Exhibit 10.35


 


SEVERANCE AGREEMENT


 


THIS AGREEMENT is entered into as of the 1st day of
September 2003 (the “Effective Date”) by and between Avaya Inc., a Delaware
corporation, and Donald K. Peterson (the “Executive”).


 


W I T N E S S E T H


 


WHEREAS, the Executive currently serves as a key
employee of the Company (as defined in Section 1) and the Executive’s services
and knowledge are valuable to the Company in connection with the management of
one or more of the Company’s principal operating facilities, divisions,
departments or subsidiaries; and


 


WHEREAS, the Board (as defined in Section 1) has
determined that it is in the best interests of the Company and its stockholders
to secure the Executive’s continued services and to ensure the Executive’s
continued dedication and objectivity in the event of any threat or occurrence
of, or negotiation or other action that could lead to, or create the
possibility of, a Change in Control (as defined in Section 1) of the
Company, without concern as to whether the Executive might be hindered or
distracted by personal uncertainties and risks created by any such possible
Change in Control, and to encourage the Executive’s full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.


 


NOW, THEREFORE, for and in consideration of the
premises and the mutual covenants and agreements herein contained, the Company
and the Executive hereby agree as follows:


 


1.                                       Definitions.  As used in this Agreement, the following
terms shall have the respective meanings set forth below:


 


(a)                                  “Board”
means the Board of Directors of the Company.


 


(b)                                 “Cause”
means:


 


(1)                                  a
material breach by the Executive of those duties and responsibilities of the
Executive which do not differ in any material respect from the duties and
responsibilities of the Executive during the 90-day period immediately prior to
a Change in Control (other than as a result of incapacity due to physical or
mental illness) which is demonstrably willful and deliberate on the Executive’s
part, which is committed in bad faith or without reasonable belief that such
breach is in the best interests of the Company and which is not remedied in a
reasonable period of time after receipt of written notice from the Company
specifying such breach;


 


(2)                                  the
commission by the Executive of a felony involving moral turpitude;


 


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(3)                                  the
commission by the Executive of theft, fraud, breach of trust or any act of
dishonesty involving the Company or its subsidiaries; or


 


(4)                                  the
significant violation by the Executive of the Company’s code of conduct or any
statutory or common law duty of loyalty to the Company or its subsidiaries.


 


(c)                                  “Change
in Control” means:


 


(1)                                  an
acquisition by any individual, entity or group (within the meaning of Section
13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), (an “Entity”) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or more of either (A) the then
outstanding shares of common stock of the Company (the “Outstanding Company
Common Stock”) or (B) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of directors
(the “Outstanding Company Voting Securities”); excluding, however, the
following: (1) any acquisition directly from the Company, other than an
acquisition by virtue of the exercise of a conversion privilege unless the
security so being converted was itself acquired directly from the Company, (2)
any acquisition by the Company, (3) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (4) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A), (B) and
(C) of subsection (3) of this Section 1(c); or


 


(2)                                  a
change in the composition of the Board such that the individuals who, as of the
Effective Date, constitute the Board (such Board shall be hereinafter referred
to as the “Incumbent Board”) cease for any reason to constitute at least a
majority of the Board; provided, however, that for purposes of
this definition, that any individual who becomes a member of the Board subsequent
to the Effective Date, whose election, or nomination for election by the
Company’s stockholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso) shall be
considered as though such individual were a member of the Incumbent Board; and provided,
further  however, that any such individual whose initial
assumption of office occurs as a result of or in connection with either an
actual or threatened solicitation by an Entity other than the Board for the
purpose of opposing a solicitation by any other Entity with respect to the
election or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of an Entity other than the Board shall not
be so considered as a member of the Incumbent Board; or


 


(3)                                  the
approval by the stockholders of the Company of a merger, reorganization or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (each, a “Corporate Transaction”) or, if consummation of
such Corporate Transaction is subject, at the time of such approval by
stockholders, to the consent of any government or governmental agency, the obtaining
of such consent (either explicitly or implicitly by consummation); excluding
however, such a Corporate


 


