exv10w1



 




Exhibit 10.1


Nortel 2005 Stock Incentive Plan




     Section 1. Purpose of the Plan. The purpose of the Plan is to promote the long-term
success of the Company by providing equity-based incentive awards to eligible employees. The Plan
is designed to provide eligible employees a proprietary interest in Nortel and thereby encourage
such employees to perform the duties of their employment to the best of their abilities and to
devote their business time and efforts to further the growth and development of the Company. The
Plan is also intended to assist the Company in attracting and retaining individuals with superior
experience and ability.



     Section 2. Definitions. For purposes of the Plan, the following terms shall have the
meaning set forth below:



          (a) “Award” shall mean an award of Options, Stock Appreciation Rights, Restricted Stock Units
or Performance Stock Units granted to a Participant under the Plan.




          (b) “Base Price” shall mean the base dollar amount used to calculate the amount, if any,
payable to a Participant with respect to a Share subject to a Stand-Alone SAR upon exercise
thereof, which base dollar amount shall not be less than 100 percent of the Market Value of a Share
on the Effective Date of the grant of the Stand-Alone SAR, subject to adjustment pursuant to
Section 11.




          (c) “Board of Directors” shall mean the Board of Directors of Nortel.




          (d) “Canadian Award” shall mean an Award pursuant to which, as applicable, (i) in the case of
Options (including any Tandem SARs), the Subscription Price is stated and payable in Canadian
dollars (and, in the case of any Tandem SARs, any cash amount payable in settlement thereof shall
be paid in Canadian dollars), (ii) in the case of Stand-Alone SARs, the Base Price is stated in
Canadian dollars and any cash amount payable in settlement thereof shall be paid in Canadian
dollars or (iii) in the case of Restricted Stock Units or Performance Stock Units, any cash amount
payable in settlement thereof shall be paid in Canadian dollars.




          (e) “Cause” shall mean a Participant’s Termination, (i) for just cause or cause under
applicable law or (ii) following his or her (A) willful breach or neglect of the duties of his or
her employment; (B) failure or refusal to perform such duties after demand for performance or to
comply with the Company’s rules, policies and practices, (C) dishonesty, (D) insubordination, (E)
gross, serious or repeated misconduct, (F) conduct endangering, or likely to endanger, the health
or safety of another employee, (G) conviction of a crime constituting a felony or other indictable
offense, (H) serious breach of his or her contract of employment, where applicable, (I) gross
incompetence, or (J) bringing the Company into disrepute; except that if, at the time of such
Termination, (1) the Participant is covered by any severance, termination or similar plan or policy
maintained by the Company that employs the Participant, the term “cause” shall have the meaning, if
any, assigned thereto under such plan or policy or if there is no such definition of cause, the
term “cause” shall mean the Participant’s Termination under circumstances in which the Participant
is not entitled to receive notice of termination or compensation in lieu of notice under such plan
or policy or (2) the Participant is party to an employment, severance, retention, or similar
contract or agreement with the Company that employs the Participant and that contains


 









 






a definition of the term “cause” or a similar term, the term “cause” shall have the meaning,
if any, assigned thereto (or to such similar term) in such contract or agreement.




          (f) “CBCA” shall mean the Canada Business Corporations Act, R.S.C. 1985, c-C-44, as amended.




          (g) “Code” shall mean the United States Internal Revenue Code of 1986, as amended.




          (h) “Committee” shall mean the Joint Leadership Resources Committee of the Board of Directors
and the Board of Directors of Nortel Networks Limited, described in Section 3 hereof, or such other
committee or joint committee as may be designated by the Board of Directors and, if applicable, the
Board of Directors of Nortel Networks Limited from time to time to administer the Plan that meets
the requirements of Section 3 hereof.




          (i) “Company” shall mean, collectively, Nortel and its direct and indirect Subsidiaries, or
any such Subsidiary individually, as the context requires.




          (j) “Control” shall mean, with respect to any Person, the possession, directly or indirectly,
severally or jointly, of the power to direct or cause the direction of the management and policies
of such Person, whether through the ownership of voting securities, by contract or credit
arrangement, as trustee or executor, or otherwise.




          (k) “Effective Date” shall mean the date as of which an Award shall take effect, provided that
the Effective Date shall not be a date prior to the date the Committee determines an Award shall be
made and, unless otherwise specified by the Committee, the Effective Date will be the date the
Committee determines an Award shall be made.




          (l) “Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended.




