Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made effective as of
November 14, 2012 (the “Effective Date”) by and between Targacept, Inc., a
Delaware corporation (“Employer”), and Dr. Stephen A. Hill, an individual
resident of Georgia (“Employee”);

RECITALS:

WHEREAS, Employer considers the availability of Employee’s services to be
important to the management and conduct of Employer’s business and desires to
secure the continued availability of Employee’s services; and

WHEREAS, Employee is willing to make his services available to Employer on the
terms and subject to the conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the
parties hereto agree as follows:

1. Employment. For the Term (as defined in Section 2), Employee shall be
employed as President and Chief Executive Officer of Employer. Employee will be
located at Employer’s principal executive offices in Winston-Salem, North
Carolina or such other location as may be approved by Employer’s Board of
Directors (the “Board”). Employee hereby accepts and agrees to such employment,
subject to the general supervision of the Board. Employee shall perform such
duties and shall have such powers, authority and responsibilities as are
customary for one holding the position of President and Chief Executive Officer
of a business similar to Employer and shall additionally render such other
services and duties as may be reasonably assigned to him from time to time by
the Board.

2. Term of Employment. Employee’s employment with Employer shall commence as of
December 1, 2012 (the “Start Date”) and continue until terminated as provided in
Section 6 or Section 7 (such period, the “Term”). Any termination of Employee’s
employment with Employer or this Agreement shall not affect the parties’
continuing obligations under Section 5, which shall survive any such
termination.

3. Compensation.

(a) For all services rendered by Employee to Employer under this Agreement,
Employer shall pay to Employee, during the Term, an annual base salary of not
less than $500,000 ($41,666.66 per month), payable in arrears in accordance with
the customary payroll practices of Employer. During the Term, Employee’s annual
base salary shall be reviewed and subject to increase in accordance with
Employer’s standard policies and procedures.

(b) Employee shall be eligible to earn an annual bonus during the Term of up to
50% of Employee’s annual base salary or such higher amount as may be determined
by the Board (or a compensation committee thereof) from time to time (Employee’s
“Target Annual Bonus”). Eligibility for the Target Annual Bonus shall be based
upon the achievement of performance objectives established by the Board (or a
compensation committee thereof) and shall be payable in the normal course after
the end of each fiscal year, but in no event to exceed ninety (90) days after
the end of each fiscal year.

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(c) All amounts payable hereunder shall be subject to such deductions and
withholdings as shall be required by law, if any.

(d) On or as soon as practicable after the Start Date, Employee shall be granted
a nonqualified stock option to purchase 400,000 shares of Employer’s common
stock (the “Option”) pursuant to an agreement substantially in the form attached
hereto as Exhibit A (the “Option Agreement”). The Option shall: (i) have a term
of ten years; (ii) an exercise price equal to the closing price of Employer’s
common stock on the NASDAQ Stock Market on the date of grant (or, if the NASDAQ
Stock Market is closed for trading on the Start Date, on the first day
thereafter on which the NASDAQ Stock Market is open); (iii) vest 25% on
December 31, 2013 and ratably thereafter on the last day of twelve
(12) consecutive calendar quarters beginning with March 31, 2014; and
(iv) otherwise be on the terms and conditions set forth in the Option Agreement.
Employee shall be eligible to receive additional awards under Employer’s 2006
Stock Incentive Plan, as amended and restated from time to time (the “2006
Plan”), or any successor plan thereto, in the discretion of the Board (or a
compensation committee thereof).

(e) Employee shall also be entitled during the Term to holidays, sick leave and
other time off and to participate in those life, health or other insurance plans
and other employee retirement and welfare benefit programs, plans, practices and
benefits generally made available from time to time to similarly situated
executives of Employer; provided that nothing herein shall obligate Employer to
continue any of such programs, plans, practices or benefits for Employee if
discontinued for all other similarly situated executives of Employer. Without
limiting the foregoing, Employee shall be entitled to paid vacation during each
fiscal year of the Term of twenty (20) days.

4. Reimbursement of Expenses. Employer shall pay or reimburse Employee for all
reasonable travel and other expenses incurred by Employee in performing the
duties of his employment under this Agreement and also, to the extent consistent
with Employer’s policy, for any dues and costs of membership for appropriate
professional organizations and continuing professional education, in each case
subject to such reasonable documentation and substantiation as Employer shall
require.

5. Covenants of Employee.

(a) Covenant Not to Compete. Employee covenants that during the Noncompetition
Period (as defined in Section 5(g)) and within the Noncompetition Area (as
defined in Section 5(h)), he shall not, directly or indirectly, as principal,
agent, officer, director, shareholder, member, employee, consultant or trustee,
or through the agency of any person, firm, corporation, partnership, limited
liability company, association or other entity (collectively, “Entity”), engage
in the Business (as defined in Section 5(i)). Without limiting the generality of
the foregoing, Employee agrees that during the Noncompetition Period and within
the Noncompetition Area, he shall not be (i) the owner of the outstanding
capital stock or other equity interests of any Entity (other than Employer or
its affiliates) that, directly or indirectly, engages in the Business; or
(ii) an officer, director, partner, manager, member, consultant or employee of
any Entity that, directly or indirectly, engages in the Business; provided that
this Section 5(a) shall not prevent Employee from (A) being

 

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an executive or otherwise work in the same or similar capacity for any area or
division of any Entity to the extent that such area or division does not,
directly or indirectly, engage in the Business or (B) beneficially owning less
than 1% of the stock of a corporation traded on a national securities exchange
(including, without limitation, the NASDAQ Stock Market).

(b) Nondisclosure Covenant. The parties acknowledge that Employer and its
affiliates are enterprises the success of which is attributable largely to the
ownership, use and development of certain valuable confidential and proprietary
information (“Proprietary Information”) and that Employee’s employment with
Employer will involve access to and work with Proprietary Information. Employee
acknowledges that his relationship with Employer is a confidential relationship
and agrees that he shall: (i) keep and maintain all Proprietary Information in
strictest confidence; (ii) not, either directly or indirectly, use any
Proprietary Information for his own benefit; and (iii) not, either directly or
indirectly, divulge, disclose or communicate any Proprietary Information in any
manner whatsoever to any person or Entity, other than to employees or agents of
Employer having a need to know such Proprietary Information to perform their
responsibilities on behalf of Employer or to other persons or Entities in the
normal course of Employer’s business. This nondisclosure obligation shall apply
to all Proprietary Information, whether or not Employee participated in the
development thereof. Upon termination of his employment with Employer for any
reason, Employee will return to Employer all Proprietary Information in any
medium and all other documents, data, materials or property of Employer
(including any copies thereof) in his possession. For purposes of this
Agreement, the term “Proprietary Information” shall include any and all
information related to the business of Employer, any of its affiliates or any
third party whose information Employee had access to by virtue of his employment
with Employer, or to any of their respective products, services, sales or
operations, that is not generally known to the public, specifically including,
but without limitation: trade secrets; processes; formulae; compounds and
properties thereof; data; files; research results; computer programs or related
source codes or object codes; improvements; inventions; techniques; business,
operating, marketing, partnering or merger and acquisition plans; strategies;
forecasts; copyrightable material; suppliers; vendors; methods and manner of
operations; information relating to the identity, needs and location of all
past, present and prospective customers; and information with respect to the
internal affairs of Employer and its affiliates. Such Proprietary Information
may or may not contain legends or other written notice that it is of a
confidential or proprietary nature. The parties stipulate that, as between them,
the above-described matters are important and confidential and gravely affect
the successful conduct of the business of Employer and its affiliates and that
any breach of the terms of this Section 5(b) shall be a material breach of this
Agreement.

