns.

 

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4.03. Non-Solicitation. During the Term, and for a period of two (2) years after
the expiration or earlier termination of this Agreement, Employee shall not,
directly or indirectly, through any entity, family member or agent, without the
express written consent of Employer (which consent may be withheld in Employer’s
sole discretion), solicit or contact, cause others to solicit or contact, with a
view to engaging or employing, nor shall Employee actually engage or employ, any
person who is, or at any time was, an employee or consultant of the Company
Group.
4.04. Property of Employer. All written materials, records and documents made by
Employee or coming into his possession concerning the Business or affairs of
Employer shall be the sole property of Employer and, upon the termination of
Employee’s employment hereunder or upon request of Employer at any time,
Employee shall promptly deliver the same to Employer and shall retain no copies
thereof.
4.05. Enforcement; Remedies. Employee acknowledges and agrees that any breach by
his of any of the provisions of Sections 4.01 through 4.04 (the “Restrictive
Covenants”) would result in irreparable injury and damage for which money
damages would not provide an adequate remedy. Therefore, if Employee breaches,
or threatens to commit a breach of, any of the Restrictive Covenants, Employer
shall have the right and remedy (upon compliance with any necessary
prerequisites imposed by law upon the availability of such remedy), which shall
be independent and severally enforceable, and which shall be in addition to, and
not in lieu of, any other rights and remedies available to Employer under law or
in equity (including, without limitation, the recovery of damages), to have the
Restrictive Covenants specifically enforced (without posting bond and without
the need to prove damages) by any court having equity jurisdiction, including,
without limitation, the right to an entry against Employee of restraining orders
and injunctions (preliminary, mandatory, temporary and permanent) against
violations, threatened or actual, and whether or not then continuing, of such
covenants. The existence of any claim or cause of action by Employee, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement of the Restrictive Covenants.
4.06. In General. If any decision-maker determines that any of the covenants
contained in this Agreement, including, without limitation, any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographical scope of such provision, the duration or scope of such
provision, as the case may be, shall be reduced so that such provision becomes
enforceable and, in its reduced form, such provision shall then be enforceable
and shall be enforced. The parties hereto understand that each of the covenants
of Employee contained in this Article 4 is an essential element of this
Agreement. Employee’s obligations under this Article 4 shall survive the
termination of this Agreement.

 

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Article 5. CHANGE OF CONTROL
5.01. Payment Due.
(a) Certain Terminations Following a Change of Control. If, during the Term,
there should be a Change of Control (as defined in Section 5.02), and within the
one-year period immediately following such Change of Control, (A) Employee’s
employment with Employer is terminated by Employer without cause as defined in
Section 2.02(b) (and not due to death or disability) or (B) Employee terminates
Employee’s employment with Employer for Good Reason (as defined below) or
because (1) there is a reduction, by Employer, in Employee’s compensation from
that in effect immediately prior to such Change of Control or (2) Employee is
required by Employer to relocate Employee’s principal place of employment with
Employer to a location anywhere other than Employer’s principal executive
offices in (or within 25 miles of) Mechanicsburg, Pennsylvania (except for
required travel on Employer’s business in a manner that is substantially
consistent with Employee’s business travel obligations immediately prior to such
Change of Control), then in lieu of any compensation pursuant to
Section 2.02(d), (A) Employer will pay to Employee any base salary and other
benefits earned and accrued under this Agreement within seventy-five (75) days
after the termination date, (B) Employer will pay to Employee a lump sum cash
payment equal to his total cash compensation for base salary and bonus for the
immediately preceding three completed calendar years (or equal to three times
his average total annual cash compensation for base salary and bonus for his
years of service to Employer, if less than three years), such payment to be made
on the first payroll date coincident with or next following the sixtieth (60th)
day after such termination, (C) Employer agrees that such termination would not
be voluntary or a termination “for cause” as contemplated by any stock option or
other incentive plans of Employer or Holdings and any stock option or other
award agreements entered into between Employer or Holdings and Employee
(including agreements that may be entered into after the date hereof), and that
all unvested, unexercised stock options to purchase stock of Employer or
Holdings held by Employee shall become fully vested and exercisable as of the
date of such termination, and Employee shall have the right to exercise such
options at any time prior to the expiration date of such options,
notwithstanding any contrary vesting schedule otherwise applicable to such
options, and (D) Employee shall have no further rights to compensation or
benefits, or any other rights, hereunder.
(b) Certain Termination Prior to a Change of Control. If (i) Employee’s
employment is terminated by Employer other than for cause (and not due to death
or disability) during the Term, (ii) within the six-month period following such
termination, a Change of Control occurs, and (iii) Employee reasonably
demonstrates that such termination of employment was at the request of a third
party who has taken steps reasonably calculated to effect the Change of Control,
then in lieu of the payments described in Section 2.02(d)(ii) hereof, Employer
shall pay to Employee an amount equal to Employee’s total cash compensation for
base salary and bonus for the immediately preceding three completed calendar
years (or equal to three times his average total annual cash compensation for
base salary and bonus for his years of service to Employer, if less than three
years), with such amount to be paid in equal installments on each of Employer’s
regular payroll dates over the twelve (12) month period following such
termination; provided, however, that the commencement of such payments shall be
delayed until the first payroll date of the seventh month following such
termination; provided further, that, the first payment made hereunder shall
include the payments that otherwise would be made had the delay described in the
preceding clause not been imposed.

