Exhibit 10.40

 

CHIEF EXECUTIVE CHANGE OF CONTROL AND SEVERANCE AGREEMENT

 

This Chief Executive Officer Change of Control and Severance Agreement (the
“Agreement”) is made and entered into as of September 27, 2005, by and between
Conor Medsystems, Inc., a Delaware corporation (the “Company”), and Frank
Litvack, M.D. (the “Executive”).

 

WHEREAS, the Company’s Board of Directors (the “Board”) has determined that it
would be in the best interests of the Company and its stockholders to provide
for certain severance benefits in the event the Executive’s employment is
terminated in order to align further the interests of the Executive with those
of the stockholders of the Company;

 

NOW, THEREFORE, in consideration of the Executive’s continued employment with
the Company, the Company and the Executive hereby agree as follows:

 

1. DEFINITIONS. The following terms in this Agreement shall have the meanings
set forth below:

 

1.1 “Change of Control” shall mean (i) the consummation of a merger,
reorganization or other transaction or series of related transactions following
which the stockholders of the Company immediately prior to the transaction own
less than 50% of the total voting power represented by the voting securities of
the surviving entity (or its parent) outstanding immediately after the
transaction, and the directors serving on the Board immediately prior to such
transaction fail to constitute a majority of the board of directors of the
surviving entity (or its parent) immediately after such transaction; or (ii) the
consummation of the sale or disposition by the Company of all or substantially
all of the Company’s assets.

 

1.2 “Cause” shall mean (i) the Executive’s material failure to perform the
Executive’s assigned duties or responsibilities (other than a material failure
resulting exclusively from the Executive’s disability) or breach of any
statutory duty the Executive owes to the Company after receipt of notice thereof
from the Board or individual to whom the Executive reports describing the
Executive’s failure to perform such duties or responsibilities or breach and
failure of the Executive to cure such failure or breach within thirty (30) days
after such notice; (ii) the Executive’s refusal or failure to follow the lawful
and reasonable directions of the Board or individual to whom the Executive
reports, which refusal or failure is not cured within thirty (30) days following
delivery of a written notice of such conduct to the Executive; (iii) the
Executive engaging in any act of dishonesty, fraud or misrepresentation, which
results or is intended to result in material harm to the Company’s business;
(iv) the Executive’s violation of any federal or state law or regulation
applicable to the Company’s business, which results or is intended to result in
material harm to the Company’s business; (v) the Executive’s breach of any
confidentiality agreement, invention assignment agreement or any other contract
or agreement between the Executive and the Company (including but not limited to
this Agreement); (vi) the Executive’s attempted commission of or participation
in a fraud against the Company, or any material act of dishonesty against the
Company; or (vii) the Executive’s conviction of, or plea of nolo contendere to,
any felony involving fraud, dishonesty or moral turpitude.

 

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1.3 “Constructive Termination” shall mean the resignation of the Executive due
to the occurrence of any of the following without the Executive’s consent:

 

(a) ceasing to serve as a Chief Executive Officer of a publicly traded company;

 

(b) a material reduction in the Executive’s duties, position or responsibilities
relative to the Executive’s duties, position or responsibilities in effect
immediately prior to the effective date of the Change of Control; provided,
however, that a change in the Executive’s title or reporting relationships shall
not in and of themselves (or collectively) constitute a Constructive
Termination;

 

(c) a material reduction by the Company in the Executive’s annual base salary as
in effect on the effective date of the Change of Control or as increased
thereafter; provided, however, that Constructive Termination shall not be deemed
to have occurred in the event of a reduction in the Executive’s annual base
salary that is pursuant to a salary reduction program affecting substantially
all of the executive officers or employees of the Company and that does not
adversely affect the Executive to a greater extent than other similarly situated
employees; or

 

(d) a relocation of the Executive’s primary business office to a location more
than fifty (50) miles from the location at which the Executive performed the
Executive’s duties as of the effective date of the Change of Control, except for
required travel by the Executive with respect to the Company’s business to an
extent substantially consistent with the Executive’s business travel obligations
prior to the effective date of the Change of Control.

 

1.4 “Severance Benefits” shall mean (a) Severance Payments and (b) acceleration,
equal to the number of shares that would have vested if the Executive’s
employment as CEO had continued for twelve (12) months after the employment
termination date, of the shares subject to the Executive’s stock option grants.