(c) Nonsolicitation Covenant. Employee covenants that during the Noncompetition
Period he shall not, directly or indirectly, on behalf of himself or any Entity,
call upon any of the customers or clients of Employer or potential customers or
clients of Employer for the purpose of soliciting or providing any product or
service similar to that provided by Employer, nor will he, in any way, directly
or indirectly, on behalf of himself or any Entity solicit, divert or take away,
or attempt to solicit, divert, or take away any of the customers, clients,
business or patrons of Employer (or potential customers or clients whose
business Employee solicited on behalf of Employer or about whose needs Employee
gained information during his employment with Employer); provided that the
restrictions of this Section 5(c) shall apply only to those customers, clients,
patrons or prospective customers, clients or patrons that Employee solicited,
called upon, or contacted on Employer’s behalf during the two (2) year period
immediately preceding the

 

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termination of Employee’s employment with Employer. Employee further covenants
that during the Noncompetition Period he shall not, directly or indirectly, on
behalf of himself or any Entity, solicit, induce or encourage any person to
leave the employ of Employer.

(d) Inventions. All inventions, designs, formulae, processes, discoveries,
drawings, improvements and developments made by Employee, either solely or in
collaboration with others, during his employment with Employer, whether or not
during working hours, and relating to any methods, apparatus, products,
compounds, services or deliverables that are made, furnished, sold, leased, used
or developed by Employer or its affiliates or that pertain to the business of
Employer (the “Developments”) shall become and remain the sole property of
Employer. Employee shall disclose promptly in writing to Employer all such
Developments. Employee acknowledges and agrees that all Developments shall be
deemed “works made for hire” within the meaning of the United States Copyright
Act, as amended. If, for any reason, such Developments are not deemed works made
for hire, Employee hereby assigns to Employer all of his right, title and
interest (including, but not limited to, copyright and all rights of
inventorship) in and to such Developments. At the request and expense of
Employer, whether during or after employment with Employer, Employee shall make,
execute and deliver all application papers, assignments or instruments, and
perform or cause to be performed such other lawful acts as Employer may deem
necessary or desirable in making or prosecuting applications, domestic or
foreign, for patents (including reissues, continuations and extensions thereof)
and copyrights related to such Developments or in vesting in Employer full legal
title to such Developments. Employee shall assist and cooperate with Employer or
its representatives in any controversy or legal proceeding relating to such
Developments or any patents, copyrights or trade secrets with respect thereto.
If for any reason Employee refuses or is unable to assist Employer in obtaining
or enforcing its rights with respect to such Developments, he hereby irrevocably
designates and appoints Employer and its duly authorized agents as his agents
and attorneys-in-fact to execute and file any documents and to do all other
lawful acts necessary to protect Employer’s rights in the Developments. Employee
expressly acknowledges that the special foregoing power of attorney is coupled
with an interest and is therefore irrevocable and shall survive (i) his death or
incompetency, (ii) the termination of his employment with Employer and (iii) the
termination of this Agreement.

(e) Independent Covenants. Each of the covenants on the part of Employee
contained in Sections 5(a), (b), (c) and (d) shall be construed as an agreement
independent of each other such covenant. The existence of any claim or cause of
action of Employee against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Employer of any
such covenant.

(f) Reasonableness; Injunction. Employee acknowledges that his covenants
contained in this Section 5 are reasonably necessary for the protection of
Employer, its affiliates and their respective businesses and that such covenants
are reasonably limited with respect to the activities prohibited, the duration
thereof, the geographic area thereof, the scope thereof and the effect thereof
on Employee and the general public. Employee further acknowledges that violation
of the covenants would immeasurably and irreparably damage Employer and its
affiliates and, by reason thereof, Employee agrees that for violation or
threatened violation of any of the provisions of this Agreement, Employer shall,
in addition to any other rights and remedies available to it at law or
otherwise, be entitled to an injunction to be issued by any court of competent
jurisdiction enjoining and restraining Employee from committing any violation or
threatened violation of this Agreement.

 

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Employee consents to the issuance of such injunction. Furthermore, Employer
shall, in addition to any other rights or remedies available to it, at law or
otherwise, be entitled to reimbursement of court costs, attorneys’ fees and
other expenses incurred as a result of a breach of this Agreement. Employee
agrees to reimburse Employer for such expenses promptly following a final
determination that he has breached this Agreement.

(g) Noncompetition Period. “Noncompetition Period” shall mean the period
commencing on the Effective Date and continuing until one year following
termination of Employee’s employment with Employer.

(h) Noncompetition Area. The “Noncompetition Area” shall consist of the entire
world, North America, the United States and Europe.

(i) Business. For the purposes of this Agreement, the “Business” shall mean the
business of developing, manufacturing, marketing or selling any therapeutic
product: (i) that contains or is comprised of, in whole or in part, a chemical
compound that modulates or otherwise affects any nicotinic acetylcholine
receptor in humans; or (ii) that is substantially similar to, or competitive
with, any product candidate in development, or any product manufactured,
marketed or sold, by Employer during Employee’s employment with Employer;
provided, however, that during the portion of the Noncompetition Period after
termination of Employee’s employment, no product or product candidate will be
considered competitive with the Company’s products or product candidates unless
it is substantially similar to, or competitive with, a product candidate in
development, or a product manufactured, marketed or sold, by Employer during the
five (5)-year period ending on the date of termination of Employee’s employment.

6. Disability. Upon the “disability” of Employee, this Agreement and the
employment relationship hereunder may be terminated by action of the Board upon
thirty (30) days prior written notice (the “Disability Notice”), such
termination to become effective only if such disability continues. If, prior to
the effective time of the Disability Notice, Employee shall recover from such
disability and return to the full-time active discharge of his duties, then the
Disability Notice shall be of no further force and effect and Employee’s
employment shall continue as if the same had been uninterrupted. If Employee
shall not so recover from his disability and return to his duties, then his
employment with Employer and this Agreement shall terminate at the effective
time of the Disability Notice. Such termination shall not prejudice any benefits
payable to Employee that are fully vested as of the date of such termination.
Prior to the effective time of the Disability Notice, Employee shall continue to
earn all compensation to which Employee would have been entitled as if he had
not been disabled, such compensation to be paid at the time, in the amounts, and
in the manner provided in Section 3(a). A “disability” of Employee shall be
deemed to exist at all times that Employee is considered by the insurer which
has issued any policy of disability insurance owned by Employer or for which
premiums are paid by Employer (the “Employer Policy”) to be totally disabled
under the terms of such policy. In the event there is no Employer Policy,
“disability” shall mean the inability, by reason of physical or mental
incapacity, impairment or infirmity, of Employee to perform, upon request, his
regular duties for six (6) consecutive months and the determination of the
existence or nonexistence of disability shall be made by a medical doctor who is
licensed to practice medicine in the State of North Carolina mutually acceptable
to the Board and to Employee (or, if Employee is incapacitated, his spouse).

 

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7. Termination.

(a) If Employee shall die during the Term, this Agreement and the employment
relationship hereunder will automatically terminate on the date of death, which
date shall be the last day of the Term; provided that such termination shall not
prejudice any benefits payable to Employee or Employee’s beneficiaries that are
fully vested as of the date of death.

(b) Employer may terminate this Agreement and the employment relationship
hereunder at any time, with or without Just Cause, effective at such time as may
be determined by the Board; provided that any termination with Just Cause shall
require written notice to Employee. “Just Cause” shall mean: (i) Employee’s
willful and material breach of this Agreement and his continued failure to cure
such breach to the reasonable satisfaction of the Board within thirty (30) days
following written notice of such breach to Employee from the Board;
(ii) Employee’s conviction of, or entry of a plea of guilty or nolo contendere
to a felony or a misdemeanor involving moral turpitude; (iii) Employee’s willful
commission of an act of fraud, breach of trust, or dishonesty including, without
limitation, embezzlement, that results in material damage or harm to the
business, financial condition or assets of Employer; (iv) Employee’s intentional
damage or destruction of substantial property of Employer; (v) Employee’s
violation of Employer’s policies prohibiting employment discrimination or
workplace harassment; and (vi) Employee’s commission of any act (or omission)
contrary to the ethical or professional standards generally expected of Employer
or Employee’s profession. Just Cause shall be determined by the Board in its
reasonable discretion and the particulars of any determination shall be provided
to Employee in writing. At any time within ninety (90) days of receipt by
Employee in writing of such determination, Employee may object to such
determination in writing and submit the determination to arbitration in
accordance with Section 9(j). If such determination is overturned in
arbitration, Employee will be treated as having been terminated without Just
Cause and shall be entitled to the benefits of Section 7(d).