 

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5.02. Definition of Change of Control.
(a) A “Change of Control” shall mean:
(i) the acquisition during any period of twelve (12) consecutive months, by any
Person (as defined below), including a Group (as defined below), of all or
substantially all of the assets of the Employer or Holdings (on a consolidated
basis), other than a sale or disposition by the Employer or Holdings of all or
substantially all of such entity’s assets to an entity, at least 50% of the
combined voting power of the voting securities of which are owned by Persons in
substantially the same proportion as their ownership of the Employer or
Holdings, as applicable, immediately prior to such sale or disposition, provided
that any such transaction satisfies the requirements of Treasury
Regulation Section 1.409A-3(i)(5)(vii);
(ii) any Person including a Group, but excluding any stockholder of the Employer
or Holdings who immediately prior to the Public Offering beneficially owned 12%
or more of the Employer’s or Holdings’ outstanding shares, becomes the
beneficial owner of shares of more than 50% of the total number of votes that
may be cast for the election of directors of the Employer or Holdings, as
applicable, provided that such transaction satisfies the requirements of
Treasury Regulation Section 1.409A-3(i)(5)(v);
(iii) during any period of twelve (12) consecutive months, the individuals who
served on the Board of Directors of Holdings (the “Holdings Board”) as of the
beginning of such period (the “Holdings Incumbent Directors”) cease for any
reason to constitute at least a majority of the Holdings Board; provided,
however, that any Person who becomes a director subsequent to the effective date
hereof, whose election or nomination for election was approved by a vote of at
least a majority of the directors then constituting the Holdings Incumbent
Directors shall for purposes of this clause (iii) be considered a Holdings
Incumbent Director; provided further, that such events satisfy the requirements
of Treasury Regulation Section 1.409A-3(i)(5)(vi)(2); or
(iv) the consummation of a merger or consolidation of the Employer or Holdings
in which the stockholders of the Employer or Holdings, as applicable,
immediately prior to such merger or consolidation, would not, immediately after
such merger or consolidation, beneficially own, directly or indirectly, shares
representing in the aggregate at least 50% of the combined voting power of the
voting securities of the corporation issuing cash or securities in the merger or
consolidation (or of its ultimate parent corporation, if any), provided that
such transaction satisfies the requirements of Treasury
Regulation Section 1.409A-3(i)(5)(v).
Notwithstanding the foregoing, in no event shall a “Change of Control” be deemed
to occur for purposes of this Agreement unless the total consideration for the
transaction or transactions which would, absent this paragraph, constitute a
Change of Control, has a value that is equal to or greater than $3.75 per share
of common stock of the Employer or Holdings, as applicable (the “Minimum
Value”); provided, however, that such Minimum Value shall be adjusted to reflect
changes to such common stock in the event of a stock dividend, stock split,
reverse stock split, stock combination, reclassification, recapitalization, or
other similar change in the structure or capitalization of the Employer or
Holdings.

