EXHIBIT 10.4

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (the “Agreement”) dated as of April 15, 2008 (the
“Execution Date”) is made by and between ArQule, Inc., a Delaware corporation
(the “Company”) with its principal offices at 19 Presidential Way, Woburn,
Massachusetts  01801, and Paolo Pucci (“Executive”) whose current principal
residential address is 47 Bonnie Brook Road, Westport, Connecticut 06880.

 

WHEREAS, the Company desires to employ Executive as its Chief Executive Officer
and to enter into an agreement embodying the terms of such employment; and

 

WHEREAS, Executive desires to accept such employment and enter into such an
agreement;

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and for other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the Company and
Executive (collectively, the “Parties”) hereby agree as follows:

 

1.             Term of Employment.  The Company hereby agrees to employ
Executive, and Executive hereby accepts such employment with the Company, upon
the terms and subject to the conditions set forth in this Agreement, for a
period commencing on June 9, 2008 (the “Effective Date”) and continuing for a
period of four (4) years, unless earlier terminated in accordance with the
provisions of Section 5 (the “Employment Term”), provided that the Company shall
provide Executive with no less than ninety (90) days advance written notice in
the event it decides not to extend this Agreement beyond the 4-year Employment
Term or negotiate in good faith a new agreement, and in the event the Company
does not provide such 90-day advance notice, the Company shall pay Executive up
to 90 days of his Base Salary in lieu of such advance notice.

 

2.             Title; Duties.  During the Employment Term, Executive shall serve
as the Chief Executive Officer of the Company, reporting directly to the Board
of Directors of the Company (“Board”).  Executive hereby agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities consistent with such position as the Board shall from time to
time reasonably assign to Executive.  In addition, during the Employment Term,
the Company shall nominate and renominate Executive to serve as a member of the
Board, and Executive understands and agrees that he shall resign the
directorship and any other positions that he may hold with the Company upon the
termination of his employment with the Company for any reason.

 

3.             No Conflict.  During the Employment Term, Executive shall devote
substantially all of his business time and efforts to the performance of his
duties hereunder and shall not, directly or indirectly, engage in any other
business, profession or occupation for compensation or otherwise which would
conflict with the rendition of such duties.

 

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Notwithstanding the foregoing, Executive may engage in other activities, such as
activities involving charitable, educational, religious, trade association,
civic and similar types of organizations, speaking engagements and membership on
the Board of Directors or equivalent of other organizations (“Outside
Activities”), provided that Executive shall obtain the Board’s written consent,
which consent shall not be unreasonably withheld, delayed or conditional, before
engaging in any such Outside Activities and provided further that Executive’s
participation in such Outside Activities shall not be in violation of any of his
obligations to the Company, including but not limited to those set forth in the
Company’s Code of Conduct.  Executive represents and warrants that Exhibit A
attached hereto states all Outside Activities which Executive is participating
in as of the Effective Date, and to which the Company hereby consents.

 

4.             Compensation and Benefits.

 

4.1.          Base Salary.  During the Employment Term, the Company shall pay
Executive for Executive’s services hereunder a base salary at the initial annual
rate of $450,000, payable in substantially equal installments in accordance with
the Company’s usual payment practices and subject to annual review and upward
adjustment by the Company in its sole discretion.  Such amount (as it may be
increased, but not decreased, from time to time in accordance with this
Section 4.1) shall be referred to herein as the “Base Salary.”

 

4.2.          Bonus Compensation.  For each calendar year during the Employment
Term, Executive shall be eligible to receive a discretionary annual cash bonus,
the target amount of which shall be 50 percent of Executive’s Base Salary.  The
award of an annual cash bonus, if any, shall be in the Board’s sole discretion
and shall be based on Company and individual performance.  For calendar year
2008, Executive shall be guaranteed a bonus of $225,000 which shall not be
pro-rated.  The annual cash bonus typically is paid during the first quarter of
the following calendar year, and, except as otherwise expressly provided herein,
Executive must be actively employed with the Company as of the payment date in
order to receive the annual cash bonus, if any.  Executive shall also be
eligible to participate in any and all other bonus plans and packages that are
made available to the Company’s executives, on a basis consistent with
Executive’s position and then-current Base Salary and in accordance with the
policies and practices of the Company and the Board.

 

4.3.          Stock Option Grant.  As further compensation for Executive’s
services hereunder, the Company shall grant to Executive, on the Effective Date,
a stock option (the “Execution Stock Option”) to purchase five hundred thousand
(500,000) shares of the Company’s Common Stock, $0.01 par value per share (the
“Common Stock”), pursuant to the Company’s Amended and Restated 1994 Equity
Incentive Plan (the “Plan”) and in accordance with the terms, and subject to a
vesting schedule pursuant to which twenty-five percent of the shares shall vest
on the Effective Date and twenty-five percent of the shares vesting annually for
each of the next three years commencing on the first anniversary of the
Effective Date, and other conditions, set forth in substantially the form of
Option Certificate attached hereto

 

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as Exhibit B-1.  The method of determining the exercise price of the Execution
Stock Option is set forth in the attached Exhibit C.  In its sole discretion,
the Company may grant to Executive from time to time other stock options to
purchase additional shares of Common Stock, also pursuant to the Plan and such
other terms and conditions set forth at the time of such grant (the Execution
Stock Option and such other stock options, collectively, the “Stock Options”)
and may also grant stock awards.  The Execution Stock Option is intended to be
an “incentive stock option” to the extent permissible under Section 422 of the
Internal Revenue Code of 1986 (the “Code”), including the $100,000 limitation of
Code Section 422(d).

 

4.4.          Restricted Shares.  Upon the approval of the Committee that
administers the Plan, and subject to the terms and conditions of the Plan and
the Restricted Stock Agreement substantially in the form attached hereto as
Exhibit B-2, the Company shall grant to Executive, on the Effective Date,
125,000 shares of the Company’s restricted stock, of which 50% shall become
vested and free of restrictions as of the Effective Date of this Agreement, and
the remaining 50% shall become vested and free of restrictions as of the first
anniversary of the Effective Date.

 

4.5.          Signing Bonus.  Upon execution of this Agreement, Executive shall
be entitled to a signing bonus of $200,000.00 (the “Signing Bonus”).  The
Signing Bonus shall be paid to Executive on the Company’s next regular payroll
date following the Effective Date of this Agreement.

 

4.6.          Executive Benefits.  During the Employment Term and subject to any
contributions therefor generally required of senior executives of the Company,
Executive shall be entitled to receive such employee benefits (including fringe
benefits, 401(k) plan participation, and life, health, dental, accident and
short and long term disability insurance) which the Company may, in its sole and
absolute discretion, make available generally to its senior executives or
personnel similarly situated; provided, however, that it is hereby acknowledged
and agreed that any such employee benefit plans may be altered, modified or
terminated by the Company at any time in its sole discretion without recourse by
Executive.

 

4.7.          Paid Time Off.  Executive shall be entitled to five weeks (25
working days) of paid time off (“PTO”) per annum during the Employment Term,
which will accrue pursuant to the Company’s policies and practices and is to be
taken at such time or times as shall be mutually convenient for the Company and
Executive; provided, however, that the Company may elect to increase the annual
time to which Executive shall be entitled to PTO.  Unused PTO shall be allocated
pursuant to the Company’s policies and practices.

