Exhibit 10.4
 
TRANSITIONAL COMPENSATION AGREEMENT
 
THIS AGREEMENT, made and entered into as of August 22, 2005 and amended and
restated as of December    2008 by and between Woodward Governor Company, a
Delaware corporation, (hereinafter called the “Corporation”) and Robert F.
Weber, Jr. (hereinafter called the “Executive”).
 
WITNESSETH THAT:
 
WHEREAS, the Board of Directors of the Corporation (the “Board”) has determined
that it is in the best interests of the Corporation and its shareholders to
assure that the Corporation will have the continued dedication of the Executive,
despite the possibility, threat or occurrence of a Change in Control (as defined
below) of the Corporation; and
 
WHEREAS, the Board believes that it is imperative to diminish the inevitable
distraction of the Executive which would result from the personal uncertainties
and risks created by a threatened or pending Change in Control and to encourage
the Executive’s full attention and dedication to the business of the Corporation
currently and in the event of any threatened or pending Change in Control and to
provide the Executive with appropriate compensation and benefit protection upon
a Change in Control;
 
NOW, THEREFORE, the Corporation and the Executive, each intending to be legally
bound, hereby mutually covenant and agree as follows:
 
1. Term.  This Agreement shall become effective upon the occurrence of a Change
in Control (as defined in Paragraph 4(d), below) (hereinafter called the
“Effective Date”) and shall remain in effect for a term continuing until the end
of the twenty-fourth (24th) calendar month following the month in which the
Effective Date occurs; provided, however, that, anything in this Agreement to
the contrary notwithstanding, if a Change in Control occurs and if the
Executive’s employment with the Corporation was terminated prior to the date on
which the Change in Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (a) was at the request of a third
party who was taking steps reasonably calculated to effect a Change in Control
or (b) otherwise arose in connection with or anticipation of a Change in
Control, then for all purposes of this Agreement the “Effective Date” shall mean
the date immediately prior to the date of such termination of employment.
 
2. Employment.  After the Effective Date, the Corporation shall employ the
Executive to, and the Executive shall, exercise such authority and perform such
executive duties as are commensurate with the authority being exercised and
performed by the Executive during the ninety-day period immediately prior to the
Effective Date, which services shall be performed at the location where the
Executive was employed immediately prior to the Effective Date. The Executive
shall also continue to serve as a member of the Board of Directors of the
Corporation, if serving as such as of the Effective Date. The Executive shall
devote substantially his entire time during reasonable business hours
(reasonable sick leave and vacations excepted) and reasonable best efforts to
fulfill faithfully and responsibly his duties hereunder. During the period of
employment after the Effective Date, it shall not be a violation of this
Agreement for the Executive to serve on corporate, civic or charitable boards or
committees, or be involved in civic, charitable or educational endeavors, or
manage personal investments, so long as such activities do not significantly
interfere with the performance of Executive’s responsibilities as an employee of
the Corporation hereunder. It is expressly agreed and understood that to the
extent any such activities were conducted by the Executive prior to the
Effective Date, the continued conduct of such or similar activities subsequent
to the Effective Date shall not thereafter be deemed to interfere with the
performance of the Executive’s responsibilities to the Corporation.
 
3. Compensation and Benefits.  For the Executive’s employment with the
Corporation after the Effective Date, the Executive shall be compensated as
follows:
 
(a) The Executive shall receive an annual base salary at a rate not less than
the highest aggregate annual base salary and seniority-based vacation plan
amount paid or payable to the Executive by the Corporation during the 24 month
period immediately prior to the Effective Date, to be paid in accordance

--------------------------------------------------------------------------------

 

the Corporation’s regular payroll practices. Such amount, or such greater annual
base salary rate which may be paid or payable to the Executive after the
Effective Date, is hereinafter referred to as the “Annual Base Salary.”
 
(b) The Executive shall be eligible to participate on a reasonable basis in the
Corporation’s bonus and incentive compensation plans and programs which provide
opportunities to receive compensation which are not less than opportunities
provided by the Corporation for executives with comparable annual base salary.
 
(c) The Executive shall be entitled to receive executive and employee benefits
and perquisites which are not less than the executive and employee benefits and
perquisites provided by the Corporation to executives with comparable duties or
annual base salary.
 
4. Termination.  Unless earlier terminated in accordance with the following
provisions of this Paragraph 4, the Corporation shall continue to employ the
Executive and the Executive shall remain employed by the Corporation from the
Effective Date through the end of the term of this Agreement as set forth in
Paragraph 1, above. Paragraph 6 hereof sets forth certain obligations of the
Corporation in the event that the Executive’s employment hereunder is terminated
prior to the expiration of such term. Certain capitalized terms used in this
Paragraph 4 and in Paragraphs 5 and 6 hereof are defined in Paragraph 4(d),
below.
 
