Exhibit
10.1


EMPLOYMENT AGREEMENT


This
Employment Agreement (the “Agreement”) dated as of August 1, 2006 (the “Execution
Date”) is made by and between ArQule, Inc., a Delaware corporation (the “Company”)
with its principal offices at 19 Presidential Way, Woburn, Massachusetts 01801,
and Nigel John Rulewski (“Executive”) whose current principal residential
address is 25 Bird Hill Avenue, Wellesley, MA 02481.


WHEREAS,
the Company desires to employ Executive in a senior executive capacity and to
enter into an agreement embodying the terms of such employment; and


WHEREAS,
Executive desires to accept such employment and enter into such an agreement;


NOW,
THEREFORE, in consideration of the mutual covenants and agreements contained
herein and for other good and valuable consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, the Company and Executive
(collectively, the “Parties”) hereby agree as follows:


1.                                       Term
of Employment.  The Company hereby
agrees to employ Executive, and Executive hereby accepts such employment with
the Company, upon the terms and subject to the conditions set forth in this
Agreement, for a period commencing on August
1, 2006 (the “Effective Date”) and continuing until terminated in
accordance with the provisions of Section 5 (the “Employment Term”).


2.                                       Title;
Duties.  During the Employment Term,
Executive shall serve as Chief Medical Officer, reporting directly to the Chief
Executive Officer (“CEO”) of the Company. 
Executive hereby agrees to undertake the duties and responsibilities
inherent in such position and such other duties and responsibilities consistent
with such position as the CEO shall from time to time reasonably assign to
Executive.


3.                                       No
Conflict.  During the Employment
Term, Executive shall devote substantially all of Executive’s business time and
efforts to the performance of Executive’s duties hereunder and shall not,
directly or indirectly, engage in any other business, profession or occupation
for compensation or otherwise which would conflict with the rendition of such
duties.  Notwithstanding the foregoing,
Executive may engage in other activities, such as activities involving
charitable, educational, religious, trade association, civic and similar types
of organizations, speaking engagements and membership on the Board of Directors
or equivalent of other organizations (“Outside Activities”), provided that
Executive shall obtain the prior written consent of the CEO before engaging in
any such Outside Activities and provided further that Executive’s participation
in such Outside Activities shall not be in violation of any of his obligations
to the Company, including but not limited to those set forth in the Company’s
Code of Conduct.  Executive represents
and warrants that Exhibit A attached hereto states all current business
relationships, 









 



                                                including,
but not limited to, consulting agreements, confidentiality agreements and
non-competition agreements to which Executive is a party as of the Execution
Date.


4.             Compensation and Benefits.


4.1.                              Base
Salary.  During the Employment Term,
the Company shall pay Executive for Executive’s services hereunder a base
salary at the initial annual rate of $325,000, payable in substantially equal
installments in accordance with the Company’s usual payment practices and
subject to annual review and upward adjustment by the Company in its sole
discretion.  Such amount (as it may be
increased, but not decreased, from time to time in accordance with this Section
4.1) shall be referred to herein as the “Base Salary.”


4.2.                              Bonus
Compensation.  Executive shall be
eligible to receive a discretionary annual cash bonus, the target amount of
which shall be 35 percent of Executive’s Base Salary.  The award of an annual cash bonus, if any,
shall be in the Company’s sole discretion and shall be based on Company and
individual performance.  For calendar
year 2006, the annual cash bonus awarded to Executive, if any, shall be
prorated based on the number of months Executive works for the Company during
that year.  The annual cash bonus
typically is paid during the first quarter of the following calendar year, and
Executive must be actively employed with the Company as of the payment date in
order to receive the annual cash bonus, if any. 
Executive shall also be eligible to participate in any and all other
bonus plans and packages that are made available to the Company’s executives,
on a basis consistent with Executive’s position and then-current Base Salary
and in accordance with the policies and practices of the Company and the Company’s
Board of Directors (the “Board”).


4.3.                              Stock
Option Grant.  As further
compensation for Executive’s services hereunder, the Company shall grant to
Executive, on the Effective Date, a stock option (the “Execution Stock Option”)
to purchase two hundred thousand (200,000) shares of the Company’s Common
Stock, $0.01 par value per share (the “Common Stock”), pursuant to the Company’s
Amended and Restated 1994 Equity Incentive Plan (the “Plan”) and in accordance
with the terms, and subject to a vesting schedule pursuant to which twenty-five
percent of the shares shall vest annually commencing on the first anniversary
of the Effective Date, and other conditions, set forth in the form of Option
Certificate (attached hereto as Exhibit B). 
The method of determining the exercise price of the Execution Stock
Option is set forth in the attached Exhibit C.  In its sole discretion, the Company may grant
to Executive from time to time other stock options to purchase additional
shares of Common Stock, also pursuant to the Plan and such other terms and
conditions set forth at the time of such grant (the Execution Stock Option and
such other stock options, collectively, the “Stock Options”) and may also grant
stock awards.