(c) Employee may voluntarily terminate his employment with Employer on thirty
(30) days prior written notice to Employer.

(d) Upon any termination pursuant to this Section 7, Employee shall be entitled
to receive a lump sum equal to any salary, bonus and other compensation earned
and due but not yet paid through the effective date of termination, such amount
to be payable within thirty (30) days after such effective date of termination.
In addition, if this Agreement and Employee’s employment hereunder is terminated
by (i) Employer (or its successor) other than for Just Cause (and other than for
death) or (ii) Employee within one (1) year following the first occurrence of
Good Reason, Employee shall be entitled to the following:

(A) severance, payable monthly, in an amount and for a period as follows: (1) if
such termination occurs concurrent with or within twelve (12) months following,
or in connection with but prior to, a Change in Control, the sum of Employee’s
then current monthly base salary plus one-twelfth (1/12th) of Employee’s Target
Annual Bonus, for eighteen (18) months following such termination; or (2) if
otherwise, Employee’s then current monthly base salary for twelve (12) months
following such termination (the time period in clause (1) or clause (2),
whichever is applicable, the “Severance Period”); provided that, in the event
the aggregate amount payable in the Severance Period based on the foregoing
would exceed the greater of:

(x) two times the lesser of:

(aa) the sum of Employee’s annualized compensation based upon his annual base
salary for his taxable year preceding his taxable year in which his employment
hereunder terminates (adjusted for any increase during that year that was
expected to continue indefinitely if Employee’s employment had not terminated);
or

 

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(bb) the maximum amount that may be taken into account under a qualified plan
pursuant to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended
(the “Code”), for the year in which Employee’s employment hereunder is
terminated; or

(y) the maximum amount that would be exempt under Section 409A of the Code;

then, Employer (or its successor) shall pay the amount of such excess to
Employee in a lump sum on the date that is two and one-half months following the
end of Employer’s (or its successor’s) taxable year during which the termination
of Employee’s employment occurs.

(B) if such termination occurs concurrent with or within twelve (12) months
following, or in connection with but prior to, a Change in Control, acceleration
of vesting for all unvested options to purchase capital stock, and all
restricted stock or other equity-based awards (if any), of Employer (or its
successor) held by Employee and outstanding as of the effective date of
termination. The terms of clause (B) shall be deemed incorporated into any
option or similar agreement evidencing an award made to Employee after the
Effective Date.

(C) continuation of the health care (including medical and dental) and life
insurance benefits coverage provided to Employee at his date of termination at
the same level and in the same manner as if his employment had not terminated
(subject to the customary changes in such coverages if Employee reaches age 65
or similar events), for the Severance Period, followed by COBRA election rights.
Any additional coverages Employee had at termination, including dependent
coverage, will also be continued for such period on the same terms. Any costs
Employee was paying for such coverages at the time of termination shall continue
to be paid by Employee. If the terms of any benefit plan referred to in this
section do not permit continued participation by Employee or if permitting such
continued participation would result in the imposition of an excise tax against
Employer under Section 4980D (or any successor section) of the Code, then
Employer will arrange for other coverage providing substantially similar
benefits at the same contribution level of Employee.

(D) outplacement counseling services selected by Employee, up to a maximum of
$10,000 and provided that (1) such expense is incurred by Employee on or before
the second anniversary of December 31 of the year during which the termination
of Employee’s employment occurs and (2) such amount is paid by Employer on or
before the third anniversary of December 31 of the year during which the
termination of Employee’s employment occurs.

 

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(e) If Employer (or its successor) terminates Employee’s employment for Just
Cause, Employee shall forfeit any unexercised vested or unvested stock options
(and other equity-based awards, to the extent unvested, if any) at the date of
termination. If Employee terminates his employment or if Employer (or its
successor) terminates Employee’s employment without Just Cause, Employee shall
have, with respect to each vested stock option, until the earlier of (i) three
(3) months from the date of termination or (ii) the last day of the applicable
option period/term to exercise such vested stock option.

(f) For purposes of this Agreement:

“Change in Control” shall be deemed to have occurred on the earliest of the
following dates:

(i) The date any entity or person shall have become the beneficial owner of, or
shall have obtained voting control over, more than fifty percent (50%) of the
outstanding Common Stock of Employer;

(ii) The date of the consummation of: (A) a merger, consolidation,
reorganization or similar business transaction of Employer with or into another
corporation or other business entity (each, a “corporation”), in which Employer
is not the continuing or surviving entity or pursuant to which any shares of
Common Stock of Employer would be converted into cash, securities or other
property of another entity, other than a transaction of Employer in which
holders of Common Stock immediately prior to the transaction continue to own at
least 50% of the outstanding Common Stock, or if Employer is not the surviving
entity, the common stock (or other voting securities) of the surviving entity
immediately after the transaction as immediately before; or (B) the sale or
other disposition of all or substantially all of the assets of Employer; or

(iii) The date on which the Continuing Directors (as defined below) do not
constitute a majority of the Board (or, if applicable, the Board of Directors of
a successor corporation to the Company), where the term “Continuing Director”
means at any date a member of the Board (A) who was a member of the Board on the
date of this Agreement, or (B) who was nominated or elected subsequent to such
date by at least a majority of the directors who were Continuing Directors at
the time of such nomination or election or whose election to the Board was
recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election; provided,
however, that there shall be excluded from this clause (B) any individual whose
initial assumption of office occurred as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents, by or on behalf of a
person other than the Board.

(For the purposes herein, the term “person” shall mean any individual,
corporation, partnership, group, association or other person, as such term is
defined in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), other than Employer, a subsidiary of
Employer or any employee benefit plan(s) sponsored or maintained by Employer or
any subsidiary thereof, and the term “beneficial owner” shall have the meaning
given the term in Rule 13d-3 under the Exchange Act.)

 

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The Board shall have full and final authority, in its discretion, to determine
whether a Change in Control of Employer has occurred pursuant to the above
definition, the date of the occurrence of such Change in Control and any
incidental matters relating thereto.

“Good Reason” shall mean the occurrence of any of the following events without
Employee’s express written consent:

(i) the material breach by Employer (or its successor) of any material provision
of this Agreement;

(ii) any purported termination of the employment of Employee by Employer (or its
successor) that is not effected in accordance with this Agreement;

(iii) any failure of Employer (or its successor) to pay Employee any amounts of
salary or bonus compensation that have become due and payable to Employee within
thirty (30) days after Employee has given Employer (or its successor) notice of
demand therefor;

(iv) a reduction in Employee’s annual base salary unless the reduction is part
of, and at the same percentage as, an across-the-board salary reduction for all
similarly-situated executives;

(v) any material diminution in Employee’s duties, responsibilities, authority,
reporting structure, status or title, unless approved in writing by Employee; or

(vi) being required by Employer to relocate to a location more than fifty
(50) miles from Employee’s worksite as of the Start Date (Winston-Salem, North
Carolina);

provided that Good Reason pursuant to any of clauses (i), (ii), (iii), (iv),
(v) or (vi) above shall be conditional on (A) Employee having provided written
notice to Employer (or its successor) of the initial existence of any or all of
the foregoing events within ninety (90) days of the initial existence of such
event and (B) such event continuing to exist thirty (30) days after the date of
such written notice from Employee; and provided further that, notwithstanding
anything herein to the contrary, the appointment or hiring by Employer of a
different President shall not constitute Good Reason if Employee retains the
office of Chief Executive Officer.

