Ex. 10.5
 

 
Share Option Agreement
 
Under the XOMA Ltd.
 
1981 Share Option Plan
 
(A)
Optionee:
(E)
Payroll Number:
 
Steven B. Engle
   
(B)
Grant Date:
(F)
Expiration Date:
 
August 3, 2007
 
August 3, 2017
(C)
Shares:
(G)
Exercise Price:
 
315,672
 
$2.17
(D)
Share Installments:
(H)
Option Type:
 
78,918 shares become exercisable beginning August 8, 2007
236,754 shares become exercisable in accordance with the attached
Schedule A
 
Non-Qualified Share Option

 
XOMA Ltd. (the "Company") has granted you an option to purchase the number of
Common Shares shown in item (C) above (the "Optioned Shares") at the Exercise
Price per share shown in item (G) above. This option is subject to the terms of
the Company's 1981 Share Option Plan, as amended through December 8, 2004 (the
"Plan") and to the terms and conditions set forth in this Share Option Agreement
under the XOMA Ltd. 1981 Share Option Plan (the "Agreement").
 
The details of your option are as follows:
 
 
1.           Term; Transfer.  The term of this option commences on the Grant
Date shown in item (B) above and, except as provided in Section 3 and Subsection
5(a) hereof, expires at the close of business on the Expiration Date shown in
item (F) above, which is 10 years from the Grant Date.
 

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If this option is a non-qualified option, it may be transferred or assigned to
your spouse or descendent (any such spouse or descendent, your "Immediate Family
Member") or a corporation, partnership, limited liability company or trust so
long as all of the shareholders, partners, members or beneficiaries thereof, as
the case may be, are either you or your Immediate Family Member, provided that
(i) there may be no consideration for any such transfer and (ii) subsequent
transfers of the transferred option will be prohibited other than by will or the
laws of descent and distribution. Following transfer, the option will continue
to be subject to the same terms and conditions as were applicable immediately
prior to transfer, provided that for purposes of this Agreement any references
to "you" will refer to the transferee. The events of termination of employment
will continue to be applied with respect to you, following which the option will
be exercisable by the transferee only to the extent, and for the periods
specified, in this Agreement.
 
If this option is an incentive share option, the option shall be exercisable
during your lifetime only by you and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
 
 
2.           Exercise Schedule  Provided that you remain an employee of or
consultant to the Company (as determined in accordance with Subsection 3(f)
hereof), the option granted herein will become exercisable (a) as to 25% of such
number of shares (rounded to the nearest whole integer), upon the first
anniversary of this date of grant, and (b) as to the remaining 75% of such
number of shares (rounded to the nearest whole integer) monthly in accordance
with the attached schedule A.
 
 
Exercisable installments may be exercised in whole or in part in increments of
25 or more shares and, to the extent not exercised, will accumulate and be
exercisable at any time on or before the Expiration Date or sooner termination
of the option term.
 
 
3.           Effect of Termination of Employment.
 
(a)           If you cease to be an employee of the Company at any time during
the option term for any reason other than as provided in Subsections (b), (c),
(d) or (e) below, then the period for exercising this option will be limited to
the three-month period commencing with the date of such cessation of employee
status; provided that, notwithstanding the foregoing, if you cease to be an
employee of the Company and immediately thereafter become a consultant to the
Company at any time during the option term, then the period for exercising this
option will not be limited as aforesaid but will be limited to the three-month
period commencing with the date of cessation of consultant status, if during the
option term; and provided further, that in no event will this option be
exercisable at any time after the Expiration Date. During any such limited
period of exercisability, this option may not be exercised for more than the
number of Optioned Shares (if any) for which it is exercisable at the date of
your cessation of employee or consultant status, as the case may be. Upon the
expiration of any such limited period of exercisability or (if earlier) upon the
Expiration Date, this option will terminate and cease to be outstanding.
 

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(b)           If you die and cease by reason thereof to be either an employee of
or a consultant to the Company at any time during the option term, then this
option will become fully exercisable on the date of death even if the option was
not fully exercisable prior to death, and will remain exercisable for a
twelve-month period following the date of death; provided, however, that in no
event shall this option be exercisable at any time after the Expiration
Date.  Upon the expiration of such twelve-month period or (if earlier) upon the
Expiration Date, this option will terminate and cease to be outstanding.  Upon
your death, the option will be exercisable by the personal representative of
your estate or by the person or persons to whom the option is transferred
pursuant to Section 1 above, provided any such exercise occurs prior to the
earlier of (i) the expiration of the twelve-month period following the date of
your death or (ii) the specified Expiration Date of the option term.
 