 

1.5 “Severance Payments” shall mean severance in the form of salary continuation
for twelve (12) months at the base salary rate in effect as of the Executive’s
employment termination date, subject to standard payroll deductions and
withholdings and paid on the Company’s normal payroll dates.

 

1.6 “Stock Awards” shall mean any and all stock awards granted to the Executive
by the Company to acquire capital stock of the Company, whether granted prior to
or after the date of this Agreement (other than any stock awards granted to the
Executive pursuant to a written stock award agreement which expressly provides
that the terms and conditions of this Agreement shall not apply to such stock
awards).

 

2. CHANGE OF CONTROL SEVERANCE BENEFITS.

 

2.1 If one month prior to or within thirteen (13) months after the effective
date of a Change of Control, the Executive is either terminated by the Company
without Cause or suffers a Constructive Termination; and, in either case, the
Executive provides the Company with a signed general release of all claims in
substantially the form attached hereto as Exhibit A and allows this release to
become effective, then the Executive shall be eligible for the following
severance benefits:

 

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(a) Severance Payments. The Company will pay the Executive severance in an
amount equal to the Executive’s annual base salary as in effect immediately
prior to the Change of Control plus the Executive’s annual target bonus as in
effect immediately prior to the Change of Control, the sum of which shall then
be multiplied by 1. This amount will be subject to standard payroll deductions
and withholdings, and will be paid in semi-monthly installments beginning on the
first payroll date after the Executive’s release of claims becomes effective,
and continuing for 12 months thereafter (the “Severance Period”).

 

(b) Health Insurance Payments. If, following the termination of Executive’s
employment, the Executive timely elects continued group health insurance
coverage under the federal COBRA law or similar state laws, if applicable, the
Company will reimburse the Executive’s COBRA premium costs to continue such
coverage at the level in effect as of the Executive’s termination date through
the earlier of the end of the Severance Period or the date the Executive becomes
eligible for group health insurance coverage through a new employer. If the
Executive’s Severance Period extends beyond the time period for which the
Executive is eligible for coverage under COBRA, then for that post-COBRA period
of time, the Company will reimburse the Executive for the premiums incurred by
the Executive to obtain reasonably consistent coverage. The Executive must
promptly notify the Company in writing if the Executive becomes eligible for
group health insurance coverage through a new employer during the Severance
Period.

 

(c) Accelerated Vesting. All of the then remaining unvested shares of the
capital stock of the Company subject to the Executive’s Stock Awards shall be
deemed immediately vested and exercisable as of the date the Executive’s
employment is terminated.

 

2.2 The Executive will not be eligible for any severance benefits under this
Agreement if the Company (or its successor) terminates the Executive’s
employment for Cause or if the Executive resigns for any reason other than a
Constructive Termination. Further, the Executive will not be eligible for
severance benefits under this Agreement in the event that the Executive’s
employment ends for any reason more than thirteen (13) months after the
effective date of a Change of Control.

 

3. OTHER SEVERANCE BENEFITS

 

Provided that the Executive meets the condition set forth in this paragraph, the
Executive will be eligible to receive the Severance Benefits if,: (a) the
Executive is terminated without Cause by the Company; or (b) the Executive
resigns as CEO due solely to the hiring, or anticipated hiring, of a
specifically identified and viable CEO candidate. In order to be eligible for
the Severance Benefits, the Executive must provide the Company with a signed
general release of all claims in substantially the form attached hereto as
Exhibit A and allows this release to become effective.

 

4. ADJUSTMENTS

 

4.1 Parachute Payments. If any payment or benefit the Executive would receive in
connection with a Change of Control from the Company or otherwise (“Payment”)
would (i) constitute a “parachute payment” within the meaning of Section 280G of
the Internal Revenue

 

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Code (the “Code”), and (ii) but for this sentence, be subject to the excise tax
imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall
be either (1) provided to the Executive in full, or (2) provided to the
Executive as to such lesser extent that would result in no portion of the
Payment being subject to the Excise Tax, whichever of the foregoing amounts,
when taking into account applicable federal, state, local and foreign income and
employment taxes, the Excise Tax, and any other applicable taxes, results in the
receipt by the Executive, on an after-tax basis, of the greater amount of the
Payment, notwithstanding that all or some portion of the Payment may be subject
to the Excise Tax. If a reduction in the Payment is to be made as provided
above, reductions shall occur in the following order unless the Executive elects
in writing a different order (provided, however, that such election shall be
subject to Company approval if made on or after the date that triggers the
Payment or a portion thereof): (i) reduction of cash payments; (ii) cancellation
of accelerated vesting of Stock Awards other than stock options;
(iii) cancellation of accelerated vesting of Stock Awards that are stock
options; and (iv) reduction of other benefits paid to the Executive. If
acceleration of vesting of Stock Awards is to be reduced, such acceleration of
vesting shall be cancelled in the reverse order of date of grant of Executive’s
Stock Awards (i.e., the earliest granted Stock Awards cancelled last) unless the
Executive elects in writing a different order for cancellation.

