**Exhibit 10.16**

 

**REPUBLIC COMPANIES GROUP, INC.**

**EMPLOYEE STOCK PURCHASE PLAN**

 

1. **Purpose**. The purpose of the Republic Companies Group, Inc. Employee Stock Purchase Plan (the “Plan”) is to provide eligible employees with an incentive to advance the interests of Republic Companies Group, Inc., aDelaware corporation (the “Company”), by affording an opportunity to purchase stock of the Company at a favorable price. 

 

2. **Administration of the Plan**. The Plan shall be administered by a committee (the “Committee”) as appointed by the Board of Directors ofthe Company (the “Board”). Subject to the provisions of the Plan, the Committee shall interpret and construe the Plan and all options granted under the Plan, shall make such rules as it deems necessary for the proper administration of thePlan, shall make all other determinations necessary or advisable for the administration of the Plan, including the determination of eligibility to participate in the Plan and limitations on the number of shares subject to a participant’s optionunder the Plan, and shall correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option granted under the Plan in the manner and to the extent that the Committee deems desirable to carry the Plan or any optioninto effect. The Committee shall, in its sole discretion exercised in good faith, make such decisions or determinations and take such actions as it deems appropriate, and all such decisions, determinations and actions taken or made by the Committeepursuant to this and the other paragraphs of the Plan shall be conclusive on all parties. The Committee shall not be liable for any decision, determination or action taken in good faith in connection with the administration of the Plan. 

 

3. **Participating Companies**. Each present and future parent orsubsidiary corporation of the Company (within the meaning of sections 424(e) and (f) of the Internal Revenue Code of 1986, as amended (the “Code”)) that is eligible by law to participate in the Plan shall be a “ParticipatingCompany” during the period that such corporation is such a parent or subsidiary corporation; provided, however, that the Committee may at any time and from time to time, in its sole discretion, prevent or terminate a ParticipatingCompany’s Plan participation. Any Participating Company may, by appropriate action of its Board of Directors, prevent or terminate its participation in the Plan. Transfer of employment among the Company and Participating Companies (and amongany other parent or subsidiary corporation of the Company) shall not be considered a termination of employment hereunder. 

 

4. **Eligibility**. All employees of the Company and the Participating Companies who are employed (including employees on any authorized leave ofabsence meeting the requirements of Treasury Regulation § 1.421-1(h)(2)) by the Company or any Participating Company (including any predecessor entity) for at least 180 days as of the applicable Date of Grant (as defined in subparagraph 6(a))and who are customarily employed at least 20 hours per week and at least 5 months per year shall be eligible to participate in the Plan; provided, however, that no option shall be granted to an employee if such employee, immediately after the optionis granted, owns stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or of its parent or subsidiary corporation (within the meaning of sections 423(b)(3) and 424(d) of the Code)(“Eligible Employee”). 

5. **Stock Subject to the Plan**. Subject to the provisions of paragraph 12 (relating to adjustmentupon changes in stock), the aggregate number of shares which may be sold pursuant to options granted under the Plan shall not exceed 500,000 shares of the authorized $.01 par value common stock of the Company (“Stock”), which shares may beunissued shares or reacquired shares or shares bought on the market for purposes of the Plan. Should any option granted under the Plan expire or terminate prior to its exercise in full, the shares theretofore subject to such option may again besubject to an option granted under the Plan. Any shares which are not subject to outstanding options upon the termination of the Plan shall cease to be subject to the Plan. 

 

6. **Grant Of Options**. 

 

(a) *General Statement; “Date Of Grant”; “Option Period”; “Date Of Exercise”*. Upon the effective date of the Plan, asprovided in Section 14, and continuing while the Plan remains in effect, the Company shall offer options under the Plan to all Eligible Employees to purchase shares of Stock. Except as otherwise determined by the Committee and except as providedbelow, these options shall be granted on the January 1 or July 1 immediately subsequent to the Plan’s effective date, whichever occurs earlier, and each six month anniversary of such date (each of which dates is herein referred to as a“Date of Grant”). The term of each option, except as provided below, shall begin on a Date of Grant and shall be for a period ending on the next subsequent June 30 or December 31 (each such 6 month period or shorter period in the case ofthe first period shall be referred to as an “Option Period”). The first day of the first Option Period shall be a Date of Grant and the last day of such Option Period shall be a “Date of Exercise.” Notwithstanding the foregoing,the first Date of Grant shall be October 1, 2005. The number of shares subject to each option and Option Period shall be the quotient of the sum of the payroll deductions withheld on behalf of each participant in accordance with subparagraph 6(b)for the Option Period and any amount carried forward from the preceding Option Period pursuant to subparagraph 7(a), divided by the “Option Price” (as defined in subparagraph 7(b)) of the Stock, excluding all fractions; provided, however,that the maximum number of shares that may be subject to any option may not exceed 5,000 shares (subject to adjustment as provided in paragraph 12). 