(g) Except as otherwise provided in this Section 7, upon termination of this
Agreement for any reason, Employee shall not be entitled to any form of
severance benefits, including benefits otherwise payable under any of Employer’s
regular severance plans or policies, or any other payment whatsoever. Employee
agrees that (i) the payment of any severance or other benefits pursuant to this
Section 7 shall be contingent on the delivery by Employee to Employer of a
release and waiver of legal claims related to the employment relationship
between Employee and Employer in a form reasonably acceptable to Employer and
(ii) the payments and benefits provided hereunder, subject to the terms and
conditions hereof, shall be in full satisfaction of any rights which he might
otherwise have or claim by operation of law, by implied contract or otherwise,
except for

 

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rights which he may have under any employee benefit plan of Employer.
Notwithstanding anything to the contrary in this Section 7, any release
referenced in this Section 7(g) must be executed and provided to Employer, and
the period for revoking same must have expired, before the forty-fifth
(45th) day following the effective date of termination of employment (or shall
otherwise be structured in a manner so that all payments under this Section 7
are exempt from or made in compliance with Section 409A of the Code).
Specifically but without limitation, if any payments made under this Section 7
are not exempt from Section 409A of the Code and if the forty-five (45) day
period described in the preceding sentence begins in one tax year and extends
into a second tax year, such payments shall commence during the second tax year.

(h) To the extent applicable, Employer and Employee intend that this Agreement
comply with Section 409A of the Code. The parties hereby agree that this
Agreement shall at all times be construed in a manner to comply with
Section 409A and that should any provision be found not in compliance with
Section 409A, the parties are hereby contractually obligated to execute any and
all amendments to this Agreement deemed necessary and required by legal
counsel to achieve compliance with Section 409A. In the event amendments are
required to be made to this Agreement to comply with Section 409A, Employer
shall use its best efforts to provide Employee with substantially the same
payments he would have been entitled to pursuant to this Agreement had
Section 409A not applied, but in a manner that is compliant with Section 409A.
The manner in which the immediately preceding sentence shall be implemented
shall be the subject of good faith negotiations of the parties. The parties also
agree that in no event shall any payment required to be made pursuant to this
Agreement that is considered deferred compensation within the meaning of
Section 409A be accelerated in violation of Code Section 409A.

(i) Notwithstanding anything in this Agreement to the contrary, in the event it
shall be determined that (i) any payment, award, benefit or distribution (or any
acceleration of any payment, award, benefit or distribution) by Employer (or its
successor) or any entity which effectuates a Change in Control (or any of its
affiliated entities) to or for the benefit of Employee (whether pursuant to the
terms of this Agreement or otherwise) (the “Payments”) would be subject to the
excise tax imposed by Section 4999 of the Code (the “Excise Tax”), and (ii) the
reduction of the amounts payable to Employee under this Agreement to the maximum
amount that could be paid to Employee without giving rise to the Excise Tax (the
“Safe Harbor Cap”) would provide Employee with a greater after-tax amount than
if such amounts were not reduced, then the amounts payable to Employee under
this Agreement shall be reduced (but not below zero) to the Safe Harbor Cap.
Unless Employer (or its successor) and Employee agree otherwise, the reduction
of the amounts payable hereunder, if applicable, shall be made to the extent
necessary in the following order: (i) first, any such Payments that became fully
vested prior to the Change in Control and that pursuant to paragraph (b) of
Treas. Reg. § 1.280G-1, Q/A 24, are treated as contingent compensation payments
solely by reason of the acceleration of their originally scheduled dates of
payment will be reduced, by cancellation of the acceleration of their vesting;
(ii) second, any severance payments or benefits, performance-based cash or
equity incentive awards, or other contingent compensation payments the full
amounts of which are treated as contingent on the Change in Control where
paragraphs (b) and (c) of Treas. Reg. § 1.280G-1, Q/A 24 do not apply, will be
reduced; and (iii) third, any cash or equity incentive awards, or nonqualified
deferred compensation amounts, that vest solely based on Employee’s continued
service with Employer (or its successor), and that pursuant to paragraph (c) of
Treas. Reg. § 1.280G-1, Q/A 24, are treated as contingent on the Change in
Control because they become vested as a result of the Change in Control, will be
reduced, first by

 

10

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cancellation of any acceleration of their originally scheduled dates of payment
(if payment with respect to such items is not treated as automatically occurring
upon the vesting of such items for purposes of Section 280G of the Code) and
then, if necessary, by canceling the acceleration of their vesting. In each
case, the amounts of the contingent compensation payments will be reduced in the
inverse order of their originally scheduled dates of payment or vesting, as
applicable, and will be so reduced only to the extent necessary to achieve the
required reduction. For purposes of reducing the Payments to the Safe Harbor
Cap, only amounts payable under this Agreement (and no other Payments) shall be
reduced. If the reduction of the amounts payable hereunder would not result in a
greater after-tax result to Employee, no amounts payable under this Agreement
shall be reduced pursuant to this provision.

(A) All determinations required to be made under this Section 7(i) shall be made
by the public accounting firm that is retained by Employer (or its successor) as
of the date immediately prior to the Change in Control (the “Accounting Firm”),
which shall provide detailed supporting calculations both to Employer (or its
successor) and Employee within fifteen (15) business days of the receipt of
notice from Employer (or its successor) or Employee that there has been a
Payment, or such earlier time as is requested by Employer (or its successor).
Notwithstanding the foregoing, in the event (i) the Board shall determine prior
to the Change in Control that the Accounting Firm is precluded from performing
such services under applicable auditor independence rules or (ii) the Audit
Committee of the Board determines that it does not want the Accounting Firm to
perform such services because of auditor independence concerns or (iii) the
Accounting Firm is serving as accountant or auditor for the person(s) effecting
the Change in Control, the Board shall appoint another nationally recognized
public accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees, costs and expenses (including, but not limited to, the costs of retaining
experts) of the Accounting Firm shall be borne by Employer (or its successor).
If payments are reduced to the Safe Harbor Cap or the Accounting Firm determines
that no Excise Tax is payable by Employee without a reduction in payments, the
Accounting Firm shall provide a written opinion to Employee to such effect, that
Employee is not required to report any Excise Tax on Employee’s federal income
tax return, and that the failure to report the Excise Tax, if any, on Employee’s
applicable federal income tax return will not result in the imposition of a
negligence or similar penalty. The determination by the Accounting Firm shall be
binding upon Employer (or its successor) and Employee (except as provided in
Section 7(i)(B) below).

(B) If it is established pursuant to a final determination of a court or an
Internal Revenue Service (the “IRS”) proceeding, which has been finally and
conclusively resolved, that Payments have been made to, or provided for the
benefit of, Employee by Employer (or its successor), which are in excess of the
limitations provided in this Section 7(i) (referred to hereinafter as an “Excess
Payment”), Employee shall repay the Excess Payment to Employer (or its
successor) on demand, together with interest on the Excess Payment at the
applicable federal rate (as defined in Section 1274(d) of the Code) from the
date of Employee’s receipt of such Excess Payment until the date of such
repayment. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the determination, it is possible that Payments which
will not have been made by Employer (or its successor) should have been made (an
“Underpayment”), consistent with the calculations required to be made under this
Section 7(i). In the event that it is determined (i) by the Accounting Firm,
Employer (or its successor) (which shall include the position taken by Employer
(or its successor), or together with their consolidated group, on their federal
income tax returns) or

 

11

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the IRS or (ii) pursuant to a determination by a court, that an Underpayment has
occurred, Employer (or its successor) shall pay an amount equal to such
Underpayment to Employee within ten (10) days of such determination together
with interest on such amount at the applicable federal rate from the date such
amount would have been paid to Employee until the date of payment. Employee
shall cooperate, to the extent Employee’s expenses are reimbursed by Employer
(or its successor), with any reasonable requests by Employer (or its successor)
in connection with any contests or disputes with the IRS in connection with the
Excise Tax or the determination of the Excess Payment. Notwithstanding the
foregoing, in the event that amounts payable under this Agreement were reduced
pursuant to Section 7(i) and the value of stock options is subsequently
re-determined by the Accounting Firm within the context of Treasury Regulation
§1.280G-1 Q/A 33 that reduces the value of the Payments attributable to such
options, Employer (or its successor) shall promptly pay to Employee any amounts
payable under this Agreement that were not previously paid solely as a result of
Section 7(i), subject to the Safe Harbor Cap.

