Exhibit 10.3

 

ARCH CAPITAL GROUP LTD.
Non-Qualified Stock Option Agreement

 

FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
Arch Capital Group Ltd. (the “Company”), a Bermuda company, hereby grants to
_________, an employee of the Company on the date hereof (the “Option Holder”),
the option to purchase common shares, $0.01 par value per share, of the Company
(“Shares”), upon the following terms:

 

WHEREAS, the Option Holder has been granted the following award in connection
with his or her retention as an employee and as compensation for services to be
rendered; and the following terms reflect the Company’s 2002 Long Term Incentive
and Share Award Plan (the “Plan”);

 

(a)                                  Grant.  The Option Holder is hereby granted
an option (the “Option”) to purchase _________ Shares (the “Option Shares”)
pursuant to the Plan, the terms of which are incorporated herein by reference. 
The Option is granted as of September 22, 2004 (the “Date of Grant”) and such
grant is subject to the terms and conditions herein and the terms and conditions
of the applicable provisions of the Plan.  This Option shall not be treated as
an incentive stock option as defined in Section 422 of the Internal Revenue Code
of 1986, as amended.  In the event of any conflict between this Agreement and
the Plan, the Plan shall control.

 

(b)                                 Status of Option Shares.  Upon issue, the
Option Shares shall rank equally in all respects with the other Shares.

 

(c)                                  Option Price.  The purchase price for the
Option Shares shall be, except as herein provided, $39.00 per Option Share,
hereinafter sometimes referred to as the “Option Price,” payable immediately in
full upon the exercise of the Option.

 

(d)                                 Term of Option.  The Option may be exercised
only during the period (the “Option Period”) set forth in paragraph (f) below
and shall remain exercisable until the tenth anniversary of the Date of Grant. 
Thereafter, the Option Holder shall cease to have any rights in respect
thereof.  The right to exercise the Option shall be subject to sooner
termination as provided in paragraph (j) below.

 

(e)                                  No Rights of Shareholder.  The Option
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
in the Company, either at law or in equity.

 

(f)                                    Exercisability.  Except as otherwise set
forth in paragraph (j) below, the Option shall become exercisable as to one
third of the Option Shares on the Date of Grant, as to an additional one-third
of the Option Shares on the first anniversary of the Date of Grant, and as to
the final one-third of the Option Shares on the second anniversary of the Date
of Grant, in each case subject to paragraph (j) below.  Subject to paragraph (j)
below, the Option may be exercised at any time or from time to time during the
Option Period in regard to all or any portion of the Option which is then
exercisable, as may be adjusted pursuant to paragraph (g) below.

 

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(g)                                 Adjustments for Recapitalization and
Dividends.  In the event that, prior to the expiration of the Option, any
dividend in Shares, recapitalization, Share split, reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other such change affects the Shares such that they are
increased or decreased or changed into or exchanged for a different number or
kind of shares, other securities of the Company or of another corporation or
other consideration, then in order to maintain the proportionate interest of the
Option Holder and preserve the value of the Option, (i) there shall
automatically be substituted for each Share subject to the unexercised Option
the number and kind of shares, other securities or other consideration
(including cash) into which each outstanding Share shall be changed or for which
each such Share shall be exchanged, and (ii) the exercise price shall be
increased or decreased proportionately so that the aggregate purchase price for
the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.

 

(h)                                 Nontransferability.  The Option, or any
interest therein, may not be assigned or otherwise transferred, disposed of or
encumbered by the Option Holder, other than by will or by the laws of descent
and distribution.  During the lifetime of the Option Holder, the Option shall be
exercisable only by the Option Holder or by his or her guardian or legal
representative.  Notwithstanding the foregoing, the Option may be transferred by
the Option Holder to members of his or her “immediate family “ or to a trust or
other entity established for the exclusive benefit of solely one or more members
of the Option Holder’s “immediate family.”  Any Option held by the transferee
will continue to be subject to the same terms and conditions that were
applicable to the Option immediately prior to the transfer, except that the
Option will be transferable by the transferee only by will or the laws of
descent and distribution.  For purposes hereof, “immediate family” means the
Option Holder’s children stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brother and sisters), in laws,
and relationships arising because of legal adoption.

 

(i)                                     Exercise of Option.  In order to
exercise the Option, the Option Holder shall submit to the Company an instrument
in writing signed by the Option Holder, specifying the whole number of Option
Shares in respect of which the Option is being exercised, accompanied by
payment, in a manner acceptable to the Company (which shall include a broker
assisted exercise arrangement), of the Option Price for the Option Shares for
which the Option is being exercised.  Payment to the Company in cash or Shares
already owned by the Option Holder (provided that the Option Holder has owned
such Shares for a minimum period of six months or has purchased such Shares on
the open market) and having a total Fair Market Value (as defined below) equal
to the exercise price, or in a combination of cash and such Shares, shall be
deemed acceptable for purposes hereof.  Option Shares will be issued accordingly
by the Company, and a share certificate dispatched to the Option Holder within
30 days.

 

The Company shall not be required to issue fractional Shares upon the exercise
of the Option. If any fractional interest in a Share would be deliverable upon
the exercise of the Option in whole or in part but for the provisions of this
paragraph, the Company, in lieu of delivering any such fractional share
therefor, shall pay a cash adjustment therefor in an amount equal to their Fair
Market Value (or if any Shares are not publicly traded, an amount equal to the
book value per share at the end of the most recent fiscal quarter) multiplied by
the fraction of the fractional

 

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share which would otherwise have been issued hereunder.  Anything to the
contrary herein notwithstanding, the Company shall not be obligated to issue any
Option Shares hereunder if the issuance of such Option Shares would violate the
provision of any applicable law, in which event the Company shall, as soon as
practicable, take whatever action it reasonably can so that such Option Shares
may be issued without resulting in such violations of law.  For purposes hereof,
Fair Market Value shall mean the mean between the high and low selling prices
per Share on the immediately preceding date (or, if the Shares were not traded
on that day, the next preceding day that the Shares were traded) on the
principal exchange on which the Shares are traded, as such prices are officially
quoted on such exchange.

