Exhibit 10.40

 

CHANGE OF CONTROL SEVERANCE AGREEMENT WITH MICHAEL J. MURRY DATED MARCH 23, 2003

 

[LOGO]

[Catalytica Energy Systems]

  

1388 N. Tech Blvd.

Gilbert, AZ 85233

480.556.5555 Tel

480.315.3745 Fax

www.CatalyticaEnergy.com

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This Change of Control Severance Agreement (the “Agreement”) is made and entered
into by and between Michael J. Murry (the “Employee”) and Catalytica Energy
Systems, Inc. (the “Company”), effective as of the latest date set forth by the
signatures of the parties hereto below.

 

R E C I T A L S

 

A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control as a
means of enhancing stockholder value. The Board of Directors of the Company (the
“Board”) recognizes that such consideration can be a distraction to the Employee
and can cause the Employee to consider alternative employment opportunities. The
Board has determined that it is in the best interests of the Company and its
stockholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company.

 

B. The Board believes that it is in the best interests of the Company and its
stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

 

C. The Board believes that it is imperative to provide the Employee with certain
severance benefits upon Employee’s termination of employment following a Change
of Control which provides the Employee with enhanced financial security and
provides incentive and encouragement to the Employee to remain with the Company
notwithstanding the possibility of a Change of Control.

 

D. Certain capitalized terms used in the Agreement are defined in Section 6
below.

 

The parties hereto agree as follows:

 

1. Term of Agreement. This Agreement shall terminate upon the date that all
obligations of the parties hereto with respect to this Agreement have been
satisfied.

 

2. At-Will Employment. The Company and the Employee acknowledge that the
Employee’s employment is and shall continue to be at-will, as defined under
applicable law. If the Employee’s employment terminates for any reason,
including (without limitation) any termination after an announcement of Change
of Control and prior to twenty-four (24) months following a Change of Control or
the announcement of a Change of Control, whichever comes later, the Employee
shall not be entitled to any payments, benefits, damages, awards or compensation
other than as provided by this Agreement, or as may otherwise be available in
accordance with the Company’s established employee plans and practices or
pursuant to other agreements with the Company.

 

3. Severance Benefits.

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(a) Termination In Connection With A Change of Control. If the Employee’s
employment terminates as a result of Involuntary Termination (as defined below)
other than for Cause at any time after an announcement of a Change of Control
and prior to twenty-four (24) months following a Change of Control or the
announcement of a Change of Control, whichever comes later (a “Severance
Termination”), then, subject to Section 5, the Employee shall be entitled to
receive the following severance benefits:

 

(1) Severance Payment. A cash payment in an amount equal to two hundred percent
(200%) of the Employee’s Annual Compensation plus a pro rata payment of the
current year bonus award based on the target bonus for the Employee;

 

(2) Continued Employee Benefits. One hundred percent (100%) Company-paid health,
dental and life insurance coverage at the same level of coverage as was provided
to such employee immediately prior to the Severance Termination (the
“Company-Paid Coverage”). If such coverage included the Employee’s dependents
immediately prior to the Severance Termination, such dependents shall also be
covered at Company expense. Company-Paid Coverage shall continue until the
earlier of (i) two years from the date of the Involuntary Termination or (ii)
the date that the Employee and his dependents become covered under another
employer’s group health, dental or life insurance plans that provide Employee
and his dependents with comparable benefits and levels of coverage. For purposes
of Title X of the Consolidated Budget Reconciliation Act of 1985 (“COBRA”), the
date of the “qualifying event” for Employee and his dependents shall be the date
upon which the Company-Paid Coverage terminates.

 

(3) Option and Restricted Stock Accelerated Vesting. One Hundred percent (100%)
of the unvested portion of any stock option or restricted stock held by the
Employee shall automatically be accelerated in full so as to become completely
vested.

 

(4) Timing of Severance Payments. Any severance payment to which Employee is
entitled under Section 3(a)(1) shall be paid by the Company to the Employee (or
to the Employee’s successor in interest, pursuant to Section 7(b)) in cash and
in full, not later than thirty (30) calendar days following the Termination
Date, subject to Section 9(f).

 

(b) Voluntary Resignation; Termination For Cause. If the Employee’s employment
terminates by reason of the Employee’s voluntary resignation (and is not an
Involuntary Termination), or if the Employee is terminated for Cause, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established under the Company’s then existing
option, severance and benefits plans and practices or pursuant to other
agreements with the Company.

 

(c) Disability; Death. If the Company terminates the Employee’s employment as a
result of the Employee’s Disability, or such Employee’s employment is terminated
due to the death of the Employee, then the Employee shall not be entitled to
receive severance or other benefits except for those (if any) as may then be
established under the Company’s then existing severance and benefits plans and
practices or pursuant to other agreements with the Company.

 

(d) Termination Apart from Change of Control. In the event the Employee’s
employment is terminated for any reason, either prior to the three-month notice
period before a Change of Control or after the twenty-four (24)-month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company’s existing severance and benefits plans and practices or pursuant to
other agreements with the Company.

