exv10w1



 






Exhibit 10.1




EMPLOYMENT AGREEMENT




     This Employment Agreement (the “Agreement”) is entered into as of February 2, 2005 (the
“Effective Date”) by and between Tesoro Corporation (the “Company”), and William J. Finnerty (the
“Executive”);



WITNESSETH THAT:




     WHEREAS, the Company wishes to continue to employ the Executive as its Executive Vice
President, Operations, and the Executive wishes to continue such employment; and



     WHEREAS, the Company and Executive wish to formalize the continuation of the employment
relationship in accordance with the terms and conditions set forth below in this Agreement.



     NOW THEREFORE, in consideration of the mutual promises, covenants and conditions set forth
herein, including but not limited to Employee’s employment and the payments and benefits described
herein, the sufficiency of which is hereby acknowledged, the Company and Executive hereby agree as
follows:



1. EMPLOYMENT.




The Company shall employ Executive, and Executive shall be employed by the Company upon the terms
and subject to the conditions set forth in this Agreement.




2. TERM OF EMPLOYMENT.




The term of this Agreement shall be a three (3) year period beginning on the Effective Date and
ending on the third anniversary thereof; provided that the term of this Agreement shall be
automatically extended for additional successive one year periods until either the Company or the
Executive terminates it by written notice delivered at least 30 days prior to an anniversary of the
Effective Date. The period during which Executive is employed hereunder shall be referred to as
the “Employment Period”. Either the Company or the Executive shall have the right to terminate the
Employment Period at any time during the term hereof, in accordance with Section 5 below.




3. DUTIES AND RESPONSIBILITIES.





(a) Executive shall serve as Executive Vice President, Operations of the Company. In such
capacities, Executive shall perform such duties and have the power, authority and functions
commensurate with such positions in similarly sized public companies and such other
authority and functions consistent with such positions as may be assigned to Executive from
time to time by the Chief Executive Officer.




(b) Executive shall devote substantially all of his working time, attention and energies to
the business of the Company and affiliated entities. Executive may make and manage his



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personal investments (provided such investments in other activities do not violate, in any
material respect, the provisions of Section 8 of this Agreement), be involved in charitable
and professional activities and, with the consent of the Board (which shall not unreasonably
be withheld or delayed) serve on boards of other for profit entities, provided such
activities do not materially interfere with the performance of his duties hereunder.
Service on the for profit boards that Executive is currently serving on are hereby approved.



4. COMPENSATION AND BENEFITS.





(a) ANNUAL BASE SALARY. During the Employment Period, the Executive shall receive an annual
base salary (the “Annual Base Salary”) at an annual rate of $ 415,000 less applicable taxes,
or such higher rate as may be determined from time to time by the Board of Directors of the
Company (the “Board”). The Annual Base Salary shall be paid at such intervals as the
Company pays executive salaries generally. During the Employment Period, the Annual Base
Salary shall be reviewed at least annually, beginning no more than 12 months after the last
salary increase awarded to the Executive prior to the Effective Date. Any increase in the
Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive
under this Agreement. The Annual Base Salary shall not be reduced after any such increase
and the term “Annual Base Salary” shall refer to the Annual Base Salary as so increased.




(b) ANNUAL BONUS. In addition to the Annual Base Salary, during the Employment Period,
Executive will be entitled to participate in an annual incentive compensation plan of the
Company. The Executive’s target annual bonus will be 65% of his Base Salary as in effect
for such year (the “Target Bonus”), and will be determined based upon achievement of
performance goals established by the Company pursuant to such plan.




(c) OTHER COMPENSATION. Executive shall be entitled to participate in any incentive or
supplemental compensation plan or arrangement maintained or instituted by the Company, and
covering its principal executive officers, at a level commensurate with his positions and to
receive additional compensation from the Company in such form, and to such extent, if any,
as the Compensation Committee may in its sole discretion from time to time specify.




(d) WELFARE BENEFIT PLANS. Executive and/or the Executive’s family, as the case may be,
shall be eligible for participation in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the Company (including, without
limitation, medical, prescription drugs, dental, vision, disability, employee life, group
life, accidental death and travel accident insurance plans and programs, pensions, profit
sharing programs, incentive compensation and savings plans and all other similar plans and
benefits which the Company from time to time makes available to executives) to the extent
applicable generally to other peer executives of the Company.




(e) FEE REIMBURSEMENTS. The Company will reimburse the Employee as provided in the
Company’s policies and procedures for an initiation fee or fees and dues



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for a country, luncheon or social club or clubs and will pay directly to the Employee an
amount equal to sixty-five percent (65%) of the amount so reimbursed to the Employee to
offset the applicable income tax expense to the Employee. In addition, The Company will
reimburse the Employee for additional initiation fees and related tax expenses to the extent
the Board of Directors or a duly authorized committee thereof determines such fees are
reasonable and in the best interest of the Company.




(f) EXPENSE REIMBURSEMENT. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and procedures of the
Company in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as the policies,
practices and procedures in effect generally with respect to other peer executives of the
Company at any time thereafter when the Executive incurs such reimbursable expenses.




