Exhibit 10.3

 

XENOGEN CORPORATION

CHANGE OF CONTROL SEVERANCE POLICY

 

This document sets forth all applicable terms of the Change of Control Severance
Policy (the “Policy”) of Xenogen Corporation, a Delaware corporation (the
“Company”), effective as of the date set forth above and until further amended
or terminated by the Company’s Board of Directors (together with a properly
authorized committee thereof, the “Board”) in accordance with the terms hereof.
Certain capitalized terms used in this Policy are defined in Section 9 below.

 

POLICY GOALS

 

A. It is expected that the Company from time to time will consider the
possibility of a Change of Control. The Board recognizes that such consideration
can be a distraction to officers and employees and can cause these individuals
to consider alternative employment opportunities. The Board believes 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 its officers and
certain other employees, notwithstanding the possibility, threat or occurrence
of a Change of Control.

 

B. Accordingly, the Board believes that it is in the best interests of the
Company and its stockholders to provide officers and certain other employees
with an incentive to continue their employment and to motivate such individuals
to maximize the value of the Company upon a Change of Control for the benefit of
its stockholders by providing them with certain benefits to enhance their
financial security upon an employment termination following a Change of Control.

 

POLICY

 

1. Applicability and Term. This Policy shall be applicable to each individual
listed on Exhibit A (each, an “Employee”), which may be amended by the Company
from time to time in accordance with Section 10(a) of this Policy. This Policy
shall not apply to any Involuntary Termination occurring after the one-year
anniversary of the Change of Control Effective Date. Except as set forth in
Section 10(a), this Policy shall terminate upon the earlier of (i) the one-year
anniversary of the Change of Control Effective Date (except that the termination
of this Policy pursuant to Section 1(i) will not terminate the Company’s
obligation to continued payment of severance benefits under Section 3 with
respect to an Involuntary Termination of an Employee occurring after a Change of
Control and prior to the one-year anniversary of the Change of Control Effective
Date), (ii) the date that all obligations of the Company and each Employee have
been satisfied or (iii) with respect to each Employee, the date prior to a
Change of Control on which the Employee is no longer employed by the Company.

 

2. At-Will Employment. Each 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, the Employee shall not be entitled to any payments,
benefits, damages, awards or compensation other than as provided by this Policy
or required by applicable law, or as may otherwise be established under the
Company’s then existing employee benefit plans or policies at the time of
termination.

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3. Change of Control and Severance Benefits.

 

(a) Termination Following A Change of Control – Column A. If an Employee is
listed in Column A of Exhibit A and the Employee’s employment with the Company
terminates as a result of an Involuntary Termination at any time after a Change
of Control and prior to the twelve-month anniversary of the Change of Control
Effective Date, and the Employee delivers an effective release of claims as
required under and does not breach the covenants specified in Sections 6(a) and
6(b) below, then the Employee shall be entitled to the following severance
benefits:

 

(i) The Company shall continue to pay to the Employee an amount equal to twelve
(12) months of the Employee’s then-current base salary in equal installments
paid in the same amounts as received prior to the termination, less applicable
withholdings and in accordance with the Company’s standard payroll practices,
for a period equal to the shorter of (x) the period beginning on the date of
such termination and ending on the twelve (12) month anniversary thereafter or
(y) the period beginning on the date of termination and ending on March 15 of
the year following the year of termination with the last payment equal to the
remaining amount of severance payments owed.

 

(ii) Reimbursement of Employee’s expenses for continuing his or her health care
coverage and the coverage of his or her dependents who are covered at the time
of the Involuntary Termination under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended (“COBRA”), for a period ending on the
earlier of the date that is twelve (12) months after the date of termination or
the date on which Employee becomes eligible to be covered by the health care
plans of another employer; provided however that any Company obligation under
this paragraph requires that Employee timely elect COBRA continuation coverage
as required by applicable law.