(a) Death or Disability.  The Executive’s employment shall terminate immediately
as of the Date of Termination in the event of the Executive’s death or in the
event that the Executive becomes disabled. The Executive will be deemed to be
disabled upon the earlier of (i) the end of a six (6)-consecutive month period
during which, by reason of physical or mental injury or disease, the Executive
has been unable to perform substantially all of his usual and customary duties
under this Agreement or (ii) the date that a reputable physician selected by the
Board, and as to whom the Executive has no reasonable objection, determines in
writing that the Executive will, by reason of physical or mental injury or
disease, be unable to perform substantially all of the Executive’s usual and
customary duties under this Agreement for a period of at least six
(6) consecutive months. If any question arises as to whether the Executive is
disabled, upon reasonable request therefore by the Board, the Executive shall
submit to reasonable medical examination for the purpose of determining the
existence, nature and extent of any such disability. The Board shall promptly
give the Executive written notice of any such determination of the Executive’s
disability and of any decision of the Board to terminate the Executive’s
employment by reason thereof. Until the Date of Termination for disability, the
base salary payable to the Executive shall be reduced dollar-for-dollar by the
amount of any disability benefits paid to the Executive in accordance with any
disability policy or program of the Corporation.
 
(b) Discharge for Cause.  In accordance with the procedures hereinafter set
forth, the Board may discharge the Executive from his employment hereunder for
Cause. Any discharge of the Executive for Cause shall be communicated by a
Notice of Termination to the Executive given in accordance with Paragraph 14 of
this Agreement. For purposes of this Agreement, a “Notice of Termination” means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive’s
employment under the provision so indicated and (iii) specifies the termination
date, which may be as early as the date of the giving of such notice. No
purported termination of the Executive’s employment for Cause shall be effective
without a Notice of Termination.
 
(c) Termination for Other Reasons.  The Corporation may discharge the Executive
without Cause by giving written notice to the Executive in accordance with
Paragraph 14 at least fifteen (15) days prior to the Date of Termination. The
Executive may resign from his employment, without liability to the Corporation,
by giving written notice to the Corporation in accordance with Paragraph 14 at
least fifteen (15) days prior to the Date of Termination.
 
(d) Definitions.  For purposes of this Agreement, the following capitalized
terms shall have the meanings set forth below:
 
(i) “Accrued Obligations” shall mean, as of the Date of Termination, the sum of
(A) the Executive’s base salary through the Date of Termination to the extent
not theretofore paid, (B) the amount of any

2

--------------------------------------------------------------------------------

 

bonus, incentive compensation, deferred compensation and other cash compensation
accrued by the Executive as of the Date of Termination to the extent not
theretofore paid and (C) any vacation pay, expense reimbursements and other cash
entitlements accrued by the Executive as of the Date of Termination to the
extent not theretofore paid. For the purpose of this Paragraph 4(d)(i), amounts
shall be deemed to accrue ratably over the period during which they are earned,
but no discretionary compensation shall be deemed earned or accrued until it is
specifically approved by the Board or the Compensation Committee in accordance
with the applicable plan, program or policy.
 
(ii) “Cause” shall mean: (A) the Executive’s commission of an act materially and
demonstrably detrimental to the financial condition and/or goodwill of the
Corporation or any of its subsidiaries, which act constitutes gross negligence
or willful misconduct by the Executive in the performance of his material duties
to the Corporation or any of its subsidiaries, or (B) the Executive’s commission
of any material act of dishonesty or breach of trust resulting or intended to
result in material personal gain or enrichment of the Executive at the expense
of the Corporation or any of its subsidiaries, or (C) the Executive’s conviction
of a felony involving moral turpitude, but specifically excluding any conviction
based entirely on vicarious liability. No act or failure to act will be
considered “willful” unless it is done, or omitted to be done, by the Executive
in bad faith or without reasonable belief that his action or omission was in the
best interests of the Corporation. In addition, no act or omission will
constitute Cause unless (A) a resolution finding that Cause exists has been
approved by a majority of all of the members of the Board at a meeting at which
the Executive is allowed to appear with his legal counsel and (B) the
Corporation has given detailed written notice thereof to the Executive and,
where remedial action is feasible, he then fails to remedy the act or omission
within a reasonable time after receiving such notice.
 