(g) SECURITY BENEFIT. The Company will provide Executive with personal safety and security
protection as appropriate and reasonable under the circumstances.




(h) OFFICE AND SUPPORT STAFF. During the Employment Period, the Executive shall be entitled
to an appropriate office at the Company’s principal place of business.




(i) VACATION. During the Employment Period, Executive shall be entitled to vacation each
year in accordance with the Company’s policies in effect from time to time, but in no event
less than four (4) weeks paid vacation per calendar year and an additional one (1) week for
five years of service; and an additional second week for ten years of service. The
Executive shall be entitled to such periods of sick leave as is customarily provided by the
Company for its senior executive employees.



5. TERMINATION OF EMPLOYMENT.




Executive’s employment hereunder may be terminated under the following circumstances:





(a) DEATH. Executive’s employment hereunder shall terminate upon Executive’s death.




(b) TOTAL DISABILITY. The Company may terminate Executive’s employment hereunder upon
Executive becoming ''Totally Disabled”. For purposes of this Agreement, Executive shall be
“Totally Disabled” if Executive has been physically or mentally incapacitated so as to
render Executive incapable of performing Executive’s material usual and customary duties,
with or without reasonable accommodation as required by law, under this Agreement for six
(6) consecutive months (such consecutive absence not being deemed interrupted by Executive’s
return to service for less than 10 consecutive business days if absent thereafter for the
same illness or disability). Any such termination shall be upon thirty (30) days written
notice given at any time thereafter while Executive remains Totally Disabled, provided that
a termination for Total Disability hereunder shall not be effective if Executive returns to
full performance of his duties within such thirty (30) day period.



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(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate Executive’s employment
hereunder for “Cause” at any time. If the Company elects to terminate Executive’s
employment for Cause, the Company shall provide ten (10) days written notice of the
Company’s intent to terminate Executive’s employment for “Cause.”




(i) For purposes of this Agreement, the term “Cause” shall be limited to (1) willful
misconduct by Executive with regard to the Company which has a material adverse
effect on the Company; (2) the willful refusal of Executive to attempt to follow the
proper written direction of the Chief Executive Officer, provided that the foregoing
refusal shall not be “Cause” if Executive in good faith believes that such direction
is illegal, unethical or immoral and promptly so notifies the Board; (3) substantial
and continuing willful refusal by the Executive to attempt to perform the duties
required of him hereunder (other than any such failure resulting from incapacity due
to physical or mental illness) after a written demand for substantial performance is
delivered to the Executive by the Chief Executive Officer which specifically
identifies the manner in which it is believed that the Executive has substantially
and continually refused to attempt to perform his duties hereunder; (4) material
breach of a fiduciary duty to the Company through misappropriation of Company funds
or property; or (5) the Executive being convicted of or a plea or nolo contendere to
the charge of a felony (other than a felony involving a traffic violation or as a
result of vicarious liability). For purposes of this paragraph, no act, or failure
to act, on Executive’s part shall be considered “willful” unless done or omitted to
be done, by him not in good faith and without reasonable belief that his action or
omission was in the best interests of the Company.




(ii) The ten (10) day notice of intent to terminate for Cause shall mean a notice
that shall indicate the specific termination provision in Section 5(c)(i) relied
upon and shall set forth in reasonable detail the facts and circumstances which
provide for a basis for termination for Cause. Further, the ten (10) day notice of
intent to terminate for Cause shall set the date at least ten (10) days after the
date of the notice. Any purported termination for Cause which is held by a court or
arbitrator not to have been based on the grounds set forth in this Agreement or not
to have followed the procedures set forth in this Agreement shall be deemed a
termination by the Company without Cause.




(d) VOLUNTARY TERMINATION BY EXECUTIVE. Executive may terminate employment hereunder with
or without Good Reason at any time upon thirty (30) days written notice to the Company.




(i) A Termination for Good Reason means a termination by Executive by written notice
given within thirty (30) days after the occurrence of the Good Reason event, unless
such circumstances are fully corrected prior to the date of termination specified in
the Notice of Termination for Good Reason. For purposes of this Agreement, “Good
Reason” shall mean the occurrence or failure to cause the occurrence, as the case
may be, without Executive’s express written