(c)           If you become permanently disabled and cease by reason thereof to
be either an employee of or a consultant to the Company at any time during the
option term, then you will have a period of twelve months (commencing with the
date of such cessation of employee or consultant status, as the case may be)
during which to exercise this option; provided, however, that in no event shall
this option be exercisable at any time after the Expiration Date. During such
limited period of exercisability, this option may not be exercised for more than
the number of Optioned Shares (if any) for which this option is exercisable at
the date of your cessation of employee or consultant status, as the case may be.
Upon the expiration of such limited period of exercisability or (if earlier)
upon the Expiration Date, this option will terminate and cease to be
outstanding. You will be deemed to be permanently disabled if you are, by reason
of any medically determinable physical or mental impairment expected to result
in death or to be of continuous duration of not less than twelve consecutive
months or more, unable to perform your usual duties for the Company or its
subsidiaries.
 
(d)           If you retire at or after age fifty-five (55) and the sum of your
age on the date of retirement plus years of full-time employment or consultancy
with the Company exceeds seventy (70) ("Retirement") and if by reason thereof
you cease to be either an employee of or consultant to the Company, at any time
during the option term, then this option will become fully exercisable as of the
date of Retirement (even if the option was not fully exercisable prior to
Retirement) and will remain exercisable for the full option term until the
Expiration Date as if you had continued in employment or consultancy.  On the
Expiration Date, the option will terminate and cease to be outstanding.
 
(e)           Should (i) your status as either an employee or a consultant be
terminated for cause (including, but not limited to, any act of dishonesty,
willful misconduct, fraud or embezzlement or any unauthorized disclosure or use
of confidential information or trade secrets), or (ii) you make or attempt to
make any unauthorized use or disclosure of confidential information or trade
secrets of the Company or its subsidiaries, then in any such event this option
will terminate and cease to be exercisable immediately upon the date of such
termination of employee or consultant status, as the case may be, or such
unauthorized use or disclosure of confidential or secret information or attempt
thereat.
 

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(f)           For purposes of this Agreement, you will be deemed to be an
employee of the Company for so long as you remain in the employ of the Company
or one or more of its subsidiaries, and you will be deemed to be a consultant to
the Company for so long as you are actively rendering consulting services on a
periodic basis to the Company or one or more of its subsidiaries. A legal entity
will be deemed to be a subsidiary of the Company if it is a member of an
unbroken chain of legal entities beginning with the Company, provided that each
such legal entity in the chain (other than the last legal entity) owns, at the
time of determination, shares possessing 50% or more of the total combined
voting power of all classes of shares  in one of the other legal entities in
such chain.
 
 
4.           Adjustment in Option Shares.
 
(a)           If any change is made to the Common Shares issuable under the
Plan, whether by reason of any share dividend, share split, combination of
shares, recapitalization or other change affecting the outstanding Common Shares
as a class without receipt of consideration, then appropriate adjustments will
be made to (i) the total number of Optioned Shares subject to this option and
(ii) the Exercise Price payable per share, in order to reflect such change and
thereby preclude the dilution or enlargement of benefits under this Agreement.
The adjustments determined by the plan administrator (the "Plan Administrator")
will be final, binding and conclusive.
 
(b)           If the Company is the surviving or continuing entity in any
merger, amalgamation or other business combination, then this option, if
outstanding under the Plan immediately after such merger, amalgamation or other
business combination, will be appropriately adjusted to apply and pertain to the
number and class of securities which the holder of the same number of Common
Shares as are subject to this option immediately prior to such merger,
amalgamation or other business combination would have been entitled to receive
in the consummation of such merger, amalgamation or other business combination,
and an appropriate adjustment will be made to the Exercise Price payable per
share, provided the aggregate Exercise Price payable hereunder will remain the
same.
 