 

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(b) For purposes of this Section 5.02, (A) the terms “Person,” “Group,”
“Beneficial Owner,” and “beneficially own” have the meanings set forth in
Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder, (B) the term “Voting Securities” shall
mean securities, the holders of which are ordinarily, in the absence of
contingencies, entitled to elect the corporate directors (or persons performing
similar functions) and (C) the term “Public Offering” means the consummation of
the first public offering of shares of common stock of the Employer or Holdings
after December 18, 2008 in a firm commitment underwritten offering registered
under the Securities Act of 1933, as amended, on Form S-1 or its successor
forms.
(c) For purposes of Article 5, Employee shall have “Good Reason” to terminate
Employee’s employment after a Change of Control if (i) Employee makes a good
faith determination that, as a result of such Change of Control, Employee is
unable to perform Employee’s services effectively, or there is any significant
adverse change in Employee’s authority or responsibilities, as performed
immediately prior to such Change of Control, or (ii) Employer’s obligations
under this Article 5 are not assumed by the acquiring entity or any of its
affiliates in the event of a Change of Control.
5.03. Claims Procedure. Any claim for benefits under Article 5 of this Agreement
by Employee shall be made in writing and sent to Employer at its principal
offices in Mechanicsburg, Pennsylvania, or such other place as Employer shall
hereafter designate in writing. If Employee, or any beneficiary following
Employee’s death (collectively, the “Claimant”), believes he has been denied any
benefits or payments under Article 5 of this Agreement, either in total or in an
amount less than the full benefit or payment to which the Claimant would
normally be entitled, Employer shall advise the Claimant in writing of the
amount of the benefit, or payment, if any, and the specific reasons for the
denial within thirty (30) days of the receipt of the Claimant’s claim. Employer
shall also furnish the Claimant at that time with a written notice containing:
(a) A specific reference to pertinent provisions of this Agreement;
(b) A description of any additional material or information necessary for the
Claimant to perfect the claim if possible, and an explanation of why such
material or information is needed; and
(c) An explanation of the claim review procedure set forth in this Section 5.03.

 

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Within sixty (60) days of receipt of the information described above, the
Claimant shall, if further review is desired, file a written request of
reconsideration of Employer’s decision with the Appeal Committee. The Appeal
Committee shall consist of those individuals who were serving as the
Compensation Committee of the Board of Directors of Employer immediately prior
to the Change of Control. The Appeal Committee shall select from its membership
a chairperson and a secretary and may adopt such rules and procedures as it
deems necessary to carry out its functions. In the event any individual is
unable to serve on the Appeal Committee, then the chairperson of the Appeal
Committee shall appoint a successor provided such successor must have been a
member of the Board of Directors of Employer prior to the Change of Control
(“Prior Board Member”). So long as the Claimant’s request for review is pending
with the Appeal Committee (including such 60-day period), the Claimant, or his
duly authorized representative, may review pertinent documents and may submit
issues and comments in writing to the Appeal Committee. A final and binding
decision shall be made by the Appeal Committee within thirty (30) days of the
filing by the Claimant of the request for reconsideration. The Appeal
Committee’s decision shall be conveyed to the Claimant in writing and shall
include specific reasons for the decision and specific references to the
pertinent provisions of this Agreement on which the decision is based. The
Appeal Committee shall discharge its duties under this claims procedure in
accordance with the fiduciary standards of Employee Retirement Income Security
Act of 1974, as amended (“ERISA”), and in doing so, to the extent permitted by
law, shall be indemnified and held harmless by Employer (to the extent not
indemnified or saved harmless under any liability insurance or other
indemnification arrangement with Employer) for or against all liability to which
the Appeal Committee may be subjected by reason of any act done in good faith
with respect to the adjudication of any claim under Article 5 of this Agreement,
including reasonable expenses. Notwithstanding anything to the contrary herein
contained, the Claimant shall be entitled to submit his claim for determination
to any court having competent jurisdiction regardless of whether he has first
exercised his right to have Employer’s decision reconsidered by the Appeal
Committee.
Article 6. CERTAIN ADDITIONAL PAYMENTS
6.01. If all, or any portion, of the payments or other benefits provided under
any section of this Agreement (including, without limitation, Sections 2 and 5
hereof), either alone or together with other payments and benefits which
Employee receives or is entitled to receive from the Employer or its affiliates,
(whether or not under an existing plan, arrangement or other agreement)
(collectively the “Payments”) would constitute an excess “parachute payment”
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the “Code”) and would result in the imposition on Employee of an excise
tax under Section 4999 of the Code, (such excise tax, together with any interest
and penalties related thereto, are hereinafter collectively referred to as the
“Excise Tax”) then, in addition to any other benefits to which Employee is
entitled under this Agreement, Employee shall be entitled to receive an
additional payment (a “Gross-Up Payment”) in cash, in an amount such that after
payment by Employee of all taxes including, without limitation, (i) any income
taxes (and any interest and penalties imposed with respect thereto) and (ii) any
Excise Tax, imposed upon the Gross-Up Payment, Employee retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Unless
Employer and Employee otherwise agree in

