exv10w12



 






Exhibit 10.12




VALERO ENERGY CORPORATION




STOCK OPTION PLAN




AMENDED AND RESTATED

as of

October 1, 2005




 









 





VALERO ENERGY CORPORATION

AMENDED AND RESTATED STOCK OPTION PLAN



The original Stock Option Plan (the “Original Plan”) was adopted April 23, 1997 and amended as
of July 30, 1997; October 29, 1997; May 19, 1999; December 3, 2002; December 31, 2004; and October
1, 2005. The plan is hereby amended and restated as of October 1, 2005 to fully incorporate all of
the amendments to the Original Plan to date.




1. Introduction and Statement of Purpose.




     This Stock Option Plan (the “Plan”) of Valero Energy Corporation is established for the
purpose of giving additional incentive to Key Employees of the Company by creating an opportunity
for capital accumulation. It is intended that the benefits available under this Plan, when added
to other benefits payable to these Key Employees, will furnish total compensation that is
competitive in the industries in which the Company conducts its business and in which the Company
competes for employees. This Plan sets forth the basis for the eligibility of Employees to
participate in the Plan and the terms and conditions regulating participation. The Plan provides
for the grant of Options to purchase Common Stock of Valero and stock appreciation rights (“SARs”)
which are automatically exercised upon the exercise of an Option. The Options granted under the
Plan are and are intended to be “non-qualified” options under the Internal Revenue Code of 1986, as
amended.



2. Definitions.




     For the purposes of this Plan, the following terms shall have the meanings stated below unless
a different meaning is plainly required by the context or such term is otherwise defined herein.




	 	(a)	 	“Affiliate” shall mean (i) any entity that, directly or through one or
more intermediaries, is controlled by the Company and (ii) any entity in which the
Company has a significant equity interest, as determined by the Committee.
	 
	 	(b)	 	“Board of Directors” shall mean the Board of Directors of Valero.
	 
	 	(c)	 	“Cause” shall mean the (i) conviction of the Participant by a state or federal court of
a felony involving moral turpitude, (ii) conviction of the Participant by a state or federal
court of embezzlement or misappropriation of funds of the Company, (iii) the Company’s (or
applicable Affiliate’s) reasonable determination that the Participant has committed an act of
fraud, embezzlement, theft, or misappropriation of funds in connection with such Participant’s
duties in the course of his or her employment with the Company (or applicable Affiliate), (iv)
the Company’s (or its applicable Affiliate’s) reasonable determination that the Participant
has engaged in gross mismanagement, negligence or misconduct which causes or could potentially
cause material loss, damage or injury to the Company, any of its Affiliates or their
respective employees, or (v) the Company’s (or applicable Affiliate’s) reasonable
determination that (a) the Participant has violated any policy of the Company (or applicable
Affiliate), including but not limited to, policies regarding sexual harassment, insider
trading, confidentiality, substance abuse and/or conflicts of interest, which violation could
result in the termination of the Participant’s employment, or (b) the Participant has failed
to satisfactorily perform the material duties of Participant’s position with the Company or
any of its Affiliates.
	 
	 	(d)	 	“Change of Control” shall have the meaning specified in Paragraph 4.12.
	 
	 	(e)	 	“Committee” shall mean the persons administering this Plan from time to time
pursuant to Paragraph 6.1.
	 
	 	(f)	 	“Common Stock” shall mean the common stock, par value $0.01 per share, of Valero.
	 
	 	(g)	 	“Company” shall mean Valero and its subsidiaries, and any successor or successors
to such entities.




 









 












	 	(h)	 	“Distribution Agreement” shall mean the Agreement and Plan of Distribution,
entered into between VEC and Valero, in connection with the transactions contemplated by
the Merger Agreement. “Distribution” and “Time of Distribution” shall have the meanings
specified in the Distribution Agreement.
	 
	 	(i)	 	“EBA” shall mean the Employee Benefits Agreement, entered into between Valero and
VEC, in connection with the transactions contemplated by the Merger Agreement.
	 
	 	(j)	 	“Employee” shall mean any person employed by the Company, including officers and
directors of the Company within the meaning of Section 16(a) of the Exchange Act, but
shall include a director only if also employed by the Company on a full-time basis.
	 
	 	(k)	 	“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended and in
effect from time to time.
	 
	 	(l)	 	“Exercise Date” — see Paragraph 4.3.
	 
	 	(m)	 	“Expiration Date” — see Paragraph 3.5.
	 
	 	(n)	 	“Exercise Notice” — see Paragraph 4.3.
	 
	 	(o)	 	“Key Employee” shall mean any key Employee or prospective Employee of the Company
having responsibility for planning the Company’s operations, controlling or managing its
business activities, or advising the management of the Company with respect to its
operations and business activities. The determination of “Key Employees” for purposes
of determining eligibility for participation in this Plan, and the determination of “key
employees” for purposes of applying any New York Stock Exchange Rule or determining
eligibility for participation in any other stock option plan of the Company, need not be
consistent.
	 
	 	(p)	 	“Merger Agreement” shall mean the Agreement and Plan of Merger, dated as of
January 31, 1997, between VEC, PG&E Corporation and PG&E Acquisition Corporation.
	 
	 	(q)	 	“Option” or “Options” shall mean an option or options granted pursuant to this
Plan to purchase shares of Common Stock.
	 
	 	(r)	 	“Option Agreement” shall mean a written agreement entered into between Valero and
a Participant pursuant to Paragraph 3.9.
	 
	 	(s)	 	“Option Price” — see Paragraph 3.5.
	 
	 	(t)	 	“Option Share” shall mean one share of Common Stock purchased or which may be
purchased pursuant to an Option.
	 