 

4.8.          Business Expenses and Perquisites.  Upon delivery of adequate
documentation of expenses incurred in accordance with the policies and practices
of the Company, Executive shall be entitled to reimbursement by the Company for
reasonable travel, entertainment and other business expenses incurred by
Executive in the

 

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performance of Executive’s duties hereunder in accordance with such policies as
the Company may from time to time have in effect.

 

4.9.          Temporary Housing Allowance.  During the first six (6) months of
the Employment Term, the Company shall provide Executive with a temporary
housing allowance in the gross amount of $2,000 per month, payable on the first
regularly scheduled payroll date of the Company each month.

 

4.10.        Relocation Expenses.  Upon delivery of adequate documentation of
expenses incurred in relocation of Executive’s primary residence to
Massachusetts, the Company shall reimburse Executive, in an amount not to exceed
$100,000, for reasonable expenses incurred by Executive in the course of such
relocation.  Reimbursable expenses include, but shall not be limited to, closing
costs (excluding points), up to a maximum of three percent of the purchase
price, for both the purchase of a new primary residence and the sale of
Executive’s current primary residence and the reasonable costs of moving
Executive’s household goods to a new primary residence, provided that the
Board’s decision on which relocation expenses are reimbursable under this
paragraph shall be conclusive.  Executive shall not be entitled to reimbursement
under this paragraph if he does not submit a request and provide documentation
for such reimbursement within two years of the Effective Date of this
Agreement.  The reimbursement provided under this paragraph shall not apply to
more than one relocation by Executive.  In the event that Executive resigns his
employment with the Company or is terminated for Cause within one year of
receiving any reimbursement as provided under this paragraph, Executive shall be
required to repay to the Company any and all reimbursement amounts received
pursuant to this paragraph.

 

4.11.        Deductions and Withholdings.  Notwithstanding any other provision
of this Agreement, any payments or benefits hereunder shall be subject to the
withholding of such amounts, if any, relating to tax and other payroll
deductions, as the Company reasonably determines it should withhold pursuant to
any applicable law or regulation.

 

4.12.        Annual Review.  Executive shall receive an annual review of his
performance by the Board, or by a Committee of the Board, or both.

 

5.             Termination.

 

5.1.          Without Cause by the Company. The Company may terminate
Executive’s employment hereunder at any time without Cause (as defined in
Section 5.2) upon not less than fourteen (14) days prior written notice from the
Company to Executive.  The effective date of Executive’s termination shall be
referred to herein as the “Termination Date.”  If Executive’s employment is
terminated by the Company pursuant to this Section 5.1, all compensation and
benefits provided to Executive by the Company pursuant to this Agreement or
otherwise shall cease as of the Termination Date, except that the Company shall
pay Executive all Base Salary owed to Executive for work performed prior to the
Termination Date, plus

 

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the cash value of any accrued but unused PTO, as of the Termination Date, plus
the signing bonus pursuant to Section 4.5 of this Agreement, if not previously
paid, and shall grant Executive the Execution Stock Option as provided in
Section 4.3 and subject to Sections 4.3 and 5.1.1 of this Agreement, and the
restricted stock as provided in Section 4.4 and subject to Sections 4.4 and
5.1.1 of this Agreement, both to the extent not previously granted.  In
addition, in the event the Company terminates Executive without Cause after a
calendar year has been completed but before the annual bonus, if any, relating
to that calendar year as provided in Section 4.2 above has been paid, the
Company shall pay Executive such annual bonus amount, if awarded.  For purposes
of clarity, a termination of Executive’s employment by reason of the expiration
of the Employment Term as set forth in Section 1 shall not be considered a
termination without Cause.

 

5.1.1.       The Severance Package.  In the event the Company terminates
Executive’s employment without Cause, and provided that Executive first executes
a general release in a form and of a scope reasonably acceptable to the Company
within sixty (60) days of the Termination Date, the Company shall provide the
following severance benefits to Executive (the “Severance Package”):

 

(a)           A payment (the “Severance Payment”) in the following amount:

 

(i)            An amount equal to Executive’s Base Salary through the end of the
twenty four (24) month period commencing on the Termination Date; plus

 

(ii)           An amount equal to the total bonus, if any, paid by the Company
to Executive with respect to the two (2) years preceding the year in which the
Termination Date occurs, provided that, for purposes of this paragraph only,
Executive shall be deemed to have received his 50 percent of Base Salary bonus
target for any year within such 2-year period in which Executive was not paid a
bonus solely because he was not employed by the Company.  Attached at Exhibit D
is a series of examples of the manner in which this portion of the Severance
Payment shall be calculated.

 

(b)           Payment of the costs associated with continuing the benefits which
Executive is entitled to receive pursuant to Section 4.6 of this Agreement at
the level in effect as of the Termination Date (subject to any employee
contribution requirements applicable to Executive on the Termination Date)
through the twenty four (24) month period commencing on the Termination Date, to
the extent such benefits may continue beyond the Termination Date (for example,
among other things, Executive’s coverage under the Company’s life and disability
insurance policies will terminate as of the Termination Date).

 

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(c)           The Severance Payment shall be paid to Executive in substantially
equal installments, according to the Company’s regular payroll schedule,
beginning on the first regular payroll date following the effective date of the
general release executed by Executive as provided above, subject to Section 5.8
below.

 

(d)           As of the Termination Date, any Stock Option held by Executive
shall become immediately exercisable as to all options shares without regard to
the vesting schedule set forth on the applicable Option Certificate, to the
extent such Stock Option would have vested within the one-year period following
the Termination Date.  Executive shall have one year from the Termination Date
to exercise any vested Stock Option, unless the terms of the applicable grant
documents for any such Stock Option provide for a longer exercise period.  In
addition, on the Termination Date, any shares of Restricted Stock previously
granted shall be vested and shall be free and clear of any restrictions to the
extent such Restricted Stock would have vested and to the extent any such
restrictions would have lapsed during the one year period following the
Termination Date.

 

(e)           For purposes of clarity, in the event Executive does not become an
employee of the Company pursuant to the terms and conditions of this Agreement
as of the Effective Date as a result of the Company’s actions or inactions
(other than as a result of any action or inaction of Executive which would
permit the Company to terminate Executive’s employment for Cause), the Executive
shall be entitled to receive the Severance Package, as well as the signing bonus
pursuant to Section 4.5 of this Agreement, and the Execution Stock Option and
restricted stock as provided in Sections 4.3 and 4.4 of this Agreement,
respectively, which Execution Stock Option and restricted stock shall be subject
to the provisions of this Section 5.1.1 as if Executive had received such
Execution Stock Option and restricted stock prior to the Termination Date. 
However, in lieu of the payment of the costs associated with continuing the
benefits which Executive is entitled to receive pursuant to Section 4.6 of this
Agreement as part of the Severance Package as provided in Section 5.1.1(b), the
Company shall pay the cost of the balance of Executive’s COBRA continuation
coverage from Executive’s prior employer, if elected, for a period of 18 months
or such shorter period as Executive’s COBRA continuation coverage ceases.