4.4.                              Executive
Benefits.  During the Employment Term
and subject to any contributions therefor generally required of senior
executives of the Company, 









 



                                                Executive
shall be entitled to receive such employee benefits (including fringe benefits,
401(k) plan participation, and life, health, dental, accident and short and
long term disability insurance) which the Company may, in its sole and absolute
discretion, make available generally to its senior executives or personnel
similarly situated; provided, however, that it is hereby acknowledged and
agreed that any such employee benefit plans may be altered, modified or
terminated by the Company at any time in its sole discretion without recourse
by Executive.


4.5.                              Paid
Time Off.  Executive shall be
entitled to four weeks (20 working days) of paid time off (“PTO”) per annum
during the Employment Term, which will accrue pursuant to the Company’s
policies and practices and is to be taken at such time or times as shall be
mutually convenient for the Company and Executive; provided, however, that the
Company may elect to increase the annual time to which Executive shall be
entitled to PTO.  Unused PTO shall be
allocated pursuant to the Company’s policies and practices.


4.6.                              Business
Expenses and Perquisites.  Upon
delivery of adequate documentation of expenses incurred in accordance with the
policies and practices of the Company, Executive shall be entitled to
reimbursement by the Company for reasonable travel, entertainment and other
business expenses incurred by Executive in the performance of Executive’s
duties hereunder in accordance with such policies as the Company may from time
to time have in effect.


4.7                                 Deductions
and Withholdings.  Notwithstanding
any other provision of this Agreement, any payments or benefits hereunder shall
be subject to the withholding of such amounts, if any, relating to tax and
other payroll deductions, as the Company reasonably determines it should
withhold pursuant to any applicable law or regulation.


4.8                                 Annual
Review.  Executive shall receive an
annual review of his performance by the CEO of the Company, or by a Committee
of the Board of Directors, or both.


5.             Termination.


5.1.         Without Cause by the Company.


5.1.1.                     The Severance Package.  The Company may terminate Executive’s
employment hereunder at any time without Cause (as defined in Section 5.2) upon
not less than fourteen (14) days prior written notice from the Company to
Executive.  The effective date of
Executive’s termination shall be referred to herein as the “Termination Date.”  If Executive’s employment is terminated by
the Company pursuant to this Section 5.1, all compensation and benefits
provided to Executive by the Company pursuant to this Agreement or otherwise
shall cease as of the Termination Date, except that the Company shall pay
Executive all amounts owed to Executive for work performed prior to the
Termination Date, plus the cash 









 



                                                value
of any accrued but unused PTO, as of the Termination Date.  In addition, provided that Executive first
executes a general release in a form and of a scope acceptable to the Company,
the Company shall provide the following severance benefits (the “Severance
Package”):


(a)                                  A
lump sum payment (the “Severance Payment”) in the following amount:


(i)                                     An
amount equal to Executive’s Base Salary through the end of the twelve (12)
month period commencing on the Termination Date; plus


(ii)                                  An amount equal to the average bonus, if any,
paid by the Company to Executive with respect to the two (2) years preceding
the year in which the Termination Date occurs, provided that, for purposes of
this paragraph only, Executive shall be deemed to have received his 35 percent
bonus target for any year within such 2-year period in which Executive was not
paid a bonus solely because he was not employed by the Company.  Attached at Exhibit D is a series of examples
of the manner in which this portion of the Severance Payment shall be
calculated.


(b)                                 Immediate
vesting of fifty (50) percent of any unvested portion of the Execution Stock
Option granted pursuant to Section 4.3 of this Agreement.


(c)                                  Payment
of the costs associated with continuing the benefits which Executive is
entitled to receive pursuant to Section 4.4 of this Agreement at the level in
effect as of the Termination Date (subject to any employee contribution
requirements applicable to Executive on the Termination Date) through the
twelve (12) month period commencing on the Termination Date, to the extent such
benefits may continue beyond the Termination Date (for example, among other
things, Executive’s coverage under the Company’s life and disability insurance
policies will terminate as of the Termination Date).


(d)                                 Notwithstanding
the foregoing, to the extent the Company reasonably determines that any portion
of the Severance Package is subject to Section 409A of the Internal Revenue
Code, payment of any such portion of the Severance Package subject to Section
409A shall (i) to the extent required, be delayed for a period of six months
from the Termination Date or (ii) to the extent permitted under subsequent
guidance from the Internal Revenue Service, be otherwise made to comply with
such Section 409A requirements.









 



 


5.1.2.                     Deemed Termination.  For purposes of this Section 5.1, a “termination
without Cause” shall be deemed to occur in the event any of the following
occurs and Executive provides to the Company Notice of Termination (as defined
in Section 5.6) within forty-five (45) days thereafter:


(a)                                The
Company substantially reduces or diminishes Executive’s responsibilities or
title without Cause;


(b)                               The
Company reduces Executive’s Base Salary or bonus target (other than in
connection with a Company-wide decrease in salary or bonus, respectively);


(c)                                The
Company materially breaches any of its obligations to Executive pursuant to
this Agreement, and fails to cure such breach within 30 days of receipt of
notice thereof;


(d)                               The
Company relocates Executive’s place of employment without Executive’s written
consent by a distance of more than fifty (50) miles, excluding any relocation
to the Company’s existing offices in Woburn, MA; or


(e)                         A
successor in interest to the Company fails to assume the obligations of this
Agreement.