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consent, of any of the following circumstances: (1) any material diminution of
Executive’s positions, duties or responsibilities hereunder (except in each case in
connection with the termination of Executive’s employment for Cause or Total
Disability or as a result of Executive’s death, or temporarily as a result of
Executive’s illness or other absence), or, the assignment to Executive of duties or
responsibilities that are inconsistent with Executive’s then position; (2) removal
of, the Executive from officer positions with the Company specified herein or
removal of the Executive from any of his then officer positions; (3) requiring
Executive’s principal place of business to be located other than in the San Antonio,
Texas greater Metropolitan region; (4) a failure by the Company (I) to continue any
bonus plan, program or arrangement in which Executive is entitled to participate
(the “Bonus Plans”), provided that any such Bonus Plans may be modified at the
Company’s discretion from time to time but shall be deemed terminated if (x) any
such plan does not remain substantially in the form in effect prior to such
modification and (y) if plans providing Executive with substantially similar
benefits are not substituted therefor (“Substitute Plans”), or (II) to continue
Executive as a participant in the Bonus Plans and Substitute Plans on at least the
same basis as to potential amount of the bonus as Executive participated in prior to
any change in such plans or awards, in accordance with the Bonus Plans and the
Substitute Plans, (5) any material breach by the Company of any provision of this
Agreement, including without limitation Section 10 hereof; (6) failure of any
successor to the Company (whether direct or indirect and whether by merger,
acquisition, consolidation or otherwise) to assume in a writing delivered to
Executive upon the assignee becoming such, the obligations of the Company hereunder.




(ii) A Notice of Termination for Good Reason shall mean a notice that shall indicate
the specific termination provision relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for Termination for
Good Reason. The failure by Executive to set forth in the Notice of Termination for
Good Reason any facts or circumstances which contribute to the showing of Good
Reason shall not waive any right of Executive hereunder or preclude Executive from
asserting such fact or circumstance in enforcing his rights hereunder. The Notice
of Termination for Good Reason shall provide for a date of termination not less than
ten (10) nor more than sixty (60) days after the date such Notice of Termination for
Good Reason is given, provided that in the case of the events set forth in Sections
5(d)(i)(1) or (2) the date may be five (5) days after the giving of such notice.




(e) TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate Executive’s
employment hereunder without Cause at any time upon 30 days written notice to Executive.




(f) EFFECT OF TERMINATION. Upon any termination of employment, Executive shall immediately
resign from all positions with the Company or any of its subsidiaries held by him at such
time.



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6. COMPENSATION FOLLOWING TERMINATION OF EMPLOYMENT.




In the event that Executive’s employment hereunder is terminated, Executive shall be entitled to
the following compensation and benefits upon such termination:





(a) TERMINATION IN THE EVENT OF DEATH. In the event that Executive’s employment is
terminated by reason of Executive’s death, the Company shall pay the following amounts to
Executive’s beneficiary or estate:




(i) Any accrued but unpaid Base Salary for services rendered to the date of death,
any accrued but unpaid expenses required to be reimbursed under this Agreement, any
vacation accrued to the date of termination, any earned but unpaid bonuses for any
prior period, and a pro-rata “bonus” or incentive compensation payment for the
period in which such termination occurred to the extent payments are awarded senior
executives and paid at the same time as senior executives are paid;




(ii) Any benefits to which Executive may be entitled pursuant to the plans, policies
and arrangements (including those referred to in Section 4(f) hereof), as determined
and paid in accordance with the terms of such plans, policies and arrangements;




(iii) An amount equal to the Base Salary (at the rate in effect as of the date of
Executive’s death) which would have been payable to Executive if Executive had
continued in employment for one additional year. Said payments will be paid to
Executive’s estate or beneficiary at the same time and in the same manner as such
compensation would have been paid if Executive had remained in active employment;




(iv) As of the date of termination by reason of Executive’s death, stock options
awarded to Executive and the Restricted Stock Grant shall be fully vested and
Executive’s estate or beneficiary shall have up to one (1) year from the date of
death to exercise all such options; and




(v) As otherwise specifically provided herein.




(b) TERMINATION IN THE EVENT OF TOTAL DISABILITY. In the event that Executive’s employment
is terminated by reason of Executive’s Total Disability as determined in accordance with
Section 5(b), the Company shall pay the following amounts to Executive:




(i) Any accrued but unpaid Base Salary for services rendered to the date of
termination, any accrued but unpaid expenses required to be reimbursed under this
Agreement, any vacation accrued to the date of termination and any earned but unpaid
bonuses for any prior period. Executive shall also be eligible for a pro-rata bonus
or incentive compensation payment to the extent such awards are made to senior
executives for the year in which Executive is terminated;



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(ii) Any benefits to which Executive may be entitled pursuant to the plans, policies
and arrangements (including those referred to in Section 4(f) hereof) shall be
determined and paid in accordance with the terms of such plans, policies and
arrangements;




(iii) An amount equal to the Base Salary (at the rate in effect as of the date of
Executive’s Total Disability) which would have been payable to Executive if
Executive had continued in active employment for one year following termination of
employment, less any payments under any long-term disability plan or arrangement
paid for by the Company. Payment shall be made at the same time and in the same
manner as such compensation would have been paid if Executive had remained in active
employment until the end of such period;




(iv) As of the date of termination by reason of Executive’s total disability,
Executive shall be fully vested in all stock option awards and the Restricted Stock
Grant and Executive shall have up to one (1) year from the date of termination by
reason of total disability to exercise all such options; and




(v) As otherwise specifically provided herein.