 

(b) *Election To Participate; Deduction Authorization*. Except as provided in subparagraph 6(f), an Eligible Employee may participate in the Planonly by means of payroll deduction. Except as provided in subparagraph 6(g), each Eligible Employee who elects to participate in the Plan shall deliver to the Company, within the time period prescribed by the Committee, a written payroll deductionauthorization on a form prepared by the Committee whereby he gives notice of his election to participate in the Plan as of the next following Date of Grant, and whereby he designates an integral percentage or specific amount (as determined by theCommittee) of his “Eligible Compensation” (as defined in subparagraph 6(d)) to be deducted from his compensation for each pay period and credited to a book entry account established in his name. The designated percentage or specific amountmay not result in a deduction during any payroll period of an amount less than $5.00. The designated percentage or specific amount may not exceed either of the following: (i) 50% of the amount of Eligible Compensation from which the deduction ismade; or (ii) an amount which will result in noncompliance with the limitations stated in subparagraphs 6(a) or 6(e). 

 

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(c) *Changes in Payroll Authorization*. Except as provided in subparagraph 8(a), the payrolldeduction authorization referred to in subparagraph 6(b) may not be changed until the following Date of Grant. 

 

(d) *“Eligible Compensation” Defined*. The term “Eligible Compensation” means the gross (before taxes are withheld) total of allwages, salaries, commissions, overtime and bonuses received during the Option Period, except that such term shall include elective contributions made on an employee’s behalf by the Company or a Participating Company that are not includable inincome under section 125 or section 402(e)(3) of the Code. Notwithstanding the foregoing, “Eligible Compensation” shall not include (i) employer contributions to or payments from any deferred compensation program, whether such program isqualified under section 401(a) of the Code (other than amounts considered as employer contributions under section 402(e)(3) of the Code) or nonqualified, (ii) amounts realized from the receipt or exercise of a stock option that is not an incentivestock option within the meaning of section 422 of the Code, (iii) amounts realized at the time property described in section 83 of the Code is freely transferable or no longer subject to a substantial risk of forfeiture, (iv) amounts realized as aresult of an election described in section 83(b) of the Code, and (v) any amount realized as a result of a disqualifying disposition within the meaning of section 421(b) of the Code. 

 

(e) *$25,000 Limitation*. No Eligible Employee shall be granted an option under the Plan to the extent such grant wouldpermit his rights to purchase Stock under the Plan and under all other employee stock purchase plans of the Company and its parent and subsidiary corporations (as such terms are defined in sections 424(e) and (f) of the Code) to accrue at a ratewhich exceeds $25,000 of the Fair Market Value of Stock (as defined in subparagraph 7(b)), determined at the time the option is granted, for each calendar year in which any such option granted to such employee is outstanding at any time (within themeaning of section 423(b)(8) of the Code). 

 

(f) *Leaves ofAbsence*. During a paid leave of absence approved by the Company and meeting the requirements of Treasury Regulation § 1.421-1(h)(2), a participant’s elected payroll deductions shall continue. If a participant takes an unpaid leave ofabsence, then such participant may not make additional contributions under the Plan while on unpaid leave of absence, and the participant’s payroll deductions for the applicable Option Period shall remain subject to the Plan and used toexercise options on the next following Date of Exercise. 

 

(g)*Continuing Election*. A participant (i) who has elected to participate in the Plan pursuant to subparagraph 6(b) as of a Date of Grant and (ii) who takes no action to change or revoke such election as of the next following Date of Grant, shallbe deemed to have made the same election, including the same attendant payroll deduction authorization, for such next following and/or subsequent Date(s) of Grant as was in effect for the Date of Grant for which he made such election to participate.A participant who desires to discontinue participation in the Plan for a subsequent Option Period 

 

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commencing as of the next Date of Grant shall deliver to the Company a notice of withdrawal, on a formprepared by the Committee, at least 30 days prior to the beginning of such Option Period. 

 

7. **Exercise of Options**. 