5.1.3                        Accelerated
Vesting in Change of Control. In the event that Executive’s employment is
terminated or is deemed to terminate pursuant to this Section 5.1 within one
year of the latest possible date of a Change of Control, in addition to the
Severance Package, any Stock Option held as of the Termination Date shall
become immediately exercisable as to all option shares without regard to the
vesting schedule set forth on the applicable Option Certificate. For purposes
of this Agreement, any one of the following events shall be considered a “Change
of Control” of the Company:


(a)                         The
acquisition by any “person” (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934) of any amount of the Company’s Common Stock so
that such person holds or controls fifty percent (50%) or more of the Company’s
Common Stock;


(b)                        the merger
or consolidation of the Company with or into any other entity in which the
holders of the Company’s outstanding shares of capital stock immediately before
such merger or consolidation do not, immediately after such merger or
consolidation, retain capital stock representing a majority of the voting power
of the surviving entity of such merger or consolidation;









 



 


(c)                         a sale of
all or substantially all of the assets of the Company to a third party;


(d)                        within any
twenty-four (24) month period, the election by the stockholders of the Company
of twenty percent (50%) or more of the directors of the Company other than
pursuant to nomination by the Company’s management; or


(e)                         the
execution of a legally binding, definitive agreement approved by the Board of
Directors providing for any of the events set forth in (a), (b), (c) or (d)
above.


5.2.                              For
Cause by the Company. 
Notwithstanding any other provision of this Agreement, Executive’s
employment hereunder may be terminated by the Company at any time for
Cause.  For purposes of this Agreement, “Cause”
shall mean: (i) Executive’s arbitrary, unreasonable, or willful failure to
follow the reasonable instructions of the CEO or otherwise perform Executive’s
duties hereunder (other than as a result of a Disability (as defined in
Section 5.3)) for thirty (30) days after a written demand for performance
is delivered to Executive on behalf of the Company which demand specifically
identifies the manner in which the Company alleges that Executive has not
substantially followed such instructions or otherwise performed Executive’s
duties; (ii) Executive’s willful misconduct that is materially injurious to the
Company (whether from a monetary perspective or otherwise); (iii) Executive’s
willful commission of an act constituting fraud with respect to the Company;
(iv) conviction of Executive for a felony under the laws of the United States
or any state thereof; or (v) Executive’s material breach of Executive’s
obligations under Section 6 hereof or under the Employee Non-Disclosure and
Inventions Agreement in the form attached hereto as Exhibit E, to be executed
by Executive as of the Execution Date (the “NDA”).


If Executive’s employment is terminated by the Company
for Cause, all compensation and benefits provided to Executive by the Company
pursuant to this Agreement or otherwise shall cease as of the Termination Date,
except that the Company shall pay Executive all amounts owed to Executive for
work performed prior to the Termination Date, plus the cash value of any
accrued but unused PTO, as of the Termination Date.


5.3.                              Disability.  Subject to the requirements of the Americans
with Disabilities Act, Massachusetts General Laws Chapter 151B and any other
applicable laws, Executive’s employment hereunder may be terminated by the
Company at any time in the event of the Disability of Executive.  For purposes of this Agreement, “Disability”
shall mean the inability of Executive to perform the essential functions of
Executive’s position, with or without reasonable accommodation, due to physical
or mental disablement which continues for a period of four (4) consecutive
months during the Employment Term, as determined by an 









 



                                                independent
qualified physician mutually acceptable to the Company and Executive (or
Executive’s personal representative) or, if the Company and Executive (or such
representative) are unable to agree on an independent qualified physician, as
determined by a panel of three physicians, one designated by the Company, one
designated by Executive (or such representative) and one designated by the two
physicians so designated.  If Executive’s
employment is terminated by the Company for Disability, all compensation and
benefits provided to Executive by the Company pursuant to this Agreement or
otherwise shall cease as of the Termination Date, except that (a) the Company
shall pay Executive all amounts owed to Executive for work performed prior to
the Termination Date, (b) provided that Executive first executes a general
release in a form and of a scope acceptable to the Company, Executive shall be
entitled to the Severance Package, except that the lump sum based on Executive’s
Base salary paid as a part of the Severance Package shall be reduced by the
amount of Base Salary, salary continuation (short-term disability), and cash
disability benefits (long-term disability) paid to Executive for the
corresponding period under the Company’s employee benefit plans as then in
effect, and any Stock Option held as of the Termination Date shall become
immediately exercisable as to all option shares without regard to the vesting
schedule set forth on the applicable Option Certificate.


