exv10w1



 






EXHIBIT 10.1




MANAGEMENT STABILITY AGREEMENT




     This Management Stability Agreement is dated February 2, 2005, between Tesoro Corporation, a
Delaware corporation (the “Company”), and Claude A. Flagg (“Employee”).



Recitals:



     WHEREAS, the Board of Directors of the Company has determined that it is in the best interest
of the Company to reduce uncertainty to certain key employees of the Company in the event of
certain fundamental events involving the control or existence of the Company;



     WHEREAS, the Board of Directors of the Company has determined that an agreement protecting
certain interests of key employees of the Company in the event of certain fundamental events
involving the control or existence of the Company is in the best interest of the Company because it
will assist the Company in attracting and retaining key employees such as this Employee; and



     WHEREAS, the Employee is relying on this Agreement and the obligations of the Company
hereunder in continuing to work for the Company.



     NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:



     1. Termination Following Change of Control.



     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” (following a change of control), “cause” shall be limited to the
conviction of or a plea of nolo contendere to the charge of a felony (which,
through lapse of time or otherwise, is not subject to appeal), a material breach of fiduciary duty
to the Company through the misappropriation of Company funds or property) or (ii) voluntary
termination by Employee for “good reason upon change of control” (as defined below), the Company
(or its successor) shall pay to Employee within ten days of such termination the following
severance payments and benefits:




(a) A lump-sum payment equal to two and one-half times the base salary of
the Employee at the then current rate; and




(b) A lump-sum payment equal to (i) two and one-half times the sum of the
target bonuses under all of the Company’s incentive bonus plans applicable
to the Employee for the year in which the termination occurs or the year in
which the change of control occurred, whichever is greater, and (ii) if
termination occurs in the fourth quarter of a calendar year, the sum of the
target bonuses under all of the Company’s incentive bonus plans applicable
to Employee for the year in which the termination occurs prorated daily
based on the number of days from the beginning of the calendar year in which
the termination occurs to and including the date of termination.


The Company (or its successor) shall also provide continuing coverage and benefits comparable to
all life, health and disability plans of the Company for a period of 30 months from the date of
termination, and Employee shall receive two and one-half years additional service credit under the
current non-qualified supplemental pension plans, or successors thereto, of the Company applicable
to the Employee on the date of termination.




     For purposes of this Agreement, a “change of control” shall be deemed to have occurred if (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



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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 directors, 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 one year 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.




     For purposes of this Section 1, “good reason upon change of control” shall exist if any of the
following occurs:




(i) without Employee’s express written consent, the assignment to Employee
of any duties inconsistent with the employment of Employee immediately prior
to the change of control, or a significant diminution of Employee’s
positions, duties, responsibilities and status with the Company from those
immediately prior to a change of control or a diminution in Employee’s
titles or offices as in effect immediately prior to a change of control, or
any removal of Employee from, or any failure to reelect Employee to, any of
such positions;




(ii) a reduction by the Company in Employee’s base salary in effect
immediately prior to a change of control;




(iii) the failure by the Company to continue in effect any thrift, stock
ownership, pension, life insurance, health, dental and accident or
disability plan in which Employee is participating or is eligible to
participate at the time of the change of control (or plans providing
Employee with substantially similar benefits), except as otherwise required
by the terms of such plans as in effect at the time of any change of control
or the taking of any action by the Company which would adversely affect
Employee’s participation in or materially reduce Employee’s benefits under
any of such plans or deprive Employee of any material fringe benefits
enjoyed by Employee at the time of the change of control or the failure by
the Company to provide the Employee with the number of paid vacation days to
which Employee is entitled in accordance with the vacation policies of the
Company in effect at the time of a change of control;




(iv) the failure by the Company to continue in effect any incentive plan or
arrangement (including without limitation, the Company’s Incentive
Compensation Plan and similar incentive compensation benefits) in which
Employee is participating at the time of a change of control (or to
substitute and continue other plans or arrangements providing the Employee
with substantially similar benefits), except as otherwise required by the
terms of such plans as in effect at the time of any change of control;