 

4. Attorney Fees, Costs and Expenses. The Company shall reimburse Employee for
the reasonable attorney fees, costs and expenses incurred by the Employee in
connection with any action brought by Employee to enforce his rights hereunder,
provided such action is not decided in favor of the Company.

 

5. Limitation on Payments.

 

(a) In the event that the severance and other benefits provided for in this
Agreement or otherwise payable to the Employee (i) constitute “parachute
payments” within the meaning of Section 280G of the Internal

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Revenue Code of 1986, as amended (the “Code”) and (ii) but for this Section 5,
would be subject to the excise tax imposed by Section 4999 of the Code, then the
Employee’s severance benefits under Section 3(a)(1) shall be either

 

  (A)   delivered in full, or

 

  (B)   delivered as to such lesser extent which would result in no portion of
such severance benefits being subject to excise tax under Section 4999 of the
Code,

 

whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
severance benefits, notwithstanding that all or some portion of such severance
benefits may be taxable under Section 4999 of the Code. Any taxes due under
Section 4999 shall be the responsibility of the employee.

 

(b) If a reduction in the payments and benefits that would otherwise be paid or
provided to the Employee under the terms of this Agreement is necessary to
comply with the provisions of Section 5(a), the Employee shall be entitled to
select which payments or benefits will be reduced and the manner and method of
any such reduction of such payments or benefits (including but not limited to
the number of options that would vest under Section 3(a)) subject to reasonable
limitations (including, for example, express provisions under the Company’s
benefit plans) (so long as the requirements of Section 5(a) are met). Within
thirty (30) days after the amount of any required reduction in payments and
benefits is finally determined in accordance with the provisions of Section
5(c), the Employee shall notify the Company in writing regarding which payments
or benefits are to be reduced. If no notification is given by the Employee, the
Company will determine which amounts to reduce. If, as a result of any reduction
required by Section 5(a), amounts previously paid to the Employee exceed the
amount to which the Employee is entitled, the Employee will promptly return the
excess amount to the Company.

 

(c) Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 5 shall be made in writing by the
Company’s Accountants immediately prior to Change of Control, whose
determination shall be conclusive and binding upon the Employee and the Company
for all purposes. For purposes of making the calculations required by this
Section 5, the Accountants may, after taking into account the information
provided by the Employee, make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Sections 280G and 4999 of the
Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5.

 

6.     Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:

 

(a)     Accountant. Unless the Company and the Employee otherwise agree in
writing, any determination required under the Section shall be made in writing
by the Company’s independent public accountants.

 

(b)     Annual Compensation. “Annual Compensation” means an amount equal to the
greater of (i) Employee’s Company salary for the twelve (12) months preceding
the Change of Control plus the employee’s target bonus (including cash and stock
components) for the same period or (ii) Employee’s Company Salary on an
annualized basis and the employee’s target bonus (including cash and stock
components) as of the Termination Date.

 

(b)     Cause. “Cause” shall mean (i) any act of personal dishonesty taken by
the Employee in connection with his responsibilities as an employee and intended
to result in substantial personal enrichment of the Employee, (ii) the
conviction of a felony, (iii) a willful act by the Employee that constitutes
gross misconduct and that is injurious to the Company, (iv) Employee’s failure
to satisfactorily perform his or her job duties for a period of not less than
thirty (30) days following delivery to the Employee of a written demand for
performance from the Company that describes the basis for the Company’s belief
that the Employee has not substantially performed his duties; or (v) Employee’s
continued violations of the Employee’s obligations to the Company that are
demonstrably willful and deliberate on the Employee’s part. Any dismissal for
cause in accordance with Subsection (iv) or (v) of this Section 6(b) must be
approved by the Company’s Board of Directors prior to the dismissal date.

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(c)     Change of Control. “Change of Control” means the occurrence of any of
the following events:

 

(i)     Any “person” (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) becomes the “beneficial owner” (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing fifty percent (50%) or more of the total voting power
represented by the Company’s then outstanding voting securities;

 

(ii)     A change in the composition of the Board occurring within a
twelve-month period, as a result of which fewer than a majority of the directors
are Incumbent Directors. “Incumbent Directors” shall mean directors who either
(A) are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company);

 

(iii)     The consummation of a merger or consolidation of the Company with any
other corporation, other than a merger or consolidation that would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or such surviving entity’s
parent) at least fifty percent (50%) of the total voting power represented by
the voting securities of the Company or such surviving entity or such surviving
entity’s parent outstanding immediately after such merger or consolidation;

 

(iv)     The consummation of the sale or disposition by the Company of all or
seventy-five percent (75%) or more of the Company’s assets.

 

(d) Disability. “Disability” shall mean that the Employee has been unable to
perform the essential functions of his Company duties with or without reasonable
accommodation as the result of his incapacity due to physical or mental illness,
and such inability, at least twenty-six (26) weeks after its commencement, is
determined to be total and permanent by a physician selected by the Company or
its insurers and acceptable to the Employee or the Employee’s legal
representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least thirty (30) days’ written notice by the Company of its intention to
terminate the Employee’s employment. In the event that the Employee resumes the
performance of substantially all of his duties hereunder before the termination
of his employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.