(c) TERMINATION FOR CAUSE. In the event that Executive’s employment is terminated by the
Company for Cause, the Company shall pay the following amounts to Executive:




(i) Any accrued but unpaid Base Salary for services rendered to the date of
termination, any accrued but unpaid expenses required to be reimbursed under this
Agreement, any vacation accrued to the date of termination and any earned but unpaid
bonuses for any prior period;




(ii) Any benefits to which Executive may be entitled pursuant to the plans, policies
and arrangements shall be determined and paid in accordance with the terms of such
plans, policies and arrangements; and




(iii) As otherwise specifically provided herein.




(iv) Any options, restricted stock or other awards that have not vested prior to the
date of such termination of employment shall be cancelled and any options held by
Executive shall be cancelled, whether or not then vested.




(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that Executive voluntarily terminates
employment other than for Good Reason, the Company shall pay the following amounts to
Executive:




(i) Any accrued but unpaid Base Salary for services rendered to the date of
termination, any accrued but unpaid expenses required to be reimbursed under this
Agreement, any vacation accrued to the date of termination and any earned but unpaid
bonuses for any prior period;



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(ii) Any benefits to which Executive may be entitled pursuant to the plans, policies
and arrangements shall be determined and paid in accordance with the terms of such
plans, policies and arrangements; and




(iii) As otherwise specifically provided herein.




(iv) The treatment of any options, restricted stock or other awards shall be
governed in accordance with the terms of such plan (s) under which the options,
restricted stock or other awards were granted.




(e) TERMINATION BY THE COMPANY WITHOUT CAUSE; TERMINATION BY EXECUTIVE FOR GOOD REASON. In
the event that Executive’s employment is terminated by the Company for reasons other than
death, Total Disability or Cause, or Executive terminates his employment for Good Reason,
the Company shall pay the following amounts to Executive:




(i) Any accrued but unpaid Base Salary for services rendered to the date of
termination, any accrued but unpaid expenses required to be reimbursed under this
Agreement, any vacation accrued to the date of termination and any earned but unpaid
bonuses for any prior period;




(ii) Any benefits to which Executive may be entitled pursuant to the plans, policies
and arrangements referred to in Section 4(f) hereof shall be determined and paid in
accordance with the terms of such plans, policies and arrangements;




(iii) An amount equal to two times the sum of Executive’s Base Salary plus his
Target Annual Bonus (in each case as then in effect), of which one-half shall be
paid in a lump sum within ten (10) days after such termination and one-half shall be
paid during the two (2) year period beginning on the date of Executive’s termination
and shall be paid at the same time and in the same manner as Base Salary would have
been paid if Executive had remained in active employment until the end of such
period;




(iv) The Company at its expense will continue for Executive and Executive’s spouse
and dependents, all health benefit plans, programs or arrangements, whether group or
individual, and also including deferred compensation, disability, automobile, and
other benefit plans, in which Executive was entitled to participate at any time
during the twelve-month period prior to the date of termination, until the earliest
to occur of (A) two and one-half years after the date of termination; (B)
Executive’s death (provided that benefits payable to Executive’s beneficiaries shall
not terminate upon Executive’s death); or (C) with respect to any particular plan,
program or arrangement, the date Executive becomes covered by a comparable benefit
by a subsequent employer. In the event that Executive’s continued participation in
any such plan, program, or arrangement of the Company is prohibited, the Company
will arrange to provide Executive with benefits substantially similar to those which
Executive would have been entitled



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to receive under such plan, program, or arrangement, for such period on a basis
which provides Executive with no additional after tax cost;




(v) Except to the extent prohibited by law, and except as otherwise provided herein,
Executive will be 100% vested in all benefits, awards, and grants accrued but unpaid
as of the date of termination under any pension plan, profit sharing plan,
supplemental and/or incentive compensation plans in which Executive was a
participant as of the date of termination. Executive shall also be eligible for a
bonus or incentive compensation payment, at the same time, on the same basis, and to
the same extent payments are made to senior executives, pro-rated for the fiscal
year in which the Executive is terminated;




(vi) Subject to the terms and conditions of the applicable executive long-term
incentive plans governing the option awards or restricted stock awards, Executive shall continue to vest in all stock option awards or restricted stock
awards over the two (2) year period commencing on the date of such termination of
employment. Executive shall have two (2) years after the date of termination to
exercise all options, unless by virtue of the particular stock option award, the
option grant expires on an earlier date; and




(vii) As otherwise specifically provided herein.




(f) NO OTHER BENEFITS OR COMPENSATION. Except as may be provided under this Agreement,
under the Indemnity Agreement or under the terms of any incentive compensation, employee
benefit, or fringe benefit plan applicable to Executive at the time of Executive’s
termination or resignation of employment, Executive shall have no right to receive any other
compensation, or to participate in any other plan, arrangement or benefit, with respect to
future periods after such termination or resignation.




(g) NO MITIGATION; NO SET-OFF. In the event of any termination of employment hereunder,
Executive shall be under no obligation to seek other employment and there shall be no offset
against any amounts due Executive under this Agreement on account of any remuneration
attributable to any subsequent employment that Executive may obtain. The amounts payable
hereunder shall not be subject to setoff, counterclaim, recoupment, defense or other right,
which the Company may have against the Executive or others, except upon obtaining by the
Company of a final unappealable judgment against Executive.



