Exhibit 10.7


 


ARYX THERAPEUTICS, INC.


 


2007 NON-EMPLOYEE DIRECTORS’
STOCK OPTION PLAN


 


ADOPTED BY THE BOARD OF DIRECTORS:  JULY 18, 2007


APPROVED BY THE STOCKHOLDERS:  OCTOBER 22, 2007


 


1.                                      GENERAL.


 


(a)                                  Eligible
Option Recipients. The persons eligible to receive Options are the
Non-Employee Directors of the Company.


 


(b)                                  Purpose.
The Company, by means of the Plan, seeks to retain the services of its
Non-Employee Directors, to secure and retain the services of new Non-Employee
Directors and to provide incentives for such persons to exert maximum efforts
for the success of the Company and any Affiliate by giving them an opportunity
to benefit from increases in value of the Common Stock through the automatic
grant of Nonstatutory Stock Options.


 


2.                                      ADMINISTRATION.


 


(a)                                  Administration
by Board. The Board shall administer the Plan. The Board may not
delegate administration of the Plan.


 


(b)                                  Powers
of Board. The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:


 


(i)                                    To
determine the provisions of each Option to the extent not specified in the
Plan.


 


(ii)                                To
construe and interpret the Plan and Options granted under it, and to establish,
amend and revoke rules and regulations for its administration. The Board,
in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.


 


(iii)                            To
amend the Plan or an Option as provided in Section 10.


 


(iv)                               To
terminate or suspend the Plan as provided in Section 11.


 


(v)                                   Generally,
to exercise such powers and to perform such acts as the Board deems
necessary or expedient to promote the best interests of the Company and that
are not in conflict with the provisions of the Plan.


 


(c)                                  Effect of Board’s Decision. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.


 


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3.                                      SHARES SUBJECT TO THE PLAN.


 


(a)                                  Share
Reserve. Subject to the provisions of Section 9(a) relating to
Capitalization Adjustments, the aggregate number of shares of Common Stock that
may be issued under the Plan shall not exceed 166,666, plus an automatic
annual increase beginning on January 1, 2008 and ending on (and including)
January 1, 2017, in an amount equal to the excess of (i) the number
of shares subject to Options granted during the preceding calendar year, over (ii) the
number of shares added back to the share reserve during the preceding calendar
year pursuant to the provisions of Section 3(b). Notwithstanding the
foregoing, the Board may act prior to the first day of any calendar year,
to provide that there shall be no increase in the share reserve for such
calendar year or that the increase in the share reserve for such calendar year
shall be a lesser number of shares of Common Stock than would otherwise occur
pursuant to the preceding sentence.


 


(b)                                  Reversion
of Shares to the Share Reserve. If an Option shall for any reason expire or
otherwise terminate, in whole or in part, without having been exercised in
full, the shares of Common Stock not acquired under such Option shall revert to
and again become available for issuance under the Plan. If any shares subject
to an Option are not delivered to an Optionholder because such shares are
withheld for the payment of taxes or the Option is exercised through a
reduction of shares subject to the Option (i.e.,
“net exercised”), the number of shares that are not delivered to the
Optionholder shall remain available for issuance under the Plan. If the
exercise price of an Option is satisfied by tendering shares of Common Stock
held by the Optionholder (either by actual delivery or attestation), then the
number of shares so tendered shall remain available for issuance under the
Plan.


 


(c)                                  Source
of Shares. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Company on the open market.


 


4.                                      ELIGIBILITY.


 


The Options shall
automatically be granted under the Plan as set forth in Section 5 to all
Non-Employee Directors who meet the specified criteria.


 


5.                                      NON-DISCRETIONARY GRANTS.


 


(a)                                  IPO Grants. Without any further
action of the Board, on the IPO Date, each person who is a Non-Employee
Director automatically shall be granted an Option (the “IPO Grant”) to
purchase 16,666 shares of Common Stock on the terms and conditions set forth
herein.


 


(b)                                  Initial
Grants.  Without any further action
of the Board, each person who after the IPO Date is elected or appointed for
the first time to be a Non-Employee Director automatically shall, upon the date
of his or her initial election or appointment to be a Non-Employee Director, be
granted an Option (the “Initial
Grant”) to purchase 16,666 shares of Common Stock on the terms
and conditions set forth herein.


 


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(c)                                  Annual
Grants. Without any further action of the Board, on the first Trading Day
occurring on or after April 30th each year, beginning on April 30,
2009, each person who is then a Non-Employee Director automatically shall be
granted an Option (the “Annual
Grant”) to purchase 6,666 shares of Common Stock on the terms
and conditions set forth herein.