 

The accounting firm engaged by the Company for general audit purposes as of the
day prior to the effective date of the Change of Control shall perform the
foregoing calculations. If the accounting firm so engaged by the Company is
serving as accountant or auditor for the individual, entity or group effecting
the Change of Control, the Company shall appoint a nationally recognized
accounting firm to make the determinations required hereunder. The Company shall
bear all expenses with respect to the determinations by such accounting firm
required to be made hereunder. Such accounting firm may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of the Code
and other applicable legal authority.

 

The accounting firm engaged to make the determinations hereunder shall provide
its calculations, together with detailed supporting documentation, to the
Executive and the Company within fifteen (15) calendar days after the date on
which the Executive’s right to a Payment is triggered (if requested at that time
by the Executive or the Company) or such other time as requested by the
Executive or the Company. If the accounting firm determines that no Excise Tax
is payable with respect to a Payment, it shall furnish the Executive and the
Company with an opinion reasonably acceptable to the Executive that no Excise
Tax will be imposed with respect to such Payment. Any good faith determinations
of the accounting firm made hereunder shall be final, binding and conclusive
upon the Executive and the Company.

 

4.2 Application of Section 409A. In the event that the Company determines that
any cash severance payment benefit provided under Sections 2.1(a) or 3 or
continued group health insurance coverage benefit provided under Section 2.1(b)
fails to satisfy the distribution requirement of Section 409A(a)(2)(A) of the
Code as a result of Section 409A(a)(2)(B)(i) of the Code, the payment of such
benefits shall be accelerated to the minimum extent necessary so that the
benefit is not subject to the provisions of Section 409A(a)(1) of the Code. (The
payment schedule as revised after the application of the preceding sentence
shall be referred to as the “Revised Payment Schedule.”) However, in the event
the payment of benefits pursuant to the Revised Payment Schedule would be
subject to Section 409A(a)(1) of the Code, the payment of

 

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such benefits shall not be paid pursuant to the original payment schedule or the
Revised Payment Schedule and instead the payment of such benefits shall be
delayed to the minimum extent necessary so that such benefits are not subject to
the provisions of Section 409A(a)(1) of the Code. The Board may attach
conditions to or adjust the amounts paid pursuant to this Section 4.2 to
preserve, as closely as possible, the economic consequences that would have
applied in the absence of this Section 4.2; provided, however, that no such
condition or adjustment shall result in the payments being subject to
Section 409A(a)(1) of the Code.

 

5. GENERAL PROVISIONS.

 

5.1 Prior Agreements. The Executive acknowledges and agrees any prior agreement
between the Executive and the Company providing for or relating to severance
benefits, including, but not limited to, Engagement Letter dated January 1,
2002, the Contract Extension dated August 7, 2003 and the letter agreement dated
March 4, 2004, are hereby expressly superseded and replaced in their entirety by
this Agreement and shall have no further force or effect.

 

5.2 At Will Employment. Nothing in this Agreement alters the Executive’s at-will
employment status. Either the Executive or the Company may terminate the
Executive’s employment relationship at any time, with or without cause or
advance notice. In particular, nothing expressed or implied in this Agreement
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any subsidiary
prior to or following any Change of Control.

 

5.3 Successors and Binding Agreement. This Agreement will be binding upon and
inure to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether or not
through a Change of Control (and such successor shall thereafter be deemed the
“Company” for the purposes of this Agreement). This Agreement will inure to the
benefit of and be enforceable by the Executive’s personal or legal
representatives, executors, administrators, successors, heirs, distributees and
legatees.

 

5.4 Amendments. No provision of the Agreement may be amended, modified or waived
unless such amendment, modification or waiver shall be agreed to in writing and
signed by the Executive and a duly authorized officer of the Company.

 

5.5 Severability. If any provision of the Agreement shall be determined to be
invalid or unenforceable by a court of competent jurisdiction, the remaining
provisions of the Agreement shall be unaffected thereby and shall remain in full
force and effect to the fullest extent permitted by law.