 

(b) Termination Following A Change of Control – Column B. If an Employee is
listed in Column B of Exhibit A and and the Employee’s employment with the
Company terminates as a result of an Involuntary Termination at any time after a
Change of Control and prior to the twelve-month anniversary of the Change of
Control Effective Date, and the Employee delivers an effective release of claims
as required under and does not breach the covenants specified in Sections 6(a)
and 6(b) below, then the Employee shall be entitled to the following severance
benefits:

 

(i) The Company shall continue to pay to the Employee an amount of Employee’s
then-current base salary equal to the Formula (as defined below) in equal
installments paid in the same amounts as received prior to the termination, less
applicable withholdings and in accordance with the Company’s standard payroll
practices, for a period equal to the shorter of (x) the period beginning on the
date of such termination and ending on the Formula Anniversary Date (as defined
below) or (y) the period beginning on the date of termination and ending on
March 15 of the year following the year of termination with the last payment
equal to the remaining amount of severance payments owed. For purposes of this
Policy, the Formula shall mean the greater of six months or one month per each
year or partial year of Employee’s employment with the Company in no event to
exceed nine months. For purposes of this Policy, the Formula Anniversary Date
shall mean the date that is equal to greater of six months following Employee’s
termination date or one month per each year or partial year (in the event
Employee’s employment terminates in the middle of

 

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a year period) of Employee’s employment with the Company, in no event to exceed
nine months following Employee’s termination date.

 

(ii) Reimbursement of Employee’s expenses for continuing his or her health care
coverage and the coverage of his or her dependents who are covered at the time
of the Involuntary Termination under COBRA, for a period ending on the earlier
of the Formula Anniversary Date or the date on which Employee becomes eligible
to be covered by the health care plans of another employer; provided however
that any Company obligation under this paragraph requires that Employee timely
elect COBRA continuation coverage as required by applicable law.

 

(c) Other Terminations. If the Employee’s employment with the Company is
terminated, other than as a result of an Involuntary Termination, following a
Change of Control, then the Employee shall not be entitled to the benefits of
Section 3(a) or Section 3(b), as applicable, of this Policy.

 

(d) Accrued Wages and Vacation, Expenses. Without regard to the reason for, or
the timing of, the Employee’s termination of employment: (i) the Company shall
pay the Employee any unpaid base salary due for periods prior to and including
the Termination Date; (ii) the Company shall pay the Employee all of the
Employee’s accrued and unused vacation through the Termination Date; and
(iii) following submission of proper expense reports by the Employee, the
Company shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior to
the Termination Date. These payments shall be made promptly upon termination and
within the period of time mandated by law.

 

4. Limitation on Payments. In the event it shall be determined that any
compensation by or benefit from the Company to the Employee or for the
Employee’s benefit, whether pursuant to the terms of this Policy or otherwise
(collectively, the “Payments”), (i) constitute “parachute payments” within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
“Code”), and (ii) would be subject to the excise tax imposed by Section 4999 of
the Code (the “Excise Tax”), then the Employee’s benefits under this Policy
shall be either:

 

(a) delivered in full, or

 

(b) delivered as to such lesser extent which would result in no portion of such
benefits being subject to the Excise Tax,

 

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

 

Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section shall be made in writing by the
Company’s independent public accountants (the “Accountants”), 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, the Accountants may make reasonable assumptions and approximations
concerning

 

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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. Successors.

 

(a) Company’s Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company’s business and/or assets
shall assume the Company’s obligations under this Policy and agree expressly to
perform the Company’s obligations under this Policy 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 Policy, 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
subsection (a) or which becomes bound by the terms of this Policy by operation
of law.

 

(b) Employee’s Successors. Without the written consent of the Company, Employee
shall not assign or transfer any right or obligation under this Policy to any
other person or entity. Notwithstanding the foregoing, the terms of this Policy
and all rights of Employee hereunder shall inure to the benefit of, and be
enforceable by, Employee’s personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.

 

6. Conditions to Receiving Severance under Section 3(a).

 

(a) Execution of Release Agreement upon Termination. As a condition of receiving
the benefits under Section 3(a) of this Policy, the Employee shall execute and
not revoke a general release of claims upon the termination of employment with
the Company, which will also confirm the restrictive covenants set forth in
Section 6(b) of this Policy and any other post-termination restrictions
applicable to the Employee.

 

(b) Restrictive Covenants. At the time of any Involuntary Termination triggering
the payment of any severance benefits under Section 3, Employee shall refrain
from competing with the Company and its business for a period of twelve
(12) months following such Involuntary Termination (in the case of an Employee
listed in Column A of Exhibit A) or the period of time between the Involuntary
Termination date and the Formula Anniversary Date (in the case of an Employee
listed in Column B of Exhibit A).

