exv10w38






Exhibit 10.38




CHANGE OF CONTROL AGREEMENT




     This Change of Control Agreement (the “Agreement”) is made and entered into by and
between David A. Stamler, M.D. (the “Executive”) and XenoPort, Inc., a
Delaware corporation (the “Company”), effective as of July 14, 2008.



RECITALS




     It is expected that the Company from time to time may consider the possibility of an
acquisition by another company or other change of control. The Board of Directors of the Company
(the “Board”) recognizes that such consideration can be a distraction to the Executive and
can cause the Executive to consider alternative employment opportunities. The Board has determined
that it is in the best interests of the Company and its stockholders to assure that the Company
will have the continued dedication and objectivity of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of the Company.



     The Board believes that it is in the best interests of the Company and its stockholders to
provide the Executive with an incentive to continue his employment and to motivate the Executive to
maximize the value of the Company upon a Change of Control for the benefit of its stockholders.



     Certain capitalized terms used in the Agreement are defined in Section 5 below.



     The parties hereto agree as follows:


1. Term of Agreement. This Agreement shall terminate upon the date that all obligations of
the parties hereto with respect to this Agreement have been satisfied.



2. At-Will Employment. The Company and the Executive acknowledge that the Executive’s
employment is and shall continue to be at-will. If the Executive’s employment terminates for any
reason, including (without limitation) any termination prior to a Change of Control, the Executive
shall not be entitled to any payments, benefits, damages, awards or compensation other than as
provided by this Agreement, or as may otherwise be available in accordance with written plans or
agreements with the Company, including the Executive’s offer letter, dated May 27, 2008 (the
“Offer Letter”) with respect to severance arrangements in the absence of a Change of
Control (as defined below).



3. Termination Following a Change of Control.




     (a) Termination Without Cause or Voluntary Termination For Good Reason. In the event
that a Change of Control of the Company occurs, and during the period beginning on the closing
date of the transaction giving rise to such Change of Control and ending twelve (12) months after
such closing date, the Executive’s employment with the Company (or the successor entity in such
Change of Control transaction) is either (1) terminated by the Company (or its successor entity)
without Cause (as defined below) or (2) terminated by the Executive for Good Reason (as defined



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below), then the Executive shall be entitled to receive Termination Benefits (as defined below);
provided, however, that in order for the Executive to terminate for Good Reason, (i) the Executive
must provide written notice to the Company (or the successor entity in the Change of Control
transaction) of the existence of the Good Reason condition within ninety (90) days following the
initial existence of the Good Reason condition, and (ii) the Company (or the successor entity in
the Change of Control transaction) shall not be required to provide Termination Benefits if it is
able to remedy the Good Reason condition within a period of thirty (30) days following such notice.




     (b) Payment of Termination Benefits. If the Executive becomes entitled to receive
Termination Benefits pursuant to Section 3(a), the continued payments of (i) base salary and/or
(ii) housing assistance benefits (if any) as set forth in Section 6(b)(ii) of the Offer Letter, to
the extent of payments made from the date of the Executive’s termination of employment through
March 15 of the calendar year following such termination, are intended to constitute separate
payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations and thus payable
pursuant to the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury
Regulations; to the extent such payments are made following said March 15, they are intended to
constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations
made upon an involuntary termination from service and payable pursuant to Section
1.409A-1(b)(9)(iii) of the Treasury Regulations, to the maximum extent permitted by such provision,
with any excess amount being regarded as subject to the distribution requirements of Section
409A(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), including,
without limitation, the requirement of Section 409A(a)(2)(B)(i) of the Code that payment be delayed
until six (6) months after the Executive’s termination of employment if the Executive is a
“specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code at the time of such
termination.