5.4.                              Death.  Executive’s employment hereunder shall
automatically terminate in the event of Executive’s death.  If Executive’s employment is terminated by
the death of Executive, all compensation and benefits provided to Executive by
the Company pursuant to this Agreement or otherwise shall cease as of the
Termination Date, except that (a) the Company shall pay to Executive’s estate
or legal representative all amounts owed to Executive for work performed
through the last day of Executive’s actual employment by the Company plus the
Severance Package, and (b) any Stock Option held as of the Termination Date
shall become immediately exercisable as to all option shares without regard to
the vesting schedule set forth on the applicable Option Certificate.


5.5.                              Termination
by Executive.  Executive’s employment
hereunder may be terminated by Executive at any time upon not less than Sixty
(60) days prior written notice from Executive to the Company.  Executive agrees that such notice period is
reasonable and necessary in light of the duties assumed by Executive pursuant
to this Agreement and fair in light of the consideration Executive is receiving
pursuant to this Agreement.  If Executive
terminates Executive’s employment with the Company pursuant to this Section 5.5, all compensation and benefits
provided to Executive by the Company pursuant to this Agreement or otherwise
shall cease as of the Termination Date, except that the Company shall pay
Executive all amounts owed to Executive for work performed prior to the
Termination Date, plus the cash value of any accrued but unused PTO as of the
Termination Date.









 



 


5.6.                              Notice
of Termination.  Any purported
termination of employment by the Company or by Executive shall be communicated
by written Notice of Termination to the other Party in accordance with Section
8 hereof.  For purposes of this
Agreement, a “Notice of Termination” shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of employment under the provision so indicated.


5.7.                              Survival.  The provisions of Section 6 shall survive the
termination of this Agreement.


6.             Confidentiality.


6.1.                              Definitions.  As used herein, the term “Confidential
Information” shall mean any and all ideas, inventions, information, know-how,
compounds, materials and other items (whether patentable or not) that are
confidential or proprietary to the Company (or to its affiliates, collaborators,
consultants, suppliers, or customers) whether disclosed in written, oral,
tangible or other form and whether or not labeled or otherwise identified as
confidential or proprietary. 
Confidential Information shall include, without limitation, the
following to the extent proprietary to the Company (or to its affiliates,
collaborators, consultants, suppliers or customers) and not publicly available:


(a)                                  inventions,
trade secrets, discoveries and computer programs, and any improvements or
modifications thereto;


(b)                                 engineering,
research, development and design projects, data, designs, drawings and
specifications;


(c)                                  manufacturing,
development and other technical processes, applications, methods, apparatus and
equipment;


(d)                                 business
information such as lists of approved components and sources, price lists,
product costs, production schedules, business plans, sales information, profit
and loss information, and customer and collaborator lists;


(e)                                  any
and all reagents, substances, chemical compounds, subcellular constituents,
cells or cell lines, organisms and progeny, and mutants, as well as any and all
derivatives or replications derived from or relating to such materials; and


(f)                                    any
and all information, materials and other items supplied by third parties to the
Company (or generated by the Company for third parties) under an obligation of
confidentiality.









 



 


6.2.                              Non-Disclosure.  Executive shall not at any time (whether
during or after Executive’s employment with the Company) disclose or use any
Confidential Information for Executive’s own benefit or purposes or the benefit
or purposes of any other person, firm, partnership, joint venture, association,
corporation or other organization, entity or enterprise (a “Person”) other than
the Company.


6.3.                              Exceptions.  Notwithstanding any other provision in the
Agreement, Confidential Information shall not include any information or
material which:


(a)                                  is
or becomes generally available to the public other than as a result of
disclosure thereof by Executive;


(b)                                 is
lawfully received by Executive on a non-confidential basis from a third party
that is not itself under an obligation of confidentiality or non-disclosure to
the Company with respect to such information;


(c)                                  can
be shown by Executive to have been independently developed by Executive;


(d)                                 Executive
establishes by competent proof was in Executive’s possession at the time of
disclosure by the Company and was not acquired, directly or indirectly from the
Company; or


(e)                                  is
required to be publicly disclosed by law or by regulation; provided, however,
that in such event Executive shall provide the Company with prompt advance
notice of such disclosure so that the Company has the opportunity if it so
desires to seek a protective order or other appropriate remedy.


6.4.                              Return
of Company Property.  Executive
agrees that upon termination of Executive’s employment hereunder, Executive
shall return immediately to the Company any proprietary materials, any
materials containing Confidential Information and any other Company property
then in Executive’s possession or under Executive’s control, including, without
limitation all notes, drawings, lists, memoranda, magnetic disks or tapes, or
other recording media containing such Confidential Information, whether alone
or together with non-confidential information, all documents, reports, files,
memoranda, records, software, credit cards, door and file keys, telephones,
PDAs, computers, computer access codes, disks and instructional manuals, or any
other physical property that Executive received, prepared, or helped prepare in
connection with Executive’s employment under this Agreement.  Upon termination, Executive shall not retain
any copies, duplicates, reproductions, or excerpts of Confidential Information,
nor shall Executive show or give any of the above to any third party.  Executive further agrees that Executive shall
not retain or use for Executive’s account at any time any trade name,
trademark, service mark, logo or other proprietary business designation used or
owned in connection with the business of the Company.