	 	(u)	 	“Participant” shall mean a Key Employee who is eligible to be granted an Option
under this Plan.
	 
	 	(v)	 	“Plan” — see Paragraph 1.
	 
	 	(w)	 	“Preference Share Purchase Right” shall mean one of the rights distributed
pursuant to the Rights Agreement to purchase 1/100 share of the Junior Participating
Preferred Stock, Series I, of Valero.
	 
	 	(x)	 	“Ratio” shall mean the amount obtained by dividing the average of the daily high
and low trading prices per share of VEC Common Stock as reported on the NYSE Composite
Tape (the “NYSE Tape”) on each of the last 15 consecutive full NYSE trading days (the
“Averaging Period”) ending on and including the trading day preceding the Distribution
Date (as defined in the Distribution Agreement) (the “Company Price”) by the difference
between (a) the Company Price and (b) the product of (1) the Per Share Merger
Consideration (as defined in the Merger Agreement) and (2) the average of the daily high
and low prices per share of Acquiror Common Stock (as defined in the Merger Agreement)
as reported on the NYSE Tape during the Averaging Period.
	 
	 	(y)	 	“Rights Agreement” shall mean that certain Rights Agreement, dated as of June 18,
1997, between Valero and Harris Trust and Savings Bank, as Rights Agent, as amended and
in effect from time to time.




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	 	(z)	 	“Restricted Optionee” shall mean any person who is a “director” or “officer” of
Valero within the meaning of Section 16(a) of the Exchange Act, together with any person
who is the beneficial owner of more than 10 percent of any class of equity security of
Valero registered under Section 12 of the Exchange Act.
	 
	 	(aa)	 	“SAR” or “stock appreciation right” shall mean the right, subject to the
provisions of this Plan, to receive a payment in cash equal to the difference between
the specified Strike Price of the SAR and the price of one share of the Common Stock at
the time specified in Paragraph 4.2.
	 
	 	(bb)	 	“SEC” shall mean the Securities and Exchange Commission.

	 
	 	(cc)	 	“Settlement Date” — see Paragraph 4.3.

	 
	 	(dd)	 	“Strike Price” shall mean the price per share of the Common Stock, determined
pursuant to Paragraph 3.7, from which the appreciation (if any) with respect to an SAR
shall be calculated.
	 
	 	(ee)	 	“Tax Payment” — see Paragraph 4.3.

	 
	 	(ff)	 	“Time of Distribution” — see “Distribution Agreement.”
	 
	 	(gg)	 	“Valero” shall mean Valero Energy Corporation, a Delaware corporation formerly
known as Valero Refining and Marketing Company, incorporated in 1981 under the name
Saber Energy, Inc.
	 
	 	(hh)	 	“VEC” shall mean PG&E Gas Transmission, Texas Corporation, a Delaware corporation
formerly known as Valero Energy Corporation, incorporated in 1955 under the name Coastal
States Oil and Gas Company.
	 
	 	(ii)	 	“VEC Common Stock” shall mean the Common Stock, $1.00 par value, of VEC.
	 
	 	(jj)	 	“VEC Option Plans” shall mean the following stock option plans previously adopted
by VEC: the VEC Stock Option Plan No. 3, the VEC Stock Option Plan No. 4, and the VEC
Stock Option Plan No. 5.
	 
	 	(kk)	 	“VRM Participant” shall have the same meaning as given in the EBA.





3. Granting of Options and SARs to Employees.




     3.1. Selection of Participants. The Committee may grant Options to purchase a
specified number of Option Shares to Key Employees of the Company selected by the Committee in its
sole and absolute discretion to become Participants. At or subsequent to the time that an Option
is granted to a Key Employee by the Committee, the Committee may grant to that Key Employee a
number of SARs not exceeding the number of Option Shares that may be purchased pursuant to such
Option, provided, that no SARs shall be granted with respect to Option Shares that have theretofore
been purchased by a Participant or to any Participant who, subsequent to the date of grant of such
Option, is no longer an Employee. Subject to the full and final authority of the Committee to
administer the Plan and select Participants, the granting of Options and SARs and the selection of
Participants may be based on recommendations made by the Chief Executive Officer of Valero.



     3.2. Exclusion of Committee Members. No member of the Committee, while so serving,
may be granted Options or SARs. However, a Participant who has been granted an Option or SARs
under this Plan prior to serving on the Committee may, during such term of service, continue to
hold any Options and SARs and may exercise any such Options and SARs and hold the Option Shares
acquired upon the exercise of any such Options, subject to the provisions of this Plan.



     3.3. No Right to Participate. No Employee or prospective Employee of the Company
shall have the right to require the Company or the Committee to make him or her a Participant under
this Plan.



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     3.4. Certain Options Granted Under Prior VEC Stock Option Plans. Pursuant to the
terms of the Merger Agreement, the EBA and the VEC Option Plans, certain stock options previously
awarded by VEC under the VEC Option Plans will be automatically converted at the Time of
Distribution into Options to purchase Options Shares under this Plan. Each such VEC option that is
outstanding and unexercised immediately prior to the Time of Distribution and is held by a person
who, immediately before the Time of Distribution, is a VRM Participant, or their respective
beneficiaries and dependents, shall be converted in accordance with the EBA into Options to
purchase Option Shares under this Plan. Each such VEC option eligible to be replaced by an Option
under this Plan shall be replaced with an Option with respect to a number of Option Shares equal to
the number of shares of VEC Common Stock subject to such VEC option immediately before such
replacement, multiplied by the Ratio, rounded up to the nearest whole share as necessary, and
having a per-share exercise price equal to the per-share exercise price of such VEC option
immediately before such replacement, divided by the Ratio (rounded down to the nearest whole cent
as necessary). The other terms and conditions of any such VEC option, including the vesting and
termination dates thereof, shall remain unchanged, except as may be necessary to conform to the
provisions of the Plan or as otherwise may be determined by the Committee.