(iii) A “Change in Control” shall be deemed to have occurred if:
 
(A) Any “person” (as defined in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)), excluding for this
purpose the Corporation or any subsidiary of the Corporation, or any employee
benefit plan of the Corporation or any subsidiary of the Corporation, or any
person or entity organized, appointed or established by the Corporation for or
pursuant to the terms of such plan which acquires beneficial ownership of voting
securities of the Corporation, is or becomes the “beneficial owner” (as defined
in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of
the Corporation representing fifteen percent (15%) or more of the combined
voting power of the Corporation’s then outstanding securities; provided,
however, that no Change in Control shall be deemed to have occurred (1) as the
result of an acquisition of securities of the Corporation by the Corporation
which, by reducing the number of voting securities outstanding, increases the
direct or indirect beneficial ownership interest of any person to fifteen
percent (15%) or more of the combined voting power of the Corporation’s then
outstanding securities, but any subsequent increase in the direct or indirect
beneficial ownership interest of such a person in the Corporation shall be
deemed a Change in Control, or (2) as a result of the acquisition directly from
the Corporation of securities of the Corporation representing less than 50% of
the voting power of the Corporation, or (3) if the Board of Directors of the
Corporation determines in good faith that a person who has become the beneficial
owner directly or indirectly of securities of the Corporation representing
fifteen percent (15%) or more of the combined voting power of the Corporation’s
then outstanding securities has inadvertently reached that level of ownership
interest, and if such person divests as promptly as practicable a sufficient
amount of securities of the Corporation so that the person no longer has a
direct or indirect beneficial ownership interest in fifteen percent (15%) or
more of the combined voting power of the Corporation’s then outstanding
securities; or
 
(B) During any period of two (2) consecutive years (not including any period
prior to the Effective Date of this Agreement), individuals who at the beginning
of such two-year period constitute the Board of Directors of the Corporation and
any new director or directors (except for any director designated by a person
who has entered into an agreement with the Corporation to effect a transaction
described in subparagraph (A), above, or subparagraph (C), below) whose election
by the Board or nomination for election by the Corporation’s shareholders was
approved by a vote of at

3

--------------------------------------------------------------------------------

 

least two-thirds of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
of the Board (such individuals and any such new directors being referred to as
the “Incumbent Board”); or
 
(C) Consummation of (1) an agreement for the sale or disposition of the
Corporation or all or substantially all of the Corporation’s assets, (2) a plan
of merger or consolidation of the Corporation with any other corporation, or
(3) a similar transaction or series of transactions involving the Corporation
(any transaction described in parts (1) through (3) of this subparagraph
(C) being referred to as a “Business Combination”), in each case unless after
such a Business Combination (x) the shareholders of the Corporation immediately
prior to the Business Combination continue to own, directly or indirectly, more
than fifty-one percent (51%) of the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors of the new (or continued) entity (including, but not by way of
limitation, an entity which as a result of such transaction owns the Corporation
or all or substantially all of the Corporation’s former assets either directly
or through one or more subsidiaries) immediately after such Business
Combination, in substantially the same proportion as their ownership of the
Corporation immediately prior to such Business Combination, and (y) at least a
majority of the members of the board of directors of the entity resulting from
such Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for
such Business Combination; or
 
(D) Approval by the shareholders of the Corporation of a complete liquidation or
dissolution of the Corporation.
 
(iv) “Date of Termination” shall mean (A) in the event of a discharge of the
Executive by the Board for Cause, the date specified in such Notice of
Termination, (B) in the event of a discharge of the Executive without Cause or a
resignation by the Executive, the date specified in the written notice to the
Executive (in the case of discharge) or the Corporation (in the case of
resignation), which date shall be no less than fifteen (15) days and no more
than thirty-one (31) days from the date of such written notice; provided
however, if the written notice is received in December, the notice period may be
shortened so that in no event will the Date of Termination occur in the year
following the year in which the written notice is received by either party,
(C) in the event of the Executive’s death, the date of the Executive’s death,
and (D) in the event of termination of the Executive’s employment by reason of
disability pursuant to Paragraph 4(a), the date the Executive receives written
notice of such termination.
 