          (m) “Extension Period” shall mean, with respect to a Participant whose employment Terminates
due to a Qualifying Termination Without Cause, the period beginning on such Participant’s Date of
Termination and, unless determined otherwise by the Committee, ending on the earlier of (x) the
twenty-four month anniversary of the Participant’s Date of Termination and (y) the date determined
in accordance with the following:





	 	(i)	 	in the case of a Participant who receives severance or other termination
compensation pursuant to the terms of an individual agreement entered into by such
Participant and the Company that employs the Participant or pursuant to the terms of
any plan, policy or practice of such Company, the last day of the period under (x) or
(y), as determined by the Committee: (x) the period used to calculate the portion of
the severance or other termination amount payable to the Participant under such
agreement, plan, policy or practice on the basis of his or her base salary rate or (y)
a period of calendar weeks equal to (A) the severance or other termination amount
payable to the Participant under such agreement, plan, policy or practice, divided by
(B) the Participant’s weekly base salary rate; and




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	 	(ii)	 	in the case of a Participant who is party to a written contract of employment
with the Company that employs the Participant that requires the Company to provide the
Participant prior notice of such Qualifying Termination Without Cause or pay in lieu
thereof (including payment of continued compensation during any period of “garden
leave”), other than an individual agreement described in clause (i) above, the last day
of any such notice period, in the case of a notice period that ends after the
Participant’s Date of Termination, or the last day of the period for which the
Participant receives pay in lieu of notice.




          (n) “Incentive Stock Option” shall mean an Option that, on the Effective Date, is intended to
qualify and is designated by the Committee in the applicable instrument of grant as an Incentive
Stock Option within the meaning of Section 422 of the Code (or any successor provision).




          (o) “Market Value” of a Share shall mean the average of the high and low prices for a board
lot of Shares traded in Canadian dollars on the TSX during the relevant day or, if the volume of
Shares traded on the composite tape during the relevant day in the United States exceeds the volume
of Shares traded on the TSX on such relevant day, the average of the high and low prices for a
board lot of Shares traded in U.S. dollars on the NYSE during the relevant day. The Market Value
so determined may be in Canadian dollars or in U.S. dollars. As a result, the Market Value of a
Share covered by a Canadian Award shall be either (a) such Market Value as determined above, if in
Canadian dollars, or (b) such Market Value as determined above converted into Canadian dollars at
the noon rate of exchange of the Bank of Canada on the relevant day, if in U.S. dollars. Similarly,
the Market Value of a Share covered by a U.S. Award shall be either (a) such Market Value as
determined above, if in U.S. dollars, or (b) such Market Value as determined above converted into
U.S. dollars at the noon rate of exchange of the Bank of Canada on the relevant day, if in Canadian
dollars. If on the relevant day there is not a board lot trade in the Shares on each of the TSX and
NYSE or there is not a noon rate of exchange of the Bank of Canada, then the Market Value of a
Share covered by a Canadian Award and the Market Value of a Share covered by a U.S. Award shall be
determined as provided above on the first day immediately preceding the relevant day for which
there were such board lot trades in the Shares and a noon rate of exchange. The Market Value of a
Share shall be rounded up to the nearest whole cent.




          (p) “Nortel” shall mean Nortel Networks Corporation, a Canadian corporation, or any Successor
thereto.




          (q) “NYSE” shall mean the New York Stock Exchange.




          (r) “Option” shall mean an option, granted in accordance with Section 6 hereof, to purchase a
Share.




          (s) “Participants” shall mean those individuals to whom Awards have been granted from time to
time under the Plan.




          (t) “Performance Criteria” shall mean such financial and/or personal performance criteria as
may be determined by the Committee, including any Qualifying




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Performance Criteria. Performance Criteria may be applied to either the Company as a whole or
to a business unit or single or group of Companies, either individually, alternatively or in any
combination, and measured either in total, incrementally or cumulatively over a specified
performance period, on an absolute basis or relative to a pre-established target, to previous
years’ results or to a designated comparison group, provided that the performance period for
measurement or achievement of any such Performance Criteria (or incremental element thereof) shall
in all events exceed one year.




          (u) “Performance Stock Unit” shall mean a right, granted in accordance with Section 8 hereof,
to receive one Share or a cash payment of the Market Value of a Share, as determined by the
Committee, that generally becomes Vested, if at all, subject to the attainment of Performance
Criteria and satisfaction of such other conditions to Vesting, if any, as may be determined by the
Committee.




          (v) “Person” shall mean any natural person, firm, partnership, limited liability company,
association, corporation, company, trust, business trust, governmental authority or other entity.




          (w) “Plan” shall mean this Nortel 2005 Stock Incentive Plan, as set forth herein and as the
same may be amended and in effect from time to time.