 

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writing, any determination required under this Article 6, including without
limitation, the amount of payments under this Article 6 (the “Parachute Gross-
up”) shall be computed and made in writing by Employer’s then independent public
accountants (the “Accountants”), whose determination shall be, subject to
Employee’s reasonable approval of the calculations required under this
Article 6, conclusive and binding upon Employee and Employer for all purposes.
For purposes of making the calculations required by this Article 6, the
Accountants may rely on reasonable, good faith interpretations concerning the
application of Section 280G and 4999 of the Code. Employee and Employer shall
furnish to the Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this Article 6.
Employer shall bear all costs the Accountants may reasonably incur in connection
with any calculations contemplated by this Article 6.
6.02. As a result of the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the Accountants hereunder, it
is possible that (i) Gross-Up Payments which will not have been made by the
Employer should have been made (an “Underpayment”), consistent with the
calculations required to be made hereunder or that (ii) Gross-Up Payments that
have been made will be determined to have been in excess of the Gross-Up
Payments actually required (an “Overpayment”). In the event that Employee is
required to make a payment of any Excise Tax, the Accountants shall determine
the amount of the Underpayment that has occurred and any such Underpayment shall
be promptly paid by the Employer to or for the benefit of Employee. In the event
that it is finally determined that an Overpayment has occurred, Employee shall
promptly, and in any event within thirty (30) days of such determination, refund
the amount of the Overpayment, plus any interest actually paid to Employee with
respect to the Overpayment, to the Employer. The Employer shall have the right
with respect to the determination of either an Underpayment or an Overpayment to
require Employee to appeal the assertion of any Underpayment or to claim, and
sue for, a refund of any Excise Tax paid by Employee upon any Payment or
Gross-Up Payment, provided that the Employer shall promptly reimburse Employee
for all expenses, including counsel and accounting fees, incurred in connection
with any such proceeding. Alternatively, the Employer may undertake any such
proceeding, and Employee shall cooperate with the Employer in any such
proceeding.
6.03. Notwithstanding anything contained herein to the contrary, the Gross-Up
Payment and any Underpayment shall be made promptly after Employee remits the
related taxes, but in no event later than the last day of the taxable year
following the taxable year in which Employee pays the taxes giving rise to such
Gross-Up Payment or Underpayment.
Article 7. MISCELLANEOUS
7.01. Assignment and Successors. This Agreement shall not be assignable by
Employee; and shall be assignable by Employer only to a person, firm or
corporation which may become a successor in interest to Employer with respect to
the Business or a substantial portion of the Business presently operated by it.
Employer will require any purchaser of all or substantially all of the assets of
Employer to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that Employer would be required to perform if no
such purchase had taken place. As used in this Agreement, Employer shall mean
Employer as hereinbefore defined and any purchaser of its assets as aforesaid
which executed and delivers the agreement provided for herein.