 

(a) *General Statement*. Each Eligible Employee who is a participant in the Plan, automatically and without any act on his part, shall be deemed to have exercised his option on each Date of Exercise to the extent that the cash balancethen in his account under the Plan is sufficient to purchase at the “Option Price” (as defined in subparagraph 7(b)) whole shares of Stock. Any balance remaining in his account after payment of the purchase price of those whole shares, tothe extent the balance is insufficient to purchase a whole share, shall be carried forward and used towards the purchase of whole shares in the next following Option Period. To the extent the balance remaining in his account after the payment of thepurchase price exceeds the value of a share, at such time, the entire remaining balance shall be returned to the participant. 

 

(b) *“Option Price” Defined*. The Option Price per share of Stock to be paid by each optionee on each exercise of his option shall be anamount equal to the lesser of 85% of the Fair Market Value of the Stock on the Date of Exercise or on the Date of Grant. For all purposes under the Plan, the “Fair Market Value” of a share of Stock means, for a particular day: 

 

(i) If shares of Stock of the same class are listed or admitted tounlisted trading privileges on any national or regional securities exchange at the date of determining the Fair Market Value, then the last reported sale price, regular way, on the composite tape of that exchange on that business day or, if no suchsale takes place on that business day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to unlistedtrading privileges on that securities exchange or, if no such closing prices are available for that day, the last reported sale price, regular way, on the composite tape of that exchange on the last business day before the date in question; or

 

(ii) If shares of Stock of the same class are not listed oradmitted to unlisted trading privileges as provided in subparagraph (i) and if sales prices for shares of Stock of the same class in the over-the-counter market are reported by the National Association of Securities Dealers, Inc. AutomatedQuotations, Inc. (“NASDAQ”) National Market System as of the date of determining the Fair Market Value, then the last reported sales price so reported on that business day or, if no such sale takes place on that business day, the averageof the high bid and low asked prices so reported or, if no such prices are available for that day, the last reported sale price so reported on the last business day before the date in question; or 

 

(iii) If shares of Stock of the same class are not listed or admitted tounlisted trading privileges as provided in subparagraph (i) and sales prices for shares of 

 

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Stock of the same class are not reported by the NASDAQ National Market System (or a similar system thenin use) as provided in subparagraph (ii), and if bid and asked prices for shares of Stock of the same class in the over-the-counter market are reported by NASDAQ (or, if not so reported, by the National Quotation Bureau Incorporated) as of the dateof determining the Fair Market Value, then the average of the high bid and low asked prices on that business day or, if no such prices are available for that day, the average of the high bid and low asked prices on the last business day before thedate in question; or 

 

(iv) If shares of Stock of the sameclass are not listed or admitted to unlisted trading privileges as provided in subparagraph (i) and sales prices or bid and asked prices therefor are not reported by NASDAQ (or the National Quotation Bureau Incorporated) as provided in subparagraph(ii) or subparagraph (iii) as of the date of determining the Fair Market Value, then the value determined in good faith by the Committee, which determination shall be conclusive for all purposes; or 

 

(v) If shares of Stock of the same class are listed or admitted to unlistedtrading privileges as provided in subparagraph (i) or sales prices or bid and asked prices therefor are reported by NASDAQ (or the National Quotation Bureau Incorporated) as provided in subparagraph (ii) or subparagraph (iii) as of the date ofdetermining the Fair Market Value, but the volume of trading is so low that the Board of Directors determines in good faith that such prices are not indicative of the fair value of the Stock, then the value determined in good faith by the Committee,which determination shall be conclusive for all purposes notwithstanding the provisions of subparagraphs (i), (ii) or (iii). 

 

(c) *Delivery of Share Certificates*. As soon as practicable after each Date of Exercise, the Company shall issue one or more certificatesrepresenting the total number of whole shares of Stock respecting exercised options in the aggregate of all of the Eligible Employees hereunder. Any such certificate shall be held by the Company (or its agent) and may be held in street name. If theCompany issues a certificate representing the shares of more than one Eligible Employee, the Company shall keep accurate records of the beneficial interests of each Eligible Employee in each such certificate by means of a Company stock account. EachEligible Employee shall be provided with such periodic statements as may be directed by the Committee reflecting all activity in any such Company stock account. In the event the Company is required to obtain from any commission or agency authorityto issue any such certificate, the Company shall seek to obtain such authority. Inability of the Company to obtain from any such commission or agency authority which counsel for the Company deems necessary for the lawful issuance of any suchcertificate shall relieve the Company from liability to any participant in the Plan except to return to him the amount of the balance in his account. A participant may, on the form prescribed by the Committee, request the Company to deliver to suchparticipant a certificate issued in his name representing all or a part of the aggregate whole number of shares of Stock then held by the Company on his behalf under the Plan. Further, upon the termination of a participant’s employment with theCompany and its parent or subsidiary corporations for any reason whatsoever, the Company shall deliver 