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Transaction pursuant to which (A) all or substantially
all of the individuals and entities who are beneficial owners, respectively, of
the Outstanding Company Stock and Outstanding Company Voting Securities
immediately prior to such Corporate Transaction will beneficially own, directly
or indirectly, more than 60% of, respectively, the outstanding shares of common
stock, and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Corporate Transaction (including, without limitation,
a corporation or other individual, partnership, association, joint-stock
company, trust, unincorporated organization, limited liability company, other
entity or government or political subdivision which as a result of such
transaction owns the Company or all or substantially all of the Company’s
assets either directly or through one or more subsidiaries (a “Parent Company”))
in substantially the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Entity (other
than the Company, any employee benefit plan (or related trust) of the Company,
such corporation resulting from such Corporate Transaction or, if reference was
made to equity ownership of any Parent Company for purposes of determining
whether clause (A) above is satisfied in connection with the applicable
Corporate Transaction, such Parent Company) will beneficially own, directly or
indirectly, 50% or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate Transaction or the
combined voting power of the outstanding voting securities of such corporation
entitled to vote generally in the election of the directors unless such
ownership resulted solely from ownership of securities of the Company prior to
the Corporate Transaction, and (C) individuals who were members of the
Incumbent Board will immediately after the consummation of the Corporate
Transaction constitute at least a majority of the members of the board of
directors of the corporation resulting from such Corporate Transaction (or, if
reference was made to equity ownership of any Parent Company for purposes of
determining whether clause (A) above is satisfied in connection with the
applicable Corporate Transaction, of the Parent Company); or


 


(4)                                  the
approval by the stockholders of the Company of a complete liquidation or
dissolution of the Company.


 


(d)                                 “Company”
means Avaya Inc., a Delaware corporation.


 


(e)                                  “Date
of Termination” means:


 


(1)                                  the
effective date on which the Executive’s employment by the Company terminates as
specified in a prior written notice by the Company or the Executive, as the
case may be, to the other, delivered pursuant to Section 11 or


 


(2)                                  if
the Executive’s employment by the Company terminates by reason of death, the
date of death of the Executive.


 


(f)                                    “Entity”
has the meaning set forth in Section 1(c)(1).


 


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(g)                                 “Good
Reason” means, without the Executive’s express written consent, the occurrence
of any of the following events after a Change in Control:


 


(1)                                  any
of (i) the assignment to the Executive of any duties inconsistent in any
material respect with the Executive’s duties or responsibilities with the
Company immediately prior to such Change in Control, (ii) any material
reduction in the Executive’s duties or responsibilities with the Company
immediately prior to such Change in Control; (iii) a change in the Executive’s
titles or offices with the Company as in effect immediately prior to such
Change in Control which is adverse to the Executive or (iv) any removal or
involuntary termination of the Executive from the Company otherwise than as
expressly permitted by this Agreement;


 


(2)                                  a
reduction by the Company in the Executive’s rate of annual base salary or
Target Percentage as in effect immediately prior to such Change in Control (or
if a different short-term incentive compensation opportunity is then in effect,
a reduction in the amount of such different short-term incentive compensation
opportunity below the short-term incentive compensation opportunity which had
been afforded by the Target Percentage as in effect immediately prior to such Change
in Control) or as the same may be increased from time to time thereafter;


 


(3)                                  any
requirement of the Company that the Executive be based more than 30 miles from
the facility where the Executive is located at the time of the Change in
Control;


 


(4)                                  the
failure of the Company to continue in effect any incentive compensation plan or
supplemental retirement plan, including the Supplemental Pension Plan, in which
the Executive is participating immediately prior to such Change in Control,
unless the Executive is permitted to participate in other plans providing the
Executive with substantially comparable compensation opportunity and benefits,
or the taking of any action by the Company which would adversely affect the
Executive’s participation in or materially reduce the Executive’s compensation
opportunity and benefits under any such plan; or


 


(5)                                  the
failure of the Company to obtain the assumption agreement from any successor as
contemplated in Section 10(b).


 


For purposes of this Agreement, any good faith
determination of Good Reason made by the Executive shall be conclusive; provided,
however, that an isolated, insubstantial and inadvertent action taken in
good faith and which is remedied by the Company promptly after receipt of
written notice thereof given by the Executive shall not constitute Good Reason.