 


6.                                      OPTION PROVISIONS.


 


Each Option shall
be in such form and shall contain such terms and conditions as required by
the Plan. Each Option shall contain such additional terms and conditions, not
inconsistent with the Plan, as the Board shall deem appropriate. Each Option
shall include (through incorporation of provisions hereof by reference in the
Option or otherwise) the substance of each of the following provisions:


 


(a)                                  Term.
No Option shall be exercisable after the expiration of ten (10) years from
the date it was granted.


 


(b)                                  Exercise
Price. The exercise price of each Option shall be one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on
the date the Option is granted.


 


(c)                                  Consideration.
The purchase price of Common Stock acquired pursuant to an Option may be
paid, to the extent permitted by applicable law, in any combination of (i) cash
or check, (ii) delivery to the Company (either by actual delivery or
attestation) of shares of Common Stock, or (iii) to the extent permitted
by law, pursuant to a program developed
under Regulation T as promulgated by the Federal Reserve Board that, prior to
the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds.


 


(d)                                  Transferability.
Except as otherwise provided for in this Section 6(d),
an Option shall not be transferable except by will or by the laws of descent
and distribution and shall be exercisable only by the Optionholder during the
life of the Optionholder. However, an Option may be transferred for no
consideration upon written consent of the Board if (i) at the time of
transfer, a Form S-8 registration statement under the Securities Act is
available for the issuance of shares by the Company upon the exercise of such
transferred Option, or (ii) the transfer is to the Optionholder’s employer
at the time of transfer or an affiliate of the Optionholder’s employer at the
time of transfer. Any such transfer is subject to such limits as the
Board may establish, and subject to the transferee agreeing to remain
subject to all the terms and conditions applicable to the Option prior to such
transfer. The forgoing right to transfer the Option shall apply to the right to
consent to amendments to the Option Agreement for such Option. In addition, until the Optionholder transfers the Option, an Optionholder
may, by delivering written notice to the Company, in a form provided by or
otherwise satisfactory to the Company, designate a third party who, in the
event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.


 


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(e)                                  Vesting.
Options shall vest as follows:


 


(i)                                    IPO Grant. The IPO Grant shall
vest in a series of thirty-six (36) successive equal monthly installments
during the Optionholder’s Continuous Service over the three (3)-year period
measured from the date of grant.


 


(ii)                                Initial Grant. The Initial Grant shall
vest in a series of thirty-six (36) successive equal monthly installments
during the Optionholder’s Continuous Service over the three (3)-year period measured
from the date of grant.


 


(iii)                            Annual Grant. The Annual Grant
shall vest in a series of twelve (12) successive equal monthly
installments during the Optionholder’s Continuous Service over the one (1)-year
period measured from the date of grant.


 


(f)                                    Early
Exercise. The Option may, but need not, include a provision whereby the
Optionholder may elect at any time before the Optionholder’s Continuous
Service terminates to exercise the Option as to any part or all of the
shares of Common Stock subject to the Option prior to the full vesting of the
Option. Any unvested shares of Common Stock so purchased may be subject to
a repurchase option in favor of the Company or to any other restriction the
Board determines to be appropriate. The Company will not exercise its
repurchase option until at least six (6) months (or such longer or shorter
period of time required to avoid classification of the Option as a liability
for financial accounting purposes) have elapsed following exercise of the
Option unless the Board otherwise specifically provides in the Option.


 


(g)                                 Termination
of Continuous Service. In the event that an Optionholder’s Continuous
Service terminates (other than upon the Optionholder’s death or Disability or
upon a Change in Control), the Optionholder may exercise his or her Option
(to the extent that the Optionholder was entitled to exercise such Option as of
the date of termination of Continuous Service) but only within such period of
time ending on the earlier of (i) the date three (3) months following
the termination of the Optionholder’s Continuous Service, or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination of Continuous Service, the Optionholder does not exercise his
or her Option within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.


 


(h)                                 Extension
of Termination Date. If the exercise of the Option following the
termination of the Optionholder’s Continuous Service (other than upon the Optionholder’s
death or Disability or upon a Change in Control) would be prohibited at any
time solely because the issuance of shares of Common Stock would violate the
registration requirements under the Securities Act, then the Option shall
terminate on the earlier of (i) the expiration of a period of three (3) months
after the termination of the Optionholder’s Continuous Service during which the
exercise of the Option would not be in violation of such registration
requirements, or (ii) the expiration of the term of the Option as set
forth in the Option Agreement.