 

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to such employee a certificate issued in his name representing the aggregate whole number of shares ofStock then held by the Company on his behalf under the Plan. While shares of Stock are held by the Company (or its agent), such shares may not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred, encumbered or disposed of bythe employee who has purchased such shares; provided, however, that such restriction shall not apply to the transfer of such shares of Stock pursuant to (i) a plan of reorganization of the Company, but the stock, securities or other propertyreceived in exchange therefor shall be held by the Company pursuant to the provisions hereof or (ii) a divorce. The Committee may cause the Stock certificates issued in connection with the exercise of options under the Plan to bear such legend orlegends, and the Committee may take such other actions, as it deems appropriate in order to reflect the provisions of this subparagraph 7(c) and to assure compliance with applicable securities laws. Neither the Company nor the Committee shall haveany liability with respect to a delay in the delivery of a Stock certificate pursuant to this subparagraph 7(c). 

 

(d) *Insufficiency of Shares Available for Issuance*. If the total number of shares of Stock remaining available for issuance pursuant to paragraph 5(the “Share Availability”) is less than the total number of shares of Stock that could otherwise be acquired pursuant to all options, for a given option period, after application of the limitations in paragraphs 6(a), 6(b) and 6(e) (butnot this paragraph 7(d)) (the “Total Share Limit”), then the number of shares of Stock that could otherwise be acquired pursuant to each option for the given option period shall be reduced such that the ratio of the total number of sharesthat could be acquired pursuant to each option for the given option period, after adjustments for the limitations in paragraphs 6(a), 6(b) and 6(e) (but not this paragraph 7(d)), to the Total Share Limit, equals the ratio of the total number ofshares that may be acquired pursuant to each option for the given option period, after adjustments for the limitations in paragraphs 6(a), 6(b), 6(e) and this paragraph 7(d), to the Share Availability. If the application of the adjustment providedin this paragraph 7(d) entitles an Eligible Employee to an option for a fraction of a share of Stock, the Eligible Employee’s payroll deductions that would be used to purchase that fractional share of Stock shall be returned to the EligibleEmployee as soon as administratively feasible. 

 

8.**Withdrawal from the Plan**. 

 

(a) *GeneralStatement*. Any participant may withdraw in whole from the Plan at any time prior to 30 days before the Date of Exercise relating to a particular Option Period. Partial withdrawals shall not be permitted. A participant who wishes to withdraw fromthe Plan must timely deliver to the Company a notice of withdrawal on a form prepared by the Committee. The Company, promptly following the time when the notice of withdrawal is delivered, shall refund to the participant the amount of the cashbalance in his account under the Plan; and thereupon, automatically and without any further act on his part, his payroll deduction authorization and his interest in unexercised options under the Plan shall terminate. 

 

(b) *Eligibility Following Withdrawal*. A participant who withdrawsfrom the Plan shall not be eligible to participate in the Plan until the following Date of Grant (provided that he is otherwise eligible to participate in the Plan at such time and complies with the enrollment procedures). 

 

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9. **Termination of Employment**. If the employment of a participant terminates for any reasonwhatsoever (including death), his participation in the Plan automatically and without any act on his part shall terminate as of the date of the termination of his employment. The Company shall refund to him the amount of the cash balance in hisaccount under the Plan, and thereupon his interest in unexercised options under the Plan shall terminate. 

 

10. **Restriction Upon Assignment of Option**. An option granted under the Plan shall not be transferable otherwise than by will or the laws of descentand distribution. Each option shall be exercisable, during his lifetime, only by the employee to whom granted. The Company shall not recognize and shall be under no duty to recognize any assignment or purported assignment by an employee of hisoption or of any rights under his option, and any such attempt may be treated by the Company as an election to withdraw from the Plan. 

 

11. **No Rights of Stockholder Until Certificate Issues**. With respect to shares of Stock subject to an option, a participant shall not be deemed tobe a stockholder, and he shall not have any of the rights or privileges of a stockholder. A participant shall have the rights and privileges of a stockholder upon, but not until, a certificate for shares has been issued following exercise of hisoption. With respect to a participant’s Stock held by the Company (or its agent) pursuant to subparagraph 7(c), the Company shall, as soon as practicable, pay the participant any cash dividends attributable thereto and facilitate theparticipant’s voting rights attributable thereto. 