     3.5. Determination of Option Provisions. When granting Options, the Committee shall
designate the number of Option Shares the Employee may purchase under the Option, a date upon which
the Option will automatically expire (unless an earlier termination date is established pursuant to
Paragraph 8.3; the earlier of such dates being referred to herein as the “Expiration Date”), the
price per share at which the Option Shares may be purchased (the “Option Price”), and the remaining
terms and conditions of the Option. If the Committee determines to grant SARs to the grantee or
holder of an Option, the Committee shall designate the number of SARs granted and any terms and
conditions pertaining thereto.



     3.6. Option Shares and SARs Available for Grant. (A) Subject to the provisions of
Paragraphs 4.7 and 5, the maximum number of shares of Common Stock that may be optioned under this
Plan shall be 2,000,000 shares. In addition, the number of shares available to be optioned under
this Plan may from time to time be increased by such number of additional shares as the Committee
may deem necessary. However, in no event shall the total number of shares optioned and sold under
this Plan equal or exceed 20 percent of the “voting power outstanding,” as defined in the NYSE’s
Company Manual, Paragraph 312. Shares of Common Stock optioned and sold under this Plan (and any
rights or other securities sold or delivered in accordance with Paragraph 5.1) may be either
authorized but unissued securities or reacquired (treasury) securities.



          (B) Subject to the provisions of Paragraphs 4.7 and 5, the maximum number of SARs that may be
granted under this Plan shall be equal to the maximum number of shares of Common Stock that may be
optioned and sold under this Plan.




          (C) During the term of this Plan, Valero will at all times reserve and keep available, or have
authorized but unissued, shares of Common Stock sufficient to satisfy the requirements of this
Plan. The inability of Valero to obtain, from any regulatory body having jurisdiction, any
authority deemed by Valero’s counsel to be necessary to the lawful issuance and sale of Common
Stock hereunder, shall relieve the Company of any liability in respect of the nonissuance or sale
of such Common Stock as to which such requisite authority shall not have been obtained.




     3.7. Limitations Regarding Option Price and Strike Price. The Option Price for any
Option Share shall be as specified by the Committee in its sole discretion, but shall not be less
than (a) the average of the “high” and “low” reported sales price per share of Common Stock on the
date of grant as reported in the New York Stock Exchange — Composite Transactions listing or such
other listing or quotation medium as the Committee may later designate, or if there are no sales on
such date, on the next following day on which there are sales, or (b) in the event that the Common
Stock is not listed for trading on the NYSE, an



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amount determined in accordance with standards adopted by the Committee. The Strike Price at which
an SAR is granted shall be equal to the Option Price of the Option Shares to which such SAR is
related.




     3.8. Limitation Regarding Option Period. The Plan shall continue indefinitely.
However, no Option granted under this Plan shall have a stated Expiration Date that is more than 10
years and 30 days following its date of grant. Subject to the provisions of Paragraph 4.11, an
Option and any associated SARs shall lapse and be automatically forfeited upon the earlier of the
Expiration Date (i) as set forth in the Option Agreement pursuant to which such Option and any
associated SARs are granted, or (ii) as established pursuant to Paragraph 8.3, unless an Exercise
Notice is delivered to Valero on or before the Expiration Date.



     3.9. Option Agreements. Options and SARs shall be evidenced by Option Agreements
having such terms and provisions, not inconsistent with this Plan, as the Committee deems
advisable. Option Agreements need not be uniform. Promptly following each determination by the
Committee to grant an Option or SARs to a Key Employee, the Committee shall cause Valero to enter
into an appropriate Option Agreement (or, in the case of a grant only of SARs, an amendment to an
existing Option Agreement) with such Key Employee. No Key Employee or other person claiming by,
through or under a Key Employee shall be entitled to exercise any Option or SAR until an
appropriate Option Agreement (or amendment thereto) shall have been executed by Valero and the Key
Employee. In the event that a Key Employee of the Company is granted an Option or SARs by the
Committee but for any reason, including but not limited to death or disability, does not actually
enter into a fully executed Option Agreement (or appropriate amendment thereto) with Valero, such
Key Employee shall not be deemed a Participant with respect to such Option or SARs and neither such
Key Employee nor any person claiming by, through or under such Key Employee shall be entitled under
any circumstances to exercise such Option or SARs.



     3.10 Provisions Regarding Prospective Employees. If a prospective Employee of the
Company is granted an Option or SARs pursuant to this Plan prior to actually commencing employment
with the Company but for any reason, including, but not limited to, death or total and permanent
disability, does not actually commence employment with the Company, such person shall not be deemed
a Participant for any purpose of this Plan and neither such person nor any person claiming by,
through or under such person shall be entitled under any circumstances to exercise such Option or
SARs. Upon actually commencing employment with the Company, such a prospective Key Employee will
then be deemed a Participant for all purposes of this Plan, and will then, but only then, be deemed
solely for purposes of this Plan to have been continually employed by the Company from the date of
grant of the Option to the date of commencement of employment.



4. Exercise of Options and SARs.




     4.1. Exercise of Options. Any Option and any associated SARs shall be exercisable at
such time and in such amounts, either as to all of the Option Shares covered thereby or in
installments, as is provided in the Participant’s Option Agreement or as may otherwise be provided
in this Plan. An installment option may allow the purchase of all or any part of the Option Shares
on a specified installment date or dates, and the subsequent purchase of any unpurchased Option
Shares after such installment date(s) and through the Expiration Date. However, no Option may be
exercised with respect to a fractional share.