7. COMPENSATION PAYABLE FOLLOWING CHANGE IN CONTROL.





(a) PAYMENTS FOLLOWING A CHANGE IN CONTROL. Notwithstanding anything to the contrary
contained herein, should Employee at any time within two years of a change of control cease
to be an employee of the Company (or its successor), by reason of (i) involuntary
termination by the Company (or its successor) other than for “Cause”, or (ii) voluntary
termination by Employee for “Good Reason”, the Company (or its successor) shall pay to
Employee within ten days of such termination the following severance payments and benefits:



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(i) An amount equal to three (3.0) times the sum of Executive’s Base Salary plus his
Target Annual Bonus (65%) (in each case as then in effect) payable in a lump-sum
within 5 days following the Change in Control or, if later, within five (5) days
following the date the Executive ceases to be Executive Vice President, Operations
of the Company. Payment of the amount specified under this Paragraph 7(a) (i) shall
be in lieu of any amount payable under Paragraph 6(b)(iii) or Paragraph 6(e)(iii).




(ii) Executive will receive three years additional service credit under the current
non-qualified supplemental pension plans, or successors thereto, of the Company
applicable to the Executive.




(iii) Executive will be 100% vested in all benefits, awards, and grants
(including stock option grants and stock awards, all of such stock options remaining
exercisable for a period of at least three (3.0) years following the Change in
Control) accrued but unpaid as of the Change in Control under any non-qualified
pension plan, supplemental and/or incentive compensation or bonus plans, in which
Executive was a participant as of the date of the Change in Control. Executive
shall also receive a bonus or incentive compensation payment (the “bonus payment”)
equal to 65% of his then Base Salary, pro-rated as of the effective date of the
termination. The bonus payment shall be payable within five (5) days after the
Change in Control or, if later, within five (5) days following the date the
Executive ceases to be Executive Vice President of the Company, and shall be in lieu
of any bonus the Employee would otherwise be entitled to receive under Paragraph
6(b)(i) or Paragraph 6(e)(v).




For purposes of this Agreement, following a Change in Control, the term “Company” shall
include the entity surviving such Change in Control.




(b) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.




(i) In the event that the Executive shall become entitled to payments and/or
benefits provided by this Agreement or any other amounts in the “nature of
compensation” (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any person whose actions result in a
change of ownership or effective control covered by Section 280G(b)(2) of the Code
or any person affiliated with the Company or such person) as a result of such change
in ownership or effective control (collectively the “Company Payments”), and such
Company Payments will be subject to the tax (the “Excise Tax”) imposed by Section
4999 of the Code (and any similar tax that may hereafter be imposed by any taxing
authority) the Company shall pay to the Executive at the time specified in
subsection (iv) below an additional amount (the “Gross-up Payment”) such that the
net amount retained by the Executive, after deduction of any Excise Tax on the
Company Payments and any U.S. federal, state, and for local income or payroll tax
upon the Gross-up Payment provided for by this Section 7(b), but before deduction
for any U.S. federal, state,




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and local income or payroll tax on the Company Payments, shall be equal to the
Company Payments.




(ii) For purposes of determining whether any of the Company Payments and Gross-up
Payments (collectively the “Total Payments”) will be subject to the Excise Tax and
the amount of such Excise Tax, (x) the Total Payments shall be treated as “parachute
payments” within the meaning of Section 280G(b)(2) of the Code, and all “parachute
payments” in excess of the “base amount” (as defined under Code Section 280G(b)(3)
of the Code) shall be treated as subject to the Excise Tax, unless and except to the
extent that, in the opinion of the Company’s independent certified public
accountants appointed prior to any change in ownership (as defined under Code
Section 280G(b)(2)) or tax counsel selected by such accountants (the “Accountants”)
such Total Payments (in whole or in part) either do not constitute “parachute
payments,” represent reasonable compensation for services actually rendered within
the meaning of Section 280G(b)(4) of the Code in excess of the “base amount” or are
otherwise not subject to the Excise Tax, and (y) the value of any non-cash benefits
or any deferred payment or benefit shall be determined by the Accountants in
accordance with the principles of Section 280G of the Code.