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(v) the failure by the Company to continue in effect any plan or arrangement
with respect to securities of the Company (including, without limitation,
any plan or arrangement to receive and exercise stock options, stock
appreciation rights, restricted stock or grants thereof or to acquire stock
or other securities of the Company) in which Employee is participating at
the time of a change of control (or to substitute and continue plans or
arrangements providing the Employee with substantially similar benefits),
except as otherwise required by the terms of such plans as in effect at the
time of any change of control or the taking of any action by the Company
which would adversely affect Employee’s participation in or materially
reduce Employee’s benefits under any such plan;




(vi) the relocation of the Company’s principal executive offices to a
location outside the San Antonio, Texas, area, or the Company’s requiring
Employee to be based anywhere other than at the location of the Company’s
principal executive offices, except for required travel on the Company’s
business to an extent substantially consistent with Employee’s present
business travel obligations, or, in the event Employee consents to any such
relocation of the Company’s principal executive or divisional offices, the
failure by the Company to pay (or reimburse Employee for) all reasonable
moving expenses incurred by Employee relating to a change of Employee’s
principal residence in connection with such relocation and to indemnify
Employee against any loss (defined as the difference between the actual sale
price of such residence and the higher of (a) Employee’s aggregate
investment in such residence or (b) the fair market value thereof as
determined by a real estate appraiser reasonably satisfactory to both
Employee and the Company at the time the Employee’s principal residence is
offered for sale in connection with any such change of residence;




(vii) any failure by the Company to obtain the assumption of this Agreement
by any successor or assign of the Company;



     In the event of a change of control as “change of control” is defined in any stock option plan
or stock option agreement pursuant to which the Employee holds options to purchase common stock of
the Company, Employee shall retain the rights to all accelerated vesting and other benefits under
the terms thereof.



     The Company shall pay any attorney fees incurred by Employee in reasonably seeking to enforce
the terms of this Paragraph 1.



     2. Complete Agreement.



     This Agreement constitutes the entire agreement between the parties and cancels and supersedes
all other agreements between the parties which may have related to the subject matter contained in
this Agreement.



     3. Modification; Amendment; Waiver.



     No modification, amendment or waiver of any provisions of this Agreement shall be effective
unless approved in writing by both parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of either party thereafter to enforce each and every provision hereof in
accordance with its terms.



     4. Governing Law; Jurisdiction.



     This Agreement and performance under it, and all proceedings that may ensue from its breach,
shall be construed in accordance with and under the laws of the State of Texas.



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     5. Severability.



     Whenever possible, each provision of this Agreement shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this Agreement shall be held
to be prohibited by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.



     6. Assignment.



     The rights and obligations of the parties under this Agreement shall be binding upon and inure
to the benefit of their respective successors, assigns, executors, administrators and heirs,
provided, however, that the Company may not assign any duties under this Agreement without the
prior written consent of the Employee.



     7. Limitation.



     This Agreement shall not confer any right or impose any obligation on the Company to continue
the employment of Employee in any capacity, or limit the right of the Company or Employee to
terminate Employee’s employment.



     8. Notices.



     All notices and other communications under this Agreement shall be in writing and shall be
given in person or by telegraph, facsimile or first class mail, certified or registered with return
receipt requested, and shall be deemed to have been duly given when delivered personally or three
days after mailing or one day after transmission of a telegram or facsimile, as the case may be, to
the representative persons named below:



	 	 	 	 	 
	

	 	If to the Company:
	 	Corporate Secretary
	

	 	 	 	Tesoro Corporation
	

	 	 	 	300 Concord Plaza Drive
	

	 	 	 	San Antonio, Texas 78216-6999
	 
	 	 	 	 
	

	 	If to the Employee:
	 	

	

	 	 	 	

	

	 	 	 	







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



	 	 	 	 	 	 	 
	 	 	COMPANY:	 	TESORO CORPORATION
	 
	 	 	 	 	 	 
	

	 	 	 	By	 	/s/   Bruce A. Smith
	

	 	 	 	 	 	

	 	 	 	 	Bruce A. Smith
	 	 	 	 	Chairman of the Board of Directors,
	 	 	 	 	President and Chief Executive Officer
	 
	 	 	 	 	 	 
	 	 	EMPLOYEE:	 	/s/   Claude
A. Flagg








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