 
5.           Corporate Transaction.
 
(a)           In the event of one or more of the following transactions
("Corporate Transaction"):
 
(i)  a merger, amalgamation or acquisition in which the Company is not the
surviving or continuing entity, except for a transaction the principal purpose
of which is to change the jurisdiction of the Company's organization,
 
(ii)  the sale, transfer or other disposition of all or substantially all of the
assets of the Company, or
 
(iii)  any other reorganization or business combination in which fifty percent
(50%) or more of the Company's outstanding voting shares are transferred to
different holders in a single transaction or a series of related transactions,
 

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then the exercisability of this option will automatically be accelerated so that
such option may be exercised simultaneously with consummation of such Corporate
Transaction for the Applicable Percentage (as defined below) of the Optioned
Shares. No such acceleration of this option will occur, however, if and to the
extent:  (x) the terms of the agreement for such Corporate Transaction provide
as a prerequisite to the consummation of such Corporate Transaction that ou
tstanding options under the Plan (including this option) are to be assumed by
the successor or parent thereof or are to be replaced with the comparable
options to purchase shares of capital stock of the successor or parent thereof,
such comparability to be determined by the Plan Administrator, or (y) the
acceleration of this option would, when added to the present value of certain
other payments in the nature of compensation which become due and payable to you
in connection with the Corporate Transaction, result in the payment to you of
excess parachute payments under Section 280G(b) of the Internal Revenue Code.
The existence of such excess parachute payments will be determined by the Plan
Administrator in the exercise of its reasonable business judgment and on the
basis of tax counsel provided to the Company. Immediately following consummation
of the Corporate Transaction, this option will, to the extent not previously
exercised or assumed by the successor or its parent, terminate and cease to be
exercisable.
 
As used herein, “Applicable Percentage” means (i) 33.3% if the Corporate
Transaction Trigger Event (as defined below) occurs on or before September 30,
2007, (ii) 66.7% if  the Corporate Transaction Trigger Event occurs on or after
October 1, 2007 and on or before December 31, 2007 and (iii) 100% in the event
the Corporate Transaction Trigger Event occurs on or after January 1, 2008, and
“Corporate Transaction Trigger Event” means, with respect to a particular
Corporate Transaction, full execution of a “heads-of-terms”-style agreement
reflecting a fully-negotiated set of terms for such Corporate Transaction
intended to lead directly to the drafting and finalization of a definitive
agreement governing such Corporate Transaction.
 
(b)           The exercisability of this option as an incentive share option
under the Federal tax laws (if designated as such above) will be subject to the
applicable dollar limitation of Section 16 hereof.
 
(a)           The Plan Administrator will use its best efforts to provide you
with written notice of a Corporate Transaction at least ten business days prior
to the effective date.
 
(d)           This Agreement will not in any way affect the right of the Company
to adjust, reclassify, reorganize or otherwise make changes in its capital or
business structure or to merge, amalgamate, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
 
 
6.           Privilege of Share Ownership.  The holder of this option will not
have any rights of a shareholder with respect to the Optioned Shares until such
individual has exercised the option, paid the Exercise Price and been issued a
certificate for the purchased shares.
 
 
7.           Manner of Exercising Option.
 
(a)           In order to exercise this option with respect to all or any part
of the Optioned Shares for which this option is at the time exercisable, you (or
in the case of exercise after your death, your executor, administrator, heir,
legatee or transferee as the case may be) must take the following actions:
 

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(i)  Provide the Secretary of the Company with written notice of such exercise,
specifying the number of Optioned Shares with respect to which the option is
being exercised.
 
(ii)  Pay the Exercise Price for the purchased Optioned Shares in one or more of
the following alternative forms:  (A) full payment in cash or by check payable
to the Company's order; (B) full payment in Common Shares of the Company valued
at fair market value on the exercise date (as such terms are defined below); (C)
full payment in combination of Common Shares of the Company valued at fair
market value on the exercise date and cash or check payable to the Company's
order; (D) payment effected through a broker-dealer sale and remittance
procedure pursuant to which you (I) will provide irrevocable written
instructions to the designated broker-dealer to effect the immediate sale of the
purchased shares and remit to the Company, out of the sale proceeds, an amount
equal to the aggregate Exercise Price payable for the purchased shares plus all
applicable Federal and State income and employment taxes required to be withheld
by the Company by reason of such purchase and (II) will provide written
directives to the Company to deliver the certificates for the purchased shares
directly to such broker-dealer; or, to the extent the Plan Administrator
specifically authorizes such method of payment at the time of exercise, (E)
payment by a full-recourse promissory note. Any such promissory note authorized
by the Plan Administrator will be substantially in the form approved by the Plan
Administrator, will bear interest at the minimum per annum rate necessary to
avoid the imputation of interest income to the Company and compensation income
to you under the Federal tax laws and will become due in full (in one or more
consecutive annual installments measured from the execution date of the note)
not later than the Expiration Date of this option. Payment of the note will be
secured by the pledge of the purchased shares, and the pledged shares will be
released only as the note is paid.
 