     4.2. Automatic Exercise of SARs, Settlement Price for SARs. SARs may not be exercised
except simultaneously with the exercise of an Option. A Participant or other person exercising an
Option shall be deemed to have automatically exercised on the Exercise Date that number of related
SARs equal to the number of Option Shares purchased, not exceeding the lesser of (a) the number of
related SARs held by the Participant, or (b) the number of SARs then permitted to be exercised
under the Participant’s Option



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Agreement. When a Participant holds fewer related SARs than the number of Option Shares to which
his or her Option pertains, the Committee may adopt policies, or include terms in the Participant’s
Option Agreement, that permit or require the Participant to exercise such SARs during or after
specified periods, or in conjunction with the exercise of a certain portion of an Option, or that
permit the Participant to determine, with any restrictions as the Committee may prescribe, the
timing of exercise of the SARs. SARs shall be settled on the basis of the daily average sales
price of the Common Stock on the Exercise Date.




     4.3. Exercise Procedure. Options and SARs may be exercised only by written notice of
exercise (the “Exercise Notice”), in such form as the Committee may prescribe, delivered to
Valero’s Stock Benefit Plan Administration department at Valero’s principal business office and
signed by the Participant or other person specified herein as being entitled to exercise the same.
The date on which the Exercise Notice is delivered to Valero shall be the “Exercise Date.” The
Exercise Notice for Options Shares shall specify a date (the “Settlement Date”), not less than five
business days nor more than ten business days following the Exercise Date, upon which the Option
Shares shall be issued to the Participant (or other person entitled to exercise the Option) and the
Option Price shall be paid to Valero. Subject to the provisions of Paragraph 3.6(A), on the
Settlement Date the person exercising an Option shall tender to Valero full payment for the Option
Shares with respect to which the Option is exercised, together with an additional amount equal to
the amount of all taxes required to be collected or withheld by the Company in connection with the
exercise of the Option (the “Tax Payment”); provided, however, that when related SARs are exercised
at the same time an Option is exercised, the Tax Payment shall be reduced by withholding the amount
thereof, to the extent possible, from the cash payment otherwise payable by the Company to the
Participant as the result of the exercise of such SARs. Subject to the prior approval or
disapproval of the Committee, and to such rules and limitations as it may adopt, if no related SARs
are exercised the Tax Payment may also be made in whole or in part by (a) withholding from the
number of shares otherwise deliverable to the person exercising the Option a number of shares whose
fair market value equals the Tax Payment or (b) delivering certificates for other shares of Common
Stock owned by the person exercising the Option, endorsed in blank with appropriate signature
guarantee, having a fair market value equal to the amount otherwise to be collected or withheld.
Any calculation with respect to a Participant’s income, required tax withholding or other matters
required to be made by the Company upon the exercise of an Option shall be made using the average
of the high and low reported sales price per share of the Common Stock on the Exercise Date,
whether or not the Exercise Notice is delivered to the Company before or after the close of trading
on that date, unless otherwise specified by the Committee. Notwithstanding the foregoing, for
Option exercises using the Company’s “same-day-sale for cash method” or “broker sale for stock
method,” a Participant’s taxable gain and related tax withholding on the exercise will be
calculated using the actual market price at which shares of Common Stock were sold in the
transaction. All calculations made with respect to a Participant’s income, required tax
withholding or other matters made upon exercise of an SAR shall be made using the price at which
such SAR is settled, unless otherwise specified by the Committee.



     4.4. Payment for SARs. SARs shall be paid or settled only in cash. Payment for SARs
shall be made on the Settlement Date.



     4.5. Payment with Common Stock. Subject to any rules and limitations as the Committee
may adopt or as may be set forth in any Option Agreement, a person exercising an Option for the
receipt of Option Shares may pay for the Option Shares with other shares of Common Stock legally
and beneficially owned by that person at the time of the exercise of an Option.



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     4.6. Rights as Stockholder. Until the issuance of the stock certificate(s) for Option
Shares purchased hereunder (as evidenced by the appropriate entry on the books of Valero or of a
duly authorized transfer agent of Valero), no right to vote or receive dividends or any other
rights as a stockholder of Valero shall exist with respect to such Option Shares, notwithstanding
the exercise of any Option. No adjustment will be made for a dividend or other rights for which
the record date is prior to the date that stock certificates evidencing such shares of Common Stock
are issued, except as otherwise provided under Paragraph 5.



     4.7 Effect of Termination and Forfeiture. (A) Except as otherwise expressly provided
in this Paragraph 4.7 and Paragraphs 4.11 and 4.12, or as otherwise determined by the Committee on
the date of grant and included in the Option Agreement, an Option (and any associated SARs)
(collectively, “Exercisable Award”) may be exercised by a Participant only while he or she is and
has continually been, since the date of the grant of the Option, an Employee of the Company. In
the event a Participant’s employment with the Company is voluntarily terminated by the Participant
(other than through retirement, death or disability), then: (i) that portion of any Exercisable
Award that has not vested on or prior to such date of termination shall automatically lapse and be
forfeited, and (ii) all vested but unexercised Exercisable Awards previously granted to that
Participant under the Plan shall automatically lapse and be forfeited at the close of business on
the 30th day following that date of such Participant’s termination, unless an Exercisable Award
expires earlier according to its original terms. If a Participant’s employment is involuntarily
terminated by the Company for Cause: (i) that portion of any Exercisable Award that has not vested
on or prior to such date of termination shall automatically lapse and be forfeited, and (ii) all
vested but unexercised Exercisable Awards previously granted to that Participant under the Plan
shall automatically lapse and be forfeited at the close of business on the 30th day following that
date of such Participant’s termination, unless an Exercisable Award expires earlier according to
its original terms. If a Participant’s employment is terminated by the Company other than for
Cause, then (i) those Exercisable Awards previously awarded to the Participant hereunder and not
yet vested shall automatically lapse and be forfeited as of the date of the Participant’s
termination and (ii) those Exercisable Awards previously awarded to the Participant hereunder which
are vested but unexercised as of the date of the Participant’s termination shall automatically
lapse and be forfeited at the close of business on the last business day of the twelfth month
following the month during which Participant’s termination occurs, unless such vested Options (and
any associated SARs) sooner expire according to their original term. If a Participant’s employment
is terminated by retirement, death or disability, the provisions of Paragraph 4.11 shall apply. If
a Participant shall forfeit, voluntarily surrender or otherwise permanently lose his right to
exercise an Option or SAR under any provision of this Plan or otherwise, or if any Option shall
terminate or expire pursuant to its terms, the Option Shares subject to such Option shall once more
be available to be optioned and sold under this Plan pursuant to a new Option granted hereunder,
and any associated SARs shall again be available for grant hereunder.