(j) To the extent required by law or by any policy, plan or agreement (as each
may be in effect from time to time) of Employer, Employer may require Employee
to repay to Employer any bonus or other incentive-based or equity-based
compensation paid to Employee and to comply with any equity retention policy,
stock ownership guidelines or similar guidelines or policies as may be
established by Employer, and Employee hereby expressly agrees to comply with any
such requirements.

8. Best Efforts of Employee. Employee agrees that he will at all times
faithfully, industriously and to the best of his ability, experience and talents
perform all the duties that may be required of him pursuant to the express and
implicit terms hereof to the reasonable satisfaction of Employer, commensurate
with his position. Such duties shall be rendered at such place as Employer
designates and Employee acknowledges that he may be required to travel as shall
reasonably be required to promote the business of Employer. To the extent
reasonably required by the duties assigned to him, Employee shall devote
substantially all his time, attention, knowledge and skills to the business and
interest of Employer and shall be entitled to all the benefits, profits and
other issue arising from or incident to all work, service and advice of
Employee. During the Term, Employee shall not be interested, directly or
indirectly, in any manner as partner, manager, officer, director, shareholder,
member, adviser, consultant, employee or in any other capacity in any other
business; provided, that nothing herein contained shall be deemed to prevent or
limit the right of Employee to (a) beneficially own less than 1% of the stock of
a corporation traded on a national securities exchange (including, without
limitation, the NASDAQ Stock Market) as long as such passive investment does not
interfere with or conflict with the performance of services to be rendered
hereunder or (b) serve as chairman of the board of directors of either or both
of Novelos Therapeutics, Inc. and Audeo Oncology Inc.

9. Miscellaneous.

(a) This Agreement shall be governed by and construed in accordance with the
laws of the State of North Carolina, without regard to conflicts of law
principles thereof.

(b) This Agreement, together with the Option Agreement, constitutes the entire
Agreement between Employee and Employer with respect to the subject matter
hereof and supersedes in their entirety any and all prior oral or written
agreements, understandings or

 

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arrangements between Employee and Employer or any of its affiliates relating to
the terms of Employee’s employment by Employer. Any and all such agreements,
understandings and arrangements are hereby terminated and of no force or effect,
and Employee hereby expressly disclaims any rights under any and all such
agreements, understandings and arrangements. This Agreement may not be amended
or terminated except by an agreement in writing signed by both parties.

(c) This Agreement may be executed in two counterparts, each of which shall be
deemed and original and both of which, taken together, shall constitute one and
the same instrument.

(d) Any notice or other communication required or permitted under this Agreement
shall be effective only if it is in writing and delivered in person or by
nationally recognized overnight courier service or deposited in the mails,
postage prepaid, return receipt requested, addressed as follows:

To Employer:

Targacept, Inc.

200 East First Street, Suite 300

Winston-Salem, North Carolina 27101

Attn: General Counsel

Attn: Chief Financial Officer

To Employee:

Dr. Stephen A. Hill

[ADDRESS]

Notices given in person or by overnight courier service shall be deemed given
when delivered in person or the day after delivery to the courier addressed to
the address required by this Section 9(d), and notices given by mail shall be
deemed given three (3) days after deposit in the mails. Either party may
designate by written notice to the other party in accordance herewith any other
address to which notices addressed to such designating party shall be sent.

(e) The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof. It is understood and agreed that
no failure or delay by Employer or Employee in exercising any right, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.

(f) This Agreement may not be assigned by Employee without the written consent
of Employer. This Agreement shall be binding on any heirs, representatives,
successors or assigns of either party.

 

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(g) For purposes of this Agreement, employment of Employee by any affiliate of
Employer shall be deemed to be employment by Employer hereunder, and a transfer
of employment of Employee from one such affiliate to another shall not be deemed
to be a termination of employment of Employee by Employer or a cessation of the
Term, it being the intention of the parties hereto that employment of Employee
by any affiliate of Employer shall be treated as employment by Employer and that
the provisions of this Agreement shall continue to be fully applicable following
any such transfer.

(h) The respective rights and obligations of the parties hereunder shall survive
any termination of the Term or Employee’s employment with Employer to the extent
necessary to preserve such rights and obligations for their stated durations.

(i) In the event that it shall become necessary for either party to retain the
services of an attorney to enforce any terms under this Agreement, the
prevailing party, in addition to all other rights and remedies hereunder or as
provided by law, shall be entitled to reasonable attorneys’ fees and costs of
suit. Employer shall reimburse Employee for the reasonable fees and expenses of
counsel to Employee for the original negotiation of this Agreement.

(j) Except as otherwise provided in this Section 9(j), any controversy or claim
arising out of or relating to this Agreement shall be settled by arbitration in
accordance with Commercial Arbitration Rules of the American Arbitration
Association then in effect, and judgment upon the award rendered by the
arbitration panel, which shall consist of three members, may be entered in any
court having jurisdiction. Any arbitration shall be held in Winston-Salem, North
Carolina, unless otherwise agreed in writing by the parties. One arbitrator
shall be selected by Employee, one arbitrator shall be selected by Employer, and
the third arbitrator shall be selected by the two arbitrators selected by
Employee and Employer. Notwithstanding the foregoing, any claim or dispute with
respect to or arising out of any of the covenants in Section 5 or the covenant
in Section 8 related to Employee’s interest in other businesses, or any
statutory or common law claim of patent infringement, misappropriation of trade
secrets, unfair competition, unfair or deceptive trade practices, interference
with contract, or interference with actual or prospective economic or business
relations, shall be excluded from this Section 9(j).

[remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the Effective Date.

 

Targacept, Inc.     By:  

/s/ Mark Skaletsky

   

/s/ Dr. Stephen A. Hill

Name:   Mark Skaletsky     Dr. Stephen A. Hill Title:   Chairman of the Board  
  Date: 11/14/2012     Date: 11/14/2012

 

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EXHIBIT A

OPTION AGREEMENT

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TARGACEPT, INC.

NONQUALIFIED STOCK OPTION AGREEMENT

THIS NONQUALIFIED STOCK OPTION AGREEMENT (together with Schedule A, attached
hereto, the “Agreement”), effective as of the date specified as the “Grant Date”
on Schedule A attached hereto, between TARGACEPT, INC., a Delaware corporation
(the “Corporation”), and the individual identified on Schedule A attached
hereto, an Employee of the Corporation or an Affiliate (the “Executive”). This
Agreement shall be administered by the Compensation Committee (the
“Administrator”) of the Board of Directors (the “Board”) of the Corporation or,
to the extent permitted by applicable laws, rules and regulations (“Applicable
Law”), a designee of the Compensation Committee.