 

7. Notices.

 

(a) General. Notices and all other communications contemplated by this Policy
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 or her at the home address which he or she most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall

 

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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 with or without 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 this Section. Any such notice provided by the
Company under circumstances constituting a for-Cause termination, or by the
Employee under circumstances constituting an Involuntary Termination shall
indicate the specific termination provision in this Policy 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 30 days after the giving of such
notice). The failure by either party to include in the notice any fact or
circumstance which contributes to a showing of a for-Cause termination or an
Involuntary Termination shall not waive any right of such party hereunder or
preclude such party from asserting such fact or circumstance in enforcing such
party’s rights hereunder.

 

8. Arbitration.

 

(a) Any dispute or controversy arising out of, relating to, or in connection
with this Policy, or the interpretation, validity, construction, performance,
breach, or termination thereof, shall be settled by binding arbitration to be
held in Alameda County in accordance with the National Rules for the Resolution
of Employment Disputes then in effect of the American Arbitration Association
(the “Rules”). The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator’s decision in any court having jurisdiction.

 

(b) The arbitrator(s) shall apply California law to the merits of any dispute or
claim, without reference to conflicts of law rules. The arbitration proceedings
shall be governed by federal arbitration law and by the Rules, without reference
to state arbitration law. Employee and the Company consent to the personal
jurisdiction of the state and federal courts located in California for any
action or proceeding arising from or relating to this Policy or relating to any
arbitration in which the parties are participants.

 

(c) Nothing in this Section modifies Employee’s at-will employment status.
Either Employee or the Company can terminate the employment relationship at any
time, with or without Cause.

 

(d) SUBMISSION OF ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH
THIS POLICY, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH
OR TERMINATION THEREOF TO BINDING ARBITRATION, CONSTITUTES A WAIVER OF THE
PARTY’S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES
RELATING TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT
LIMITED TO, THE FOLLOWING CLAIMS:

 

(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT; BREACH OF CONTRACT,
BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING,
BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL INFLICTION OF EMOTIONAL
DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION; NEGLIGENT OR INTENTIONAL
INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION;

 

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(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR MUNICIPAL STATUTE,
INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE
CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE
AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR LABOR STANDARDS ACT, THE
CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR CODE SECTION 201, et seq;
and

 

(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND REGULATIONS RELATING
TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.

 

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

 

(a) Cause. “Cause” shall mean (i) any act of personal dishonesty taken by the
Employee in connection with his responsibilities as an employee which is
intended to result in substantial personal enrichment of the Employee,
(ii) Employee’s conviction of a felony which the Board reasonably believes has
had or will have a material detrimental effect on the Company’s reputation or
business, (iii) a willful act by the Employee which constitutes misconduct and
is injurious to the Company, or (iv) continued willful violations by the
Employee of the Employee’s obligations to the Company after there has been
delivered to the Employee a written demand for performance from the Company
which describes the basis for the Company’s belief that the Employee has not
substantially performed his duties.

 

(b) Change of Control. “Change of Control” shall mean the occurrence of any of
the following events:

 

(i) the signing of an agreement by the Company and another entity relating to a
merger or consolidation of the Company with the other entity, other than a
merger or consolidation which 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) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation;

 

(ii) the approval by the stockholders of the Company of a plan of complete
liquidation of the Company or the signing of an agreement by the Company and
another entity relating to the sale or disposition by the Company of all or
substantially all of the Company’s assets to the other entity;

 

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

 

(iv) a change in the composition of the Board, 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 those directors whose election or
nomination was not in connection with any transactions described in subsections
(i), (ii), or (iii) or in connection with an actual or threatened proxy contest
relating to the election of directors of the Company.

 

(c) Involuntary Termination. “Involuntary Termination” shall mean (i) without
the Employee’s express written consent, a significant reduction of the
Employee’s duties, position or responsibilities relative to the Employee’s
duties, position or responsibilities in effect immediately prior to such
reduction, or the removal of the Employee from such position, duties and
responsibilities; provided, however, that a reduction in duties, position or
responsibilities solely by virtue of the Company being acquired and made part of
a larger entity (as, for example, when the Chief Financial Officer of the
Company remains as such following a Change of Control but is not made the Chief
Financial Officer of the acquiring corporation) shall not constitute an
“Involuntary Termination;” (ii) without the Employee’s express written consent,
a reduction by the Company of the Employee’s base salary as in effect
immediately prior to such reduction; (iii) without the Employee’s express
written consent, a material reduction by the Company in the kind or level of
employee benefits (including cash and stock bonus plans) to which the Employee
is entitled immediately prior to such reduction with the result that the
Employee’s overall benefits package is significantly reduced; (iv) without the
Employee’s express written consent, the relocation of the Employee to a facility
or a location which increases Employee’s one-way commute from Employee’s
residence at the time of the Change of Control by more than thirty (30) miles;
(v) any purported termination of the Employee by the Company which is not
effected for Cause; or (vi) the failure of the Company to obtain the assumption
of this Policy by any successors contemplated in Section 5.