          (B) In the case of any termination of employment (whether voluntary or involuntary, disability related, or upon retirement
or otherwise), the Committee or the Chief Executive Officer of Valero may, in connection with any
Participant’s termination of employment with the Company, (i) authorize any existing Option
Agreement of such Participant to remain in full force and effect under its existing terms and
conditions (including its existing vesting schedule) or such amended terms and conditions as the
Committee or the Chief Executive Officer shall approve, and/or (ii) authorize amendments to any
existing Option Agreement (or a new Option Agreement superseding any prior Option Agreement)
between Valero and such Participant removing and/or modifying any or all of the then present or
future restrictions, conditions and/or limitations (whether arising under such Option Agreement or
this Plan) on the exercise of the Options (and any associated SARs) previously granted to such
Participant; provided that no authorization or amendment (or new Option Agreement) shall increase
the aggregate number of Options granted to any Participant; and provided that, in accordance with
Article II. Section 4 of Valero’s Bylaws, any such action with respect to the Chief Executive
Officer or




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the President must be approved by the Board of Directors and any such action with respect to a
Restricted Optionee must be approved by the Committee. Any action referred to in the preceding
sentence shall be taken by Valero, if at all, not later than six months following the Participant’s
effective date of termination.




          (C) In cases of ambiguity in connection with the termination of any Participant from
employment with the Company, the Chief Executive Officer of the Company is authorized to determine
which, if any, of the provisions of this Article 4 shall apply to such termination of employment,
such determination to be binding upon the Company.




     4.8 Effect of Leave of Absence. A Participant who commences a leave of absence shall
thereupon be suspended from participation in this Plan during the leave of absence. During a
period of suspension from this Plan, a Participant cannot exercise any Option or any associated
SARs that would, but for this provision, vest during such period of suspension, provided however,
that such Participant shall be entitled to exercise any Options or SARs that become exercisable
pursuant to Paragraph 4.12 during the period of suspension. A Participant, while suspended, may
exercise an Option (and any related SARs) with respect to any portion which vested prior to the
first day of such suspension; however, such Option Shares must be purchased prior to the Expiration
Date of the Option. Notwithstanding the foregoing provisions of this Paragraph 4.8, the Committee,
in its sole and absolute discretion, may determine at any time before or after the commencement of
such leave of absence that the commencement of such leave of absence will be treated as a
termination of employment for purposes of the Plan. If the Committee so determines, the Committee
shall so notify the Participant and specify a date, not less than 10 days following such
notification, by which the Participant must deliver an Exercise Notice with respect to any Option
Shares which the Participant is then entitled to purchase and exercise any related SARs that may
then be exercised. Options and SARs not exercised by the Participant by such date shall be
forfeited. The Committee may, in its sole and absolute discretion, change or modify the exercise
dates or other terms of any Option or SARs held by a Participant who commences a leave of absence
which were not vested at the commencement of such leave of absence.



     4.9 Effect of Disability. The total and permanent disability of a Participant shall
terminate the participation of such Participant in this Plan subject to the conditions set forth in
Paragraph 4.11. The Committee shall determine whether a Participant is totally and permanently
disabled for purposes of this Plan and when such disability (if any) commenced, and such
determinations by the Committee shall be conclusive and binding on the Participant and all persons
claiming by, through or under such Participant. These determinations shall be made on the basis of
medical reports and other evidence satisfactory to the Committee and in accordance with a uniform,
nondiscriminatory policy applied by the Committee, but such determinations shall not be binding on
the Company or any Participant with respect to any other employee benefit or other plan or
insurance policy, and need not be consistent with any determinations made under any such plan or
insurance policy.



     4.10 Effect of Retirement or Death. The retirement or death of a Participant shall
terminate, effective on the date of such retirement or death, the participation of such Participant
in this Plan subject to the conditions set forth in Paragraph 4.11. For purposes of this Plan, a
Participant shall be deemed to have retired when the Participant retires under the provisions of
the pension plan for Employees of Valero or any other, similar pension plan of the Company
providing benefits to such Participant. In the case of a Participant who is not a participant in
such a plan, retirement shall be deemed to occur when the Participant retires from the service of
the Company.



     4.11 Exercise Following Termination, Retirement, Disability or Death. If a
Participant’s employment is terminated because of retirement, death or disability (with the
determination of disability to be made within the sole discretion of the Committee), any
unexercised Option or SAR held by the



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Participant shall remain outstanding according to its original terms; alternatively, the Committee
or, except with respect to a Participant subject to Section 16 under the Exchange Act, the Chief
Executive Officer of the Company, may prescribe new or additional terms for the vesting, exercise
or realization of the Option or SAR. Absent any determination by the Committee or the Chief
Executive Officer to the contrary, any unexercised Option or SAR held by a Participant whose
employment is terminated because of retirement, death or disability shall vest or become
exercisable according to the Option or SAR’s original terms.