R E C I T A L S :

In consideration of the services of the Executive and such other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Corporation and the Executive, intending to be legally bound,
hereby agree as follows:

1. Nature of Award. In connection with the Corporation’s hiring of the Executive
as the President and Chief Executive Officer of the Corporation as provided in
the Employment Agreement between Executive and the Corporation dated on or about
the date hereof (the “Employment Agreement”), the Administrator has agreed to
grant the Executive a nonqualified stock option (as defined below, the “Option”)
pursuant to the terms of the Agreement. The Option is intended to serve as an
inducement grant as described under Rule 5635(c)(4) of the NASDAQ Listing Rules.
For purposes of clarity, the Executive has not previously been an employee or
director of the Corporation, and the Option is intended to serve as an
inducement material to the Executive’s entering into employment with the
Corporation.

2. Grant of Option; Term of Option. The Corporation hereby grants to the
Executive, as a matter of separate inducement and agreement in connection with
his employment or service to the Corporation, and not in lieu of any salary or
other compensation for his services, the right and Option (the “Option”) to
purchase all or any part of such aggregate number of shares (the “Shares”) of
common stock of the Corporation (the “Common Stock”) at a purchase price (the
“Option Price”) as specified on Schedule A, attached hereto, and subject to such
other terms and conditions as may be stated herein or on Schedule A. The
Executive expressly acknowledges that the terms of Schedule A shall be
incorporated herein by reference and shall constitute part of this Agreement.
The Corporation and the Executive further acknowledge and agree that the
signatures of the Corporation and the Executive on the Grant Notice contained in
Schedule A shall constitute their acceptance of all of the terms of this
Agreement and their agreement to be bound by the terms of this Agreement. The
Option (or any portion thereof) shall be designated as a nonqualified stock
option, as stated on Schedule A, and shall not be intended to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended (the “Code”). The Option is a stand-alone option and is not granted
under the Corporation’s 2006 Stock Incentive Plan (as amended and restated
through March 9, 2011) or any other stock incentive plan of the Corporation.
Except as otherwise provided in the Agreement, this Option will expire if not
exercised in full by the Expiration Date specified on Schedule A.

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3. Exercise of Option. Subject to the terms of the Agreement, the Option shall
become exercisable on the date or dates, and subject to such conditions, as are
set forth on Schedule A attached hereto. To the extent that the Option is
exercisable but is not exercised, the Option shall accumulate and be exercisable
by the Executive in whole or in part at any time prior to expiration of the
Option, subject to the terms of the Agreement. The Executive expressly
acknowledges that the Option may vest and be exercisable only upon such terms
and conditions as are provided in the Agreement. Upon the exercise of an Option
in whole or in part and payment of the Option Price in accordance with the
provisions of this Agreement, the Corporation shall, as soon thereafter as
practicable, deliver to the Executive a certificate or certificates for the
Shares purchased. Payment of the Option Price may be made (a) in cash or by cash
equivalent; and, unless prohibited by Applicable Law or the Administrator,
payment may also be made (b) by delivery (by either actual delivery or
attestation) of shares of Common Stock owned by the Executive (subject to such
terms and conditions, if any, as may be determined by the Administrator); (c) by
shares of Common Stock withheld upon exercise but only if and to the extent that
payment by such method does not result in variable accounting or other
accounting consequences deemed unacceptable to the Corporation; (d) as long as a
Public Market for the Common Stock exists, by delivery of written notice of
exercise to the Corporation and delivery to a broker of written notice of
exercise and irrevocable instructions to promptly deliver to the Corporation the
amount of sale or loan proceeds to pay the Option Price; (e) by such other
payment methods as may be approved by the Administrator and which are acceptable
under Applicable Law; or (f) by any combination of the foregoing methods. Shares
delivered or withheld in payment of the Option Price shall be valued at their
Fair Market Value on the date of exercise, as determined in accordance with the
terms of the Agreement.

4. No Right of Employment or Service; Forfeiture of Option. Neither the
Agreement nor any other action related to the grant of the Option shall confer
upon the Executive any right to continue in the employment or service of the
Corporation or an Affiliate or interfere with the right of the Corporation or an
Affiliate to terminate the Executive’s employment or service at any time. Except
as otherwise expressly provided in the Agreement or as determined by the
Administrator, all rights of the Executive with respect to the Option shall
terminate upon termination of the employment of the Executive with the
Corporation or an Affiliate. The grant of the Option does not create any
obligation of the Corporation to grant further awards.

5. Termination of Employment. Unless the Administrator, in its sole discretion,
determines otherwise, the Option shall not be exercised unless the Executive is,
at the time of exercise, an Employee and has been an Employee continuously since
the date the Option was granted, subject to the following:

 

  (a) The employment relationship of the Executive shall be treated as
continuing intact for any period that the Executive is on military or sick leave
or other bona fide leave of absence, provided that the period of such leave does
not exceed ninety (90) days, or, if longer, as long as the Executive’s right to
reemployment is guaranteed either by statute or by contract. The employment
relationship of the Executive shall also be treated as continuing intact while
the Executive is not in active service because of Disability (as defined in
Section 5(b)). The Administrator shall have sole authority to determine whether
the Executive has terminated employment or service, the basis for such
termination and the date of the Executive’s termination of employment or service
for any reason (the “Termination Date”).

 

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  (b) If the employment of the Executive is terminated because of Disability or
death, the Option may be exercised only to the extent vested and exercisable on
the Executive’s Termination Date, and any portion of the Option that is not
vested and exercisable as of the Executive’s Termination Date shall terminate as
of such date. The Option, to the extent vested and exercisable, must be
exercised, if at all, prior to the first to occur of the following, whichever
shall be applicable (after which time the Option shall terminate): (i) the close
of the period of one year next succeeding the Termination Date; or (ii) the
close of the Option Period. In the event of the Executive’s death, the Option
shall be exercisable by such person or persons as shall have acquired the right
to exercise the Option by will or by the laws of intestate succession. For
purposes herein, “Disability” shall have the meaning given in the Employment
Agreement or, if the Employment Agreement ceases to be in effect, “Disability”
shall mean the inability to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death, or which has lasted or can be expected to last for
a continuous period of not less than twelve (12) months. The determination of
“Disability” shall be made by the Administrator and its determination shall be
final and conclusive.

 

  (c) If the employment of the Executive is terminated for any reason other than
Disability, death or for Cause, the Option may be exercised to the extent vested
and exercisable on his Termination Date, and any portion of the Option that is
not vested and exercisable as of the Executive’s Termination Date shall
terminate as of such date. The Option, to the extent vested and exercisable,
must be exercised, if at all, prior to the first to occur of the following,
whichever shall be applicable (after which time the Option shall terminate):
(i) the close of the period of three (3) months next succeeding the Termination
Date; or (ii) the close of the Option period. If the Executive dies following
such termination of employment and prior to the date specified in clause (i) of
this Section 5(c), the Executive shall be treated as having died while employed
under Section 5(b) immediately preceding (treating for this purpose the
Executive’s date of termination of employment as the Termination Date). In the
event of the Executive’s death, the Option shall be exercisable by such person
or persons as shall have acquired the right to exercise the Option by will or by
the laws of intestate succession.

 

  (d) If the employment of the Executive is terminated for Cause, the Option
shall lapse and no longer be exercisable as of 5:00 p.m. Eastern Standard Time
on his Termination Date, as determined by the Administrator. For the purposes
herein, “Cause” shall mean the Executive’s termination of employment or service
resulting from the Executive’s termination for “Just Cause” as defined in the
Employment Agreement or, if the Employment Agreement ceases to be in effect,
then the Executive’s termination shall be for “Cause” if termination results due
to the Executive’s: (i) dishonesty; (ii) refusal to perform his duties for the
Corporation; (iii) engaging in fraudulent conduct; or (iv) engaging in any
conduct that could be materially damaging to the Corporation without a
reasonable good faith belief that such conduct was in the best interest of the
Corporation. The determination of “Cause” shall be made by the Administrator and
its determination shall be final and conclusive.