4. Certain Additional Payments by the Company.




     (a) If any payment or benefit the Executive would receive pursuant to a Change of Control from
the Company or otherwise would (i) constitute a “parachute payment” within the meaning of Section
280G of the Code (collectively, the “Payment”) and (ii) but for this sentence, be subject
to the excise tax imposed by Section 4999 of the Code or any interest or penalties payable 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 such Payment shall be
reduced to an amount that results in no portion of the Payment being subject to the Excise Tax,
provided that such reduction would not result in a ten percent (10%) or greater reduction in the
amount of the Payment.



     If such reduction would result in a ten percent (10%) or greater reduction in the amount of
the Payment, then there shall be no such reduction and the Executive shall be entitled to receive
from the Company an additional payment (a “Gross-Up Payment”) in an amount such that after
payment by the Executive of all taxes (including, without limitation, any income and employment
taxes and any interest and penalties imposed with respect thereto resulting from any improper
reporting by the Company for employment tax purposes) imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payment; provided, however, that the maximum amount of any such Gross-Up Payment shall be
$3,000,000.



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     (b) For purposes of determining the amount of the Gross-Up Payment: (1) the Executive shall be
deemed to have paid federal income taxes calculated at the lower rate between: (i) 35% (which
represents the highest marginal rate of federal income taxation applicable to ordinary income for
the 2007 calendar year (the “2007 Federal Tax Rate”)); and (ii) the highest marginal rate
of federal income taxation applicable to ordinary income then in effect for the calendar year in
which the Gross-Up Payment is to be made; (2) the Executive shall be deemed to have paid applicable
state income taxes calculated at the lower rate between: (i) 10.3% (which represents the highest
marginal rate of California state income taxation applicable to ordinary income for the 2007
calendar year, net of the maximum reduction in federal income taxes that could be obtained from
deduction of such state taxes in the 2007 calendar year (the “2007 State Tax Rate”)); and
(ii) the highest marginal rate of California state income taxation applicable to ordinary income
for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in
federal income taxes that could be obtained from deduction of such state taxes; and (3) the Excise
Tax rate shall be deemed to equal the lower rate between: (i) 20% (which represents the Excise Tax
rate in effect for the 2007 calendar year (the “2007 Excise Tax Rate”)); and (ii) the
actual excise tax rate imposed by Section 4999 of the Code, or by comparable laws and regulations,
then in effect for the calendar year in which the Gross-Up Payment is to be made. Any Gross-Up
Payment shall be paid to the Executive by the end of the calendar year following the calendar year
in which the Executive remits the applicable taxes.



     (c) In the event that: (1) the highest marginal rate of federal income taxation applicable to
ordinary income then in effect for the Executive for the calendar year in which the Gross-Up
Payment could be made is higher than the 2007 Federal Tax Rate; (2) the highest marginal rate of
California state income taxation for the Executive’s applicable state income taxes applicable to
ordinary income for the calendar year in which the Gross-Up Payment could be made is higher than
the 2007 State Tax Rate; and/or (3) the actual excise tax rate imposed by Section 4999 of the Code,
or by comparable laws and regulations then in effect, is higher than the 2007 Excise Tax Rate, then
the amount of the Gross-Up Payment shall be determined based upon the 2007 Federal Tax Rate, 2007
State Tax Rate and 2007 Excise Tax Rate as set forth in Section 4(b) unless the Board of Directors
of the Company amends this Agreement with the Executive pursuant to Section 8(b) to specifically
provide that the amount of the Gross-Up Payment shall be determined for purposes of this Agreement
based upon rates higher than the 2007 Federal Tax Rate, 2007 State Tax Rate and/or 2007 Excise Tax
Rate. In the event that the Board of Directors of the Company elects to amend this Agreement as
set forth in this Section 4(c), the Company shall deliver an amendment to this Agreement to the
Executive for review and execution no later than twenty (20) calendar days after the date on which
the Executive’s right to a Payment is triggered (if requested at that time by the Company or the
Executive).