 


(h)                                 “Nonqualifying
Termination” means a termination of the Executive’s employment:


 


(1)                                  by
the Company for Cause,


 


(2)                                  by
the Executive for any reason other than Good Reason,


 


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(3)                                  by
the Executive for Good Reason more than six (6) months after the event
constituting Good Reason,


 


(4)                                  as
a result of the Executive’s death or


 


(5)                                  by
the Company under circumstances where the Executive qualifies for benefits
under a long-term disability pay plan.


 


(i)                                     “Potential
Change in Control,” for purposes of this Plan, shall mean the happening of any
of the following events:


 


(1)                                  the
commencement of a tender or exchange offer by any third person which, if
consummated, would result in a Change in Control;


 


(2)                                  the
execution of an agreement by the Company, the consummation of which would
result in the occurrence of a Change in Control;


 


(3)                                  the
public announcement by any person (including the Company) of an intention to
take or to consider taking actions which if consummated would constitute a
Change in Control other than through a contested election for directors of the
Company; or


 


(4)                                  the
adoption by the Board, as a result of other circumstances, including, without
limitation, circumstances similar or related to the foregoing, of a resolution
to the effect that a Potential Change in Control has occurred.


 


A
Potential Change in Control shall be deemed to be pending until the earliest of
(i) the first anniversary thereof, (ii) the occurrence of a Change in Control
and (iii) the occurrence of a subsequent Potential Change in Control.


 


(j)                                     “Supplemental
Pension Plan” means the Avaya Inc. Supplemental Pension Plan or any successor
plan.


 


(k)                                  “Target
Percentage” means the annualized percentage applied to an Executive’s annual
base salary in order to calculate the target award for such Executive under the
Company’s short-term incentive compensation program, prior to the application
of Company or individual performance factors.


 


(l)                                     “Termination
Period” means the period of time beginning with a Change in Control and ending
on the earlier to occur of:


 


(1)                                  two
years following such Change in Control and


 


(2)                                  the
Executive’s death.


 


2.                                       Obligations
of the Executive.  The Executive
agrees that in the event of a Potential Change in Control, he shall not
voluntarily leave the employ of the Company without Good Reason prior to the
termination of such Potential Change in Control as follows:


 


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(a)                                  if
the Potential Change in Control terminates by reason other than the occurrence
of a Change in Control, until the earlier of (1) the first anniversary of such
Potential Change in Control and (2) the occurrence of a subsequent Potential
Change in Control; and


 


(b)                                 if
the Potential Change in Control terminates by reason of the occurrence of a
Change in Control, until 90 days following such Change in Control.


 


For purposes of clause (a) of the preceding sentence,
Good Reason shall be determined as if a Change in Control had occurred when
such Potential Change in Control became known to the Board.


 


3.                                       Payments
Upon Termination of Employment.


 


(a)                                  If
during the Termination Period the employment of the Executive shall terminate,
other than by reason of a Nonqualifying Termination, then the Company shall pay
to the Executive, within 30 days following the Date of Termination, as
compensation for services rendered to the Company:


 


(1)                                  a
cash amount equal to the sum of (i) the Executive’s full annual base salary
from the Company and its affiliated companies through the Date of Termination
and any short-term incentive compensation earned by the Executive for any
performance period ending prior to the Date of Termination, in each case to the
extent not theretofore paid, (ii) an amount equal to the Executive’s annual
base salary multiplied by the Executive’s Target Percentage applicable
immediately prior to the Date of Termination (or, if greater, immediately prior
to the Change in Control), multiplied by 50%, multiplied by a fraction, the numerator
of which is the number of days elapsed in the applicable six-month performance
period in which the Date of Termination occurs through the Date of Termination
and the denominator of which is 180 (or if a different short-term incentive
compensation opportunity is then in effect, an amount equal to the target
short-term incentive compensation afforded by such different short-term
incentive compensation opportunity for the applicable performance period in
which the Date of Termination occurs (but not less than the amount that would
have been afforded by the Target Percentage as in effect immediately prior to
such Change in Control), multiplied by a fraction, the numerator of which is
the number of days elapsed in the applicable performance period in which the
Date of Termination occurs through the Date of Termination and the denominator
of which is the total number of days in such applicable performance period) and
(iii) any compensation previously deferred by the Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to
the extent not theretofore paid; plus


 