 

5.1.2.       Deemed Termination.  For purposes of this Section 5.1, a
“termination without Cause” by the Company shall be deemed to have occurred
where Executive has complied with the “Deemed Termination Process”

 

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(hereinafter defined) following the occurrence of any of the following events (a
“Deemed Termination Condition”) without the Executive’s prior written consent:

 

(a)           A diminution of Executive’s Base salary (other than in connection
with a Company-wide decrease in salary affecting all or substantially all senior
management employees of the Company);

 

(b)           A diminution in Executive’s authority, duties,  responsibilities
or CEO title without Cause;

 

(c)           A material change in the geographic location of Executive’s place
of employment (for purposes of this paragraph, a “material change” shall be
deemed to occur only if the Company relocates Executive’s place of employment by
a distance of more then fifty (50) miles, excluding any relocation to the
Company’s existing offices in Woburn, MA); or

 

(d)           The Company fails to grant the Execution Stock Option or the
restricted stock as provided in Sections 4.3 and 4.4 of this Agreement,
respectively.

 

(e)           The Company materially breaches any of its obligations to
Executive pursuant to this Agreement, including but not limited to its
obligation to nominate and renominate Executive to serve as a member of the
Board.

 

“DEEMED TERMINATION PROCESS” SHALL MEAN THAT (I) THE EXECUTIVE REASONABLY
DETERMINES IN GOOD FAITH THAT A DEEMED TERMINATION CONDITION HAS OCCURRED;
(II) THE EXECUTIVE PROVIDES WRITTEN NOTICE TO THE BOARD OF THE OCCURRENCE OF THE
DEEMED TERMINATION CONDITION WITHIN 45 DAYS OF THE INITIAL OCCURRENCE OF SUCH
CONDITION; (III) THE EXECUTIVE COOPERATES IN GOOD FAITH WITH THE COMPANY’S
EFFORTS, FOR A PERIOD NOT LESS THAN 30 DAYS FOLLOWING SUCH NOTICE (THE “CURE
PERIOD”), TO REMEDY THE DEEMED TERMINATION CONDITION; (IV) NOTWITHSTANDING SUCH
EFFORTS, THE DEEMED TERMINATION CONDITION CONTINUES TO EXIST; AND (V) THE
EXECUTIVE PROVIDES THE COMPANY WITH A NOTICE OF TERMINATION, WHICH ESTABLISHES A
TERMINATION DATE WITHIN 30 DAYS AFTER THE END OF THE CURE PERIOD.  IF THE
COMPANY CURES THE DEEMED TERMINATION CONDITION DURING THE CURE PERIOD, A
“TERMINATION WITHOUT CAUSE” SHALL BE DEEMED NOT TO HAVE OCCURRED.

 

5.2.          For Cause by the Company.  Notwithstanding any other provision of
this Agreement, Executive’s employment hereunder may be terminated by the
Company at any time for Cause.  For purposes of this Agreement, “Cause” shall
mean: (i) Executive’s failure to follow the reasonable instructions of the Board
or otherwise perform Executive’s duties hereunder (other than as a result of a
Disability (as defined in Section 5.3)) for thirty (30) days after a written
demand for performance is delivered to Executive on behalf of the Company, which
demand specifically identifies the manner in which the Company alleges that

 

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Executive has not substantially followed such instructions or otherwise
performed Executive’s duties; (ii) material violation by Executive of the
Company’s Code of Conduct; (iii) Executive’s willful misconduct that is
materially injurious to the Company (whether from a monetary perspective or
otherwise); (iv) Executive’s willful commission of an act constituting fraud
with respect to the Company; (v) conviction of Executive for a felony under the
laws of the United States or any state thereof; or (vi) Executive’s material
breach of Executive’s obligations under Sections 7 or 8 hereof, provided that
the Company first provides Executive with written notice of such material
breach.  A final determination of whether Cause exists under this Agreement,
including but not limited to any determination of whether any act or omission of
Executive constitutes a “material” violation of the Company’s Code of Conduct, a
“material” breach of this Agreement, or is “materially injurious” to the
Company, shall be made by the Board.

 

If Executive’s employment is terminated by the Company for Cause, all
compensation and benefits provided to Executive by the Company pursuant to this
Agreement or otherwise shall cease as of the Termination Date, except that the
Company shall pay Executive all Base Salary owed to Executive for work performed
prior to the Termination Date, plus the cash value of any accrued but unused
PTO, as of the Termination Date.

 

5.3.          Disability.  Subject to the requirements of the Americans with
Disabilities Act, Massachusetts General Laws Chapter 151B and any other
applicable laws, Executive’s employment hereunder may be terminated by the
Company at any time in the event of the Disability of Executive.  For purposes
of this Agreement, “Disability” shall mean the inability of Executive to perform
the essential functions of Executive’s position, with or without reasonable
accommodation, due to physical or mental disablement which continues for a
period of four (4) consecutive months during the Employment Term, as determined
by an independent qualified physician mutually acceptable to the Company and
Executive (or Executive’s personal representative) or, if the Company and
Executive (or such representative) are unable to agree on an independent
qualified physician, as determined by a panel of three physicians, one
designated by the Company, one designated by Executive (or such representative)
and one designated by the two physicians so designated.  If Executive’s
employment is terminated by the Company for Disability, all compensation and
benefits provided to Executive by the Company pursuant to this Agreement or
otherwise shall cease as of the Termination Date, except that (a) the Company
shall pay Executive all Base Salary owed to Executive for work performed prior
to the Termination Date, plus the cash value of any accrued but unused PTO, as
of the Termination Date, plus the signing bonus pursuant to Section 4.5 of this
Agreement, if not previously paid, and shall grant Executive the Execution Stock
Option as provided in Section 4.3 and subject to Sections 4.3 and 5.3 of this
Agreement and the restricted stock as provided in Section 4.4 and subject to
Sections 4.4 and 5.3 of this Agreement, both to the extent not previously
granted; (b) in the event the Company terminates Executive by reason of
Disability after a calendar year has been completed but before the annual bonus,
if any, relating to that calendar year

 

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as provided in Section 4.2 above has been paid, the Company shall pay Executive
such annual bonus amount, if awarded; and (c) provided that Executive first
executes a general release in a form and of a scope reasonably acceptable to the
Company within sixty (60) days of the Termination Date, Executive shall be
entitled to the Severance Package, except that the portion of the Severance
Payment based on Executive’s Base Salary paid as a part of the Severance Package
shall be reduced by the amount of Base Salary, salary continuation (short-term
disability), and cash disability benefits (long-term disability) paid to
Executive for the corresponding period under the Company’s employee benefit
plans as then in effect, and any Stock Option held as of the Termination Date
shall become immediately exercisable as to all option shares without regard to
the vesting schedule set forth on the applicable Option Certificate and shall
have one year from the Termination Date to exercise any vested Stock Option,
unless the terms of the applicable grant documents for any such Stock Option
provide for a longer exercise period, and any shares of Restricted Stock
previously granted shall immediately be free and clear of any restrictions.