(iii) For purposes of determining the amount of the Gross-up Payment, the Executive
shall be deemed to pay U.S. federal income taxes at the highest marginal rate of
U.S. federal income taxation in the calendar year in which the Gross-up Payment is
to be made and state and local income taxes at the highest marginal rate of taxation
in the state and locality of the Executive’s residence for the calendar year in
which the Company Payment is to be made, net of the maximum reduction in U.S.
federal income taxes which could be obtained from deduction of such state and local
taxes if paid in such year. In the event that the Excise Tax is subsequently
determined by the Accountants to be less than the amount taken into account
hereunder at the time the Gross-up Payment is made, the Executive shall repay to the
Company, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the prior Gross-up Payment attributable to such reduction
(plus the portion of the Gross-up Payment attributable to the Excise Tax and U.S.
federal, state and local income tax imposed on the portion of the Gross-up payment
being repaid by the Executive if such repayment results in a reduction In Excise Tax
or a U.S. federal, state and local income tax deduction), plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code.
Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to
be refunded to the Company has been paid to any U.S. federal, state and local tax
authority, repayment thereof (and related amounts) shall not be required until
actual refund or credit of such portion has been made to the Executive, and interest
payable to the Company shall not exceed the interest received or credited to the
Executive by such tax authority for the period it held such portion. The Executive
and the Company shall mutually agree upon the course of action to be pursued (and
the method of allocating the expense thereof) if the Executive’s claim for refund or
credit is denied.



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In the event that the Excise Tax is later determined by the Accountant or the
Internal Revenue Service to exceed the amount taken into account hereunder at the
time the Gross-up Payment is made (including by reason of any payment the existence
or amount of which cannot be determined at the time of the Gross-up Payment), the
Company shall make an additional Gross-up Payment in respect of such excess (plus
any interest or penalties payable with respect to such excess) at the time that the
amount of such excess is finally determined.




(iv) The Gross-up Payment or portion thereof provided for in subsection (iii) above
shall be paid not later than the thirtieth (30th) day following an event occurring
which subjects the Executive to the Excise Tax; provided, however, that if the
amount of such Gross-up Payment or portion thereof cannot be finally determined on
or before such day, the Company shall pay to the Executive on such day an estimate,
as determined in good faith by the Accountant, of the minimum amount of such
payments and shall pay the remainder of such payments (together with interest at the
rate provided in Section 1274(b)(2)(B) of the Code), subject to further payments
pursuant to subsection (iii) hereof, as soon as the amount thereof can reasonably be
determined, but in no event later than the ninetieth day after the occurrence of the
event subjecting the Executive to the Excise Tax. In the event that the amount of
the estimated payments exceeds the amount subsequently determined to have been due,
such excess shall constitute a loan by the Company to the Executive, payable on the
fifth day after demand by the Company (together with interest at the rate provided
in Section 1274(b)(2)(B) of the Code).




(v) In the event of any controversy with the Internal Revenue Service (or other
taxing authority) with regard to the Excise Tax, the Executive shall permit the
Company to control issues related to the Excise Tax (at its expense), provided that
such issues do not potentially materially adversely affect the Executive, but the
Executive shall control any other issues. In the event the issues are interrelated,
the Executive and the Company shall in good faith cooperate so as not to jeopardize
resolution of either issue, but if the parties cannot agree the Executive shall make
the final determination with regard to the issues. In the event of any conference
with any taxing authority as to the Excise Tax or associated income taxes, the
Executive shall permit the representative of the Company to accompany the Executive,
and the Executive and the Executive’s representative shall cooperate with the
Company and its representative.




(vi) The Company shall be responsible for all charges of the Accountant.




(vii) The Company and the Executive shall promptly deliver to each other copies of
any written communications, and summaries of any verbal communications, with any
taxing authority regarding the Excise Tax covered by this Section 7(b).




(c) CHANGE IN CONTROL. For purposes of this Agreement, “Change in Control” means the
occurrence of any of the following events:



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(i) there shall be consummated (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant to
which shares of the Company’s Common Stock would be converted into cash, securities
or other property, other than a merger of the Company where a majority of the Board
of Directors of the surviving corporation are, and for a two-year period after the
merger continue to be, persons who were directors of the Company immediately prior
to the merger or were elected as directors, or nominated for election as director,
by a vote of at least two-thirds of the directors then still in office who were
directors of the Company immediately prior to the merger, or (B) any sale, lease,
exchange or transfer (in one transaction or a series of related transactions) of all
or substantially all of the assets of the Company, or




(ii) the shareholders of the Company shall approve any plan or proposal for the
liquidation or dissolution of the Company, or




(iii) (A) any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the
Company or a subsidiary thereof or any employee benefit plan sponsored by the
Company or a subsidiary thereof, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities of the Company
representing 20 percent or more of the combined voting power of the Company’s then
outstanding securities ordinarily (and apart from rights accruing in special
circumstances) having the right to vote in the election of directors, as a result of
a tender or exchange offer, open market purchases, privately negotiated purchases or
otherwise, and (B) at any time during a period of two years thereafter, individuals
who immediately prior to the beginning of such period constituted the Board of
Directors of the Company shall cease for any reason to constitute at least a
majority thereof, unless the election or the nomination by the Board of Directors
for election by the Company’s shareholders of each new director during such period
was approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period.