(2)                                  a
lump-sum cash amount (subject to any applicable payroll or other taxes required
to be withheld pursuant to Section 5) in an amount equal to (i) three (3) times the Executive’s highest annual base salary from the
Company and its affiliated companies in effect during the 12-month period prior
to the Date of Termination, plus (ii) an amount equal to the product of three
(3) times such annual base salary
multiplied by the Executive’s Target Percentage as applicable immediately prior
to the Date of Termination (or, if greater, immediately prior to the Change in
Control) (or if a different


 


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short-term incentive compensation opportunity is then
in effect, an amount equal to the product of three (3) times
the annual target short-term incentive compensation afforded by such different
short-term incentive compensation opportunity, but not less than three (3) times
the amount that would have been afforded by the Target Percentage as in effect
immediately prior to such Change in Control); 
provided, however, that any amount paid pursuant to this
Section 3(a)(2) shall be paid in lieu of any other amount of severance relating
to salary, short-term incentive compensation or other bonus continuation to be
received by the Executive upon termination of employment of the Executive under
any severance plan, policy or arrangement of the Company.  Notwithstanding the foregoing, if the Company
is obligated by law or contract to pay severance pay, notice pay or other
similar benefits, or if the Company is obligated by law or by contract to
provide advance notice of separation (“Notice Period”), then the payments made
pursuant to this Section 3(a)(2) shall be reduced by the amount of any such
severance, notice pay or other similar benefits, as applicable, and by the
amount of any severance pay, notice pay or other similar benefits received
during any Notice Period.


 


(b)                                 In
addition to the payments to be made pursuant to Section 3(a), the Company shall
pay to the Executive at the time the payments pursuant to Section 3(a) shall be
made, a lump-sum cash amount equal to the actuarial equivalent of the excess of
(i) the Executive’s accrued benefits under any qualified defined benefit
pension plan and any nonqualified supplemental defined benefit pension plan of
the Company in which the Executive is a participant, calculated by increasing
the Executive’s age and service credit under such plans as of the Date of
Termination by three (3) year(s)
over (ii) the Executive’s accrued benefits under such plans as of the Date of
Termination.  Such lump sum cash amount
shall be computed using the same actuarial methods and assumptions then in use
for purposes of computing benefits under such plans, provided that the interest
rate used in making such computation shall not be greater than the interest
rate permitted under Section 417(e) of the Internal Revenue Code of 1986, as
amended (the “Code”), on the Date of Termination.


 


(c)                                  For
a period of three (3) years
commencing on the Date of Termination, the Company shall continue to keep in
full force and effect all policies of medical and life insurance with respect
to the Executive and his dependents with the same level of coverage, upon the
same terms and otherwise to the same extent as such policies shall have been in
effect immediately prior to the Date of Termination or as provided generally
with respect to other peer executives of the Company and its affiliated
companies, and the Company and the Executive shall share the costs of the
continuation of such insurance coverage in the same proportion as such costs
were shared immediately prior to the Date of Termination; provided, however,
that the medical and life insurance coverage provided pursuant to this Section
3(c) shall be in lieu of any other medical and life insurance coverage to which
the Executive is entitled under any plan, policy or arrangement of the Company
or any law obligating the Company to provide such insurance coverage upon
termination of employment of the Executive.


 


(d)                                 If
during the Termination Period the employment of the Executive shall terminate
by reason of a Nonqualifying Termination, then the Company shall pay to the
Executive, within 30 days following the Date of
Termination, a cash amount equal to the sum of:


 


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(1)                                  the
Executive’s full annual base salary from the Company through the Date of
Termination, to the extent not theretofore paid, and


 


(2)                                  any
compensation previously deferred by the Executive (together with any interest
and earnings thereon) and any accrued vacation pay, in each case to the extent
not theretofore paid.