(iii)  Furnish to the Company appropriate documentation that the person or
persons exercising the option, if other than you, have the right to exercise
this option.
 
(b)           For purposes of Subsection 7(a) hereof, the fair market value per
Common Share on any relevant date will be determined in accordance with
Subsections (i) through (iii) below, and the exercise date will be the date on
which you exercise this option in compliance with the provisions of Subsection
7(a).
 
(i)  If the Common Shares are not listed or admitted to trading on any stock
exchange on the date in question, but is traded in the over-the-counter market,
the fair market value will be the closing selling price per share of such shares
on such date, as such price is reported by the National Association of
Securities Dealers through its Nasdaq National Market. If there is no reported
closing selling price of the shares on the date in question then the closing
selling price on the last preceding date for which such quotation exists will be
determinative of fair market value.
 

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(i)  If the Common Shares are listed or admitted to trading on any stock
exchange on the date in question, the fair market value will be the closing
selling price per share of such shares on such date on the stock exchange
determined by the Plan Administrator to be the primary market for such shares,
as such price is officially quoted on such exchange. If there is no reported
closing selling price of such shares on such exchange on the date in question,
the fair market value will be the closing selling price on the exchange on the
last preceding date for which such quotation exists.
 
(iii)  If the Common Shares are neither listed nor admitted to trading on any
stock exchange nor traded in the over-the-counter market on the date in question
or if the Plan Administrator determines that the quotations under Subsections
(i) or (ii) above do not accurately reflect the fair market value of such
shares, the fair market value will be determined by the Plan Administrator after
taking into account such factors as the Plan Administrator may deem appropriate,
including one or more independent professional appraisals.
 
(b)           In no event may this option be exercised for any fractional share.
 
 
8.           Compliance with Laws and Regulations.
 
(a)           The exercise of this option and the issuance of Optioned Shares
upon such exercise will be subject to compliance by the Company and by you with
all applicable requirements of law relating thereto and with all applicable
regulations of any stock exchange on which the Company's Common Shares may be
listed at the time of such exercise and issuance.
 
(b)           In connection with the exercise of this option, you will execute
and deliver to the Company such representations in writing as may be requested
by the Company in order for it to comply with the applicable requirements of
Federal and State securities laws.
 
 
9.           Restrictive Legends.  If and to the extent any Optioned Shares
acquired under this option are not registered under the Securities Act of 1933,
the certificates for such Optioned Shares will be endorsed with restrictive
legends, including (without limitation) the following:
 
"The Shares represented by this certificate have not been registered under the
Securities Act of 1933. The shares have been acquired for investment and may not
be sold or offered for sale in the absence of (a) an effective registration
statement for the shares under such Act, (b) a 'no action' letter of the
Securities and Exchange Commission with respect to such sale or offer, or (c) an
opinion of counsel to the Company that registration under such Act is not
required with respect to such sale or offer."
 
 
10.           Successors and Assigns.  Except to the extent otherwise provided
in Section 1 and Subsection 5(a), the provisions of this Agreement will inure to
the benefit of, and be binding upon your successors, administrators, heirs,
legal representatives and assigns and the successors and assigns of the Company.
 

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11.           Liability of the Company.
 
(a)           If the Optioned Shares covered by this Agreement exceed, as of the
Grant Date, the number of Common Shares which may without shareholder approval
be issued under the Plan, then this option will be void with respect to such
excess shares unless shareholder approval of an amendment sufficiently
increasing the number of Common Shares issuable under the Plan is obtained in
accordance with the provisions of the Plan.
 
(b)           The inability of the Company to obtain approval from any
regulatory body having authority deemed by the Company to be necessary to the
lawful issuance and sale of any Common Shares pursuant to this option will
relieve the Company of any liability in respect of the non-issuance or sale of
such shares as to which such approval will not have been obtained.
 