 

5.6 Notices. Any notice or other communication required or permitted under the
Agreement shall be in writing and shall be deemed to have been duly given when
delivered by hand, electronic transmission (with a copy following by hand or by
overnight courier), by registered or certified mail, postage prepaid, return
receipt requested or by overnight courier addressed to the other party. All
notices shall be addressed as follows, or to such other address or addresses as
may be substituted by notice in writing:

 

To the Company:

Conor Medsystems, Inc.

1003 Hamilton Court

Menlo Park, CA 94025

  

To the Executive:

Frank Litvack, M.D.

c/o Conor Medsystems, Inc.

1003 Hamilton Court

Menlo Park, CA 94025

 

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5.7 Governing Law. The Agreement shall be construed, interpreted and governed in
accordance with the laws of the State of California, without reference to rules
relating to conflicts of law.

 

5.8 Independent Counsel. The Executive acknowledges that this Agreement has been
prepared on behalf of the Company by Cooley Godward LLP, counsel to the Company
and that Cooley Godward LLP does not represent, and is not acting on behalf of,
the Executive. The Executive has been provided with an opportunity to consult
with the Executive’s own counsel with respect to this Agreement. The Executive
understands that the Company does not make any representation or warranty as to
the tax treatment of the Executive’s Stock Awards.

 

5.9 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same agreement.

 

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

 

CONOR MEDSYSTEMS, INC.       EXECUTIVE

By:

 

/s/ Michael Boennighausen

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      By:  

/s/ Frank Litvack

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Name:   Michael Boennighausen       Print Name:   Frank Litvack, M.D. Title:  
Chief Financial Officer            

 

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EXHIBIT A

 

RELEASE AGREEMENT

 

Reference is made to that certain Chief Executive Change of Control and
Severance Agreement by and between Conor Medsystems, Inc. and myself dated
September 27, 2005 (the “Agreement”).

 

I hereby confirm my obligations under the Company’s proprietary information and
inventions agreement.

 

I acknowledge that I have read and understand Section 1542 of the California
Civil Code which reads as follows: “A general release does not extend to claims
which the creditor does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially affected his
settlement with the debtor.” I hereby expressly waive and relinquish all rights
and benefits under that section and any law of any jurisdiction of similar
effect with respect to my release of any claims I may have against the Company.

 

In exchange for the benefits I am receiving under the Agreement, I hereby
generally and completely release the Company and its directors, officers,
employees, shareholders, partners, agents, attorneys, predecessors, successors,
parent and subsidiary entities, insurers, affiliates, and assigns from any and
all claims, liabilities and obligations, both known and unknown, that arise out
of or are in any way related to events, acts, conduct, or omissions occurring
prior to my signing this Agreement. This general release includes, but is not
limited to: (1) all claims arising out of or in any way related to my employment
with the Company or the termination of that employment; (2) all claims related
to my compensation or benefits from the Company, including salary, bonuses,
commissions, vacation pay, expense reimbursements, severance pay, fringe
benefits, stock, stock options, or any other ownership interests in the Company;
(3) all claims for breach of contract, wrongful termination, and breach of the
implied covenant of good faith and fair dealing; (4) all tort claims, including
claims for fraud, defamation, emotional distress, and discharge in violation of
public policy; and (5) all federal, state, and local statutory claims, including
claims for discrimination, harassment, retaliation, attorneys’ fees, or other
claims arising under the federal Civil Rights Act of 1964 (as amended), the
federal Americans with Disabilities Act of 1990, the federal Age Discrimination
in Employment Act of 1967 (as amended) (“ADEA”), and the California Fair
Employment and Housing Act (as amended).

 

I acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under ADEA. I also acknowledge that the consideration given
under the Plan for the waiver and release in the preceding paragraph hereof is
in addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (A) my waiver and release do not apply to any rights or claims that may
arise on or after the date I execute this Release Agreement; (B) I have the
right to consult with an attorney prior to executing this Release Agreement;
(C) I have twenty-one (21) days to consider this Release Agreement (although I
may choose to voluntarily execute it earlier); (D) I have seven (7) days
following my execution of this Release Agreement to revoke it; and (E) this

 

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Release Agreement shall not be effective until the date upon which the
revocation period has expired, which shall be the eighth (8th) day after I
execute this Release Agreement.

 

EMPLOYEE Name:  

 

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Date:  

 

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