 


(i)                                    Disability
of Optionholder. In the event that an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s Disability, the Optionholder may exercise
his or her Option (to the extent that the Optionholder was entitled to exercise
it as of the date of termination of Continuous Service), but only within such
period of time ending on the earlier of


 


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(i) the date twelve (12) months following such
termination of Continuous Service, or (ii) the expiration of the term of
the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein or in the Option Agreement, the Option shall terminate.


 


(j)                                    Death
of Optionholder. In the event that (i) an Optionholder’s Continuous
Service terminates as a result of the Optionholder’s death, or (ii) the
Optionholder dies within the three (3)-month period after the termination of
the Optionholder’s Continuous Service for a reason other than death, then the
Option may be exercised (to the extent the Optionholder was entitled to
exercise such Option as of the date of death) by the Optionholder’s estate, by
a person who acquired the right to exercise the Option by bequest or
inheritance or by a person designated to exercise the Option upon the
Optionholder’s death, but only within the period ending on the earlier of (i) the
date eighteen (18) months following the date of death, or (ii) the
expiration of the term of such Option as set forth in the Option Agreement. If,
after the Optionholder’s death, the Option is not exercised within the time
specified herein, the Option shall terminate.


 


(k)                                Termination Upon Change in Control. In
the event that an Optionholder’s Continuous Service terminates as of, or within
twelve (12) months following  a
Change in Control, the Optionholder may exercise his or her Option (to the
extent that the Optionholder was entitled to exercise such Option as of the
date of termination of Continuous Service) within such period of time ending on
the earlier of (i) the date twelve (12) months following the effective
date of the Change in Control, or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, after termination of
Continuous Service, the Optionholder does not exercise his or her Option within
the time specified herein or in the Option Agreement (as applicable), the
Option shall terminate.


 


7.                                      COVENANTS OF
THE COMPANY


 


(a)                                  Availability
of Shares. During the terms of the Options, the Company shall keep
available at all times the number of shares of Common Stock required to satisfy
such Options.


 


(b)                                  Securities
Law Compliance. The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be
required to grant Options and to issue and sell shares of Common Stock upon
exercise of the Options; provided, however, that
this undertaking shall not require the Company to register under the Securities
Act the Plan, any Option or any Common Stock issued or issuable pursuant to any
such Option. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority that counsel for the
Company deems necessary for the lawful issuance and sale of Common Stock under
the Plan, the Company shall be relieved from any liability for failure to issue
and sell Common Stock upon exercise of such Options unless and until such
authority is obtained.


 


8.                                      MISCELLANEOUS.


 


(a)                                  Use of Proceeds. Proceeds from the
sale of shares of Common Stock pursuant to Options shall constitute general
funds of the Company.


 


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(b)                                  Stockholder
Rights. No Optionholder shall be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares of Common Stock subject
to such Option unless and until such Optionholder has satisfied all
requirements for exercise of the Option pursuant to its terms.


 


(c)                                  No
Service Rights. Nothing in the Plan, any instrument executed, or Option
granted pursuant thereto shall confer upon any Optionholder any right to
continue to serve the Company as a Non-Employee Director or shall affect the right
of the Company or an Affiliate to terminate the service of a Director pursuant
to the Bylaws of the Company or an Affiliate, and any applicable provisions of
the corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.


 


(d)                                  Investment
Assurances. The Company may require an Optionholder, as a condition of
exercising or acquiring Common Stock under any Option, (i) to give written
assurances satisfactory to the Company as to the Optionholder’s knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Option; and (ii) to give written assurances
satisfactory to the Company stating that the Optionholder is acquiring the
Common Stock subject to the Option for the Optionholder’s own account and not
with any present intention of selling or otherwise distributing the Common
Stock. The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon
the exercise or acquisition of Common Stock under the Option has been
registered under a then currently effective registration statement under the
Securities Act, or (ii) as to any particular requirement, a determination
is made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.


 


(e)                                  Withholding
Obligations. The Optionholder may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under an Option by any of the following means (in addition to the Company’s
right to withhold from any compensation paid to the Optionholder by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing
the Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionholder as a result of the exercise or acquisition of
Common Stock under the Option; provided,
however, that no shares of Common Stock are withheld with a value
exceeding the minimum amount of tax required to be withheld by law; or (iii) delivering
to the Company owned and unencumbered shares of the Common Stock.


 


(f)                                    Electronic
Delivery. Any reference herein to a “written” agreement or document shall
include any agreement or document delivered electronically or posted on the
Company’s intranet.


 


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9.                                      ADJUSTMENTS UPON CHANGES IN COMMON
STOCK; CORPORATE TRANSACTIONS.