 



 


7.                                       Specific
Performance.  Executive acknowledges
and agrees that the Company’s remedies at law for a breach or threatened breach
of any of the provisions of Section 6 would be inadequate and, in recognition
of this fact, Executive agrees that, in the event of such a breach or
threatened breach, in addition to any remedies at law, the Company, without
posting any bond, shall be entitled to obtain equitable relief in the form of
specific performance, temporary restraining orders, temporary or permanent
injunctions or any other equitable remedy which may then be available.


8.                                       Notices.  Any notice hereunder by either Party to the
other shall be given in writing by personal delivery, telex, facsimile,
overnight courier or certified mail, return receipt requested, addressed, if to
the Company, to the attention of the CEO with a copy to the General Counsel at
the Company’s executive offices or to such other address as the Company may
designate in writing at any time or from time to time to Executive, and if to
Executive, to Executive’s most recent address on file with the Company.  Notice shall be deemed given, if by personal
delivery or by overnight courier, on the date of such delivery or, if by telex
or facsimile, on the business day following receipt of answer back or facsimile
information or, if by certified mail, on the date shown on the applicable
return receipt.


9.                                       Assignment.  This Agreement may not be assigned by either
Party without the prior written consent of the other Party, provided, however,
that the Company may assign this Agreement without Executive’s consent in the
event of a merger, acquisition, or transfer of all or substantially all of the
assets of the Company with or to a third party (a “Merger”).  In the event of a Merger, the Company shall
require any successor Person to assume and agree to perform this Agreement;
failure to so assume and agree shall constitute a deemed termination for
purposes of Section 5.1.2(e).


10.                                 Entire
Agreement.  The NDA and this
Agreement constitute the entire agreement between the Parties with respect to
the subject matter hereof and there have been no oral or other agreements of
any kind whatsoever as a condition precedent or inducement to the signing of
this Agreement or otherwise concerning this Agreement or the subject matter
hereof.  In the event there is any
conflict between this Agreement and the NDA, this Agreement shall prevail.


11.                                 Expenses.  The Parties shall each pay their own
respective expenses incident to the enforcement or interpretation of, or
dispute resolution with respect to, this Agreement, including all fees and
expenses of their counsel for all activities of such counsel undertaken
pursuant to this Agreement, provided, however, that in the event Executive is
the prevailing Party in any judicial or arbitral proceeding relating to this
Agreement, the Company shall reimburse Executive for all reasonable costs, fees
and expenses (including reasonable attorneys’ fees) incurred by Executive in
connection with such proceeding.


12.                                 Arbitration.  In the event any dispute should arise between
the Parties with respect to any of the terms and conditions of this Agreement,
then, at the initiation of either Party, such dispute shall be submitted and
finally settled by arbitration in Boston, Massachusetts under the rules of the
Employment Disputes Rules of the American Arbitration 









 



                                                Association
by an arbitrator selected by the American Arbitration Association.  The dispute shall be determined in accordance
with Section 18 of this Agreement, except with respect to issues of
arbitrability, which shall be governed by the Federal Arbitration Act, 9 U.S.C. Secs. 1-16, and not state
law.  The arbitrator shall allow such
discovery as is appropriate to the purposes of arbitration in accomplishing a
fair, speedy and cost-effective resolution of the dispute.  If any Party fails to participate in the
arbitration proceedings, the arbitrator may proceed to decision based on
expedited written submissions by the participating Party.  The award rendered by the arbitrator shall be
nonappealable, final and binding upon the Parties, and judgment upon the award
rendered may be entered by either Party in any court of competent jurisdiction.  The Parties agree not to institute any
litigation or proceedings against each other in connection with this Agreement
except as provided in this Section 12, provided, however, that either Party
shall have the right to seek injunctive relief or other provisional remedies in
any federal or state court of competent jurisdiction in the Commonwealth of
Massachusetts.


13.                                 Waivers
and Further Agreements.  Any waiver
of any terms or conditions of this Agreement shall not operate as a waiver of
any other breach of such terms or conditions or any other term or condition,
nor shall any failure to enforce any provision hereof operate as a waiver of
such provision or of any other provision hereof; provided, however, that no
such written waiver, unless it, by its own terms, explicitly provides to the
contrary, shall be construed to effect a continuing waiver of the provision
being waived and no such waiver in any instance shall constitute a waiver in
any other instance or for any other purpose or impair the right of the Party
against whom such waiver is claimed in all other instances or for all other
purposes to require full compliance with such provision.  Each of the Parties agrees to execute all
such further instruments and documents and to take all such further action as
the other Party may reasonably require in order to effectuate the terms and
purposes of this Agreement.