 

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6. Effect of Change in Control. Subject to the terms of Section 7(d) of the
Employment Agreement, the Administrator shall (taking into account any Code
Section 409A considerations) have sole discretion to determine the effect, if
any, on the Option, including but not limited to the vesting, earning or
exercisability of the Option, in the event of a Change in Control (as defined in
Section 22(b)). Without limiting the generality of the foregoing, in the event
of a Change in Control, the Administrator’s discretion shall include, but shall
not be limited to, the discretion to determine that the Option shall vest, be
earned or become exercisable in whole or in part, shall be assumed or
substituted for another award, shall be cancelled without the payment of
consideration or that other actions (or no action) shall be taken with respect
to the Option. The Administrator also has discretion to determine that
acceleration or any other effect of a Change in Control on the Option shall be
subject to both the occurrence of a Change in Control event and termination of
employment or service of the Participant.

7. Nontransferability of Option. The Option shall not be transferable (including
by sale, assignment, pledge or hypothecation) other than by will or the laws of
intestate succession, except as may be permitted by the Administrator in its
sole discretion in a manner consistent with the registration provisions of the
Securities Act of 1933, as amended (the “Securities Act”). Except as may be
permitted by the preceding, the Option shall be exercisable during the
Executive’s lifetime only by him or by his guardian or legal representative. The
designation of a beneficiary in accordance with procedures implemented by the
Administrator or its designee does not constitute a transfer.

8. Superseding Agreement; Successors and Assigns. This Agreement supersedes any
statements, representations or agreements of the Corporation with respect to the
grant of the Option or any related rights, and the Executive hereby waives any
rights or claims related to any such statements, representations or agreements.
This Agreement does not supersede or amend the Employment Agreement or any
existing (or future) confidentiality agreement, nonsolicitation agreement,
noncompetition agreement or other similar agreement between the Executive and
the Corporation, including, but not limited to, any restrictive covenants
contained in such agreements. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective executors,
administrators, heirs, successors and assigns.

9. Governing Law. The Agreement shall be construed and enforced according to the
laws of the State of North Carolina, without regard to the conflict of laws
provisions of any state, and in accordance with applicable federal laws of the
United States.

10. Amendment and Termination; Waiver. The Agreement may be modified or amended
only by the written agreement of the parties hereto. Notwithstanding the
foregoing, the Administrator shall have unilateral authority to amend the
Agreement (without Executive consent) to the extent necessary to comply with
Applicable Law or changes to Applicable Law (including but in no way limited to
Code Section 409A and federal securities laws). The waiver by the Corporation of
a breach of any provision of the Agreement by the Executive shall not operate or
be construed as a waiver of any subsequent breach by the Executive.

11. No Rights as Stockholder. The Executive and his or her legal
representatives, legatees and distributees shall not be deemed to be the holder
of any Shares subject to the Option and shall not have any rights of a
stockholder unless and until (and then only to the extent that) certificates for
such Shares have been issued and delivered to him or them (or, in the case of
uncertified shares, other written evidence of ownership in accordance with
Applicable Law shall have been provided).

 

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12. Withholding; Tax Matters.

 

  (a) The Executive acknowledges that the Corporation shall require the
Executive to pay the Corporation in cash the amount of any tax or other amount
required by any governmental authority to be withheld and paid over by the
Corporation to such authority for the account of the Executive, and the
Executive agrees, as a condition to the grant of the Option and delivery of the
Shares or any other benefit, to satisfy such obligations. Notwithstanding the
foregoing, the Administrator may establish procedures to permit the Executive to
satisfy such obligations in whole or in part, and any other local, state,
federal, foreign or other income tax obligations relating to the Option, by
electing (the “election”) to have the Corporation withhold shares of Common
Stock from the Shares to which the Executive is entitled. The number of Shares
to be withheld shall have a Fair Market Value as of the date that the amount of
tax to be withheld is determined as nearly equal as possible to (but not
exceeding) the amount of such obligations being satisfied. Each election must be
made in writing to the Administrator in accordance with election procedures
established by the Administrator.

 

  (b) The Executive acknowledges that the Corporation has made no warranties or
representations to the Executive with respect to the tax consequences
(including, but not limited to, income tax consequences) related to the
transactions contemplated by this Agreement, and the Executive is in no manner
relying on the Corporation or its representatives for an assessment of such tax
consequences. The Executive acknowledges that there may be adverse tax
consequences upon acquisition or disposition of the Shares subject to the Option
and that the Executive should consult a tax advisor prior to such exercise or
disposition. The Executive acknowledges that he has been advised that he should
consult with his own attorney, accountant or tax advisor regarding the decision
to enter into this Agreement and the consequences thereof. The Executive also
acknowledges that the Corporation has no responsibility to take or refrain from
taking any actions in order to achieve a certain tax result for the Executive.

13. Administration. The authority to construe and interpret this Agreement shall
be vested in the Administrator. Any interpretation of the Agreement by the
Administrator and any decision made by it with respect to the Agreement is final
and binding.

14. Notices. Any written notices provided for in this Agreement shall be in
writing and shall be deemed sufficiently given if either hand delivered or if
sent by fax or overnight courier, or by postage paid first class mail. Notices
sent by mail shall be deemed received three (3) business days after mailed but
in no event later than the date of actual receipt. Notices shall be directed, if
to the Executive, at the Executive’s address indicated on Schedule A (or such
other address as may be designated by the Executive in a manner acceptable to
the Administrator), or, if to the Corporation, at the Corporation’s principal
office, attention Chief Financial Officer, Targacept, Inc. Notice may also be
provided by electronic submission, if and to the extent permitted by the
Administrator.

15. Severability. The provisions of this Agreement are severable and if any one
or more provisions may be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions shall nevertheless be binding and
enforceable.

 

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16. Restrictions on Option and Shares. The Corporation may impose such
restrictions on the Option, the Shares and any other benefits underlying the
Option as it may deem advisable, including without limitation restrictions under
the federal securities laws, the requirements of any stock exchange or similar
organization and any blue sky, state or foreign securities laws applicable to
such Option or Shares. Notwithstanding any other provision in the Agreement to
the contrary, the Corporation shall not be obligated to issue, deliver or
transfer shares of Common Stock, make any other distribution of benefits, or to
take any other action, unless such delivery, distribution or action is in
compliance with all Applicable Law (including but not limited to the
requirements of the Securities Act). The Corporation will be under no obligation
to register the Shares with the Securities and Exchange Commission (the “SEC”)
or to effect compliance with the exemption, registration, qualification or
listing requirements of any state securities laws, stock exchange or similar
organization, and the Corporation will have no liability for any inability or
failure to do so. As a condition to the exercise of the Option, the Corporation
may require the Executive or other person exercising the Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribution
such Shares, if, in the opinion of legal counsel for the Corporation, such a
representation is required. The Corporation may cause a restrictive legend to be
placed on any certificate for Shares issued pursuant to the exercise of the
Option in such form as may be prescribed from time to time by Applicable Law or
as may be advised by legal counsel.

17. Effect of Changes in Status. Unless the Administrator, in its sole
discretion, determines otherwise, the Option shall not be affected by any change
in the terms, conditions or status of the Executive’s employment, provided that
the Executive continues to be in the employ of the Corporation or an Affiliate.
Without limiting the foregoing, the Administrator has sole discretion to
determine, at the time of grant of the Option or at any time thereafter, the
effect, if any, on the Option if the Executive’s status as an Employee changes,
including but not limited to a change from full-time to part-time, or vice
versa, or if other similar changes in the nature or scope of the Executive’s
employment occur.

18. Right of Offset. Notwithstanding any other provision of the Agreement, the
Corporation may (subject to any Code Section 409A considerations) at any time
reduce the amount of any payment otherwise payable to or on behalf of the
Executive by the amount of any obligation of the Executive to the Corporation
that is or becomes due and payable and, by entering into this Agreement, the
Executive shall be deemed to have consented to such reduction.