     4.12 Effect of Change of Control. (A) As used herein, the term “Change of Control”
shall mean each occurrence of any one or more of the following events:




     (i) the stockholders of Valero approve any agreement or transaction pursuant to which:
(a) the Company will merge or consolidate with any other Person (other than a wholly owned
subsidiary of the Company) and will not be the surviving entity (or in which the Company
survives only as the subsidiary of another entity); (b) the Company will sell all or
substantially all of its assets to any other Person (other than a wholly owned subsidiary of
the Company); or (c) the Company will be liquidated or dissolved; or




     (ii) any “person” or “group” (as these terms are used in Section 13(d) and 14(d) of the
Exchange Act) other than the Company, any subsidiary of the Company, any employee benefit
plan of the Company or its subsidiaries, or any entity holding Common Stock for or pursuant
to the terms of such employee benefit plans, is or becomes an “Acquiring Person” as defined
in the Rights Agreement (or any successor Rights Agreement) (or, if no Rights Agreement is
then in effect, such person or group acquires or holds such number of shares as, under the
terms and conditions of the most recent such Rights Agreement to be in force and effect,
would have caused such person or group to be an “Acquiring Person” thereunder); or




     (iii) any “person” or “group” shall commence a tender offer or exchange offer for 30% or
more of the shares of Common Stock then outstanding, or for any number or amount of Common
Stock which, if the tender or exchange offer were to be fully subscribed and all shares for
which the tender or exchange offer is made were to be purchased or exchanged pursuant to the
offer, would result in the acquiring person or group directly or indirectly beneficially
owning 50% or more of the Common Stock then outstanding; or




     (iv) individuals who, as of any date, constitute the Board of Directors (the “Incumbent
Board”) thereafter cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director whose election, or nomination for
election by Valero’s stockholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such individual
were a member of the Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a person or group other than the
Board; or




     (v) the occurrence of the Distribution Date (as defined in the Rights Agreement); or




     (vi) any other event determined by the Board of Directors or the Committee to constitute
a “Change of Control” hereunder.



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          (B) Notwithstanding the provisions of Paragraph 4.7, in the event that a Change of Control
shall occur, each Option (and any SARs) held by a Participant pursuant to the Plan shall remain
exercisable until the earlier of (i) the Expiration Date of the Option, or (ii) 90 days following
the Participant’s date of termination of employment.




5. Adjustments Upon Changes In Capitalization.




     5.1. Securities Received Upon Exercise. If all or any portion of an Option or SAR is
exercised subsequent to any stock dividend, rights distribution, split-up, recapitalization,
exchange of shares, merger, consolidation, spin-off, reorganization, or liquidation, as a result of
which shares or other securities of any class or rights shall be issued in respect of outstanding
shares of Common Stock or shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or other securities (hereafter “Reorganization
Event”), the person exercising such Option or SAR shall receive, (a) for the aggregate price
payable upon such exercise of such Option, (i) the aggregate number and class of shares, rights or
other securities for which a recognized market exists, and (ii) a cash amount equal to the fair
market value on such date, as reasonably determined by the Committee, of any other property (other
than regular cash dividend payments) and of any shares, rights or other securities for which no
recognized market exists, which, if shares of Common Stock (as authorized at the date of the
granting of such Option) had been purchased at the date of granting of the Option for the same
aggregate price (on the basis of the price per share provided in the Option) and had not been
disposed of, such person or persons would be holding at the time of such exercise as a result of
such purchase and any such Reorganization Event, and (b) a cash amount upon the exercise of the
SARs equal to the difference between the aggregate Strike Price of such SAR and the aggregate of
(i) the average sales price, on the date provided in Paragraph 4.2 hereof, as the case may be, of
any whole shares or units of Common Stock, rights or other securities for which a recognized market
exists, and (ii) the fair market value on such date, as reasonably determined by the Committee, of
any other property (other than regular cash dividend payments) which the holder of a number of
shares of Common Stock equal to the number of such SARs, if such shares had been purchased at the
date of granting of such SARs and not otherwise disposed of, would be holding at the time of
exercise of such SARs as a result of such purchase and any such Reorganization Event; provided,
however, that no fractional share of Common Stock, fractional right or other fractional security
shall be issued upon any such exercise, and the aggregate price paid shall be appropriately reduced
to reflect any fractional share of Common Stock, fractional right or other fractional security not
issued; and provided further, however, that if the exercise of any Option subsequent to any
Reorganization Event would, pursuant to clause (a) of this Paragraph 5.1, require the delivery of
shares, rights or other securities that Valero is not then authorized to issue or that in the sole
judgment of the Committee cannot be issued without undue effort or expense, the person exercising
the Option shall receive, in lieu of such shares, rights or other securities, a cash payment equal
to the fair market value on the Exercise Date, as reasonably determined by the Committee, of such
shares, rights or other securities. For purposes of applying the provisions of this Plan, the
Preference Share Purchase Rights distributed pursuant to the Rights Agreement shall be deemed not
to have been distributed until the Distribution Date (as defined in the Rights Agreement).



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     5.2. Adjustment of Option Shares Available. In the event of any change in the number
of shares of Common Stock outstanding resulting from a Reorganization Event, (a) the aggregate
number and class of shares of Common Stock remaining available to be optioned under this Plan shall
be that number and class which a person, to whom an Option had been granted for all of the
available shares of Common Stock under this Plan on the date preceding such change, would be
entitled to receive as provided in Paragraph 5, and (b) the aggregate number of SARs remaining
available under this Plan shall be determined pursuant to the formula b/a (c) wherein:




	 	 	 	a = the number of Option Shares available to be optioned under this Plan
immediately prior to such change,
	 
	 	 	 	b = the number of Option Shares available to be optioned under this Plan
immediately following such change, and
	 
	 	 	 	c = the number of SARs available for grant under this Plan immediately prior
to such change.




