EXHIBIT 10.31
SOUTHWEST AIRLINES CO.
2007 EQUITY INCENTIVE PLAN
NOTICE OF GRANT OF STOCK OPTIONS
     Southwest Airlines Co. hereby grants to you (the “Participant”) the right
and option (the “Option” or “Options”) to purchase shares of the Common Stock of
the Company as follows:
Participant:
Grant Date:
Expiration Date:
Exercise Price:
Number of Options Granted:
Option Type:
Vesting Schedule:                          Per schedule below
      Vesting Date:                           Vesting Schedule
     In all cases, it will be a condition to vesting that the Participant still
be an Employee or Director on the vesting date.
     Participant understands and agrees that the Option described above is
granted in accordance with and subject to the terms and conditions of the
Southwest Airlines Co. 2007 Equity Incentive Plan (the “Plan”) and the
applicable terms and conditions accompanying this notice of grant (the “Terms
and Conditions”).
     The Plan, the Terms and Conditions, and the prospectus for the Plan are
enclosed with this Notice of Grant. Additional copies of these documents are
available upon request to the Company’s Stock Option Administration Department.
     Participant is not required to exercise these Options; however, by
exercising any of these Options or by asserting any other rights pursuant to the
Plan, Participant will be deemed to have agreed to the terms and conditions of
the Plan and the accompanying Terms and Conditions.
Southwest Airlines Co.

 

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SOUTHWEST AIRLINES CO.
2007 EQUITY INCENTIVE PLAN
TERMS AND CONDITIONS
STOCK OPTIONS
     By exercising an option (an “Option”) or asserting any other rights
pursuant to the Southwest Airlines Co. 2007 Equity Incentive Plan (the “Plan”),
you (“you” or the “Participant”) will be deemed to have agreed to the terms and
conditions of the Plan, which terms and conditions are incorporated herein by
reference, and the terms and conditions set forth below. Capitalized terms used
and not otherwise defined herein shall have the meanings assigned to them in the
Plan.
     1. Vesting. Subject to these Terms and Conditions and the provisions of the
Plan, the Options granted to you pursuant to the Plan shall become exercisable
as set forth in the Notice of Grant that you have received in connection with
the Plan.
     2. Term; Rights Upon Termination of Service. In the event of the
termination of the Participant’s service as an Employee or Director with the
Company or any Affiliate, the Participant’s Options that have not vested as of
the date of termination shall automatically and without notice terminate and
become null and void at 4:00 p.m., Eastern Time, on the date of termination. The
outstanding and vested portion of the Option shall thereafter automatically and
without notice terminate and become null and void at 4:00 p.m., Eastern Time, on
the date that is the earliest to occur of the following (the “Option Expiration
Date”):
          (a) the date of the Participant’s termination of service with the
Company or an Affiliate for cause, including breach by the Participant of an
employment agreement with the Company or an Affiliate or the Participant’s
commission of a felony or misdemeanor (whether or not prosecuted) against the
Company or an Affiliate;
          (b) The expiration of two (2) years following the date of termination
of a Participant’s employment with the Company or an Affiliate if the
Participant is not also a Director of the Company;
          (c) The expiration of five (5) years following the date of termination
of a Directors’ service with the Board;
          (d) The expiration of such other period of time or the occurrence of
such event as is provided for in the Participant’s Notice of Grant;
          (e) the expiration of ten (10) years from the date of grant of the
Option.
     Upon the occurrence of any event described in this Section 2, if the
Participant desires to exercise the Option prior to the Option Expiration Date,
the Participant must provide notice of exercise to the Company or the Company’s
designee prior to the close of trading on the New York Stock Exchange on the
Option Expiration Date.

 