 

(d) Change of Control Effective Date. “Change of Control Effective Date” shall
mean the effective date of a Change of Control described in Section 9(b)(iii)
and Section 9(b)(iv) and shall mean the effective date of the transaction
approved by stockholders and described in Section 9(b)(i) and Section 9(b)(ii).

 

(e) Termination Date. “Termination Date” shall mean the effective date of any
notice of termination delivered by one party to the other hereunder.

 

10. Miscellaneous Provisions.

 

(a) Amendment or Termination. The Board may in its sole discretion amend or
terminate this Policy at any time and in any manner; provided, however, that the
Board may not terminate or amend this Policy in a way that is materially adverse
to an Employee without the written consent of the Employee; and provided further
that notwithstanding anything to the contrary

 

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contained in this paragraph or in this Policy, it is the parties’ intent that no
payment made or to be made hereunder shall be subject to the provisions of
Section 409A(a)(1)(B) of the Internal Revenue Code, as amended, and accordingly,
the parties agree that this Policy and the Employees’ rights under it shall be
amended to conform to their intent as set forth in this proviso.

 

(b) Effect of Statutory Benefits. To the extent that any severance benefits are
required to be paid to the Employee upon termination of employment with the
Company as a result of any requirement of law or any governmental entity in any
applicable jurisdiction, the aggregate amount of severance benefits payable
pursuant to Section 3 hereof shall be reduced by such amount.

 

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

 

(d) Waiver. No provision of this Policy may be waived or discharged unless the
waiver or discharge is agreed to in writing and signed by the affected 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 Policy 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.

 

(e) Integration. This Policy supersedes all prior or contemporaneous agreements,
whether written or oral, with respect to this Policy; provided that, for
clarification purposes, this Policy shall not affect any agreements between the
Company and each Employee regarding intellectual property matters,
non-solicitation restrictions or confidential information of the Company.

 

(f) Choice of Law. The validity, interpretation, construction and performance of
this Policy shall be governed by the internal substantive laws, but not the
conflicts of law rules, of the State of California.

 

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

 

(h) Employment Taxes. Employee is responsible for any applicable taxes of any
nature (including any penalties or interest that may apply to such taxes) that
the Company reasonably determines apply to any payment made hereunder.
Employee’s receipt of any benefit hereunder is conditioned on his or her
satisfaction of any applicable withholding or similar obligations that apply to
such benefit, and any cash payment owed hereunder will be reduced to satisfy any
such withholding or similar obligations that may apply. The parties’ mutual
intent is that none of the payment arrangements under this Policy constitute a
“deferral of compensation” under Internal Revenue Code Section 409A (“Section
409A”) and that this Policy will be interpreted in a manner consistent with that
intent. The parties acknowledge, though, that uncertainty exists with respect to
certain interpretive issues under Section 409A. Accordingly, notwithstanding
anything else to the contrary contained herein, to the extent the Company in
good faith determines both that any payment provided for hereunder constitutes a
“deferral of compensation” under Section 409A and that

 

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Employee is as of the relevant date a “key employee” (as defined in
Section 409A(a)(2)(B)(i)), then no amounts shall be payable to Employee
hereunder prior to the earlier of (a) Employee’s death following the date of
employment termination, or (b) the date that is six months following the date of
Employee’s “separation from service” with the Company (within the meaning of
Section 409A). The Company may make such amendments to the terms of this Policy
as may be necessary to avoid the imposition of penalties and additional taxes
under Section 409A; provided however that no such amendment shall materially
increase the cost to, or impose any additional liability on, the Company with
respect to any benefits contemplated or provided hereunder.

 

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EXHIBIT A

 

Column A

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Column B

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William A. Albright

Jason M. Brady

David DeNola

Michael J Sterns, D.V.M.

  

Anthony Purchio, Ph.D.

Other Xenogen Employees added

to this list from time to time by

Xenogen’s Compensation Committee

 

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