Upon the occurrence of any Reorganization Event, the Committee shall be entitled (but shall not be
required) to determine that new Option Agreements shall be entered into with Participants
reflecting the Reorganization Event.




6. Administration.




     6.1. Plan Administered by Committee. This Plan shall be administered by a committee
composed solely of two or more “Non-Employee Directors” (as defined in Rule 16b-3 under the
Exchange Act) of Valero, which committee shall, except as hereinafter set forth, be the
Compensation Committee, as appointed and constituted from time to time by the Board of Directors.
In the event that the membership of the Compensation Committee shall fail to meet the foregoing
criteria, then additional or different members of the Board of Directors shall be appointed by the
Board of Directors to act for purposes of administering this Plan so that the Committee
administering this Plan shall consist solely of two or more “Non-Employee Directors.”



     6.2. Powers of the Committee. In connection with its administration of this Plan, the
Committee is empowered to:




	 	(a)	 	Make all determinations and computations concerning the selection of
Participants, the granting of Options and SARs, the pricing thereof and the number of
Option Shares to be optioned, and SARs to be granted, to each Participant;
	 
	 	(b)	 	Cause Valero to enter into Option Agreements with Participants;
	 
	 	(c)	 	With the consent of the Participant, enter into agreements amending any Option
Agreement to grant SARs thereunder, change the Option Price or Expiration Date of any
Option, the Strike Price of any SAR or any other term or condition thereof, or to
terminate any such Option Agreement;
	 
	 	(d)	 	Make rules and regulations for the administration of the Plan not inconsistent
with the terms and provisions of this Plan, including rules providing for the
accelerated exercise of Options and SARs in such circumstances as the Committee may deem
appropriate;
	 
	 	(e)	 	Construe all terms, provisions, conditions and limitations of the Plan in good
faith, and adopt amendments to the Plan;
	 
	 	(f)	 	Make equitable adjustments for any mistakes or errors in the administration of
this Plan or deemed by the Committee to be necessary as the result of any unusual
situation or any ambiguity in the Plan;




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	 	(g)	 	Select, employ and compensate, from time to time, consultants, accountants,
attorneys and other agents and employees as the Compensation Committee may deem
necessary or advisable for the proper and efficient administration of this Plan.





     6.3. Express Powers not Exclusive. The foregoing list of express powers granted to
the Committee upon the adoption of this Plan is not intended to be either complete or exclusive,
but the Committee shall have, in addition to the specific powers granted by this Plan, such powers
that it may deem necessary, desirable, convenient or appropriate for the supervision and
administration of this Plan. Except as otherwise specifically provided herein, the decisions or
judgment of the Committee on any question or claim arising hereunder shall be final, binding and
conclusive upon the Participants and all persons claiming by, through or under a Participant.



7. Miscellaneous Provisions.




     7.1. Nonassignability. Without prior written approval from the Committee, no
Options, SARs, or any other security, right or interest granted under this Plan shall be
transferable by the Participant, except upon Participant’s death and then the same shall be
transferred to the Participant’s beneficiary designated under the Valero Energy Corporation
Beneficiary Designation Form, or if there is no such designation, then the same shall be
transferred pursuant to the will of the Participant and if there is no will, then pursuant to the
applicable laws of descent and distribution, and no Participant or other person claiming by,
through or under a Participant shall have any right to sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt any
Option Shares, SARs, or any cash amounts or other shares, rights or securities (if any) payable
hereunder, or any part thereof, all of which are, and all rights in and to which are, hereby
expressly declared to be nonassignable and nontransferable; any such purported sale, assignment or
conveyance without the Committee’s prior approval shall be void and of no force or effect. No
Option Shares, SARs, and no part of any cash amounts or other shares, rights or securities payable
hereunder (if any) shall, prior to actual payment or delivery, be subject to seizure or
sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a
Participant, or other person claiming by, through or under a Participant, or be transferable by
operation of law in the event of bankruptcy or insolvency.



     7.2. Investment Letter. As a condition to the exercise of any portion of an
Option, the Committee, the General Counsel or the Corporate Secretary may require the person
exercising such Option to represent and warrant to Valero at the time of any such exercise that the
Option Shares are being purchased only for investment and without any present intention to sell or
distribute such Option Shares, if, in the opinion of counsel for Valero, such representation is
required or desirable under the Securities Act of 1933 or any other applicable state, federal or
local law, regulation or rule of any governmental agency. The Committee, the General Counsel or
the Corporate Secretary may require such person to execute and deliver to Valero an appropriate
investment letter containing representations and warranties of the type generally described above.



     7.3. Representatives of the Participant. Neither the Company, its officers,
directors, employees, or agents, nor any member of the Committee shall bear any liability to the
estate of, or to any spouse, beneficiary, legatee or heir of a Participant, or to the Participant,
or to any other person, for authorizing an heir, beneficiary, executor, legatee, administrator,
guardian or legal representative of a Participant, or an individual or entity who is represented as
such, to exercise an Option or SAR or for issuing the Option Shares purchased pursuant to the
exercise of any Option, or for making any cash payment (or for withholding any Tax Payment from any
cash payment) relating to any SAR granted under this Plan.



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     7.4. Responsibility for Taxes. All taxes payable with respect to income to a
Participant resulting from the exercise of an Option or SARs granted hereunder shall be the sole
responsibility of the Participant, not of the Company or Valero, whether or not Valero or the
Company shall have withheld or collected from the Participant any sums required to be withheld or
collected in respect of such income, and whether or not any sums withheld or collected shall be
sufficient to provide for any such taxes.