 

5.4.          Death.  Executive’s employment hereunder shall automatically
terminate in the event of Executive’s death.  If Executive’s employment is
terminated by the death of Executive, all compensation and benefits provided to
Executive by the Company pursuant to this Agreement or otherwise shall cease as
of the Termination Date, except that (a) the Company shall pay to Executive’s
estate or legal representative all Base Salary owed to Executive for work
performed prior to the Termination Date, plus the cash value of any accrued but
unused PTO, as of the Termination Date, plus the signing bonus pursuant to
Section 4.5 of this Agreement, if not previously paid, and shall grant Executive
the Execution Stock Option as provided in Section 4.3 and subject to Sections
4.3 and 5.4 of this Agreement, and the restricted stock as provided in
Section 4.4 and subject to Section 4.4 and 5.4 of this Agreement, both to the
extent not previously granted, (b) in the event the Company terminates Executive
by reason of Death after a calendar year has been completed but before the
annual bonus, if any, relating to that calendar year as provided in Section 4.2
above has been paid, the Company shall pay Executive such annual bonus amount,
if awarded; and (c) provided that Executive’s estate first executes a general
release in a form and of a scope reasonably acceptable to the Company within
ninety (90) days of the Termination Date, Executive shall be entitled to the
Severance Package, and any Stock Option held as of the Termination Date shall
become immediately exercisable as to all option shares without regard to the
vesting schedule set forth on the applicable Option Certificate and shall have
one year from the Termination Date to exercise any vested Stock Option, unless
the terms of the applicable grant documents for any such Stock Option provide
for a longer exercise period, and any shares of Restricted Stock previously
granted shall immediately be free and clear of any restrictions.

 

5.5.          Termination by Executive.  Executive’s employment hereunder may be
terminated by Executive at any time upon not less than thirty (30) days prior
written notice from Executive to the Board.  Executive agrees that such notice

 

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period is reasonable and necessary in light of the duties assumed by Executive
pursuant to this Agreement and fair in light of the consideration Executive is
receiving pursuant to this Agreement.  If Executive terminates Executive’s
employment with the Company pursuant to this Section 5.5, all compensation and
benefits provided to Executive by the Company pursuant to this Agreement or
otherwise shall cease as of the Termination Date, except that the Company shall
pay Executive all amounts owed to Executive for work performed prior to the
Termination Date, plus the cash value of any accrued but unused PTO as of the
Termination Date.

 

5.6.          Notice of Termination.  Any purported termination of employment by
the Company or by Executive shall be communicated by written Notice of
Termination to the other Party in accordance with Section 9 hereof.  For
purposes of this Agreement, a “Notice of Termination” shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of employment under the provision so indicated.

 

5.7.          Survival.  The provisions of Section 7 shall survive the
termination of this Agreement.

 

5.8           Section 409A of the Code.  It is the intention of the parties to
this Agreement that, to the extent possible, no payment or entitlement pursuant
to this Agreement will give rise to any adverse tax consequences to Executive
under Section 409A of the Internal Revenue Code (“Code”) and Department of
Treasury regulations and other interpretive guidance issued thereunder,
including that issued after the date hereof (collectively, “Section 409A”).  The
Agreement shall be interpreted to that end and consistent with that objective. 
Notwithstanding any other provision herein, if Executive is a “specified
employee” as defined in, and pursuant to, Treas. Reg. Section 1.409A-1(i) on the
Termination Date, no payment of compensation under this Agreement shall be made
to Executive during the period lasting six (6) months from the Termination
Date.  If any payment to Executive is delayed pursuant to the foregoing
sentence, such payment instead shall be made in a lump sum payment on the first
business day following the expiration of the six-month period referred to in the
prior sentence, and, as of the first business day following the expiration of
such six-month period, all such payments shall resume in accordance with the
schedule for such payments.

 

Each payment under this Agreement shall be designated as a “separate payment”
within the meaning of Section 409A of the Code.  To the extent any reimbursement
or in-kind benefit due to Executive under this Agreement constitutes “deferred
compensation” under Section 409A of the Code, any such reimbursement or in-kind
benefit shall be paid to Executive in a manner consistent with Treas. Reg.
Section 1.409A-3(i)(1)(iv).

 

6.             Accelerated Vesting in Change of Control.  In the event that both
(i) a Change of Control occurs and (ii) the Company terminates Executive’s
employment without Cause (or is

 

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deemed to terminate Executive’s employment without Cause) within the period
commencing three months prior to the latest possible date of a Change of Control
and ending one year after the latest possible date of a Change of Control, any
Stock Option held by Executive shall become immediately exercisable as to all
option shares without regard to the vesting schedule set forth on the applicable
Option Certificate, and any shares of Restricted Stock previously granted shall
immediately be free and clear of any restrictions.  For purposes of this
Agreement, any one of the following events shall be considered a “Change of
Control” of the Company:

 

(a)           Acquisition by any “person” (as such term is defined in
Section 3(a)(9) of the Securities Exchange Act of 1934) of any amount of the
Company’s Common Stock so that such person holds or controls fifty percent (50%)
or more of the Company’s Common Stock;

 

(b)           Merger or consolidation of the Company with or into any other
entity in which the holders of the Company’s outstanding shares of capital stock
immediately before such merger or consolidation do not, immediately after such
merger or consolidation, retain capital stock representing a majority of the
voting power of the surviving entity of such merger or consolidation;

 

(c)           Sale of all or substantially all of the assets of the Company to a
third party;

 

(d)           Within any twenty-four (24) month period, the election by the
stockholders of the Company of twenty percent (20%) or more of the directors of
the Company other than pursuant to nomination by the Board, or its designated
committee; or

 

(e)           Execution of a legally binding, definitive agreement approved by
the Board of Directors providing for any of the events set forth in (a), (b),
(c) or (d) above.

 

7.             Confidentiality.

 

7.1.          Definitions.  As used herein, the term “Confidential Information”
shall mean any and all ideas, inventions, information, know-how, compounds,
materials and other items (whether patentable or not) that are confidential or
proprietary to the Company (or to its affiliates, collaborators, consultants,
suppliers, or customers) whether disclosed in written, oral, tangible or other
form and whether or not labeled or otherwise identified as confidential or
proprietary.  Confidential Information shall include, without limitation, the
following to the extent proprietary to the Company (or to its affiliates,
collaborators, consultants, suppliers or customers) and not publicly available:

 

(a)           inventions, trade secrets, discoveries and computer programs, and
any improvements or modifications thereto;

 

(b)           engineering, research, development and design projects, data,
designs, drawings and specifications;

 

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(c)                                  manufacturing, development and other
technical processes, applications, methods, apparatus and equipment;

 

(d)                                 business information such as lists of
approved components and sources, price lists, product costs, production
schedules, business plans, sales information, profit and loss information, and
customer and collaborator lists;

 

(e)                                  any and all reagents, substances, chemical
compounds, subcellular constituents, cells or cell lines, organisms and progeny,
and mutants, as well as any and all derivatives or replications derived from or
relating to such materials; and

 

(f)                                    any and all information, materials and
other items supplied by third parties to the Company (or generated by the
Company for third parties) under an obligation of confidentiality.

 

7.2.                              Non-Disclosure.  Executive shall not at any
time (whether during or after Executive’s employment with the Company) disclose
or use any Confidential Information for Executive’s own benefit or purposes or
the benefit or purposes of any other person, firm, partnership, joint venture,
association, corporation or other organization, entity or enterprise (a
“Person”) other than the Company.

 

7.3.                              Exceptions.  Notwithstanding any other
provision in the Agreement, Confidential Information shall not include any
information or material which:

 

(a)                                  is or becomes generally available to the
public other than as a result of disclosure thereof by Executive;

 

(b)                                 is lawfully received by Executive on a
non-confidential basis from a third party that is not itself under an obligation
of confidentiality or non-disclosure to the Company with respect to such
information;

 

(c)                                  can be shown by Executive to have been
independently developed by Executive;

 

(d)                                 Executive establishes by competent proof was
in Executive’s possession at the time of disclosure by the Company and was not
acquired, directly or indirectly from the Company; or

 

(e)                                  is required to be publicly disclosed by law
or by regulation; provided, however, that in such event Executive shall provide
the Company with prompt advance notice of such disclosure so that the Company
has the opportunity if it so desires to seek a protective order or other
appropriate remedy.