(v) “Good Reason” shall mean any of the following without the written consent of
the Executive: (A)(1) assignment of duties inconsistent with the Executive’s
position, authority, duties or responsibilities referred to in Paragraph 2, or
any action by the Corporation which results in a substantial diminution of such
position, authority, duties or responsibilities, other than an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Corporation promptly after receipt of notice thereof given by
the Executive, or (2) if applicable, removal or other failure to continue
Executive as a member of the Board as required by Paragraph 2, (B) any reduction
in Executive’s Annual Base Salary, or bonus or incentive opportunities from
those referred to in Paragraph 3(a) or 3(b), other than an isolated,
insubstantial and inadvertent reduction not made in bad faith and which is
remedied by the Corporation promptly after receipt of notice thereof given by
the Executive, or (C) a relocation of Executive to an office location more than
30 miles from the location referred to in Paragraph 2, or (D) failure by the
Corporation to provide Executive with the executive or employee benefits and
perquisites referred to in Paragraph 3(c), other than an isolated, insubstantial
and inadvertent reduction not made in bad faith and which is remedied by the
Corporation promptly after receipt of notice thereof given by the Executive, or
(E) failure by any successor to enter into the assumption of and agreement to
perform this Agreement referred to in Paragraph 13. For purposes of this
Paragraph 4(d)(v), any good faith determination by the Executive that one of the
foregoing events has occurred shall be conclusive. In addition, resignation for
any reason by the Executive, which resignation is to be effective at any time
during the 30 day period beginning twelve (12) months after the Effective Date
shall constitute a resignation for Good Reason;

4

--------------------------------------------------------------------------------

 

provided, further, that if the Executive dies after the execution of a
definitive agreement for a transaction which will constitute a Change in Control
but before the expiration of such 30-day period, then the Executive shall be
deemed to have terminated employment for Good Reason on the later of (1) the
effective date of the Change in Control or (2) the date of the Executive’s death
or termination of employment due to disability.
 
(vi) “Qualifying Termination” shall mean termination of the Executive’s
employment after the Effective Date and during the term of this Agreement as
described in Paragraph 1, above, (A) by reason of the discharge of the Executive
by the Corporation other than for Cause or disability or (B) by reason of the
resignation of the Executive for Good Reason within six (6) months after an
event constituting Good Reason or (C) in accordance with the last sentence of
the definition of Good Reason in subparagraph (v), above.
 
5. Vesting of Equity Awards Upon a Change in Control.  Immediately upon a Change
in Control, all stock options, restricted stock and other equity awards to the
Executive which are not otherwise vested shall vest in full, and all options
shall remain exercisable for the period provided for in the applicable plan or
award agreement.
 
6. Obligations of the Corporation Upon Termination.  The following provisions
describe certain obligations of the Corporation to the Executive under this
Agreement upon termination of his employment. However, except as explicitly
provided in this Agreement, nothing in this Agreement shall limit or otherwise
adversely affect any rights which the Executive may have under applicable law,
under any other agreement with the Corporation or any of its subsidiaries, or
under any compensation or benefit plan, program, policy or practice of the
Corporation or any of its subsidiaries.
 
(a) Death, Disability, Discharge for Cause, or Resignation Without Good
Reason.  In the event the Executive’s employment terminates by reason of the
death or disability of the Executive (other than in circumstances which
constitute a Qualifying Termination under Paragraph 4(d)(vi)(C)), or by reason
of the discharge of the Executive by the Corporation for Cause, or by reason of
the resignation of the Executive other than for Good Reason, the Corporation
shall pay to the Executive, or his designated beneficiaries, heirs or estate, in
the event of the Executive’s death, all Accrued Obligations in a lump sum within
thirty (30) days after the Date of Termination; provided, however, that any
portion of the Accrued Obligations which consists of bonus, deferred
compensation, or incentive compensation shall be determined and paid in
accordance with the terms of the relevant plan as applicable to the Executive.
In addition, if the Executive’s employment is terminated by death, disability or
retirement under a retirement plan of the Corporation or by resignation of the
Executive other than for Good Reason, the Executive may, in the discretion of
the Compensation Committee, be awarded a pro rata cash bonus for the year in
which the Date of Termination occurs; provided, however, that in no event shall
any pro rata cash bonus be paid later than March 15th of the year following the
year in which the Date of Termination occurs.
 
(b) Qualifying Termination.  In the event of a Qualifying Termination, the
Executive shall receive the following benefits:
 
(i) Payment of all Accrued Obligations in a lump sum on the Date of Termination;
provided, however, that any portion of the Accrued Obligations which consists of
bonus, deferred compensation or incentive compensation shall be determined and
paid in accordance with the terms of the relevant plan as applicable to the
Executive,
 
(ii) Payment in a lump sum on the Date of Termination of a pro rata cash bonus
for the year in which the Date of Termination occurs, determined and paid in
accordance with the terms of the then current annual bonus plan applicable to
the Executive,
 
(iii) Payment in a lump sum on the Date of Termination of a salary replacement
amount equal to three hundred percent (300%) of the annual base salary required
to be paid to Executive pursuant to Paragraph 3(a) above, or if greater, the
rate of annual salary as in effect immediately prior to the Date of Termination,

5

--------------------------------------------------------------------------------

 