     7.5. Employment Not Guaranteed. Nothing contained in this Plan nor any action taken
hereunder shall be construed to create a contract of employment or to give any Participant any
right to be retained in the employ of the Company or to serve or continue to serve as an officer or
director of Valero or any subsidiary of Valero.



     7.6. Gender, Singular and Plural. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may
require. As the context may require, the singular may be read as the plural and the plural as the
singular.



     7.7. Captions. The captions of the Paragraphs of this Plan are for convenience only
and shall not control or affect the meaning or construction of any of its provisions.



     7.8. Validity. In the event any provision of this Plan is held invalid, void, or
unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other
provision of this Plan.



     7.9. Notice. Any notice, statement, decision or communication required or permitted
to be given under this Plan shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, if to the Company, to the principal office of Valero, directed to the
attention of the Corporate Secretary of Valero, and if to a Participant or other person, to the
address of the Participant or other person as it shall appear on the books of the Company. Any
such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of
the third day following the date shown on the postmark on receipt for registration or
certification.



     7.10 NYSE Listing. Notwithstanding anything to the contrary contained in this Plan,
in any Option grant, or any agreement entered into hereunder, any grant made under this Plan shall
be conditional and shall be entered into or granted, as the case may be, subject to acceptance of
the Option Shares for listing on the NYSE. No such agreement entered into under this Plan or any
Option grant made under this Plan shall create any obligation in the Company prior to such
acceptance. If the Option Shares ultimately are not accepted for such listing, then any and all
such agreements theretofore entered into shall thereupon terminate and shall be void and of no
force or effect, no Option Shares shall be required to be issued thereunder.



     7.11 Inconsistency. In the event of any conflict or inconsistency between the
provisions of this Plan and the provisions of any Option Agreement, the provisions of this Plan
shall control.



     7.12 Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a
committee of such officers or managers, the authority, subject to the terms and limitations the
Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect
to, or to amend, suspend, or terminate Awards held by, Employees who are not deemed “officers” or
“directors” of the Company for purposes of Section 16 of the Exchange Act, or who are otherwise not
subject to Section 16.



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8. Amendment and Termination of Plan and Option Agreements.




     8.1. Amendments and Termination. The Board of Directors or the Committee, without
approval of the Participants but subject to Paragraph 8.2, may amend this Plan from time to time.
The Board of Directors or the Committee, without approval of the Participants but subject to
Paragraph 8.2, may at any time terminate this Plan.



     8.2. Effect of Amendment or Termination. Any amendment or termination of this Plan
may not materially adversely affect Options or SARs already granted. If any termination or
amendment materially adversely affects Options or SARs already granted, then such Options and SARs
shall, subject to Paragraph 8.3, remain in full force and effect as if this Plan had not been so
amended or terminated. If the Board of Directors or the Committee deems it appropriate or is
advised by counsel that stockholder approval is required, the amendment or termination of this Plan
shall be submitted to the stockholders of Valero for approval.



     8.3 Cancellation of Options. Any other provision of this Plan to the contrary
notwithstanding, if either (a) the Option Price of any Option shall on any NYSE trading day equal
or exceed 125 percent of the closing sales price per share of the Common Stock (determined as
provided in Paragraph 3.7), or (b) out of any period of 120 consecutive NYSE trading days the
Option Price of any Option shall exceed the closing sales price per share of the Common Stock
(determined as provided in Paragraph 3.7) on any 80 or more of such days, then the Committee, in
its sole discretion, may unilaterally cancel and terminate such Option, the related Option
Agreement and any associated SARs. Upon such Committee determination, the Expiration Date of such
Option, Option Agreement, and SARs shall be at the close of business on the date of such
determination. The Committee shall cause notification of cancellation to be sent to the
Participant (or other person entitled to exercise such Option), but failure to send or any delay in
sending notice shall not nullify, delay, or otherwise affect cancellation. No compensation shall
be paid or payable to any Participant (or other person entitled to exercise such Option), or other
person claiming by, through or under a Participant, in respect of any cancellation. If an Option,
the related Option Agreement, and any associated SARs, shall be terminated and canceled pursuant to
the provisions of this Paragraph 8.3, the Option Shares and any associated SARs subject to such
Option (to the extent not theretofore exercised) shall once more be available to be optioned and
sold under this Plan pursuant to a new Option granted hereunder. No Participant with respect to
whom an Option and any associated SARs has been canceled pursuant to this Paragraph 8.3 shall have
any right, whether by virtue of such cancellation or otherwise, to require the Company or the
Committee to grant a new Option to him under this Plan or any other stock option plan of the
Company.



9. Claims.




     9.1. Filing of Claims. A Participant or other person claiming to have been denied any
benefit or right provided under this Plan shall have the right to file a written claim with the
Committee. All claims shall be submitted on a form provided by the Committee, which shall be
signed by the claimant and shall be considered filed on the date the claim is received by the
Committee. The claim will be reviewed and a written decision will be rendered by a member of the
Committee designated by the Committee for such purpose within 90 days following receipt of the
claim.



     9.2. Review of Denial. Within 90 days after receipt of a notice of any denial of
benefits, the claimant or his authorized representative may request, in writing, to appear before
the full Committee for a review of his or her claim. The Committee in its discretion may elect to
grant the Participant’s request to personally appear before the Committee. Any decision of the
Committee thereafter to deny benefits shall be in writing and shall include the specific reasons
for the decision and references to relevant Plan



14









 




provisions on which the decision is based. The decision of the Committee shall be final,
conclusive and binding upon the Participant or other claimant and all persons claiming by, through
or under such claimant.





15