 

7.4.                              Return of Company Property.  Executive agrees
that upon termination of Executive’s employment hereunder, Executive shall
return immediately to the

 

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Company any proprietary materials, any materials containing Confidential
Information and any other Company property then in Executive’s possession or
under Executive’s control, including, without limitation all notes, drawings,
lists, memoranda, magnetic disks or tapes, or other recording media containing
such Confidential Information, whether alone or together with non-confidential
information, all documents, reports, files, memoranda, records, software, credit
cards, door and file keys, telephones, PDAs, computers, computer access codes,
disks and instructional manuals, or any other physical property that Executive
received, prepared, or helped prepare in connection with Executive’s employment
under this Agreement.  Upon termination, Executive shall not retain any copies,
duplicates, reproductions, or excerpts of Confidential Information, nor shall
Executive show or give any of the above to any third party.  Executive further
agrees that Executive shall not retain or use for Executive’s account at any
time any trade name, trademark, service mark, logo or other proprietary business
designation used or owned in connection with the business of the Company.

 

8.                                       Non-Competition; Non-Solicitation.

 

8.1                                 Non-Competition.  During Executive’s
employment with the Company or any of its affiliates and for a period of two
(2) years after the termination or cessation of such employment for any reason,
Executive shall not directly or indirectly, alone or through any other
organization or entity, including without limitation becoming an employee,
investor (except as provided below), officer, agent, partner, member or director
of any such organization or entity, engage or prepare to engage in any
Competitive Activity.  For purposes of this Agreement, the term “Competitive
Activity” means any area of business that the Company or any of its affiliates
worldwide (which affiliates shall not include any entity that purchases the
Company or otherwise acquires all or substantially all of the Company’s assets
and any of such purchasing or acquiring entity’s affiliates) conducted or
actively planned to conduct at any time during Executive’s employment, including
but not limited to oncological drug development and kinase platform drug
development.  Notwithstanding the foregoing, Executive shall not be deemed to be
engaged directly or indirectly in any Competitive Activity if Executive
participates in any such business solely as a passive investor in up to one
percent (1%) of the equity securities of a company or partnership, and provided
further that it shall not be a violation of this Section for Executive (i) to
accept employment with or otherwise perform services for any entity which
engages in Competitive Activity, provided that the operations of such entity are
not substantially devoted to engaging in Competitive Activity and provided
further that at least one level of executive management exists within such
entity between Executive and any Competitive Activity; or (ii) to accept
employment with or otherwise perform services for any entity which engages in
Competitive Activity provided that the business unit within such entity in which
Executive is employed or otherwise performing services, is in no way engaged,
directly or indirectly, in any Competitive Activity.  For purposes of this
Section, Executive shall be deemed to be engaging in Competitive Activity as of
the date that Executive accepts employment or consulting engagement with any
other person or entity, regardless of when

 

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Executive actually begins providing services under such employment or consulting
engagement, but only if Executive is preparing to engage in Competitive Activity
during such period.  Nothing in this Section shall be construed to affect in any
way Executive’s confidentiality obligations as set forth in Section 7 of this
Agreement.  Nothing in this Section shall be construed to prohibit Executive
from seeking permission from the Board to engage in any activity which may
otherwise fall within the definition of Competitive Activity as set forth in
this Section, provided that a grant of permission from the Board, if any, must
be in writing.

 

8.2                                 Non-Solicitation.  During Executive’s
employment with the Company or any of its affiliates and for a period of two
(2) years after the termination or cessation of such employment for any reason
thereafter, Executive will not directly or indirectly: (a) solicit, divert or
take away, or attempt to divert or take away, the business or patronage of any
of the clients, customers or accounts, or prospective clients, customers or
accounts of the Company or its affiliates with whom the Company or its
affiliates has or is actively negotiating a written agreement as of the
Termination Date; (b) recruit, solicit or hire any person who is, or within the
six (6) month period preceding the Termination Date was, an officer, director or
employee of the Company or any of its affiliates or was a scientific consultant
with an exclusive arrangement with the Company or any of its affiliates; or
(c) induce or attempt to induce any officer, director, employee consultant,
agent or representative of the Company or any of its affiliates to discontinue
his or her relationship with the Company or any of its affiliates or to commence
an employment or other business relationship with another entity.

 

9.                                       Other Agreements.  Executive hereby
represent to the Company that Executive is not bound by any agreement or any
other previous or existing business relationship which conflicts with or
prevents the full performance of Executive’s duties and obligations to the
Company (including Executive’s duties and obligations under this or any other
agreement with the Company).  Executive understands that the Company does not
desire to acquire from Executive any trade secrets or confidential business
information Executive may have acquired from others.  Therefore, Executive agree
that during the Employment Term and thereafter, Executive will not improperly
use or disclose any proprietary information or trade secrets of any former or
concurrent employer, or any other person or entity with whom Executive has an
agreement or to whom Executive owes a duty to keep such information in
confidence.

 

10.                                 Injunctive Relief.  Executive acknowledges
and agrees that the Company’s remedies at law for a breach or threatened breach
of any of the provisions of Sections 7 and 8 would be inadequate and, in
recognition of this fact, Executive agrees that, in the event of such a breach
or threatened breach, in addition to any remedies at law, the Company, without
posting any bond, shall be entitled to obtain equitable relief in the form of
specific performance, temporary restraining orders, temporary or permanent
injunctions or any other equitable remedy which may then be available.  In
addition, in the event that Executive breaches any provision of Sections 7 or 8
of this Agreement, the applicable time periods set forth in such Sections, shall
be extended for a period of time equal to the

 

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period of time during which Executive was in breach of the Agreement, up to a
maximum of twenty-four months, and if the Company is required to seek relief
from such breach in any judicial proceedings, then such time limitations shall
extend for a period of time equal to the pendency of any such proceedings,
including all appeals, up to a maximum of twenty-four months.  In connection
with the restrictions in Sections 7 and 8, Executive represents that his
economic means are such that those provisions will not prevent him from
providing for himself and his family on a basis satisfactory to Executive.

 

11.                                 Excess Parachute Payments.  If any payment
or benefit Executive would receive under this Agreement, when combined with any
other payment or benefit Executive receives pursuant to the termination of
Executive’s employment with the Company (“Payment”) would constitute in whole or
in part an “excess parachute payment” within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the “Code”) subject to the excise tax
imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall
be either (i) the full amount of such Payment or (ii) such lesser amount (with
cash payments being reduced before stock option compensation) as would result if
the payment were reduced until no portion of the Payment was subject to the
Excise Tax, whichever of the foregoing amounts, taking into account the
applicable federal state and local employments taxes, income taxes, and the
Excise Tax, results in Executive’s retention, on an after-tax basis, of the
greater net amount.

 

12.                                 Notices.  Any notice hereunder by either
Party to the other shall be given in writing by personal delivery, telex,
facsimile, overnight courier or certified mail, return receipt requested,
addressed, if to the Company, to the attention of the Chair of the Board at the
Company’s executive offices or to such other address as the Board may designate
in writing at any time or from time to time to Executive, and if to Executive,
to Executive’s most recent address on file with the Company.  Notice shall be
deemed given, if by personal delivery or by overnight courier, on the date of
such delivery or, if by telex or facsimile, on the business day following
receipt of answer back or facsimile information or, if by certified mail, on the
date shown on the applicable return receipt.