 

12.**Changes in Stock; Adjustments**. Whenever any change is made in the Stock after the plan is approved by stockholders regardless of whether such change is made prior to the effective date of the Plan, by reason of a stock dividend or by reasonof subdivision, stock split, reverse stock split, recapitalization, reorganization, combinations, reclassification of shares, or other similar change, appropriate action will be taken by the Committee to adjust accordingly the number of sharessubject to the Plan, the maximum number of shares that may be subject to any option, and the number and Option Price of shares subject to options outstanding under the Plan. 

 

Upon the occurrence of a Change in Control, unless a surviving corporation assumes or substitutes new options (within themeaning of section 424(a) of the Code) for all options then outstanding or the Committee elects to continue the options then outstanding without change, the Date of Exercise for all options then outstanding shall be accelerated to a date fixed bythe Committee prior to the effective date of such Change in Control. 

 

“Change in Control” means the occurrence of any of the following events: 

 

(a) The agreement to acquire or a tender offer for beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934 (“Exchange Act”)) by any individual, entity orgroup (within the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”), of 50% or more of either (x) the then outstanding shares of Common Stock of the Company (the “Outstanding Company Common Stock”) or (y)the combined voting power of the then outstanding voting 

 

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securities of the Company entitled to vote generally in the election of directors (the “OutstandingCompany Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company,(C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses(A), (B) and (C) of paragraph (c) below; or 

 

(b) Individualswho constitute the Incumbent Board cease for any reason to constitute at least a majority of the Board; “Incumbent Board” shall be defined as the individuals who constitute the Board as of the Effective Date and any other individual whobecomes a director of the Company after that date and whose election or appointment by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of the directors then comprising theIncumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual orthreatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board; or 

 

(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or anacquisition of assets of another corporation (a “Business Combination”), in each case, unless, following such Business Combination, (A) the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior tosuch Business Combination represent or are converted into or exchanged for securities which represent or are convertible into more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the thenoutstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of suchtransaction owns the Company, or all or substantially all of the Company’s assets either directly or through one or more subsidiaries), (B) no Person (excluding any employee benefit plan (or related trust) of the Company or the corporationresulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting powerof the then outstanding voting securities of such corporation except to the extent that such ownership of the Company existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporationresulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 

 

(d) Approval by the stockholders of the Company of a complete liquidation ordissolution of the Company. 

 

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13. **Use of Funds; No Interest Paid**. All funds received or held by the Company under the Plan shallbe included in the general funds of the Company free of any trust or other restriction, and may be used for any corporate purpose. No interest shall be paid to any participant or credited to his account under the Plan. 

 

14. **Term of the Plan**. The Plan shall be effective as of the dateimmediately prior to a firm commitment underwritten public offering of the Stock for cash; provided that the Plan is approved by the stockholders of the Company within 12 months of the date of adoption by the Board. Notwithstanding any provision inthe Plan, no option granted under the Plan shall be exercisable prior to such stockholder approval, and, if the stockholders of the Company do not approve the Plan within 12 months after its adoption by the Board, then the Plan shall automaticallyterminate. 

 

15. **Amendment or Termination the Plan**. TheBoard in its discretion may terminate the Plan at any time with respect to any shares for which options have not theretofore been granted. The Board and Committee shall have the right to alter or amend the Plan or any part thereof from time to timewithout the approval of the stockholders of the Company; provided, that no change in any option theretofore granted may be made which would impair the rights of the participant without the consent of such participant; and provided, further, that theBoard and Committee may not make any alteration or amendment which would increase the aggregate number of shares which may be issued pursuant to the provisions of the Plan (other than as a result of the anti-dilution provisions of the Plan), changethe class of individuals eligible to receive options under the Plan, or cause options issued under the Plan to fail to meet the requirements for employee stock purchase plans as defined in section 423 of the Code without the approval of thestockholders of the Company. 

 

16. **Securities Laws**. TheCompany shall not be obligated to issue any Stock pursuant to any option granted under the Plan at any time when the shares covered by such option have not been registered under the Securities Act of 1933, as amended, and such other state andfederal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for theissuance and sale of such shares. Further, all Stock acquired pursuant to the Plan shall be subject to the Company’s policy or policies, if any, concerning compliance with securities laws and regulations, as the same may be amended from time totime. 

 

17. **No Restriction on Corporate Action**. Nothingcontained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action which is deemed by the Company or such subsidiary to be appropriate or in its best interest, whether or not such action would have anadverse effect on the Plan or any award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action. 

 

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EXECUTED this 8th day of August, 2005. 

 
**REPUBLIC COMPANIES GROUP, INC.**By: 
/s/ Parker W. Rush
Name: 
Parker W. Rush
Title: 
President and Chief Executive Officer

 

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