 

(e) Involuntary Termination. “Involuntary Termination” shall mean (i) without
the Employee’s express written consent, the significant reduction of the
Employee’s duties, authority or responsibilities, relative to the Employee’s
duties, authority or responsibilities as in effect immediately prior to such
reduction, or the assignment to Employee of such reduced duties, authority or
responsibilities, including any change which results in Employee not reporting
directly to the Board of Directors or any reduction in title or responsibilities
which results in Employee not holding the most senior executive position
reporting directly to the Company’s Board of Directors; (ii) without the
Employee’s express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Employee immediately prior to such reduction; (iii) a
reduction by the Company in the base salary or target bonus of the Employee as
in effect immediately prior to such reduction; (iv) a material reduction by the
Company in the kind or level of employee benefits to which the Employee was
entitled immediately prior to such reduction with the result that the Employee’s
overall benefits package is significantly reduced; (v) the relocation of the
Employee to a facility or a location more than twenty-five (25) miles from the
Employee’s then present location, without the Employee’s express written
consent; (vi) any purported termination of the Employee by the Company that is
not effected for Disability or for Cause, or any purported termination for which
the grounds relied upon are not valid; (vii) the failure of the Company to
obtain the assumption of this Agreement by any successors contemplated in
Section 7(a) below; or (viii) any act or set of facts or circumstances that
would, under California case law or statute constitute a constructive
termination of the Employee.

 

(f) Termination Date. “Termination Date” shall mean (i) if this Agreement is
terminated by the Company for Disability, thirty (30) days after notice of
termination is given to the Employee (provided that the Employee shall not have
returned to the performance of the Employee’s duties on a full-time basis during
such thirty

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(30)-day period), (ii) if the Employee’s employment is terminated by the Company
for any other reason, the date on which a notice of termination is given,
provided that if within thirty (30) days after the Company gives the Employee
notice of termination, the Employee notifies the Company that a dispute exists
concerning the termination or the benefits due pursuant to this Agreement, then
the Termination Date shall be the date on which such dispute is finally
determined, either by mutual written agreement of the parties, or a by final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected), or (iii)
if the Agreement is terminated by the Employee, the date on which the Employee
delivers the notice of termination to the Company.

 

7. Successors.

 

(a) Company’s Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company’s business and/or assets
shall assume the obligations under this Agreement and agree expressly to perform
the obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a
succession. For all purposes under this Agreement, the term “Company” shall
include any successor to the Company’s business and/or assets which executes and
delivers the assumption agreement described in this Section 7(a) or which
becomes bound by the terms of this Agreement by operation of law.

 

(b) Employee’s Successors. The terms of this Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.

 

8. Notice.

 

(a) General. Notices and all other communications contemplated by this Agreement
shall be in writing and shall be deemed to have been duly given when personally
delivered or when mailed by U.S. registered or certified mail, return receipt
requested and postage prepaid. In the case of the Employee, mailed notices shall
be addressed to him at the home address which he most recently communicated to
the Company in writing. In the case of the Company, mailed notices shall be
addressed to its corporate headquarters, and all notices shall be directed to
the attention of its Secretary.

 

(b) Notice of Termination. Any termination by the Company for Cause or by the
Employee as a result of a voluntary resignation or an Involuntary Termination
shall be communicated by a notice of termination to the other party hereto given
in accordance with Section 8(a) of this Agreement. Such notice shall indicate
the specific termination provision in this Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than thirty (30) days after the giving
of such notice). The failure by the Employee to include in the notice any fact
or circumstance which contributes to a showing of Involuntary Termination shall
not waive any right of the Employee hereunder or preclude the Employee from
asserting such fact or circumstance in enforcing his rights hereunder.

 

9. Miscellaneous Provisions.

 

(a) No Duty to Mitigate. The Employee shall not be required to mitigate the
amount of any payment contemplated by this Agreement, nor shall any such payment
be reduced by any earnings that the Employee may receive from any other source.

 

(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.

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(c) Whole Agreement. This Agreement and any outstanding stock option agreements
represent the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same. Other than the agreements described in the preceding sentence,
no agreements, representations or understandings (whether oral or written and
whether express or implied) which are not expressly set forth in this Agreement
have been made or entered into by either party with respect to the subject
matter hereof.

 

(d) Choice of Law. The validity, interpretation, construction and performance of
this Agreement shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of California
without regard to principles of conflicts of laws.

 

(e) Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.

 

(f) Withholding. All payments made pursuant to this Agreement will be subject to
withholding of applicable income and employment taxes.

 

(g) Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together will constitute one and
the same instrument.

 

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
of the Company by its duly authorized officer, as of the day and year set forth
below.

 

COMPANY

     

CATALYTICA ENERGY SYSTEMS, INC.

           

By:

 

/s/    Ricardo B. Levy       

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Ricardo B. Levy

           

Title:

 

Chairman of the Board

           

Date:

 

March 23, 2003

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EMPLOYEE

         

/s/    Michael J. Murry       

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Michael J. Murry

           

Date:

 

March 12, 2003

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