     (d) Any reduction of the Payment provided for in this Section 4 shall occur in the following
order unless the Executive elects in writing a different order (provided, however, that such
election shall be subject to Company approval if made on or after the date on which the event that
triggers the Payment occurs): (i) reduction of cash payments; (ii) cancellation of accelerated
vesting of Stock Rights; and (iii) reduction of employee benefits. In the event that acceleration of
vesting of Stock Rights compensation is to be reduced, such acceleration of vesting shall be
cancelled in the



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reverse order of the date of grant of the Executive’s Stock Rights unless the
Executive elects in writing a different order for cancellation.




     (e) The accounting firm engaged by the Company for general audit purposes as of the day prior
to the effective date of the Change of Control shall perform the foregoing calculations. If the
accounting firm so engaged by the Company is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Company shall appoint a nationally recognized
accounting firm to make the determinations required hereunder. The Company shall bear all expenses
with respect to the determinations by such accounting firm required to be made hereunder. The
accounting firm engaged to make the determinations hereunder shall provide its calculations,
together with detailed supporting documentation, to the Company and the Executive within fifteen
(15) calendar days after the date on which the Executive’s right to a Payment is triggered (if
requested at that time by the Company or the Executive) or such other time as requested by the
Company or the Executive. If the accounting firm determines that no Excise Tax is payable with
respect to a Payment, it shall furnish the Company and the Executive with an opinion reasonably
acceptable to the Executive that no Excise Tax will be imposed with respect to such Payment. Any
good faith determinations of the accounting firm made hereunder shall be final, binding and
conclusive upon the Company and the Executive.


5. Definition of Terms. The following terms referred to in this Agreement shall have the
following meanings:




          “Cause” shall mean either: (i) any act of personal dishonesty taken by the Executive
in connection with his responsibilities as an Executive and intended to result in substantial
personal enrichment of the Executive; (ii) the conviction of a felony; (iii) a willful act by the
Executive that constitutes gross misconduct and that is injurious to the Company; or (iv) following
delivery to the Executive of a written demand for performance from the Company that describes the
basis for the Company’s belief that the Executive has not substantially performed his duties,
continued violations by the Executive of the Executive’s obligations to the Company that are
demonstrably willful and deliberate on the Executive’s part.




          “Change of Control” means the completion by the Company of a reorganization, merger or
consolidation, in each case with respect to which persons who were the stockholders of the Company
immediately prior to such reorganization, merger or consolidation would not immediately thereafter
own more than 50% of, respectively, the capital stock and the combined voting power entitled to
vote generally in the election of directors of the reorganized, merged or consolidated
corporation’s then-outstanding voting securities, or of a liquidation or dissolution of the Company
or of the sale of all or substantially all of the assets of the Company. For purposes hereof, such
Change of Control shall be deemed to have occurred on the date on which the transaction closes.




          “Good Reason” shall mean any of the following conditions arising without the
Executive’s express written consent:




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               (i) an assignment to the Executive of material duties or a material reduction of the
Executive’s duties, either of which results in a significant diminution in the Executive’s position
or responsibilities in effect immediately prior to the closing date of the Change of Control
transaction, or the removal of the Executive from such position and responsibilities;



               (ii) a material reduction by the Company (or the successor entity in the Change of Control
transaction) in the base compensation of the Executive as in effect immediately prior to such
reduction; or



               (iii) a relocation of the Executive’s principal place of employment to a facility or a
location more than 40 miles from the Executive’s then present location.



          “Stock Rights” shall mean all of the Executive’s options, restricted stock, restricted
stock units or rights to acquire vested ownership of shares of Common Stock of the Company under
plans, agreements or arrangements that are compensatory in nature, including, without limitation,
the Company’s 1999 Stock Plan, the Company’s 2005 Equity Incentive Plan and Restricted Stock
Purchase Agreements between the Company and the Executive.