19. Counterparts; Further Instruments. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. The parties hereto agree
to execute such further instruments and to take such further action as may be
reasonably necessary to carry out the purposes and intent of this Agreement.

20. Compliance with Recoupment, Ownership and Other Policies or Agreements. As a
condition to receiving the Option, the Executive agrees that he shall abide by
all provisions of any equity retention policy, compensation recovery policy,
stock ownership guidelines and other similar policies maintained by the
Corporation, each as in effect from time to time and to the extent applicable to
Executive from time to time. In addition, the Executive agrees that he shall be
subject to such compensation recovery, recoupment, forfeiture or other similar
provisions as may apply at any time to the Executive under Applicable Law.

 

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21. Adjustments. If there is any change in the outstanding shares of Common
Stock because of a merger, consolidation or reorganization involving the
Corporation or an Affiliate, or if the Board declares a stock dividend, stock
split distributable in shares of Common Stock, reverse stock split, combination
or reclassification of the Common Stock, or if there is a similar change in the
capital stock structure of the Corporation or an Affiliate affecting the Common
Stock, the number of Shares of Common Stock subject to the Option (to the extent
unexercised) shall be correspondingly adjusted, and the Administrator shall make
such adjustments to the Option, the Option Price and to any provisions of the
Agreement as the Administrator deems equitable to prevent dilution or
enlargement of the Option or as may be otherwise advisable.

22. Certain Definitions. In addition to other terms defined herein, the
following terms shall have the meanings given below:

 

  (a) “Affiliate” means any business entity which is controlled by, under common
control with or controls the Corporation, including but not limited to any
“parent” or “subsidiary” corporation as defined under Code Section 424.

 

  (b) “Change in Control” shall be deemed to have occurred if and as provided in
the Employment Agreement (and as defined therein) or, if the Employment
Agreement ceases to be in effect, “Change in Control” shall be deemed to have
occurred on the earliest of the following dates:

 

  (i) The date any entity or person shall have become the beneficial owner of,
or shall have obtained voting control over, more than thirty percent (30%) of
the outstanding Common Stock of the Corporation;

 

  (ii) The date of the consummation of: (A) a merger, consolidation,
reorganization or similar business transaction of the Corporation with or into
another corporation or other business entity (each, a “corporation”), in which
the Corporation is not the continuing or surviving entity or pursuant to which
any shares of Common Stock of the Corporation would be converted into cash,
securities or other property of another entity, other than a transaction of the
Corporation in which holders of Common Stock immediately prior to the
transaction continue to own at least 50% of the outstanding Common Stock, or if
the Corporation is not the surviving entity, the common stock (or other voting
securities) of the surviving entity immediately after the transaction as
immediately before; or (B) the sale or other disposition of all or substantially
all of the assets of the Corporation; or

 

  (iii)

The date on which the Continuing Directors (as defined below) do not constitute
a majority of the Board (or, if applicable, the Board of Directors of a
successor corporation to the Corporation), where the term “Continuing Director”
means at any date a member of the Board (A) who was a member of the Board on the
date of this Agreement, or (B) who was nominated or elected subsequent to such
date by at least a majority of the directors who were Continuing Directors at
the time of such nomination or election or whose election to the Board was
recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election; provided,
however, that there shall be excluded from

 

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  this clause (B) any individual whose initial assumption of office occurred as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened solicitation of
proxies or consents, by or on behalf of a person other than the Board.

(For the purposes herein, the term “person” shall mean any individual,
corporation, partnership, group, association or other person, as such term is
defined in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), other than the Corporation, a
subsidiary of the Corporation or any employee benefit plan(s) sponsored or
maintained by the Corporation or any subsidiary thereof, and the term
“beneficial owner” shall have the meaning given the term in Rule 13d-3 under the
Exchange Act.)

The Administrator shall have full and final authority, in its discretion, to
determine whether a Change in Control of the Corporation has occurred pursuant
to the above definition, the date of the occurrence of such Change in Control
and any incidental matters relating thereto.

 

  (c) “Employee” means any person who is an employee of the Corporation or any
Affiliate. For this purpose, an individual shall be considered to be an Employee
only if there exists between the individual and the Corporation or an Affiliate
the legal and bona fide relationship of employer and employee.

 

  (d) “Fair Market Value” per share of the Common Stock shall be established in
good faith by the Administrator and, unless otherwise determined by the
Administrator, the Fair Market Value shall be determined in accordance with the
following provisions: (i) if the shares of Common Stock are listed for trading
on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock
Market, the Fair Market Value shall be the closing sales price per share of the
shares on the New York Stock Exchange, the American Stock Exchange or the NASDAQ
Stock Market (as applicable) on the date the Option is granted or other
determination is made (such date of determination being referred to herein as a
“valuation date”), or, if there is no transaction on such date, then on the
trading date nearest preceding the valuation date for which closing price
information is available, and, provided further, if the shares are not listed
for trading on the New York Stock Exchange, the American Stock Exchange or the
NASDAQ Stock Market, the Fair Market Value shall be the average between the
highest bid and lowest asked prices for such stock on the date of grant or other
valuation date as reported on the NASDAQ OTC Bulletin Board Service or by the
National Quotation Bureau, Incorporated or a comparable service; or (ii) if the
shares of Common Stock are not listed or reported in any of the foregoing, then
the Fair Market Value shall be determined by the Administrator based on such
valuation measures or other factors as it deems appropriate. Notwithstanding the
foregoing, Fair Market Value shall be determined in accordance with Code
Section 409A if and to the extent required.

 

  (e) A “Public Market” for the Common Stock shall be deemed to exist (i) upon
consummation of a firm commitment underwritten public offering of the Common
Stock pursuant to an effective registration statement under the Securities Act,
or (ii) if the Administrator otherwise determines that there is an established
public market for the Common Stock.

[Signatures of the Corporation and the Executive follow on Schedule A/Grant
Notice.]

 

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TARGACEPT, INC.

NONQUALIFIED STOCK OPTION AGREEMENT

Schedule A/Grant Notice

1. Pursuant to the terms and conditions of that certain Nonqualified Stock
Option Agreement (the “Agreement”) dated                  by and between
Targacept, Inc. (the “Corporation”) and Dr. Stephen A. Hill (the “Executive”),
you, the Executive, have been granted a stock option (the “Option”) to purchase
400,000 shares (the “Shares”) of the Common Stock as outlined below.

 

Name of Executive:    Dr. Stephen A. Hill Address:   

[ADDRESS]

Grant Date:                        , 2012 Number of Shares Subject to Option:   
400,000 Option Price:    Type of Option:    Nonqualified Stock Option Expiration
Date (Last day of Option Period):                        , 2022 Vesting
Schedule/Conditions:    25% on December 31, 2013 and ratably thereafter on the
last day of twelve (12) consecutive calendar quarters beginning with March 31,
2014

2. By my signature below, I, the Executive, hereby acknowledge receipt of this
Grant Notice and the Agreement which is attached to this Grant Notice. I
understand that the Grant Notice and other provisions of Schedule A herein are
incorporated by reference into the Agreement and constitute a part of the
Agreement. By my signature below, I further agree to be bound by the terms of
the Agreement, including but not limited to the terms of this Grant Notice and
the other provisions of Schedule A contained herein. The Corporation reserves
the right to treat the Option and the Agreement as cancelled, void and of no
effect if the Executive fails to return a signed copy of the Grant Notice within
thirty (30) days of grant date stated above.

 

Signature:  

 

    Date:  

 

      Agreed to by:       TARGACEPT, INC.       By:  

 

        Name:  

 

        Title:  

 

 

Attest:

 

Peter A. Zorn Senior Vice President, Legal Affairs, General Counsel and
Secretary

Note: If there are any discrepancies in the name or address shown above, please
make the appropriate corrections on this form. Please retain a copy of the
Agreement, including this Grant Notice, for your files.