 

(j)                                     Termination of Service.  In the event
the Option Holder ceases to be an employee of the Company (a) due to his death
or Permanent Disability (as defined in the Company’s Incentive Compensation
Plan), or (b) due to termination (x) by the Company not for Cause (as defined in
the Company’s Incentive Compensation Plan) or (y) by the Option Holder for Good
Reason (as defined in the Employment Agreement, dated as of _________, between
the Option Holder and _________), the Option, to the extent not already
exercisable in full, shall become immediately exercisable in full and shall
continue to be exercisable by the Option Holder (or his Beneficiary or estate in
the event of his death) for a period of three years following such termination
of employment (but not beyond the Option Period).  In the event of termination
of employment (other than by the Company for Cause) after the attainment of
Retirement Age (as defined in the Company’s Incentive Compensation Plan), the
Option shall continue to vest on the schedule set forth in paragraph (f) above
so long as the Option Holder does not engage in any activity in competition with
any activity of the Company or any of its Subsidiaries other than serving on the
board of directors (or similar governing body) of another company or as a
consultant for no more than 26 weeks per calendar year (“Competitive Activity”)
and shall continue to be exercisable by the Option Holder (or his Beneficiary or
estate in the event of his death) for a period of three years following the
later of (i) the last date this Option actually vests under paragraph (f) above
or (ii) the date of termination of employment of the Option Holder (but in no
event beyond the Option Period).  In the event the Option Holder engages in a
Competitive Activity, the Option, to the extent then exercisable, may be
exercised for 90 days following the date on which the Option Holder engages in
such Competitive Activity (but not beyond the Option Period).  In the event that
the Option Holder ceases to be an employee of the Company for any other reason,
except due to a termination of the Option Holder’s employment by the Company for
Cause (as defined in the Company’s Incentive Compensation Plan), the Option, to
the extent then exercisable, may be exercised for 90 days following termination
of employment (but not beyond the Option Period).  In the event of a termination
of the Option Holder’s employment for Cause, the Option shall immediately cease
to be exercisable and shall be immediately forfeited.  To the extent the Option
is not exercisable at the time of termination of employment, the Option shall be
immediately forfeited.  For purposes of this Option, service with any of the
Company’s wholly owned subsidiaries shall be considered to be service with the
Company.

 

(k)                                  Obligations as to Capital.  The Company
agrees that it will at all times maintain authorized and unissued share capital
sufficient to fulfill all of its obligations under the Option.

 

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(l)                                     Transfer of Shares.  The Option, the
Option Shares, or any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered, or transferred or disposed of in any other manner, in
whole or in part, only in compliance with the terms, conditions and restrictions
as set forth in the governing instruments of the Company, applicable United
States federal and state securities laws and the terms and conditions hereof.

 

(m)                               Expenses of Issuance of Option Shares.  The
issuance of stock certificates upon the exercise of the Option in whole or in
part, shall be without charge to the Option Holder.  The Company shall pay, and
indemnify the Option Holder from and against any issuance, stamp or documentary
taxes (other than transfer taxes) or charges imposed by any governmental body,
agency or official (other than income taxes) by reason of the exercise of the
Option in whole or in part or the resulting issuance of the Option Shares.

 

(n)                                 Withholding.  No later than the date of
exercise of the Option granted hereunder, the Option Holder shall pay to the
Company or make arrangements satisfactory to the Committee regarding payment of
any federal, state or local taxes of any kind required by law to be withheld
upon the exercise of such Option and the Company shall, to the extent permitted
or required by law, have the right to deduct from any payment of any kind
otherwise due to the Option Holder, federal, state and local taxes of any kind
required by law to be withheld upon the exercise of such Option.

 

(o)                                 References.  References herein to rights and
obligations of the Option Holder shall apply, where appropriate, to the Option
Holder’s legal representative or estate without regard to whether specific
reference to such legal representative or estate is contained in a particular
provision of this Option.

 

(p)                                 Notices.  Any notice required or permitted
to be given under this agreement shall be in writing and shall be deemed to have
been given when delivered personally or by courier, or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the party concerned at the address indicated below or to such changed address as
such party may subsequently by similar process give notice of:

 

If to the Company:

 

Arch Capital Group Ltd.:

Wessex House
45 Reid Street
Hamilton HM 12 Bermuda
Attn:  Secretary

 

If to the Option Holder:

 

The last address delivered to the Company by the Option Holder in the manner set
forth herein.

 

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(q)                                 Governing Law.  This agreement shall be
governed by and construed in accordance with the laws of New York, without
giving effect to principles of conflict of laws thereof.

 

(r)                                    Entire Agreement.  This agreement and the
Plan constitute the entire agreement among the parties relating to the subject
matter hereof, and any previous agreement or understanding among the parties
with respect thereto is superseded by this agreement and the Plan.

 

(s)                                  Counterparts.  This agreement may be
executed in two counterparts, each of which shall constitute one and the same
instrument.

 

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IN WITNESS WHEREOF, the undersigned have executed this agreement as of the Date
of Grant.

 

 

ARCH CAPITAL GROUP LTD.

 

 

 

 

 

 

 

By:

 

 

 

 

 

 

 

 

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