          “Termination Benefits” shall mean (1) all unvested Stock Rights (as defined above)
shall become fully vested as of the effective date of such termination of employment described in
Section 3(a); (2) the Executive shall continue to receive for a period of twelve (12) months
following the effective date of such termination of employment described in Section 3(a) continued
payment of the greater of the Executive’s base salary in effect immediately prior to (i) such
termination or (ii) the closing date of the transaction giving rise to a Change of Control; and (3)
assuming that the Executive was receiving housing assistance benefits as set forth in Section
6(b)(ii) of the Offer Letter at the time of the closing date of the transaction giving rise to a
Change of Control, then the Executive shall continue to receive such housing assistance benefits as
set forth in Section 6(b)(ii) of the Offer Letter. In addition, the Executive shall have the right
to continue his health insurance benefits pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1985 (“COBRA”) and any analogous provisions of applicable state law.
Should the Executive so elect, the Company shall reimburse the Executive for twelve (12) months of
such health care coverage following the effective date of such termination of employment described
in Section 3(a).



6. Successors.




     (a) Company’s Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially
all of the Company’s business and/or assets shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the absence of a succession.
For all purposes under this Agreement, the term “Company” shall include any successor to the
Company’s business and/or assets that executes and delivers the assumption agreement described in
this Section 6(a) or that becomes bound by the terms of this Agreement by operation of law.



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     (b) Executive’s Successors. The terms of this Agreement and all rights of the
Executive hereunder 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.


7. Notice.




     (a) General. Notices and all other communications contemplated by this Agreement
shall be in writing and shall be deemed to have been duly given when personally delivered or when
mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the
case of the Executive, mailed notices shall be addressed to the Executive at his home address most
recently communicated to the Company in writing. In the case of the Company, mailed notices shall
be addressed to its corporate headquarters, and all notices shall be directed to the attention of
its Secretary.



     (b) Notice of Termination. Any termination by the Company for Cause or by the
Executive as a result of a voluntary resignation shall be communicated by a notice of termination
to the other party hereto given in accordance with Section 7(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for termination under the
provision so indicated, and shall specify the termination date (which shall be not more than 30
days after the giving of such notice).


8. Miscellaneous Provisions.




     (a) No Duty to Mitigate. Except as set forth in Section 4, the Executive shall not be
required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such
payment be reduced by any earnings that the Executive may receive from any other source.



     (b) Amendment; Waiver. No provision of this Agreement shall be amended, modified,
waived or discharged unless the amendment, modification, waiver or discharge is agreed to in
writing and signed by the Executive and by an authorized officer of the Company (other than the
Executive). No waiver by either party of any breach of, or of compliance with, any condition or
provision of this Agreement by the other party shall be considered a waiver of any other condition
or provision or of the same condition or provision at another time.



     (c) Whole Agreement. No agreements, representations or understandings (whether oral
or written and whether express or implied) that are not expressly set forth in this Agreement have
been made or entered into by either party with respect to the subject matter hereof. This
Agreement represents the entire understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior arrangements and understandings regarding same.



     (d) Choice of Law. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California as applied to agreements entered



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into among California residents to be performed entirely within California, without regard to
conflict of laws rules.




     (e) Severability. The invalidity or unenforceability of any provision or provisions
of this Agreement shall not affect the validity or enforceability of any other provision hereof,
which shall remain in full force and effect.



     (f) Counterparts. This Agreement may be executed in counterparts, each of which shall
be deemed an original, but all of which together will constitute one and the same instrument.




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     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the
Company by its duly authorized officer, as of the day and year set forth below.



	 	 	 	 	 	 	 
	COMPANY:	 	XenoPort, Inc.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ William J. Rieflin
 

William J. Rieflin
	 	 
	 

	 	 	 	President	 	 
	 
	 	 	 	 	 	 
	EXECUTIVE:	 	David A. Stamler, M.D.	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	/s/ David A. Stamler
 

David A. Stamler, MD
	 	 
	 

	 	 	 	Senior Vice President, Chief Medical Officer	 	 






Signature Page to XenoPort, Inc. Change of Control Agreement