8. RESTRICTIVE COVENANTS.





(a) COMPETITIVE ACTIVITY. Executive covenants and agrees that at all times during
Executive’s period of employment with the Company, and for one (1) year thereafter,
Executive will not engage in, assist, or have any active interest or involvement, whether as
an employee, agent, consultant, creditor, advisor, officer, director, stockholder (excluding
holding of less than 3% of the stock of a public company), partner, proprietor or any type
of principal whatsoever in any person, firm, or business entity which, directly or
indirectly, is engaged in the business competitive with that conducted and carried on by the
Company, without the Company’s specific written consent to do so. Notwithstanding the
foregoing, Executive may be employed by or provide services to, an investment banking firm
or consulting firm that provides services to entities described in the previous sentence,
provided that Executive does not personally represent or provide services to such entities.



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(b) NON-SOLICITATION. Executive covenants and agrees that at all times during Executive’s
period of employment with the Company, and for a period of two (2) years after the
termination thereof, whether such termination is voluntary or involuntary by wrongful
discharge, or otherwise, Executive will not directly and personally knowingly (i) induce any
customers of the Company or corporations affiliated with the Company to patronize any
similar business which competes with any material business of the Company; (ii) after his
termination of employment, request or advise any customers of the Company or corporations
affiliated with the Company to withdraw, curtail or cancel such customer’s business with the
Company; or (iii) after his termination of employment, individually or through any person,
firm, association or corporation with which he is now, or may hereafter become associated,
solicit, entice or induce any then employee of the Company, or any subsidiary of the
Company, to leave the employ of the Company, or such other corporation, to accept employment
with, or compensation from the Employee, or any person, firm, association or corporation
with which Executive is affiliated without prior written consent of the Company. The
foregoing shall not prevent Executive from serving as a reference for employees.




(c) PROTECTED INFORMATION. Executive recognizes and acknowledges that Executive has had and
will continue to have access to various confidential or proprietary information concerning
the Company, corporations affiliated with the Company, and its clients and third parties
doing business with the Company of a special and unique value which may include, without
limitation, (i) books and records relating to operation, finance, accounting, sales,
personnel and management, (ii) policies and matters relating particularly to operations such
as customer service requirements, costs of providing service and equipment, operating costs
and pricing matters, and (iii) various trade or business secrets, including customer lists,
route sheets, business opportunities, marketing or business diversification plans, business
development and bidding techniques, methods and processes, financial data and the like, to
the extent not generally known in the industry (collectively, the “Protected Information”).
Executive therefore covenants and agrees that Executive will not at any time, either while
employed by the Company or afterwards, knowingly make any independent use of, or knowingly
disclose to any other person or organization (except as authorized by the Company) any of
the Protected Information, provided that (I) while employed by the Company, Executive may in
good faith make disclosures he believes desirable, and (II) Executive may comply with legal
process.



9. ENFORCEMENT OF COVENANTS.





(a) RIGHT TO INJUNCTION. Executive acknowledges that a breach of the covenants set forth in
Section 8 hereof will cause irreparable damage to the Company with respect to which the
Company’s remedy at law for damages may be inadequate. Therefore, in the event of breach or
threatened breach of the covenants set forth in Section 8 by Executive, Executive and the
Company agree that the Company shall be entitled to the following particular forms of
relief, in addition to remedies otherwise available to it at law or equity; injunctions,
both preliminary and permanent, enjoining or restraining such breach or threatened breach
and Executive hereby consents to the issuance thereof forthwith and without bond by any
court of competent jurisdiction.



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(b) SEPARABILITY OF COVENANTS. The covenants contained in Section 8 hereof constitute a
series of separate covenants, one for each applicable State in the United States and the
District of Columbia, and one for each applicable foreign country. If in any judicial
proceeding, a court shall hold that any of the covenants set forth in Section 8 exceed the
time, geographic, or occupational limitations permitted by applicable laws, Executive and
the Company agree that such provisions shall and are hereby reformed to the maximum time,
geographic, or occupational limitations permitted by such laws. Further, in the event a
court shall hold unenforceable any of the separate covenants deemed included herein, then
such unenforceable covenant or covenants shall be deemed eliminated from the provisions of
this Agreement for the purpose of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding. Executive and the Company
further agree that the covenants in Section 8 shall each be construed as a separate
agreement independent of any other provisions of this Agreement, and the existence of any
claim or cause of action by Executive against the Company whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of
any of the covenants of Section 8.



10. INDEMNIFICATION.



The Company shall indemnify and hold harmless Executive to the fullest extent permitted by law and
in accordance with the existing Indemnification Agreement dated May 2, 1996 between Company and the
Executive (the “Indemnification Agreement”) for any action or inaction of Executive while serving
as an officer and director of the Company or, at the Company’s request, as an officer or director
of any other, entity or as a fiduciary of any benefit plan. The Company shall cover the Executive
under directors and officers liability insurance both during and, while potential liability exists,
after the Employment Term in the same amount and to the same extent as the Company covers its other
officers and directors.