 
12.           No Employment or Consulting Contract.  Nothing in this Agreement
or in the Plan will confer upon you any right to continue in the employ or
service of the Company for any period of time or interfere with or otherwise
restrict in any way the rights of the Company (or any subsidiary of the Company
employing or retaining you) or you, which rights are hereby expressly reserved
by each, to terminate your employee or consultant status as the case may be, at
any time for any reason whatsoever, with or without cause.
 
 
13.           Notices.  Any notice required to be given or delivered to the
Company under the terms of this Agreement will be in writing and addressed to
the Company in care of its Secretary at its principal offices. Any notice
required to be given or delivered to you will be in writing and addressed to you
at the address indicated below your signature line herein. All notices will be
deemed to be given or delivered upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
 
 
14.           Construction.  This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the express terms and provisions of the Plan. Any dispute regarding
the interpretation of this Agreement will be submitted to the Plan Administrator
for resolution. The decision of the Plan Administrator will be final, binding
and conclusive. Questions regarding this option or the Plan should be referred
to the Legal Department of the Company.
 
 
15.           Governing Law.  The interpretation, performance, and enforcement
of this Agreement will be governed by the laws of the State of California.
 
 
16.           Additional Terms Applicable to an Incentive Share Option.  In the
event this option is an incentive share option, the following terms and
conditions will apply to the grant:
 
(a)           This option will cease to qualify for favorable tax treatment as
an incentive share option under the Federal tax laws if (and to the extent) this
option is exercised for Optioned Shares:  (i) more than three months after the
date you cease to be an employee for any reason other than death or permanent
disability (as defined in Section 3) or (ii) more than one (1) year after the
date you cease to be an employee by reason of permanent disability.
 

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(b)           Except in the event of a Corporate Transaction under Section 5,
this option will not become exercisable in the calendar year in which granted if
(and to the extent) the aggregate fair market value (determined at the Grant
Date) of the Company's Common Shares for which this option would otherwise first
become exercisable in such calendar year would, when added to the aggregate fair
market value (determined as of the respective date or dates of grant) of the
Company's Common Shares for which this option or one or more other post-1986
incentive share options granted to you prior to the Grant Date (whether under
the Plan or any other option plan of the Company or any parent or subsidiary)
first become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability
of this option is deferred by reason of the foregoing limitation, the deferred
portion will first become exercisable in the first calendar year or years
thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of
this Section 16(b) would not be contravened.
 
(c)           Should the exercisability of this option be accelerated upon a
Corporate Transaction in accordance with Section 5, then this option will
qualify for favorable tax treatment as an incentive share option under the
Federal tax laws only to the extent the aggregate fair market value (determined
at the Grant Date) of the Company's Common Shares for which this option first
becomes exercisable in the calendar year in which the Corporate Transaction
occurs does not, when added to the aggregate fair market value (determined as of
the respective date or dates of grant) of the Company's Common Shares for which
this option or one or more other post-1986 incentive share options granted to
you prior to Grant Date (whether under the Plan or any other option plan of the
Company or any parent or subsidiary) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.
 
(d)           To the extent that this option fails to qualify as an incentive
share option under the Federal tax laws, you will recognize compensation income
in connection with the acquisition of one or more Optioned Shares hereunder, and
you must make appropriate arrangements for the satisfaction of all Federal,
State or local income tax withholding requirements and Federal social security
employee tax requirements applicable to such compensation income. 
 
 
17.           Tax Arrangements.  You hereby agree to make appropriate
arrangements with the Company or subsidiary thereof by which you are employed or
retained for the satisfaction of all Federal, State or local income tax
withholding requirements and Federal social security employee tax requirements
applicable to the exercise of this option.
 

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XOMA LTD.
 
By:                                                                                     
 
Christopher J. Margolin
Vice President , General Counsel
and Secretary
 
Dated:                                                                                
 
I hereby agree to be bound by the terms and conditions of this Agreement and the
Plan.
 
By:                                                                                     
 
Steven B. Engle
14891 De La Valle Place
Del Mar, CA  92014
 
Dated:                                                                                
 
If the optionee resides in California or another community property
jurisdiction, I, as the optionee's spouse, also agree to be bound by the terms
and conditions of this Agreement and the Plan.
 
By:                                                                                     
 
Carolyn G. Engle
14891 De La Valle Place
Del Mar, CA  92014
 
Dated:                                                                                     
 

 
 
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