(iv) Payment in a lump sum on the Date of Termination of a bonus replacement
amount equal to three hundred percent (300%) of the highest of the annual bonus
paid or payable to the Executive for the three (3) years preceding the year in
which the Date of Termination occurs or, if greater, the Executive’s target
bonus for year in which the Date of Termination occurs,
 
(v) Payment in a lump sum on the Date of Termination of a retirement replacement
amount equal to 300% of the sum of the Member Investment and Stock Ownership
Plan, Retirement Income Plan and Unfunded Deferred Compensation Plan
contributions made or credited by the Corporation for the benefit of the
Executive for the plan year of each such plan during which the Date of
Termination occurs or, if greater, for the plan year of each such plan (or any
successor or replacement plan) immediately preceding the plan year in which the
Effective Date occurs,
 
(vi) Continuation, for a period of three (3) years after the Date of
Termination, of the following employee benefits on terms at least as favorable
to the Executive as those which would have been provided if the Executive’s
employment had continued for that time pursuant to this Agreement, with the cost
of such benefits to be paid by the Corporation: medical and dental benefits,
life and disability insurance, and executive physical examinations
(“Corporation-Paid Coverage”). Corporation-Paid Coverage shall be paid directly
by the Corporation to the applicable insurer and/or administrator when premiums
for such coverage are due in accordance with the terms and conditions of the
applicable insurance policy or administrative services agreement.
Notwithstanding the foregoing, if the Executive is a “specified employee” (as
described in Section 7 below) on the date of the Executive’s “separation from
service” (as described in Section 7 below), continued coverage under the
disability and life insurance plans shall be solely at the expense of the
Executive for the period beginning on the date of the Executive’s separation and
ending six (6) months thereafter. On the date six (6) months and one (1) day
following his or her separation (or, in the event of his or her death, at such
earlier time as provided in Section 7 below), the Corporation shall reimburse
the Executive for the Corporation-Paid Coverage under the disability and life
insurance plans portion of such expense in a lump sum cash payment. Thereafter,
Corporation-Paid Coverage under the disability and life insurance plans shall be
paid directly by the Corporation to the applicable insurer and/or administrator
when premiums for such coverage are due in accordance with the terms and
conditions of the applicable insurance policy or administrative services
agreement. To the extent the Corporation is unable to provide comparable
insurance for reasons other than cost, the Corporation may provide a lesser
level or no coverage and compensate the Executive for the difference in coverage
through a cash lump sum payment grossed up for taxes, payable on the Date of
Termination. This payment will be tied to the cost of an individual insurance
policy if it were assumed to be available. Upon the expiration of the coverage
provided under this paragraph (vi), the Executive and Executive’s dependents
will be entitled to elect Consolidated Omnibus Budget Reconciliation Act of 1985
(“COBRA”) continuation coverage on the same basis as would be extended with
respect to an employee whose employment terminated at the time of such
expiration and for purposes of Title X of COBRA, the date of the “qualifying
event” for the Executive and Executive’s dependents shall be the date upon which
the Corporation-Paid Coverage terminates,
 
(vii) Outplacement services, at the expense of the Corporation, from a provider
reasonably selected by the Executive, provided however, to the extent the
outplacement services are taxable under the Internal Revenue Code, the expenses
must be incurred before the last day of the second year following separation
from service and the reimbursement must be made before the last day of the third
year following separation from service, and
 
(viii) Tax preparation services for the Executive’s taxable year in which the
Date of Termination occurs, provided at the expense of the Corporation, on the
same basis as provided to Executive immediately prior to the Effective Date
provided however, to the extent the tax preparation services are taxable under
the Internal Revenue Code, the expenses must be incurred before the last day of
the second year following separation from service and the reimbursement must be
made before the last day of the third year following separation from service.

6

--------------------------------------------------------------------------------

 

7. Section 409A.
 
(a) Six-Month Delay.  Notwithstanding anything to the contrary in this
Agreement, no Deferred Compensation Separation Benefits (as defined below) will
be considered due or payable until the Executive has incurred a “separation from
service” within the meaning of Section 409A of the Internal Revenue Code of
1986, as amended and the final regulations and any guidance promulgated
thereunder (together, “Section 409A”). Notwithstanding anything to the contrary
in this Agreement, if the Executive is a “specified employee” within the meaning
of Section 409A at the time of his termination (other than due to death), the
severance payable to him, if any, pursuant to this Agreement, when considered
together with any other severance payments or separation benefits that are
considered deferred compensation under Section 409A (together, the “Deferred
Compensation Separation Benefits”) that are payable within the first six
(6) months following his termination of employment, will become payable on the
first payroll date that occurs on or after the date six (6) months and one
(1) day following the date of the Executive’s termination of employment. All
subsequent Deferred Compensation Separation Benefits, if any, will be payable in
accordance with the payment schedule applicable to each payment or benefit.
Notwithstanding anything herein to the contrary, if the Executive dies following
termination but prior to the six (6) month anniversary of termination, then any
payments delayed in accordance with this Section 7 will be payable in a lump sum
as soon as administratively practicable after the date of the Executive’s death
and all other Deferred Compensation Separation Benefits will be payable in
accordance with the payment schedule applicable to each payment or benefit. Each
payment and benefit payable under this Agreement is intended to constitute
separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury
Regulations.
 