 

13.                                 Assignment.  This Agreement may not be
assigned by either Party without the prior written consent of the other Party,
provided, however, that the Company may assign this Agreement without
Executive’s consent in the event of a merger, acquisition, or transfer of all or
substantially all of the assets of the Company with or to a third party (a
“Merger”).  In the event of a Merger, the Company shall require in writing any
successor Person to assume and agree to perform this Agreement; failure to so
assume and agree shall constitute a Deemed Termination Condition for purposes of
Section 5.1.2(d).

 

14.                                 Entire Agreement.  This Agreement
constitutes the entire agreement between the Parties with respect to the subject
matter hereof and there have been no oral or other agreements of any kind
whatsoever as a condition precedent or inducement to the signing of this
Agreement or otherwise concerning this Agreement or the subject matter hereof.

 

15.                                 Expenses.  The Parties shall each pay their
own respective expenses incident to the enforcement or interpretation of, or
dispute resolution with respect to, this Agreement, including all fees and
expenses of their counsel for all activities of such counsel

 

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undertaken pursuant to this Agreement, provided, however, that in the event
Executive is the prevailing Party in any judicial proceeding relating to this
Agreement, the Company shall reimburse Executive for all reasonable costs, fees
and expenses (including reasonable attorneys’ fees) incurred by Executive in
connection with such proceeding.

 

16.                                 Waivers and Further Agreements.  Any waiver
of any terms or conditions of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions or any other term or condition, nor
shall any failure to enforce any provision hereof operate as a waiver of such
provision or of any other provision hereof; provided, however, that no such
written waiver, unless it, by its own terms, explicitly provides to the
contrary, shall be construed to effect a continuing waiver of the provision
being waived and no such waiver in any instance shall constitute a waiver in any
other instance or for any other purpose or impair the right of the Party against
whom such waiver is claimed in all other instances or for all other purposes to
require full compliance with such provision.  Each of the Parties agrees to
execute all such further instruments and documents and to take all such further
action as the other Party may reasonably require in order to effectuate the
terms and purposes of this Agreement.

 

17.                                 Amendments.  This Agreement may not be
amended, nor shall any waiver, change, modification, consent or discharge be
effected except by an instrument in writing executed by both Parties.

 

18.                                 Severability.  If any provision of this
Agreement shall be held or deemed to be, or shall in fact be, invalid,
inoperative or unenforceable as applied to any particular case in any
jurisdiction or jurisdictions, or in all jurisdictions or in all cases, because
of the conflict of any provision with any constitution or statute or rule of
public policy or for any other reason, such circumstance shall not have the
effect of rendering the provision or provisions in question invalid, inoperative
or unenforceable in any other jurisdiction or in any other case or circumstance
or of rendering any other provision or provisions herein contained invalid,
inoperative or unenforceable to the extent that such other provisions are not
themselves actually in conflict with such constitution, statute or rule of
public policy, but this Agreement shall be reformed and construed in any such
jurisdiction or case as if such invalid, inoperative or unenforceable provision
had never been contained herein and such provision reformed so that it would be
valid, operative and enforceable to the maximum extent permitted in such
jurisdiction or in such case.

 

19.                                 Counterparts.  This Agreement maybe executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.

 

20.                                 Section Headings.  The headings contained in
this Agreement are for reference purposes only and shall not in any way affect
the meaning or interpretation of this Agreement.

 

21.                                 Governing Law and Forum.  This Agreement
shall in all events and for all purposes be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts without regard to
any choice of law principle that would dictate the application of the laws of
another jurisdiction.  Any action, suit or other legal proceeding

 

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which may be commenced to resolve any matter arising under or relating to any
provision of this Agreement shall be commenced only in a court of the
Commonwealth of Massachusetts (or, if appropriate, a federal court located
within Massachusetts), and the parties hereby consent to the jurisdiction of
such court with respect to any action, suit or proceeding commenced in such
court.

 

IN WITNESS WHEREOF, the Parties have executed or caused to be executed this
Agreement as of the Execution Date.

 

 

ARQULE, INC.

 

EXECUTIVE

By:

 /s/ Patrick J. Zenner

 

By:

 /s/ Paolo Pucci

Name: Patrick J. Zenner

 

Name: Paolo Pucci

Title: Chair, Board of Directors

 

 

 

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EXHIBIT A

 

OUTSIDE ACTIVITIES

 

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EXHIBIT B-1

 

ARQULE, INC. AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN

STOCK OPTION TERMS AND CONDITIONS

 

THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES
WHICH HAVE BEEN ISSUED UNDER THE 1994 EQUITY INCENTIVE PLAN

AND REGISTERED UNDER THE SECURITIES ACT OF 1933.

 

1.  Plan Incorporated by Reference.  This Option is issued pursuant to the terms
of the Plan and may be amended as provided in the Plan.  Capitalized terms used
and not otherwise defined in this certificate have the meanings given to them in
the Plan.  This certificate does not set forth all of the terms and conditions
of the Plan, which are incorporated herein by reference, and nothing herein
shall be deemed to supercede the terms and conditions of the Plan.  The
Committee administers the Plan and its determinations regarding the operation of
the Plan are final and binding.  Copies of the Plan may be obtained upon written
request without charge from the Company. [This Option is intended to be an
“incentive stock option” to the extent permissible under Section 422 of the
Internal Revenue Code of 1986 (the “Code”), including the $100,000 limitation of
Code Section 422(d).]

 

2.  Option Price.  The price to be paid for each share of Common Stock issued
upon exercise of the whole or any part of this Option is the Option Price set
forth on the face of this certificate.

 

3.  Vesting Schedule.  This Option may be exercised at any time and from time to
time over the number of shares and in accordance with the vesting schedule set
forth on the face of this certificate, but only for the purchase of whole
shares, provided that if Option Holder’s employment is terminated by the Company
pursuant to Section 5.1 (including 5.1.2), 5.3 or 5.4 of the Employment
Agreement between the Company and Option Holder dated April 15, 2008
(“Employment Agreement”), then this Option may be exercised at any time and from
time to time over the number of shares and in accordance with the vesting
schedule set forth in the applicable Section of the Employment Agreement and
subject to the terms and conditions of such applicable Section of the Employment
Agreement.   Notwithstanding the foregoing, this Option may not be exercised as
to any shares after the Expiration Date.

 

4.  Method of Exercise.  To exercise this Option, the Option Holder shall
deliver written notice of exercise to the Company specifying the number of
shares with respect to which the Option is being exercised accompanied by
payment of the Option Price for such shares in cash, by certified check or in
such other form, including shares of Common Stock of the Company valued at their
Fair Market Value on the date of delivery, as the Committee may approve. 
Promptly following such a notice, the Company will deliver to the Option Holder
a certificate representing the number of shares with respect to which the Option
is being exercised.

 

5.  Rights as a Stockholder or Employee.  The Option Holder shall not have any
rights in respect of shares as to which the Option shall not have been exercised
and payment made as provided above.  The Option Holder shall not have any rights
to continued employment by the Company or any group company by virtue of the
grant of this Option.