 


4.                                       Certain
Additional Payments by the Company.  


 


(a)                                  Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company or its affiliated
companies to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, including, without limitation, as a result of the acceleration of
the vesting of stock options, restricted stock units or other equity awards,
but determined without regard to any additional payments required under this
Section 4) (a “Payment”) would be subject to the excise tax imposed by Section
4999 of the Code, or any interest or penalties are incurred by the Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the “Excise
Tax”), then the Executive shall be entitled to receive an additional payment (a
“Gross-Up Payment”) in an amount such that after payment by the Executive of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income and employment taxes (and any
interest and penalties imposed with respect thereto) and the Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments; provided, however,
that the Executive shall be entitled to receive a Gross-Up Payment only if the
amount of the “parachute payment” (as defined in Section 280G(b)(2) of the
Code) exceeds the sum of (A) $50,000 plus (B) 2.99 times the
Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code),
and provided  further, that if the Executive is not entitled to
receive a Gross-Up Payment, the Executive shall be entitled to receive only
such amounts under Sections 3(a)(2), 3(b) and 3(c) of this Agreement that
would not include any “excess parachute payment” (as defined in
Section 280G(b)(1) of the Code). 
The intent of the parties is that the Company shall be solely
responsible for, and shall pay, any Excise Tax on any Payment and Gross-Up
Payment and any income and employment taxes (including, without limitation,
penalties and interest) imposed on any Gross-Up Payment, as well as bearing any
loss of tax deduction caused by the Gross-Up Payment.


 


(b)                                 Subject
to the provisions of Section 4(c), all determinations required to be made under
this Section 4, including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by the Company’s public
accounting firm (the “Accounting Firm”) which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. 
All fees and expenses of the Accounting Firm shall be borne solely by
the Company.  Any Gross-Up Payment, as
determined pursuant to this Section 4, shall be paid by the Company to the
Executive within five (5) days of the receipt of the Accounting Firm’s
determination.  If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion that


 


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failure to report the
Excise Tax on the Executive’s applicable federal income tax return would not
result in the imposition of a negligence or similar penalty.  The Accounting Firm shall make all
determinations under the tax standard of “substantial authority” as such term
is used in Section 6662 of the Code. 
Any determination by the Accounting Firm shall be binding upon the
Company and the Executive.  As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made (“Underpayment”), consistent with the calculations required to be
made hereunder.  In the event that the
Company exhausts its remedies pursuant to Section 4(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.


 


(c)                                  The
Executive shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company
of the Gross-Up Payment.  Such
notification shall be given as soon as practicable but no later than 10
business days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid.  The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect
to such claim is due).  If the Company
notifies the Executive in writing prior to the expiration of such period that
it desires to contest such claim, the Executive shall:


 


(1)                                  give
the Company any information reasonably requested by the Company relating to
such claim,


 


(2)                                  take
such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company,


 


(3)                                  cooperate
with the Company in good faith in order effectively to contest such claim, and


 


(4)                                  permit
the Company to participate in any proceedings relating to such claim;


 


provided, however, that the Company shall
bear and pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses.  Without limitation on the foregoing
provisions of this Section 4(c), the Company shall control all proceedings
taken in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or


 


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contest
the claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided  further, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and provided  further, that any extension
of the statute of limitations relating to payment of taxes for the taxable year
of the Executive with respect to which such contested amount is claimed to be
due is limited solely to such contested amount. 
Furthermore, the Company’s control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.


 


(d)                                 If,
after the receipt by the Executive of an amount advanced by the Company
pursuant to Section 4(c), the Executive becomes entitled to receive, and
receives, any refund with respect to such claim, the Executive shall (subject
to the Company’s complying with the requirements of Section 4(c)) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto).  If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 4(c), a determination is
made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.


 


5.                                       Withholding
Taxes.  The Company may withhold from
all payments due to the Executive (or his beneficiary or estate) hereunder all
taxes which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom.


 


6.                                       Reimbursement
of Expenses.  If any contest or
dispute shall arise under this Agreement involving termination of the Executive’s
employment with the Company or involving the failure or refusal of the Company
to perform fully in accordance with the terms hereof, the Company shall
reimburse the Executive, on a current basis, for all reasonable legal fees and
expenses, if any, incurred by the Executive in connection with such contest or
dispute, together with interest thereon at a rate equal to the prime rate, as
published under “Money Rates” in The Wall Street Journal from time to
time, but in no event higher than the maximum legal rate permissible under
applicable law, such interest to accrue from the date the Company receives the
Executive’s statement for such fees and expenses through the date of payment
thereof; provided, however, that in the event the resolution of
any such contest or dispute includes a finding denying, in total, the Executive’s
claims in such contest or dispute, the Executive shall be required to reimburse
the Company, over a period of 12 months from the date of such resolution, for
all sums advanced to the Executive pursuant to this Section 6.