(b) The foregoing provisions are intended to comply with the requirements of
Section 409A so that none of the severance payments and benefits to be provided
hereunder will be subject to the additional tax imposed under Section 409A, and
any ambiguities herein will be interpreted to so comply. The Executive and the
Corporation agree to work together in good faith to consider amendments to this
Agreement and to take such reasonable actions, which are necessary, appropriate
or desirable to avoid imposition of any additional tax or income recognition
prior to actual payment to him under Section 409A.
 
8. Certain Additional Payments by the Corporation.  The Corporation agrees that:
 
(a) Anything in this Agreement to the contrary notwithstanding, in the event it
shall be determined that any payment or distribution by the Corporation to or
for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this
Paragraph 8) (a “Payment”) would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended, (the “Code”) or
if any interest or penalties are incurred by the Executive with respect to such
excise tax (such excise tax, together with any such interest and penalties,
being hereinafter collectively referred to as the “Excise Tax”), then the
Executive shall be entitled to receive an additional payment (a “Gross-Up
Payment”) in an amount such that, after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payment. . Notwithstanding the foregoing, if the Executive is a
“specified employee” (as described in Section 7 above) on the date of the
Executive’s “separation from service” other than due to death (as described in
Section 7 above) and a Gross-Up Payment would not have been required under this
Section 8 in the absence of the benefits provided for in this Agreement, any
Gross-Up Payment otherwise due to the Executive on or within the six (6) month
period following the Executive’s separation from service will accrue during such
six (6) month period and will become payable in a lump sum payment (less any
applicable withholding taxes) on the date six (6) months and one (1) day
following the date of the Executive’s separation from service.
 
(b) Subject to the provisions of paragraph (c), below, all determinations
required to be made under this Paragraph 8, including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made by
the accounting firm which is then serving as the auditors for the Corporation
(the “Accounting Firm”),

7

--------------------------------------------------------------------------------

 

which shall provide detailed supporting calculations both to the Corporation and
the Executive within fifteen (15) business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time as is
requested by the Corporation. In the event that the Accounting Firm is serving
as accountant or auditor for the individual, entity or group effecting the
Change in Control, the Executive shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Corporation. Any
Gross-Up Payment, as determined pursuant to this Paragraph 8, shall be paid by
the Corporation to the Executive within five (5) days of the receipt of the
Accounting Firm’s determination. If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with a
written opinion that failure to report the Excise Tax on the Executive’s
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. Any good faith determination by the Accounting
Firm shall be binding upon the Corporation and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Corporation should have
been made (“Underpayment”), consistent with the calculations required to be made
hereunder. In the event that the Corporation exhausts its remedies pursuant to
paragraph (c), below, and the Executive thereafter is required to make a payment
of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid
by the Corporation to or for the benefit of the Executive.
 
(c) The Executive shall notify the Corporation in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Corporation of a Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than fifteen (15) business days after the Executive is
informed in writing of such claim and shall apprise the Corporation of the
nature of such claim and the date on which such claim is requested to be paid.
The Executive shall not pay such claim prior to the expiration of the thirty
(30)-day period following the date on which Executive gives such notice to the
Corporation (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Corporation notifies the Executive in
writing prior to the expiration of such period that it desires to contest such
claim, the Executive shall:
 
(i) Give the Corporation any information reasonably requested by the Corporation
relating to such claim,
 
(ii) Take such action in connection with contesting such claim as the
Corporation shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Corporation,
 
(iii) Cooperate with the Corporation in good faith in order effectively to
contest such claim, and
 
(iv) Permit the Corporation to participate in any proceedings relating to such
claim; provided, however, that the Corporation shall bear and pay directly all
costs and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for all taxes (including interest and penalties
with respect thereto), including without limitation any Excise Tax and income
tax (including interest and penalties with respect thereto), imposed as a result
of such representation and payment of costs and expenses. Without limiting the
foregoing provisions of this paragraph (c), the Corporation shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner; and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Corporation shall determine; provided, however, that if the Corporation directs
the Executive to pay such claim and sue for a refund, the

8

--------------------------------------------------------------------------------

 

Corporation shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, for all taxes (including interest and penalties with respect
thereto), including without limitation any Excise Tax and income tax (including
interest or penalties with respect thereto), imposed with respect to such
advance or with respect to any imputed income with respect to such advance; and
further provided that any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Corporation’s control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder
and the Executive shall be entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue Service or any other taxing
authority.
 