 

6.  Recapitalization, Mergers, Etc.  As provided in the Plan, in the event of a
corporate transaction affecting the Company’s outstanding Common Stock, the
Committee shall equitably adjust the number and kind of shares subject to this
Option and the exercise price hereunder or make provision for a cash payment. 
If such transaction involves a consolidation or merger of the Company with
another entity, the sale or exchange of all or substantially all of the assets
of the Company or a reorganization or liquidation of the Company, then in lieu
of the foregoing, the Committee may upon written notice to the Option Holder
provide that this

 

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Option shall terminate on a date not less than 20 days after the date of such
notice unless theretofore exercised.  In connection with such notice, the
Committee may in its discretion accelerate or waive any deferred exercise
period.

 

7.             Option Not Transferable.  This Option is not transferable by the
Option Holder other than upon the death of the Option Holder, in accordance with
the Plan.

 

8.  Exercise of Option After Termination of Employment.  Except as expressly set
forth in this Paragraph, Paragraph 9 of this Agreement or as expressly set forth
in the Employment Agreement (and, in that case, subject to the applicable terms
and conditions of the Employment Agreement), if the Option Holder’s employment
with (a) the Company, or (b) a corporation (or parent or subsidiary corporation
of such corporation) issuing or assuming a stock option in a transaction to
which section 424(a) of the Code applies, is terminated for any reason, the
Option Holder may exercise the rights which were available to the Option Holder
at the time of such termination only within three months from the date of
termination.  Upon the death of the Option Holder, his or her Designated
Beneficiary shall have the right, at any time within twelve months after the
date of death, to exercise in whole or in part any rights that were available to
the Option Holder at the time of death.  It is understood and agreed, however,
that any part of the Option intended to be an “incentive stock option” that is
not exercised within three months following the date of termination will lose
incentive stock option qualification and automatically convert to a Nonstatutory
Stock Option for the remainder of the applicable exercise period. 
Notwithstanding the foregoing, no rights under this Option may be exercised
after the Expiration Date.

 

9.  Exercise of Option Upon Retirement.  Upon Retirement, as defined below, any
unvested shares set forth on the face of this certificate shall vest, and this
Option may be exercised in whole or part until the earlier of up to two years
from the date of Retirement or the Expiration Date.  “Retirement” as to any
Option Holder shall mean such person’s leaving the employment of the Company or
an Affiliate after reaching age 55 with ten (10) years of full-time continuous
service with the Company; provided, that the sum of the Option Holder’s age plus
the number of years of continuous service equals or exceed seventy (70).

 

10.  Compliance with Securities Laws.  It shall be a condition to the Option
Holder’s right to purchase shares of Common Stock hereunder that the Company
may, in its discretion, require (a) that the shares of Common Stock reserved for
issue upon the exercise of this Option shall have been duly listed, upon
official notice of issuance, upon any national securities exchange or automated
quotation system on which the Company’s Common Stock may then be listed or
quoted, (b) that either (i) a registration statement under the Securities Act of
1933 with respect to the shares shall be in effect, or (ii) in the opinion of
counsel for the Company, the proposed purchase shall be exempt from registration
under that Act and the Option Holder shall have made such undertakings and
agreements with the Company as the Company may reasonably require, and (c) that
such other steps, if any, as counsel for the Company shall consider necessary to
comply with any law applicable to the issue of such shares by the Company shall
have been taken by the Company or the Option Holder, or both.  The certificates
representing the shares purchased under this Option may contain such legends as
counsel for the Company shall consider necessary to comply with any applicable
law.

 

11.  Payment of Taxes.  To the extent applicable: The Option Holder shall pay to
the Company, or make provision satisfactory to the Company for payment of, any
taxes required by law to be withheld with respect to the exercise of this
Option.  The Committee may, in its discretion, require any other Income taxes
imposed on the sale of the shares to be paid by the Option Holder.  In the
Committee’s discretion, such tax obligations may be paid by entering into some
other arrangements to ensure that such amount is available to them or it
(whether by authorizing the sale of some or all of the shares and payment to the
Company or the member of the Group (as the case may be) of the requisite amount
of the proceeds of sale or otherwise). The

 

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Company and any group company may, to the extent permitted by law, deduct any
such tax obligations from any payment of any kind otherwise due to the Option
Holder.

 

12.  Transfer of Personal Data.  By acknowledging and accepting this award, you
understand that, in order to perform its requirements under the Plan, the
Company may transfer and process personal data and/or sensitive personal data
about you.  Such data may include but is not limited to personal and financial
data about you and sale of shares purchased under the Plan from time to time. 
You also hereby give explicit consent to the Company to transfer and process any
such personal data and/or sensitive data outside the country in which you work
or are employed including countries which may be outside the European Economic
Area where there may be no legislation in relation to an individual’s rights
concerning personal data.  This may also apply to other companies in the Company
group, third party advisers and administrators or regulatory authorities.

 

13.  Special Tax Consequences.  The Option Holder acknowledges that, to the
extent the aggregate Fair Market Value of stock with respect to which “incentive
stock options” (within the meaning of Section 422 of the Code, but without
regard to Section 422(d) of the Code), including this Option, are exercisable
for the first time by the Option Holder during any calendar year (under the Plan
and all other incentive stock option plans of the Company, any Subsidiary and
any parent corporation thereof (within the meaning of Section 422 of the Code))
exceeds $100,000, such options shall be treated as Nonstatutory Options to the
extent required by Section 422 of the Code.  The Option Holder further
acknowledges that the rule set forth in the preceding sentence shall be applied
by taking options into account in the order in which they were granted.  For
purposes of these rules, the Fair Market Value of stock shall be determined as
of the time the option with respect to such stock is granted.

 

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EXHIBIT B-2

 

ARQULE, INC. AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN

 

Restricted Stock Agreement

 

This Restricted Stock Agreement (“Agreement”) between ArQule, Inc. (the
“Company”) and Paolo Pucci (the “Grantee”) dated as of [date].

 

1.  Grant; Plan Incorporated by Reference.

 

                (a)  On the terms and conditions set forth in this Agreement,
the Company hereby awards to Grantee 125,000 shares of Stock (the “Restricted
Stock”), as provided for in Section 4.4 of the Employment Agreement between the
Company and Grantee dated April 15, 2008 (the “Employment Agreement”).  The
award of the Restricted Shares is made pursuant to and is governed by the
ArQule, Inc. Amended and Restated 1994 Equity Incentive Plan (the “Plan”), the
terms of which are incorporated into this Agreement by this reference, and
nothing herein shall be deemed to supercede the terms and conditions of the
Plan.  Upon execution of this Agreement, the Company will cause the shares of
Restricted Stock to be issued, in electronic form (with the restrictions
contained herein electronically noted) in the Grantee’s name.  The term
“Restricted Stock” shall include any additional shares of Stock issued on
account of the forgoing shares by reason of stock dividends, stock splits or
recapitalizations (whether by way of mergers, consolidations, combinations or
exchanges of shares or the like).

 

                (b)  Grantee agrees and acknowledges that this Agreement shall
constitute, for purposes of Section 151(f) of the Delaware General Corporation
Law, notice of the restrictions set forth herein with respect to the Restricted
Stock.

 

                (c)  Capitalized terms used and not otherwise defined in this
Agreement will have the meanings ascribed to them in the Plan.  The
Compensation, Nominating and Governance Committee of the Board of Directors of
ArQule, Inc. (the “Committee”) administers the Plan and its determinations
regarding the interpretation and operation of the Plan are final and binding.  A
copy of the Plan, the Plan Prospectus and the Prospectus Supplement are
available on the ArQule Intranet site.