14.                                 Amendments.  This Agreement may not be amended, nor shall
any waiver, change, modification, consent or discharge be effected except by an
instrument in writing executed by both Parties.


15.                                 Severability.  If any provision of this Agreement shall be
held or deemed to be, or shall in fact be, invalid, inoperative or
unenforceable as applied to any particular case in any jurisdiction or
jurisdictions, or in all jurisdictions or in all cases, because of the conflict
of any provision with any constitution or statute or rule of public policy or
for any other reason, such circumstance shall not have the effect of rendering
the provision or provisions in question invalid, inoperative or unenforceable in
any other jurisdiction or in any other case or circumstance or of rendering any
other provision or provisions herein contained invalid, inoperative or
unenforceable to the extent that such other provisions are not themselves
actually in conflict with such constitution, statute or rule of public policy,
but this Agreement shall be reformed and construed in any such jurisdiction or
case as if such invalid, inoperative or unenforceable provision had never been
contained herein and such provision reformed so that it would be valid,
operative and enforceable to the maximum extent permitted in such jurisdiction
or in such case.









 



 


16.                                 Counterparts.  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.


17.                                 Section
Headings.  The headings contained in
this Agreement are for reference purposes only and shall not in any way affect
the meaning or interpretation of this Agreement.


18.                                 Governing
Law.  This Agreement shall be
governed by and construed and enforced in accordance with the law (other than
the law governing conflict of law questions) of the Commonwealth of
Massachusetts.









 



 


IN WITNESS WHEREOF, the Parties have executed or
caused to be executed this Agreement as of the Execution Date.


	
  ARQULE, INC.

  	
   

  	
  EXECUTIVE

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By: /s/ Peter S.
  Lawrence

  	
   

  	
  By: /s/ Nigel John Rulewski

  
	
   

  	
   

  	
   

  
	
  Name: Peter S.
  Lawrence

  	
   

  	
  Name: Nigel John Rulewski

  
	
  Title: Executive
  Vice President

  	
   

  	
   

  



 









 



EXHIBIT A


Business Relationships


 















 


 


EXHIBIT
B


Option Certificate















 


 


EXHIBIT C


Determination of Option Price


The exercise price of the Execution Stock Option is
the Fair Market Value of ArQule’s Common Stock (as defined below) as of the
Effective Date as defined in Section 1 of the Employment Agreement between the
Company and Executive.


The Fair Market Value of ArQule’s Common Stock shall
be the closing price of the Common Stock as reported by the NASDAQ National
Market on the trading day immediately prior to the date of the commencement of
Executive’s employment with the Company.















 


 


EXHIBIT D


Calculation of the Severance Payment


Pursuant to Section
5.1.1(a)(ii), the portion of the Executive’s Severance Payment based on bonuses
(“Bonus Severance”) awarded to Executive, if any, would be calculated in the
following manner:


Example #1
— Executive terminated in year one of employment.


Bonus Severance = 35% (average of 35% deemed amount
for two-year lookback period where Executive did not work for the Company).


Example #2 — Executive awarded a 30%
bonus for year one of employment, terminated during year 2.


Bonus Severance = 32.5% (average 30% Year 1 award and
35% deemed amount for the year during the two-year lookback period where
Executive did not work for the Company).


Example #3 — Executive awarded a 30%
bonus for year one of employment, a 0% for year 2 of employment, terminated
during year 3.


Bonus Severance = 15% (average of year 1 and year 2
bonuses actually awarded).
















 


EXHIBIT E


EMPLOYEE NON-DISCLOSURE
AND INVENTIONS AGREEMENT


In consideration
of my employment or continued employment by ArQule, Inc., a Delaware
corporation, and its successors, subsidiaries, and affiliates (collectively,
the “Company”), and for other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, I agree as follows:


1.               Confidential Information and Proprietary Materials


I understand that
the Company continually obtains and develops valuable proprietary and
confidential information concerning its business, business relationships, and
financial affairs (as further defined below, the “Confidential Information”)
and valuable Proprietary Materials (as defined below) which may become known to
me in connection with my employment.


I acknowledge that
all Proprietary Materials and all Confidential Information are and shall remain
the exclusive property of the Company or of the third party providing such
Proprietary Materials or Confidential Information to me or the Company.  By way of illustration, but not limitation,
Confidential Information may include Inventions (as defined below), trade
secrets, technical information, know-how, research and development activities
of the Company, product and marketing plans, customer and supplier information,
and information disclosed to the Company or to me by third parties of a
proprietary or confidential nature or under an obligation of confidence.  Confidential Information is contained in
various media, including without limitation, patent applications, computer
programs in object and/or source code, flow charts and other program
documentation, manuals, plans, drawings, designs, technical specifications,
laboratory notebooks, supplier and customer information, internal financial
data, and other documents and records of the Company, whether or not in writing
and whether or not labeled or identified as confidential or proprietary.  As used in this Agreement “Proprietary
Materials” shall include, without limitation: any and all reagents, substances,
chemical compounds, subcellular constituents, cells or cell lines, organisms
and progeny, and mutants, as well as any and all derivatives or replications
derived from or relating to such materials.