(d) If, after the receipt by the Executive of an amount advanced by the
Corporation pursuant to paragraph (c), above, the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Corporation’s complying with the requirements of said paragraph (c))
promptly pay to the Corporation the amount of such refund (together with any
interest paid or credited thereon, after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Corporation pursuant
to said paragraph (c), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Corporation does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid; and the amount
of such advance shall offset, to the extent thereof, the amount of the Gross-Up
Payment required to be paid.
 
9. No Set-Off or Mitigation.  The Corporation’s obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Corporation may have against
the Executive or others. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement, and such
amounts shall not be reduced whether or not the Executive obtains other
employment.
 
10. Payment of Certain Expenses.  The Corporation shall pay the reasonable legal
fees and expenses incurred by the Executive in connection with the negotiation
and preparation of this Agreement. In addition, the Corporation shall pay
promptly as incurred, to the fullest extent permitted by law, all legal fees and
expenses which the Executive may reasonably incur as a result of any contest by
the Corporation, the Executive or others of the validity or enforceability of,
or liability under, any provision of this Agreement (including as a result of
any contest initiated by the Executive about the amount of any payment due
pursuant to this Agreement), plus in each case interest on any delayed payment
at the applicable federal rate provided for in Section 7872(f)(2)(A) of the
Code, plus an additional amount such that after payment by the Executive of all
taxes imposed on such additional amount, the Executive shall retain an amount
equal to the total taxes imposed on the Executive due to the payment by the
Corporation, to or for the Executive, of legal fees and expenses with respect to
any such contest; provided, however, that the Corporation shall not be obligated
to make such payment with respect to any contest in which the Corporation
prevails over the Executive.
 
11. Indemnification.  To the full extent permitted by law, the Corporation
shall, both during and after the term of the Executive’s employment, indemnify
the Executive (including the advancement of expenses) for any judgments, fines,
amounts paid in settlement and reasonable expenses, including attorneys’ fees,
incurred by the Executive in connection with the defense of any lawsuit or other
claim to which he is made a party by reason of being (or having been) an
officer, director or employee of the Corporation or any of its subsidiaries. In
addition, the Executive shall be covered, both during and after the term of the
Executive’s employment, by director and officer liability insurance to the
maximum extent that such insurance covers any officer or director (or former
officer or director) of the Corporation.
 
12. Confidentiality.  During and after the period of employment with the
Corporation, the Executive shall not, without prior written consent from the
Chief Executive Officer or the General Counsel of the

9

--------------------------------------------------------------------------------

 

Corporation, directly or indirectly disclose to any individual, corporation or
other entity, other than to the Corporation or any subsidiary or affiliate
thereof or their officers, directors or employees entitled to such information
or any other person or entity to whom such information is disclosed in the
normal course of the business of the Corporation) or use for the Executive’s own
benefit or for the benefit of any such individual, corporation or other entity,
any Confidential Information of the Corporation. For purposes of this Agreement,
“Confidential Information” is information relating to the business of the
Corporation or its subsidiaries or affiliates (a) which is not generally known
to the public or in the industry, (b) which has been treated by the Corporation
and its subsidiaries and affiliates as confidential or proprietary, (c) which
provides the Corporation or its subsidiaries or affiliates with a competitive
advantage, and (d) in the confidentiality of which the Corporation has a legally
protectable interest. Confidential Information which becomes generally known to
the public or in the industry, or in the confidentiality of which the
Corporation and its subsidiaries and affiliates cease to have a legally
protectable interest, shall cease to be subject to the restrictions of this
Paragraph 12.
 
13. Binding Effect.  This Agreement shall be binding upon and inure to the
benefit of the heirs and representatives of the Executive and the successors and
assigns of the Corporation. Amounts payable under this Agreement upon the
Executive’s death shall be paid to his beneficiaries, if any, designated in
writing and filed with the Corporate Secretary, and in the absence of such
designation, shall be paid to his heirs by will or laws of descent and
distribution. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation, or otherwise) to all or a substantial portion of
its assets, by agreement in form and substance reasonably satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Corporation would be required to perform
this Agreement if no such succession had taken place. Regardless of whether such
an agreement is executed, this Agreement shall be binding upon any successor of
the Corporation in accordance with the operation of law, and such successor
shall be deemed the “Corporation” for purposes of this Agreement.
 