 


(a)                                  Capitalization
Adjustments. In the event of a Capitalization Adjustment, the Board shall
proportionately and appropriately adjust: (i) the class(es) and maximum
number of securities subject to the Plan pursuant to Section 3(a), (ii) the
class(es) and number of securities for which the nondiscretionary grants of
Options are made pursuant to Section 5, and (iii) the class(es) and
number of securities and price per share of stock subject to outstanding
Options. The Board shall make such adjustments, and its determination shall be
final, binding and conclusive.


 


(b)                                  Dissolution
or Liquidation. In the event of a dissolution or liquidation of the
Company, all outstanding Options shall terminate immediately prior to the
completion of such dissolution or liquidation.


 


(c)                                  Corporate Transaction.


 


(i)                                    Options May Be Assumed. In
the event of a Corporate Transaction, any surviving corporation or acquiring
corporation (or the surviving or acquiring corporation’s parent company) may assume
or continue any or all Options outstanding under the Plan or may substitute
similar stock options for Options outstanding under the Plan (including but not
limited to, options to acquire the same consideration paid to the stockholders
of the Company pursuant to the Corporate Transaction), and any reacquisition or
repurchase rights held by the Company in respect of Common Stock issued
pursuant to Options may be assigned by the Company to the successor of the
Company (or the successor’s parent company, if any), in connection with such
Corporate Transaction. A surviving corporation or acquiring corporation may choose
to assume or continue only a portion of an Option or substitute a similar
option for only a portion of an Option.


 


(ii)                                Options Held by Active Optionholders. In
the event of a Corporate Transaction in which the surviving corporation or
acquiring corporation (or its parent company) does not assume or continue such
outstanding Options or substitute similar stock options for such outstanding
Options, then with respect to Options that have not been assumed, continued or
substituted and that are held by Optionholders whose Continuous Service has not
terminated prior to the effective time of the Corporate Transaction (referred
to as the “Active
Optionholders”), the vesting of such Options (and, if applicable,
the time at which such Options may be exercised) shall (contingent upon
the effectiveness of the Corporate Transaction) be accelerated in full to a
date prior to the effective time of such Corporate Transaction as the Board
shall determine (or, if the Board shall not determine such a date, to the date
that is five (5) days prior to the effective time of the Corporate
Transaction), and the Options shall terminate if not exercised (if applicable)
at or prior to the effective time of the Corporate Transaction, and any
reacquisition or repurchase rights held by the Company with respect to such
Options shall lapse (contingent upon the effectiveness of the Corporate
Transaction).


 


(iii)                            Options Held by Former Optionholders. In
the event of a Corporate Transaction in which the surviving corporation or
acquiring corporation (or its parent company) does not assume or continue such
outstanding Options or substitute similar stock options for such outstanding
Options, then with respect to any other Options that have not been assumed,


 


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continued or substituted and that are held by persons
other than Active Optionholders, the vesting of such Options (and, if
applicable, the time at which such Options may be exercised) shall not be
accelerated unless otherwise provided in Section 9(d) or in a written
agreement between the Company or any Affiliate and the holder of such Options,
and such Options shall terminate if not exercised (if applicable) prior to the
effective time of the Corporate Transaction; provided,
however, that any reacquisition or repurchase rights held by the
Company with respect to such Options shall not terminate and may continue
to be exercised notwithstanding the Corporate Transaction.


 


(iv)                               Payment for Options in Lieu of Exercise. Notwithstanding
the foregoing, in the event an Option will terminate if not exercised prior to
the effective time of a Corporate Transaction, the Board may provide, in
its sole discretion, that the holder of such Option may not exercise such
Option but will receive a payment, in such form as may be determined
by the Board, equal in value to the excess, if any, of (i) the value of
the property the holder of the Option would have received upon the exercise of
the Option, over (ii) the exercise price payable by the Optionholder in
connection with such exercise.


 


(d)                                  Change
in Control. In the event that an Optionholder (i) is required to
resign his or her position as a Non-Employee Director as a condition of a
Change in Control, or (ii) is removed from his or her position as a
Non-Employee Director in connection with a Change in Control, the outstanding
Options held by such Optionholder shall become fully vested and exercisable
immediately prior to the effectiveness of such resignation or removal (and
contingent upon the effectiveness of such Change in Control).


 


(e)                                  Parachute
Payments.