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     3. Manner of Exercise.
          (a) Procedure. The Option may be exercised by the Participant (or by
the person who acquires the Option by will or the laws of descent and
distribution or otherwise by reason of the death of the Participant) as to all
or part of the shares covered by the Option by delivery to the Company or the
Company’s designee of (i) notice of the exercise in substantially the form and
manner prescribed by the Company (the “Notice”), setting forth the number of
shares of Common Stock with respect to which the Option is to be exercised and
the date of exercise thereof, and (ii) consideration with a value equal to the
aggregate exercise price for the shares to be purchased. From time to time, the
Company and/or the Committee may establish procedures relating to effecting such
exercises. No fractional shares shall be issued as a result of exercising an
Option.
          (b) Payment. In the Notice, the Participant shall elect the form of
payment, which may be as follows: (i) in cash; (ii) in shares of Common Stock;
(iii) by delivery (including by fax or electronic means in accordance with
procedures determined by the Committee) to the Company or its designee of an
irrevocable Option exercise notice together with irrevocable instructions from
the Participant to a broker or dealer reasonably acceptable to the Company to
sell certain of the shares of Common Stock purchased upon exercise of the Option
or to pledge such shares as collateral for a loan and promptly deliver to the
Company or the Company’s designee the amount of sale or loan proceeds necessary
to pay the exercise price; and/or (iv) in any other form of valid consideration
that is acceptable to the Committee in its sole discretion; provided that, with
respect to a cashless exercise of the Option (in accordance with clause
(iii) above) the Option will be deemed exercised on the date of sale of the
shares of Common Stock received upon exercise. The Notice shall be signed by the
person(s) exercising the Option and, in the event the Option is being exercised
by any person(s) other than the Participant, the Notice shall be accompanied by
proof satisfactory to the Company’s counsel of the right of such person(s) to
exercise the Option. If payment is to be made in cash, the Participant shall
deliver to the Company or the Company’s designee a cashier’s check or electronic
funds transfer in the amount of the exercise price on or before the exercise
date. If payment is to be made in shares of Common Stock, (i) it shall be valued
at its fair market value on the date of the Notice; and (ii) to the extent
requested by the Company, the Notice shall be accompanied by documentation,
satisfactory to the Committee, proving ownership of the number of shares of
Common Stock to be used as payment. For these purposes, “fair market value”
shall be the mean between the highest and lowest quoted selling prices of the
Common Stock on such day, as reported by the primary national stock exchange on
which such stock is listed.
          (c) Irrevocable Election. The giving of such Notice to the Company or
its designee shall constitute an irrevocable election to purchase the number of
shares specified in the Notice on the date specified in the Notice.
          (d) Withholding Taxes. To the extent that the exercise of any Option
or the disposition of shares of Common Stock acquired upon exercise of an Option
results in compensation income to the Optionee for tax purposes, the Participant
shall deliver to the Company or the Company’s designee at the time of such
exercise or disposition such amount of money, if any, as the Company may require
to meet its obligations under applicable tax laws or regulations, and, if the
Participant fails to do so, the Company shall be authorized to (i) withhold
delivery of certificates upon exercise and (ii) withhold from remuneration then
or thereafter payable to the Participant any tax required to be withheld by
reason of such resulting

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compensation income. The Company is authorized to take such other action as it
deems appropriate to ensure that all applicable federal, state, local, or other
income, employment, or other tax withholding obligations to which the
Participant is subject in connection with the Option are withheld or collected
from the Participant.
          (e) Delivery of Shares. Upon satisfaction of the conditions set forth
in this Section 3, the Company shall cause certificates for any shares to be
delivered to the Participant or otherwise credited to the account of the
Participant (or to the person exercising the Participant’s Options in the event
of death) as soon as practicable after the exercise date.
     4. Nontransferable. The Option shall not be transferable by the Participant
other than by will or the laws of descent and distribution, and during the
Participant’s lifetime shall be exercisable only by the Participant or the
Participant’s legal guardian or representative.
     In the event of the Participant’s death during a period during which the
Participant’s Options could have been exercised by the Participant, the Option
shall thereafter be exercisable, to the extent exercisable at the date of death,
only by his or her executors or administrators or the person(s) who acquires
such Option by will or the laws of descent or distribution, or otherwise by
reason of the death of the Participant.
     5. Rights of Participant. Neither the Participant nor his or her executors,
administrators, beneficiaries, or legal representatives shall have any of the
rights of a Shareholder of the Company with respect to the shares subject to the
Option until a certificate or certificates for such shares shall have been
issued upon the exercise of the Option or such shares have otherwise been
credited to such person’s account.
     6. No Rights to Continued Employment or Service as a Director. The
Participant agrees that nothing herein shall be construed to confer upon the
Participant any right to continue as an Employee or Director of the Company or
any Affiliate or to interfere in any way with the right of the Company or any of
its Affiliates to terminate the Participant’s employment or other service at any
time.
     7. Adjustments upon Changes in Capitalization. The number and kind of
shares covered by the Option, and the Option exercise price, shall be subject to
adjustment in accordance with Article XI of the Plan.
     8. Purchase for Investment and Legality. The Participant, by acceptance
hereof, represents and warrants to the Company that the purchase of shares of
Common Stock upon the exercise of the Option shall be for investment and not
with a view to distribution, provided that this representation and warranty
shall be inoperative if, in the opinion of counsel to the Company, a proposed
sale or distribution of such shares is pursuant to an applicable effective
registration statement under the Securities Act of 1933, as amended, or is,
without such representation and warranty, exempt from registration under such
Act.
     The Participant agrees that the obligation of the Company to issue shares
upon the exercise of an Option shall also be subject as conditions precedent to
compliance with applicable provisions of the Securities Act of 1933, the
Securities Exchange Act of 1934, state securities laws, rules and regulations
under any of the foregoing, and applicable requirements of any securities
exchange upon which the Company’s securities shall be listed.

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     The Company may (i) endorse an appropriate legend referring to the
foregoing restrictions upon the certificate or certificates representing any
shares of Common Stock issued or transferred to the Participant upon the
exercise of the Option or (ii) otherwise note such restrictions with respect to
shares that are not certificated.

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