I agree that I
shall not, during the term of my employment and thereafter, publish, disclose,
or otherwise make available to any third party, other than employees of the
Company, any Confidential Information or Proprietary Materials except as
expressly authorized in writing by the Company. 
I agree that I shall use such Confidential Information and Proprietary
Materials only in the performance of my duties for the Company and in
accordance with any Company policies regarding the protection of Confidential
Information and Proprietary Materials.  I
agree not to use such Confidential Information or Proprietary Materials for my
own benefit or for the benefit of any person or business entity other than the
Company.


I agree to
exercise all reasonable precautions to protect the integrity and
confidentiality of Confidential Information and Proprietary Materials in my
possession.  I further agree not to
remove any Proprietary Materials or materials containing Confidential
Information from the Company’s premises except to the extent necessary to my
employment. Upon the termination of 









 



 


my employment, or
at any time upon the Company’s request, I shall return immediately to the
Company any and all Proprietary Materials and any materials containing any
Confidential Information then in my possession or under my control.


Confidential
Information shall not include information that (a) is or becomes generally
known within the Company’s industry through no fault of mine; (b) was known to
me at the time it was disclosed as evidenced by my written records at the time
of disclosure; or (c) is lawfully and in good faith made available to me by a
third party who did not derive it from the Company and who imposes no
obligation of confidence on me.


2.               Assignment of Inventions


I agree promptly
to disclose to the Company any and all ideas, concepts, discoveries,
inventions, developments, original works of authorship, software programs,
software and systems documentation, trade secrets, technical data, know-how,
and Proprietary Materials that relate, directly or indirectly, to the business
of the Company or that arise out of my employment with the Company and that are
conceived, devised, invented, developed, or reduced to practice or tangible
medium by me, under my direction, or jointly by me and others during any period
that I am employed or engaged by the Company, whether or not during normal
working hours or on the premises of the Company (“Inventions”).


I hereby assign to
the Company all of my right, title, and interest to the Inventions and any and
all related patent rights, copyrights, and applications and registrations for
such patent rights and copyrights. 
During and after my employment, I shall cooperate with the Company, at
the Company’s expense, in obtaining proprietary protection for the Inventions
and I shall execute all documents that the Company shall reasonably request in
order to perfect the Company’s rights in the Inventions.  I hereby appoint the Company my attorney to
execute and deliver any such documents on my behalf in the event I should fail
or refuse to do so within a reasonable period of time following the Company’s
request.  I understand that, to the
extent this Agreement shall be construed in accordance with the laws of any
state that limits the assignability to the Company of certain employee
inventions, this Agreement shall be interpreted not to apply to any such
invention that a court rules or the Company agrees is subject to such state
limitation.


I further
represent that the attached Schedule A contains a complete list of all
inventions made, conceived, or first reduced to practice by me, under my
direction, or jointly by me and others prior to my employment with the Company
(“Prior Inventions”) and that are not assigned to the Company under the terms
of this Agreement. If there are no Prior Inventions listed in Schedule A,
I represent that there are no such Prior Inventions.


3.               Other Business Relationships


I hereby represent
to the Company that, except as identified on Schedule B, I am not bound
by any agreement or any other previous or existing business relationship that
conflicts with or prevents the full performance of my duties and obligations to
the Company (including my duties and obligations under this or any other
agreement with the Company) during my employment, such as confidentiality
agreements or covenants restricting future employment.



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I understand that
the Company does not desire to acquire from me any trade secrets, know-how, or
confidential business information that I may have acquired from others.
Therefore, I agree that during my employment with the Company, I will not
improperly use or disclose any proprietary information or trade secrets of any
former or concurrent employer, or any other person or entity with whom I have
an agreement or to whom I owe a duty to keep such information in confidence.  Those persons or entities with whom I have
such agreements or to whom I owe such a duty are identified on Schedule B.


4.               Non-Solicitation of Employees; Non-Competition


I
acknowledge the highly competitive nature of the business of the Company and
its affiliates, and accordingly agree as follows:


A.                                   During my employment with the Company or any
of its affiliates and for a period of one (1) year thereafter, I will not
directly or indirectly, alone or through any other organization or entity,
including without limitation becoming an employee, investor (except as provided
below), officer, agent, partner or director of any such organization or entity,
engage in any activity that competes with the business of the Company and its
affiliates (“Competitive Activity”).  For
purposes of this Agreement, Competitive Activity means all business activities
of the Company and its affiliates worldwide. 
Notwithstanding the foregoing, I will not be deemed to be engaged
directly or indirectly in any Competitive Activity if I participate in any such
business solely (a) as a passive investor in up to one percent (1%) of the
equity securities of a company or partnership, or (b) in connection with full
time academic duties with an academic institution.