14. Notices.  All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
by hand or by recognized commercial delivery service or on the third business
day after being mailed within the continental United States by first class
certified mail, return receipt requested, postage prepaid, addressed as follows:
 

  (a)  If to the Board or the Corporation, to:
Woodward Governor Company
1000 East Drake Road
Fort Collins, Colorado 80525
Attn: Corporate Secretary

 

  (b)  If to the Executive, to:
Robert F. Weber, Jr.
1000 East Drake Road
Fort Collins, CO 80525
(Unless otherwise specified by the Executive)

 
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
 
15. Tax Withholding.  The Corporation shall provide for the withholding of any
taxes required to be withheld by federal, state, or local law with respect to
any payment in cash, shares of stock and/or other property made by or on behalf
of the Corporation to or for the benefit of the Executive under this Agreement
or otherwise. The Corporation may, at its option: (a) withhold such taxes from
any cash payments owing from the Corporation to the Executive, (b) require the
Executive to pay to the Corporation in cash such amount as may be required to
satisfy such withholding obligations and/or (c) make other satisfactory
arrangements with the Executive to satisfy such withholding obligations.
 
16. Arbitration.  Any dispute or controversy between the Corporation and the
Executive arising out of or relating to this Agreement or the breach of this
Agreement shall be settled by arbitration administered by the

10

--------------------------------------------------------------------------------

 

American Arbitration Association (“AAA”) in accordance with its Commercial
Arbitration Rules then in effect, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. Any
arbitration shall be held before a single arbitrator who shall be selected by
the mutual agreement of the Corporation and the Executive, unless the parties
are unable to agree to an arbitrator, in which case the arbitrator will be
selected under the procedures of the AAA. The arbitrator shall have the
authority to award any remedy or relief that a court of competent jurisdiction
could order or grant, including, without limitation, the issuance of an
injunction. However, either party may, without inconsistency with this
arbitration provision, apply to any court otherwise having jurisdiction over
such dispute or controversy and seek interim provisional, injunctive or other
equitable relief until the arbitration award is rendered or the controversy is
otherwise resolved. Except as necessary in court proceedings to enforce this
arbitration provision or an award rendered hereunder, or to obtain interim
relief, neither a party nor an arbitrator may disclose the existence, content or
results of any arbitration hereunder without the prior written consent of the
Corporation and the Executive. The Corporation and the Executive acknowledge
that this Agreement evidences a transaction involving interstate commerce.
Notwithstanding any choice of law provision included in this Agreement, the
United States Federal Arbitration Act shall govern the interpretation and
enforcement of this arbitration provision. The arbitration proceeding shall be
conducted in Rockford, Illinois or such other location to which the parties may
agree. The Corporation shall pay the costs of any arbitrator appointed
hereunder.
 
17. No Assignment.  Except as otherwise expressly provided herein, this
Agreement is not assignable by any party and no payment to be made hereunder
shall be subject to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or other charge.
 
18. Execution in Counterparts.  This Agreement may be executed by the parties
hereto in two (2) or more counterparts, each of which shall be deemed to be an
original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
 
19. Jurisdiction and Governing Law.  This Agreement shall be construed and
interpreted in accordance with and governed by the laws of the State of
Illinois, other than the conflict of laws provisions of such laws.
 
20. Severability.  If any provision of this Agreement shall be adjudged by any
court of competent jurisdiction to be invalid or unenforceable for any reason,
such judgment shall not affect, impair or invalidate the remainder of this
Agreement. Furthermore, if the scope of any restriction or requirement contained
in this Agreement is too broad to permit enforcement of such restriction or
requirement to its full extent, then such restriction or requirement shall be
enforced to the maximum extent permitted by law, and the Executive consents and
agrees that any court of competent jurisdiction may so modify such scope in any
proceeding brought to enforce such restriction or requirement.
 
21. Prior Understandings.  This Agreement embodies the entire understanding of
the parties hereto and supersedes all other oral or written agreements or
understandings between them regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
each of the parties hereto. The headings in this Agreement are for convenience
of reference only and shall not be construed as part of this Agreement or to
limit or otherwise affect the meaning hereof.

11

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.

                             
Attest:
  WOODWARD GOVERNOR COMPANY               By:  
    
       

        Robert F. Weber, Jr.         Title: Chief Financial Officer and
Treasurer               By:  
    
       

        James R. Rulseh        
Title: Chairman of the Compensation
 Committee of the Board of Directors

12