 


(i)                                    If
the acceleration of the vesting and exercisability of Options provided for in
Sections 9(c) and 9(d), together with payments and other benefits of an
Optionholder, (collectively, the “Payment”) (i) constitute a “parachute
payment” within the meaning of Section 280G of the Code, or any comparable
successor provisions, and (ii) but for this Section 9(e) would
be subject to the excise tax imposed by Section 4999 of the Code, or any
comparable successor provisions (the “Excise Tax”), then such Payment shall be
either (1) provided to such Optionholder in full, or (2) provided to
such Optionholder as to such lesser extent that would result in no portion of
such Payment being subject to the Excise Tax, whichever of the foregoing
amounts, when taking into account applicable federal, state, local and foreign
income and employment taxes, the Excise Tax, and any other applicable taxes,
results in the receipt by such Optionholder, on an after-tax basis, of the
greatest amount of the Payment, notwithstanding that all or some portion of the
Payment may be subject to the Excise Tax.


 


(ii)                                Unless
the Company and such Optionholder otherwise agree in writing, any determination
required under this Section 9(e) shall be made in writing in good
faith by the Accountant. If a reduction in the Payment is to be made as
provided above, reductions shall occur in the following order unless the
Optionholder elects in writing a different order (provided, however, that such election shall be subject to
Company approval if made on or after the date that triggers the Payment or a
portion thereof): (i) reduction of cash payments; (ii) cancellation
of accelerated vesting of Options; and (iii) reduction of other benefits
paid to the Optionholder. If acceleration of vesting of Options is to be
reduced, such acceleration of vesting shall be


 


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cancelled in the reverse order of date of grant of
Options (i.e., the earliest
granted Option cancelled last) unless the Optionholder elects in writing a
different order for cancellation.


 


(iii)                            For
purposes of making the calculations required by this Section 9(e), the
Accountant may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of the Code and other applicable legal authority. The
Company and the Optionholder shall furnish to the Accountant such information
and documents as the Accountant may reasonably request in order to make
such a determination. The Company shall bear all costs the Accountant may reasonably
incur in connection with any calculations contemplated by this Section 9(e).


 


(iv)                               If,
notwithstanding any reduction described above, the Internal Revenue Service
(the “IRS”)
determines that the Optionholder is liable for the Excise Tax as a result of
the Payment, then the Optionholder shall be obligated to pay back to the
Company, within thirty (30) days after a final IRS determination or, in the
event that the Optionholder challenges the final IRS determination, a final
judicial determination, a portion of the Payment (the “Repayment Amount”). The
Repayment Amount with respect to the Payment shall be the smallest such amount,
if any, as shall be required to be paid to the Company so that the Optionholder’s
net after-tax proceeds with respect to the Payment (after taking into account
the payment of the Excise Tax and all other applicable taxes imposed on the
Payment) shall be maximized. The Repayment Amount with respect to the Payment
shall be zero if a Repayment Amount of more than zero would not result in the
Optionholder’s net after-tax proceeds with respect to the Payment being maximized.
If the Excise Tax is not eliminated pursuant to this paragraph, the
Optionholder shall pay the Excise Tax.


 


(v)                                   Notwithstanding
any other provision of this Section 9(e), if (i) there is a reduction
in the Payment as described above, (ii) the IRS later determines that the
Optionholder is liable for the Excise Tax, the payment of which would result in
the maximization of the Optionholder’s net after-tax proceeds of the Payment
(calculated as if the Payment had not previously been reduced), and (iii) the
Optionholder pays the Excise Tax, then the Company shall pay or otherwise
provide to the Optionholder that portion of the Payment that was reduced
pursuant to this Section 9(e) contemporaneously or as soon as
administratively possible after the Optionholder pays the Excise Tax so that
the Optionholder’s net after-tax proceeds with respect to the Payment are
maximized.


 


(vi)                               If
the Optionholder either (i) brings any action to enforce rights pursuant
to this Section 9(e), or (ii) defends any legal challenge to his or
her rights under this Section 9(e), the Optionholder shall be entitled to
recover attorneys’ fees and costs incurred in connection with such action,
regardless of the outcome of such action; provided,
however, that if such action is commenced by the Optionholder, the
court finds that the action was brought in good faith.


 


10.                               AMENDMENT OF THE PLAN AND OPTIONS.


 


(a)                                  Amendment
of Plan. Subject to the limitations, if any, of applicable law, the Board,
at any time and from time to time, may amend the Plan. However, except as
provided in Section 9(a) relating to Capitalization Adjustments, no
amendment shall be effective unless


 


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approved by the stockholders of the Company to the
extent stockholder approval is necessary to satisfy applicable law.


 


(b)                                  Stockholder
Approval. The Board, in its sole discretion, may submit any other
amendment to the Plan for stockholder approval.