B.                                     During my employment with the Company or any
of its affiliates and for a period of one (1) year thereafter, I will not
directly or indirectly: (a) solicit, divert or take away, or attempt to divert
or take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts of the Company or its
affiliates with whom the Company or its affiliates has or is actively
negotiating a written agreement as of the date as of which my employment with
the Company or any of its affiliates terminates (the “Separation Date”); (b)
recruit, solicit or hire any person who is, or within the six (6) month period
preceding the Separation Date was, an officer, director or employee of the
Company or any of its affiliates or was a scientific consultant with an
exclusive arrangement with the Company or any of its affiliates; or (c) induce
or attempt to induce any officer, director, employee consultant, agent or
representative of the Company or any of its affiliates to discontinue his or
her relationship with the Company or any of its affiliates or to commence an
employment or other business relationship with another entity.


Your failure to comply
with the requirements in this paragraph may result in termination for cause.



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5.               No Obligation of Continued Employment


I understand that
this Agreement does not constitute a contract of employment or create an
obligation on the part of the Company to continue my employment with the
Company.  I understand that my employment
is “at will” and that my obligations under this Agreement shall not be
diminished by any change in my position, title, or function with, or
compensation by, the Company.


6.               Miscellaneous


This Agreement may
be assigned by the Company to (a) any entity controlled by, controlling or
under common control with the Company or (b) to any successor of its business
to which this Agreement relates (whether by purchase, merger, consolidation or
otherwise).  I may not assign or transfer
any of my rights or obligations under this Agreement.  This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective successors and
other legal representatives, including, to the extent permitted by the terms of
this Agreement, their assignees.


This Agreement
supersedes all prior agreements, written or oral, with respect to the subject
matter of this Agreement.  This Agreement
may be changed only by a written instrument signed by both parties.


In the event that
any one or more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other
provisions of this Agreement, and all other provisions shall remain in full
force and effect.  If any of the
provisions of this Agreement is held to be excessively broad, it shall be
reformed and construed by limiting and reducing it so as to be enforceable to
the maximum extent permitted by law.  I
agree that should I violate any obligation imposed on me in this Agreement, I
shall continue to be bound by the obligation until a period equal to the term
of such obligation has expired without violation of such obligation.


No delay or
omission by the Company in exercising any right under this Agreement will
operate as a waiver of that or any other right. 
A waiver or consent given by the Company on any occasion is effective
only in that instance and will not be construed as a bar to or waiver of any
right on any other occasion.


I acknowledge that
the restrictions contained in this Agreement are necessary for the protection
of the business and goodwill of the Company and are reasonable for such
purpose. I agree that any breach of this Agreement by me will cause irreparable
damage to the Company and that in the event of such breach, the Company shall
be entitled, in addition to monetary damages and to any other remedies
available to the Company under this Agreement and at law, to equitable relief,
including injunctive relief, and to payment by myself of all costs incurred by
the Company in enforcing the provisions of this Agreement, including reasonable
attorneys fees.


This Agreement
shall be construed as a sealed instrument and shall in all events and for all
purposes be governed by, and construed in accordance with, the laws of the
Commonwealth of Massachusetts without regard to any choice of law principle
that would dictate the application of the laws of another jurisdiction.  Any action, suit, or other legal proceeding I
may commence 



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in order to
resolve any matter arising under or relating to any provision of this Agreement
shall be commenced only in a court of the Commonwealth of Massachusetts (or, if
appropriate, a federal court located within Massachusetts), and I hereby
consent to the jurisdiction of such court with respect to any action, suit, or
proceeding commenced in such court by the Company.


I HAVE
READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND I UNDERSTAND, AND AGREE TO,
EACH OF SUCH PROVISIONS.


	
   

  	
   

  	
   

  
	
  

  	
   

  	
   

  
	
  Date

  	
   

  	
  Signature of
  Employee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Print Name

  



 


Acknowledged and agreed
to by:


	
  ARQULE, INC

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Anthony S.
  Messina

  	
   

  	
   

  
	
  Vice President,
  Human Development

  	
   

  	
   

  



 



 5














 


 


SCHEDULE A


PRIOR INVENTIONS


The following is a
complete list of all Prior Inventions:


	
  

  	
   

  	
  No Prior Inventions

  
	
   

  	
   

  	
  See below for description of Prior Inventions

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Additional Sheets Attached

  



 


If I am claiming
any Prior Inventions above, I agree that, if in the course of my employment
with the Company, I incorporate into a Company product, process, or machine a
Prior Invention owned by me or in which I have an interest, the Company shall
automatically be granted and shall have a nonexclusive, royalty-free,
irrevocable, transferable, perpetual worldwide license, with the right to grant
sublicenses, to make, have made, modify, use, and sell such Prior Invention as
part of, or in connection with, such product, process, or machine.















 


 


SCHEDULE B


PRIOR COMMITMENTS