 


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7.                                       Operative
Event.  Notwithstanding any provision
herein to the contrary, no amounts shall be payable hereunder unless and until
there is a Change in Control at a time when the Executive is employed by the
Company.


 


8.                                       Termination
of Agreement.


 


(a)                                  This
Agreement shall be effective on the Effective Date and shall expire on the
second anniversary of the Effective Date, provided that the term of this
Agreement shall be extended automatically for one additional year as of each
annual anniversary of the Effective Date, commencing with the second
anniversary of the Effective Date (each such date a “Renewal Date”) unless this
Agreement is terminated pursuant to Section 8(b) or, if earlier, upon the
earlier to occur of (i) termination of the Executive’s employment with the
Company prior to a Change in Control and (ii) the Executive’s death.  Notwithstanding the foregoing, any expiration
of this Agreement shall not retroactively impair or otherwise adversely affect
the rights of the Executive which have arisen prior to the date of such
expiration.


 


(b)                                 The
Company shall have the right, in its sole discretion, pursuant to action by the
Board, to approve the amendment or termination of this Agreement, which
amendment or termination shall not become effective until the Renewal Date
coincident with or next following the date of such action, or if later, the
date fixed by the Board for such amendment or termination; provided, that an
amendment which is not adverse to the interests of the Executive shall take
effect immediately; and provided further, that in no event shall this Agreement
be amended in a manner adverse to the interests of the Executive or be
terminated during any period that a Potential Change in Control is pending or
in the event of a Change in Control.


 


9.                                       Scope
of Agreement.  Nothing in this
Agreement shall be deemed to entitle the Executive to continued employment with
the Company or its subsidiaries and, if the Executive’s employment with the
Company shall terminate prior to a Change in Control, then the Executive shall
have no further rights under this Agreement; provided, however,
that any termination of the Executive’s employment following a Change in
Control shall be subject to all of the provisions of this Agreement.


 


10.                                 Successors;
Binding Agreement.


 


(a)                                  This
Agreement shall not be terminated by any merger or consolidation of the Company
whereby the Company is or is not the surviving or resulting corporation or as a
result of any transfer of all or substantially all of the assets of the
Company.  In the event of any such
merger, consolidation or transfer of assets, the provisions of this Agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.


 


(b)                                 The
Company agrees that concurrently with any merger, consolidation or transfer of
assets referred to in Section 10(a), it will cause any successor or transferee
unconditionally to assume, by written instrument delivered to the Executive (or
the Executive’s beneficiary or estate), all of the obligations of the Company
hereunder.  Failure of the Company to
obtain such assumption prior to the effectiveness of any such merger,
consolidation or transfer of assets shall be a breach of this Agreement and
shall entitle the Executive to compensation and


 


11





















 


other benefits from the
Company in the same amount and on the same terms as the Executive would be
entitled hereunder if the Executive’s employment were terminated following a
Change in Control other than by reason of a Nonqualifying Termination during
the Termination Period.  For purposes of
implementing the foregoing, the date on which any such merger, consolidation or
transfer becomes effective shall be deemed the Date of Termination.


 


(c)                                  This
Agreement shall inure to the benefit of and be enforceable by the Executive’s
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. 
If the Executive shall die while any amounts would be payable to the
Executive hereunder had the Executive continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to such person or persons appointed in writing by the Executive
to receive such amounts or, if no person is so appointed, to the Executive’s
estate.


 


11.                                 Notices.


 


(a)                                  For
purposes of this Agreement, all notices and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered or five (5) days after deposit in the United States mail,
certified and return receipt requested, postage prepaid, addressed


 


(1)                                  if
to the Executive, to the home address of the Executive on the most current
Company records, and if to the Company, to Avaya Inc., attention Vice
President, Human Resources with a copy to the Secretary of the Board, or


 


(2)                                  to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.


 


(b)                                 A
written notice of the Executive’s Date of Termination by the Company or the
Executive, as the case may be, to the other, shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) to the extent
applicable, set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated and (iii) specify the termination date (which date shall
be not less than fifteen (15) days after the
giving of such notice).  The failure by
the Executive or the Company to set forth in such notice any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive’s or the Company’s rights hereunder.