 


(c)                                  No
Impairment of Rights. Rights under any Option granted before amendment of the
Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the affected Optionholder, and (ii) such
Optionholder consents in writing.


 


(d)                                  Amendment
of Options. The Board, at any time and from time to time, may amend
the terms of any one or more Options; provided,
however, that the rights under any Option shall not be impaired by
any such amendment unless (i) the Company requests the consent of the
Optionholder, and (ii) the Optionholder consents in writing.


 


11.                               TERMINATION OR SUSPENSION OF THE PLAN.


 


(a)                                  Plan
Term. The Board may suspend or terminate the Plan at any time. No
Options may be granted under the Plan while the Plan is suspended or after
it is terminated.


 


(b)                                  No
Impairment of Rights. Suspension or termination of the Plan shall not
impair rights and obligations under any Option granted while the Plan is in
effect except with the written consent of the Optionholder.


 


12.                               EFFECTIVE DATE OF PLAN.


 


                                                The
Plan shall become effective on the IPO Date, but no Option shall be exercised
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.


 


13.                               CHOICE OF LAW.


 


The law of the state of
Delaware shall govern all questions concerning the construction, validity and
interpretation of this Plan, without regard to that state’s conflict of laws
rules.


 


14.                               DEFINITIONS.


 


As used in the Plan, the
following definitions shall apply to the capitalized terms indicated below:


 


(a)                                  “Accountant” means the independent public
accountants of the Company.


 


(b)                                  “Affiliate” means, at the time of determination,
any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405
of the Securities Act. The Board shall have the authority to determine the time
or times at which “parent” or “subsidiary” status is determined within the
foregoing definition.


 


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(c)                                  “Annual Grant” means an Option granted annually to
all Non-Employee Directors who meet the specified criteria pursuant to Section 5(c).


 


(d)                                  “Annual Meeting” means the
first annual meeting of the stockholders of the Company held each calendar year
at which the Directors are selected.


 


(e)                                  “Board” means the Board of Directors of the
Company.


 


(f)                                    “Capitalization Adjustment”
means any change that is made in, or other events that occur with respect to,
the Common Stock subject to the Plan or subject to any Option after the
Effective Date without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by
the Company). Notwithstanding the foregoing, the conversion of any convertible
securities of the Company shall not be treated as a transaction “without the receipt
of consideration” by the Company.


 


(g)                                 “Change in Control”
means the occurrence, in a single transaction or in a series of related
transactions, of any one or more of the following events:


 


(i)                                    any
Exchange Act Person becomes the Owner, directly or indirectly, of securities of
the Company representing more than fifty
percent (50%) of the combined voting power of the Company’s then
outstanding securities other than by virtue of a merger, consolidation or
similar transaction. Notwithstanding
the foregoing, a Change in Control shall not be deemed to occur (A) on
account of the acquisition of securities of the Company by an investor, any
affiliate thereof or any other Exchange Act Person from the Company in a
transaction or series of related transactions the primary purpose of which
is to obtain financing for the Company through the issuance of equity
securities or (B) solely because the level of Ownership held by any
Exchange Act Person (the “Subject
Person”) exceeds the
designated percentage threshold of the outstanding voting securities as a
result of a repurchase or other acquisition of voting securities by the Company
reducing the number of shares outstanding, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting
securities that, assuming the repurchase or other acquisition had not occurred,
increases the percentage of the then outstanding voting securities Owned by the
Subject Person over the designated percentage threshold, then a Change in
Control shall be deemed to occur;


 


(ii)                                there
is consummated a merger, consolidation or similar transaction involving
(directly or indirectly) the Company and, immediately after the consummation of
such merger, consolidation or similar transaction, the stockholders of the
Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding
voting securities representing more than fifty percent (50%) of the combined outstanding voting power of
the surviving Entity in such merger, consolidation or similar transaction or (B) more
than fifty percent (50%) of the
combined outstanding voting power of the parent of the surviving Entity in such
merger, consolidation or similar transaction, in each case in substantially the
same proportions as their


 


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Ownership of the outstanding voting securities of the
Company immediately prior to such transaction;


 


(iii)                            the
stockholders of the Company approve or the Board approves a plan of complete
dissolution or liquidation of the Company, or a complete dissolution or
liquidation of the Company shall otherwise occur, except for a liquidation into
a parent corporation;


 


(iv)                               there
is consummated a sale, lease, exclusive license or other disposition of all or
substantially all of the consolidated assets of the Company and its
Subsidiaries, other than a sale, lease, license or other disposition of all or
substantially all of the consolidated assets of the Company and its
Subsidiaries to an Entity, more than fifty
percent (50%) of the combined voting power of the voting securities of
which are Owned by stockholders of the Company in substantially the same
proportions relative to each other as their Ownership of the outstanding voting
securities of the Company immediately prior to such sale, lease, license or
other disposition; or


 


(v)                                   individuals
who, on the date the Plan is adopted by the Board, are members of the Board
(the “Incumbent Board”)
cease for any reason to constitute at least a majority of the members of the
Board; provided, however, that if the
appointment or election (or nomination for election) of any new Board member
was approved or recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member shall, for purposes of the Plan, be
considered as a member of the Incumbent Board.