11. DISPUTES AND PAYMENT OF ATTORNEY’S FEES.



If at any time during the term of this Agreement or afterwards there should arise any dispute as to
the validity, interpretation or application of any term or condition of this Agreement, the Company
agrees, upon written demand by Executive (and Executive shall be entitled upon application to any
court of competent jurisdiction, to the entry of a mandatory injunction, without the necessity of
posting any bond with respect thereto, compelling the Company) to promptly provide sums sufficient
to pay on a current basis (either directly or by reimbursing Executive) Executive’s costs and
reasonable attorney’s fees (including expenses of investigation and disbursements for the fees and
expenses of experts, etc.) incurred by Executive in connection with reasonably seeking to enforce
the terms of this Agreement. The provisions of this Section 11, without implication as to any
other section hereof, shall survive the expiration or termination of this Agreement and of
Executive’s employment hereunder.




12. WITHHOLDING OF TAXES.



The Company may withhold from any compensation and benefits payable under this Agreement all
applicable federal, state, local, or other taxes.




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13. SOURCE OF PAYMENTS.



All payments provided under this Agreement, other than payments made pursuant to a plan which
provides otherwise, shall be paid from the general funds of the Company, and no special or separate
fund shall be established, and no other segregation of assets made, to assure payment. Executive
shall have no right, title or interest whatever in or to any investments which the Company may make
to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a
right to receive payments from the Company hereunder, such right shall be no greater than the right
of an unsecured creditor of the Company.




14. ASSIGNMENT.



Except as otherwise provided in this Agreement, this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, representatives, successors and
assigns. This Agreement shall not be assignable by Executive (but any payments due hereunder which
would be payable at a time after Executive’s death shall be paid to Executive’s designated
beneficiary or, if none, his estate) and shall be assignable by the Company only to any financially
solvent corporation or other entity resulting from the reorganization, merger or consolidation of
the company with any other corporation or entity or any corporation or entity to or with which. the
Company’s business or substantially all of its business or assets may be sold, exchanged or
transferred, and it must be so assigned by the Company to, and accepted as binding upon it by, such
other corporation or entity in connection with any such reorganization, merger, consolidation,
sale, exchange or transfer in a writing delivered to Executive in a form reasonably acceptable to
Executive (the provisions of this sentence also being applicable to any successive such
transaction).




15. ENTIRE AGREEMENT; AMENDMENT.



This Agreement shall supersede any and all existing oral or written agreements, representations, or
warranties between Executive and the Company or any of its subsidiaries or affiliated entities
relating to the terms of Executive’s employment by the Company. It may not be amended except by a
written agreement signed by both parties.




16. GOVERNING LAW.



This Agreement shall be governed by and construed to accordance with the laws of the State of Texas
applicable to agreements made and to be performed in that State, without regard to its conflict of
laws provisions.




17. REQUIREMENT OF TIMELY PAYMENTS.



If any amounts which are required, or determined to be paid or payable, or reimbursed or
reimbursable, to Executive under this Agreement (or any other plan, agreement, policy or
arrangement with the Company) are not so paid promptly at the times provided herein or therein,
such amounts shall accrue interest, compounded daily, at an 8% annual percentage rate, from the
date such amounts were required or determined to have been paid or payable, reimbursed or
reimbursable to Executive, until such amounts and any interest accrued thereon are finally and




16









 







fully paid, provided, however, that in no event shall the amount of interest contracted for,
charged or received hereunder, exceed the maximum non-usurious amount of interest allowed by
applicable law.




18. NOTICES



Any notice, consent, request or other communication made or given in connection with this Agreement
shall be in writing and shall be deemed to have been duly given when delivered or mailed by
registered or certified mail, return receipt requested, or by facsimile or by hand delivery, to
those listed below at their following respective addresses or at such other address as each may
specify by notice to the others:




	 	 	 
	To the Company:

	 	Tesoro Corporation
	

	 	300 Concord Plaza
	

	 	San Antonio, Texas 78216
	

	 	Attention: Corporate Secretary
	 
	To Executive:

	 	At the address for Executive set forth below.






19. MISCELLANEOUS.





(a) WAIVER. The failure of a party to insist upon strict adherence to any term of this
Agreement on any occasion shall not be considered a waiver thereof or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other term of this
Agreement.




(b) SEPARABILITY. Subject to Section 9 hereof, if any term or provision of this Agreement
is declared illegal or unenforceable by any court of competent jurisdiction and cannot be
modified to be enforceable, such term or provision shall immediately become null and void,
leaving the remainder of this Agreement in full force and effect.




(c) HEADINGS. Section headings are used herein for convenience of reference only and shall
not affect the meaning of any provision of this Agreement.




(d) RULES OF CONSTRUCTION. Whenever the context so requires, the use of the singular shall
be deemed to include the plural and vice versa.




(e) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, and such counterparts will together
constitute but one Agreement.



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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year
first above written.



TESORO CORPORATION




	 	 	 	 
	By:
	 	/s/ BRUCE A. SMITH
	

	 	Bruce A. Smith
	

	 	Chairman of the Board of Directors, President and Chief Executive Officer
	 
	 	 
	Date:

	 	February 7, 2005






EXECUTIVE




William J. Finnerty




	 	 	 	 
	/s/ WILLIAM J. FINNERTY
	 
	 	 
	Date:

	 	February 7, 2005
	 
	 	 







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