 


12.                                 Full
Settlement; Resolution of Disputes. 


 


(a)                                  The
Company’s obligation to make any payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against the Executive or others.  In no event shall the Executive be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to the


 


12





















 


Executive under any of
the provisions of this Agreement and such amounts shall not be reduced whether
or not the Executive obtains other employment.


 


(b)                                 If
there shall be any dispute between the Company and the Executive in the event
of any termination of the Executive’s employment, then, unless and until there
is a final, nonappealable judgment by a court of competent jurisdiction
declaring that such termination was for Cause, that the determination by the
Executive of the existence of Good Reason was not made in good faith, or that
the Company is not otherwise obligated to pay any amount or provide any benefit
to the Executive and his dependents or other beneficiaries, as the case may be,
under Sections 3(a), 3(b) and 3(c), the Company shall pay all amounts, and
provide all benefits, to the Executive and his dependents or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Sections 3(a), 3(b) and 3(c) as though such termination
were by the Company without Cause or by the Executive with Good Reason; provided,
however, that the Company shall not be required to pay any disputed
amounts pursuant to this Section 12(b) except upon receipt of an undertaking by
or on behalf of the Executive to repay all such amounts to which the Executive
is ultimately adjudged by such court not to be entitled.


 


13.                                 Employment
with Subsidiaries.  Employment with
the Company for purposes of this Agreement shall include employment with (i)
any “subsidiary corporation” of the Company, as defined in Section 424(f) of
the Code, (ii) an entity in which the Company directly or indirectly owns 50%
or more of the voting interests or (iii) an entity in which the Company has a
significant equity interest, as determined by the Board or by the Corporate
Governance and Compensation Committee (or any successor committee) of the
Board.


 


14.                                 Governing
Law; Validity.  The interpretation,
construction and performance of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Delaware without regard to the principle of conflicts of laws.  The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which other provisions shall remain in
full force and effect.


 


15.                                 Counterparts.  This Agreement may be executed in two
counterparts, each of which shall be deemed to be an original and both of which
together shall constitute one and the same instrument.


 


16.                                 Miscellaneous.  No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by the Executive and by a duly authorized officer of the Company.  No waiver by either party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. 
Failure by the Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right the Executive or
the Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.  Except as otherwise expressly
set forth in this Agreement, the rights of, and benefits


 


13





















 


payable to, the
Executive, his estate or his beneficiaries pursuant to this Agreement are in
addition to any rights of, or benefits payable to, the Executive, his estate or
his beneficiaries under any other employee benefit plan or compensation program
of the Company.


 


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IN WITNESS WHEREOF, the Company has caused this
Agreement to be executed by a duly authorized officer of the Company and the
Executive has executed this Agreement as of the day and year first above
written.


 


	
   

  	
  AVAYA INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael J. Harrison

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE

  
	
   

  	
   

  
	
   

  	
  /s/ Donald K. Peterson

  	
   

  
	
   

  	
  Donald K. Peterson

  



 


 


Note: The Company has also entered into
Severance Agreements, each dated as of September 1, 2003 (other than with
respect to Francis M. Scricco, which such agreement was entered into on
September 1, 2004), with each of the following executive officers:


 


 


	
  Garry K. McGuire

  	
  Chief Financial Officer
  and Senior

  Vice President, Corporate

  Development

  
	
   

  	
   

  
	
  Louis J. D’Ambrosio

  	
  Group Vice President,
  Avaya

  Global Sales, Channels and

  Marketing

  
	
   

  	
   

  
	
  David P. Johnson

  	
  Senior Vice President,
  Europe,

  Middle East and Africa

  
	
   

  	
   

  
	
  Francis M. Scricco

  	
  Group Vice President,
  Avaya

  Global Services

  
	
   

  	
   

  
	
  Michael Thurk

  	
  Group Vice President,
  Enterprise

  Communications Group

  



 


Such Severance Agreements are substantially
identical to Mr. Peterson’s in all material respects, except that the severance
benefit for each above listed executive officer is two times the sum of their
respective annual base salaries and target bonuses. In addition, these
executive officers are entitled to continuation of medical and life insurance
and a pension enhancement payment for a two-year period.


 


15