 


For avoidance of
doubt, the term Change in Control shall not include a sale of assets, merger or
other transaction effected exclusively for the purpose of changing the domicile
of the Company.


 


Notwithstanding
the foregoing or any other provision of the Plan, the definition of Change in
Control (or any analogous term) in an individual written agreement between the
Company or any Affiliate and the Optionholder shall supersede the foregoing
definition with respect to Options subject to such agreement; provided, however, that if no definition
of Change in Control or any analogous term is set forth in such an individual
written agreement, the foregoing definition shall apply.


 


The Board may, in
its sole discretion and without a Optionholder’s consent, amend the definition
of “Change in Control” to conform to the definition of “Change in Control”
under Section 409A of the Code, and the regulations thereunder.


 


(h)                                 “Code” means the Internal Revenue Code of
1986, as amended.


 


(i)                                    “Common Stock” means the common stock of the
Company.


 


(j)                                    “Company” means ARYx Therapeutics, Inc., a
Delaware corporation.


 


(k)                                “Consultant” means any person, including an
advisor, who is (i) engaged by the Company or an Affiliate to render
consulting or advisory services and is compensated for such services, or (ii) serving
as a member of the Board of Directors of an Affiliate and is compensated


 


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for such services. However, service solely as a
Director, or payment of a fee for such service, shall not cause a Director to
be considered a “Consultant” for purposes of the Plan.


 


(l)                                    “Continuous Service” means
that the Optionholder’s service with the Company or an Affiliate, whether as an
Employee, Director or Consultant, is not interrupted or terminated. A change in
the capacity in which the Optionholder renders service to the Company or an
Affiliate as an Employee, Consultant or Director or a change in the entity for
which the Optionholder renders such service, provided that there is no
interruption or termination of the Optionholder’s service with the Company or
an Affiliate, shall not terminate an Optionholder’s Continuous Service; provided, however, if the corporation for which an
Optionholder is rendering service ceases to qualify as an Affiliate, as
determined by the Board in its sole discretion, such Optionholder’s Continuous
Service shall be considered to have terminated on the date such corporation
ceases to qualify as an Affiliate. For example, a change in status from a
Non-Employee Director of the Company to a Consultant of an Affiliate or an
Employee of the Company will not constitute an interruption of Continuous
Service. To the extent permitted by law, the Board or the chief executive
officer of the Company, in that party’s sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave
or any other personal leave. Notwithstanding the foregoing, a leave of absence
shall be treated as Continuous Service for purposes of vesting in an Option
only to such extent as may be provided in the Company’s leave of absence
policy or in the written terms of the Optionholder’s leave of absence.


 


(m)                              “Corporate Transaction”
means the occurrence, in a single transaction or in a series of related
transactions, of any one or more of the following events:


 


(i)                                    the
consummation of a sale  or other
disposition of all or substantially all, as determined by the Board in its sole
discretion, of the consolidated assets of the Company and its Subsidiaries;


 


(ii)                                the
consummation of a sale or other disposition of at least ninety percent (90%) of the
outstanding securities of the Company;


 


(iii)                            the
consummation of a merger, consolidation or similar transaction following which
the Company is not the surviving corporation; or


 


(iv)                               the
consummation of a merger, consolidation or similar transaction following which
the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger, consolidation or similar
transaction are converted or exchanged by virtue of the merger, consolidation
or similar transaction into other property, whether in the form of
securities, cash or otherwise.


 


(n)                                 “Director” means a member of the Board.


 


(o)                                  “Disability” means, with respect to a
Optionholder, the inability of such Optionholder 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 can be expected to last
for a continuous period of not less than 12 months, as provided in Section 22(e)(3) and
409A(a)(2)(c)(i) of the Code.


 


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(p)                                  “Employee” means any person employed by the
Company or an Affiliate. However, service solely as a Director, or payment of a
fee for such services, shall not cause a Director to be considered an “Employee”
for purposes of the Plan.