 

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7.02. Release. As a condition to the payment of any amount required under
Section 2.02(d) or Section 5.01 hereof, Employee shall deliver to Employer a
general release of liability of Employer and its officers and directors in a
form reasonably satisfactory to Employer, such that such release is effective,
with all revocation periods having expired unexercised, within sixty (60) days
after the date of Employee’s termination.
7.03. Withholding. All payments made pursuant to this Agreement shall be subject
to withholding of applicable deductions and income and employment taxes.
7.04. Entire Agreement. This writing represents the entire agreement and
understanding of the parties with respect to the subject matter hereof, and
supersedes all prior agreements, written or oral, with respect thereto. This
Agreement may not be altered or amended except by an agreement in writing.
7.05. Binding Effect. Subject to Section 7.01, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, assigns, heirs, executors and administrators. If any provision of
this Agreement shall be or become illegal or unenforceable in whole or in part
for any reason whatsoever, the remaining provisions shall nevertheless be deemed
valid, binding and subsisting.
7.06. Notices. Any notice or other communication required or permitted hereunder
shall be in writing and shall be delivered personally, sent by facsimile
transmission or sent by certified, registered or express mail, postage prepaid.
Any such notice shall be deemed given when so delivered personally or sent by
facsimile transmission or, if mailed, five (5) days after the date of deposit in
the United States mails to the following addresses:
If to Employee:
David S. Chernow
7100 E. Crestline Avenue
Greenwood Village, CO 80111
If to Employer:
Select Medical Corporation
4714 Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel

 

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7.07. Waivers and Amendments. This Agreement may be amended, superseded,
canceled, and the terms hereof may be waived, only by a written instrument
signed by the parties or, in the case of a waiver, by the party waiving
compliance. Except as expressly provided herein, no delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege nor any single or partial exercise of any such right, power
or privilege, preclude any other or further exercise thereof or the exercise of
any other such right, power or privilege.
7.08. Governing Law. This Agreement has been negotiated and executed within the
Commonwealth of Pennsylvania, and the validity, interpretation and enforcement
of this Agreement shall be governed by the laws of Pennsylvania.
7.09. Headings. The headings of paragraphs in this Agreement are for convenience
only; they form no part of this Agreement and shall not affect its
interpretation.
7.10. Section 409A of the Code. This Agreement is intended to comply with Code
Section 409A (to the extent applicable) and the parties hereto agree to
interpret, apply and administer this Agreement in the least restrictive manner
necessary to comply therewith and without resulting in any increase in the
amounts owed hereunder by the Employer. Notwithstanding any other provision of
this Agreement to the contrary, if Employee is a “specified employee” within the
meaning of Code Section 409A and the regulations issued thereunder, and a
payment or benefit provided for in this Agreement would be subject to additional
tax under Code Section 409A if such payment or benefit is paid within six
(6) months after Employee’s “separation from service” (within the meaning of
Code Section 409A), then such payment or benefit required under this Agreement
shall not be paid (or commence) during the six-month period immediately
following Employee’s separation from service except as provided in the
immediately following sentence. In such an event, any payments or benefits that
would otherwise have been made or provided during such six-month period and
which would have incurred such additional tax under Code Section 409A shall
instead be paid to Employee in a lump-sum cash payment on the earlier of (i) the
first regular payroll date of the seventh month following Employee’s separation
from service or (ii) the 10th business day following Employee’s death. If
Employee’s termination of employment hereunder does not constitute a “separation
from service” within the meaning of Code Section 409A, then any amounts payable
hereunder on account of a termination of Employee’s employment and which are
subject to Code Section 409A shall not be paid until Employee has experienced a
“separation from service” within the meaning of Code Section 409A. In addition,
no reimbursement or in-kind benefit shall be subject to liquidation or exchange
for another benefit and the amount available for reimbursement, or in-kind
benefits provided, during any calendar year shall not affect the amount
available for reimbursement, or in-kind benefits to be provided, in a subsequent
calendar. Any reimbursement to which Employee is entitled hereunder shall be
made no later than the last day of the calendar year following the calendar year
in which such expenses were incurred.

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

            SELECT MEDICAL CORPORATION
      By:   /s/ Robert A. Ortenzio         Robert A. Ortenzio,        Chief
Executive Officer        /s/ David S. Chernow       David S. Chernow   

 

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