 

2.  Schedule for Vesting of Rights.  Subject to Section 8 below, and subject to
the terms and conditions of the Employment Agreement, the schedule for vesting
of rights (i.e., the date upon which the restrictions on the Grantee’s
Restricted Stock will lapse) is as follows:

 

(a)                                  62,500 shares of Restricted Stock will be
vested and free of restrictions as of the effective date of the Employment
Agreement; and

 

(b)                                 62,500 shares of Restricted Stock will be
vested and free of restrictions on the first anniversary of the effective date
of the Employment Agreement.

 

3.  Forfeiture.  Subject to the terms and conditions of the Employment
Agreement, if the Grantee ceases to be an employee of the Company or an
affiliate for any reason, including disability, death and retirement, all shares
of Restricted Stock that remain subject to the restrictions imposed under
Section 2 hereof shall be forfeited upon such termination of employment and
returned to the Company unless the Board or Committee in its discretion shall
otherwise determine, and

 

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neither the Grantee nor any successors, heirs, assigns or personal
representatives of the Grantee shall thereafter have any further rights or
interest in such shares.

 

4.  Rights as a Stockholder.  The Grantee will have all the rights of a
shareholder with respect to the Restricted Stock except as provided in Section 5
below.  Accordingly, the Grantee will have the right during the Restricted
Period to vote the Restricted Stock and to receive any dividends paid with
respect to the Restricted Stock.  All such rights shall cease upon forfeiture of
the Restricted Stock.

 

5.  Award not Transferable.

 

(a)  For purposes of this Agreement, “Restricted Period” shall mean, with
respect to any shares of Restricted Stock, the period of time between the date
of this Agreement and the date on which rights in such shares of Restricted
Stock become vested in accordance with Section 2 above.

 

(b)  During the Restricted Period, neither the Restricted Stock nor any rights
relating to such shares may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of by the Grantee.

 

(c)  The Company shall not be required (i) to transfer on its books any shares
of Restricted Stock which have been sold or transferred in violation of any of
the provisions of this Agreement, or (ii) to treat as owner of such shares or to
accord the right to vote or to pay dividends to anyone to whom such shares have
been so transferred.

 

6.  Termination of Restrictions.  In the event that the Restricted Period shall
terminate with respect to the Restricted Stock and the Restricted Stock shall
not have been previously forfeited to the Company, the Company will remove the
restrictions on the shares and will deliver (in either electronic or
certificated form) such unrestricted shares to the Grantee or his or her legal
representative.

 

7.  Section 83(b) Election.  If the Grantee timely files an election pursuant to
Section 83(b) of the Code in respect of the Restricted Stock, the Grantee shall
promptly deliver to the Company a copy of the election.

 

8.  Taxes.  Any obligation of the Company to deliver shares upon the termination
of the Restricted Period with respect to the Restricted Stock, and any
obligation to deliver any dividends on those shares, will be subject to the
satisfaction of all applicable federal, state and local tax withholding
requirements.  Unless otherwise determined by the Committee, withholding
requirements shall, at Grantee’s election, be satisfied with respect to shares
of Restricted Stock (i) for which no Section 83(b) election is made, by (A) the
Company’s retention of shares, with a Fair Market Value equal to the Company’s
required withholding obligation, otherwise issuable to the Grantee as the result
of the termination of the Restricted Period, or (B) by the Company’s
withholding, through payroll, of the required amounts from payments otherwise
due to the Grantee and (ii) for which a Section 83(b) election is made, by the
Company’s withholding, through payroll, of the required amounts from payments
otherwise due to the Grantee.

 

Unless otherwise determined by the Committee, withholding requirements with
respect to any dividend paid on shares of Restricted Stock during the Restricted
Period shall be satisfied (i) in the case of a cash dividend, by withholding
from such cash, and (ii) in the case of a stock

 

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dividend, by withholding shares from such dividend with a Fair Market Value
equal to the Company’s required withholding obligation.

 

The Grantee hereby authorizes and agrees to all such tax withholding.  For
purposes of this Section 8, shares that are withheld to satisfy any applicable
withholding obligation shall be valued at their Fair Market Value on the date
the withholding obligation arises and in no event shall the aggregate Fair
Market Value of the shares withheld exceed the amount of taxes required to be
withheld.

 

9.  No Retention Rights.  Nothing in the Plan or this Agreement confers upon the
Grantee any right to continue in the service of the Company for any period of
specific duration or shall be construed to interfere with or otherwise restrict
in any way the rights of the Company or of the Grantee, which rights are
expressly reserved by each, to terminate the Grantee’s service at any time and
for any reason, with or without cause.

 

10.  Compliance with Securities Laws.  It shall be a condition to Grantee’s
right to receive the shares of Restricted Stock hereunder that the Company may,
in its discretion, require (a) that the shares of Restricted Stock shall have
been duly listed, upon official notice of issuance, upon any national securities
exchange or automated quotation system on which the Company’s Common Stock may
then be listed or quoted, (b) that either (i) a registration statement under the
Securities Act of 1933, as amended (the “Act”), with respect to the shares shall
be in effect, or (ii) in the opinion of counsel for the Company, the proposed
issuance and delivery of the shares to the Grantee shall be exempt from
registration under the Act and the Grantee shall have made such undertakings and
agreements with the Company as the Company may reasonably require, and (c) that
such other steps, if any, as counsel for the Company shall consider necessary to
comply with any law applicable to the issue of such shares by the Company shall
have been taken by the Company or the Grantee, or both.  The certificates
representing the shares of Restricted Stock may contain such legends as counsel
for the Company shall consider necessary to comply with any applicable law.

 

IN WITNESS WHEREOF, the undersigned have executed this Agreement effective on
the date first set forth above.

 

GRANTEE

 

ARQULE, INC.

 

 

 

 

 

 

Name:

 

Name:

 

 

Title:

 

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EXHIBIT C

 

DETERMINATION OF OPTION PRICE

 

The exercise price of the Execution Stock Option is the Fair Market Value of
ArQule’s Common Stock (as defined below) as of the Effective Date as defined in
Section 1 of the Employment Agreement between the Company and Executive.

 

The Fair Market Value of ArQule’s Common Stock shall be the closing price of the
Common Stock as reported by the NASDAQ National Market on the trading day of the
commencement of Executive’s employment with the Company.

 

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EXHIBIT D

 

Calculation of the Severance Payment

 

Pursuant to Section 5.1.1(a)(ii), the portion of Executive’s Severance Payment
based on bonuses (“Bonus Severance”) awarded to Executive, if any, would be
calculated in the following manner:

 

Example #1 – Executive terminated in year one of employment.

 

Bonus Component of Severance Payment = $450,000 (deemed bonus amount for
two-year lookback period where Executive did not work for the Company).

 

Example #2 – Executive deemed awarded a $225,000 bonus for year one of
employment, and awarded no bonus for year 2 of employment, then terminated
during year 3.

 

Bonus Component of Severance Payment = $225,000 (deemed year 1 bonus and year 2
bonus actually awarded).

 

Example #3 – Executive awarded a $225,000 bonus for year 2 of employment, and
awarded a $180,000 bonus for year 3 of employment (40% of target), then
terminated during year 4.

 

Bonus Component of Severance Payment = $405,000 (total of year 2 and year 3
bonuses actually awarded)

 

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