 


(q)                                  “Entity” means a
corporation, partnership, limited liability company or other entity.


 


(r)                                  “Exchange Act” means the Securities Exchange Act of
1934, as amended.


 


(s)                                  “Exchange Act Person”
means any natural person, Entity or “group” (within the meaning of Section 13(d) or
14(d) of the Exchange Act), except that “Exchange Act Person” shall not
include (i) the Company or any Subsidiary of the Company; (ii) any
employee benefit plan of the Company or any Subsidiary of the Company or any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any Subsidiary of the Company; (iii) an underwriter
temporarily holding securities pursuant to an offering of such securities; (iv) an
Entity Owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their Ownership of stock of the Company;
or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or
14(d) of the Exchange Act) that, as of the Effective Date, is the Owner,
directly or indirectly, of securities of the Company representing more than
fifty percent (50%) of the combined voting power of the Company’s then
outstanding securities.


 


(t)                                    “Fair Market Value” means, as
of any date, the value of the Common Stock determined as follows:


 


(i)                                    If
the Common Stock is listed on any established stock exchange or traded on the
Nasdaq Global Select Market or the Nasdaq Global Market, the Fair Market Value
of a share of Common Stock shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange (or the
exchange or market with the greatest volume of trading in the Common Stock) on
the date of determination, as reported in The Wall Street Journal  or such other source as the Board deems
reliable.


 


(ii)                                If
the Common Stock is listed or traded on the Nasdaq Capital Market, the Fair
Market Value of a share of Common Stock shall be the mean between the bid and
asked prices for the Common Stock on the date of determination, as reported in The Wall Street Journal  or
such other source as the Board deems reliable. Unless otherwise provided by the
Board, if there is no closing sales price (or closing bid if no sales were
reported) for the Common Stock on the date of determination, then the Fair
Market Value shall be the mean between the bid and asked prices for the Common
Stock on the last preceding date for which such quotation exists.


 


(iii)                            In
the absence of such markets for the Common Stock, the Fair Market Value shall
be determined by the Board in good faith and in a manner that complies with Section 409A
of the Code.


 


(u)                                 “Initial Grant” means an Option granted to a
Non-Employee Director who meets the specified criteria pursuant to Section 5(b).


 


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(v)                                   “IPO Date” means the date of the underwriting
agreement between the Company and the underwriter(s) managing the initial
public offering of the Common Stock, pursuant to which the Common Stock is
priced for the initial public offering.


 


(w)                                “IPO Grant” means an
Option granted to a Non-Employee Director who meets the specified criteria
pursuant to Section 5(a).


 


(x)                                  “Non-Employee Director” means a
Director who is not an Employee.


 


(y)                                  “Nonstatutory Stock Option” means an
Option that does not qualify as an “incentive stock option” within the meaning
of Section 422 of the Code and the regulations promulgated thereunder.


 


(z)                                  “Officer” means a
person who is an officer of the Company within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated thereunder.


 


(aa)                            “Option”  means a
Nonstatutory Stock Option granted pursuant to the Plan.


 


(bb)                            “Option Agreement”  means a written agreement between
the Company and an Optionholder evidencing the terms and conditions of an
individual Option grant. Each Option Agreement shall be subject to the terms
and conditions of the Plan.


 


(cc)                            “Optionholder” means a person to whom an Option is
granted pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.


 


(dd)                            “Own,” “Owned,” “Owner,” “Ownership”  A person or Entity shall be deemed to “Own,”
to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of
securities if such person or Entity, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or shares
voting power, which includes the power to vote or to direct the voting, with
respect to such securities.


 


(ee)                            “Plan” means this ARYx Therapeutics, Inc.
2007 Non-Employee Directors’ Stock Option Plan.


 


(ff)                                “Rule 16b-3” means Rule 16b-3
promulgated under the Exchange Act or any successor to Rule 16b-3, as in
effect from time to time.


 


(gg)                          “Securities Act” means the
Securities Act of 1933, as amended.


 


(hh)                          “Subsidiary” means,
with respect to the Company, (i) any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether, at the time, stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time, directly or indirectly, Owned by the Company,
and (ii) any partnership in which the Company has a direct or indirect
interest (whether in the form of voting or participation in profits or
capital contribution) of more than fifty percent (50%).


 


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(ii)                                “Trading Day” means any day on which
the exchange(s) or market(s) on which shares of Common Stock are listed,
including an established stock exchange, the Nasdaq Global Select Market or the
Nasdaq Global Market, the Nasdaq Capital Market, is open for trading.


 


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