          (x) “Prior Plan” shall mean the Nortel Networks Corporation 1986 Stock Option Plan As Amended
and Restated and/or the Nortel Networks Corporation 2000 Stock Option Plan, individually or
collectively, as the context requires.




          (y) “Prior Plan Available Shares” shall mean those Shares that, on January 1, 2006, are
authorized for issuance and available for grant of new awards under a Prior Plan (for greater
certainty, excluding Unissued Prior Plan Option Shares) .




          (z) “Prior Plan Option” shall mean an option to purchase Shares granted to a participant under
a Prior Plan that is outstanding, in whole or part, on January 1, 2006.




          (aa) “Qualifying Performance Criteria” shall mean any one or more of the following performance
criteria, either individually, alternatively or in any combination, applied to either the Company
as a whole or to a business unit or single or group of Companies, either individually,
alternatively or in any combination, and measured either in total, incrementally or cumulatively
over a period of more than one year, on an absolute basis or relative to a pre-established target,
to previous years’ results or to a designated comparison group, in each case as determined by the
Committee: (i) cash flow, (ii) earnings per share, (iii) earnings before interest, taxes and/or
amortization, (iv) return on sales, (v) total shareholder return, (vi) share price performance,
(vii) return on capital, (viii) return on assets or net assets, (ix) revenue, (x) income or net
income, (xi) operating income or net operating income, (xii) operating profit or net operating
profit, (xiii) operating margin or profit margin, (xiv) return on operating revenue, (xv) return on
invested capital, (xvi) market segment share, (xvii) product release schedules, (xviii) new product
innovation, (xix) product cost reduction, (xx) brand recognition/acceptance, (xxi) product ship
targets, or (xxii) customer satisfaction, in any such case, before or after interest and/or taxes.
The Committee may appropriately adjust any evaluation of performance under a




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Qualifying Performance Criteria to exclude any of the following events that occurs during a
performance period: (I) asset write-downs, (II) litigation or claim judgments or settlements, (III)
the effect of changes in tax law, accounting principles or other such laws or provisions affecting
reported results, (IV) accruals for reorganization and restructuring programs and (V) any
extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or
in management’s discussion and analysis of financial condition and results of operations appearing
in the annual report of Nortel to shareholders for the applicable year.




          (bb) “Qualifying Termination Without Cause” shall mean a Participant’s Termination Without
Cause if, as a result thereof, the Participant receives severance or other termination
compensation, including pay in lieu of notice, from the Company that employs the Participant
pursuant to the terms of any individual, written employment, severance or similar agreement entered
into by and between the Participant and such Company or any severance or termination plan, policy
or practice established and maintained by such Company.




          (cc) “Restricted Stock Unit” shall mean a right, granted in accordance with Section 8 hereof,
to receive a Share or a cash payment of the Market Value of a Share, as determined by the
Committee, that generally becomes Vested, if at all, based on the Participant’s period of
employment with the Company.




          (dd) “Retirement” shall mean a Participant’s Termination (including at the end of a period of
long-term disability, if applicable) in accordance with whichever of the following clauses is
applicable: (i) a Participant’s Termination after completing a number of full years of service
with the Company that, when added to the Participant’s age at his or her Date of Termination,
equals 65 or more; provided that the Participant has attained at least age 55 as of his or her Date
of Termination, unless determination of the Participant’s eligibility for enhanced rights in
respect of an Award on the basis of age (in whole or in part) is not permitted under the laws of
any jurisdiction that apply to the Participant, and (ii) in the case of a Participant described in
the exception under the foregoing clause (i), the Participant’s Termination (w) after having
satisfied all eligibility and other requirements under any special pension arrangement applicable
to the Participant to qualify for immediate commencement of retirement benefits in accordance with
the provisions of such special pension arrangement, in the case of a Participant who is party to a
special pension arrangement with the Company that employs the Participant, (x) after having
completed at least ten full years of service with the Company and, in addition, having satisfied
all eligibility and other requirements under the pension or retirement plan of the Company that
employs the Participant to qualify for immediate commencement of early or normal retirement
benefits in accordance with the provisions of such pension or retirement plan, in the case of a
Participant employed by a Company that maintains a pension or retirement plan, other than a
Participant party to a special pension arrangement subject to clause (w), (y) after having
satisfied all eligibility and other requirements under a national or other government sponsored
public social security system covering such Participant to qualify for immediate commencement of
retirement income payments under such national or other government sponsored system, in the case of
a Participant who does not participate in any pension or retirement plan and is not party to any
special pension arrangement, as contemplated under the immediately preceding clause (ii)(w) or
(ii)(x), or (z) in the case of any other Participant, as determined by the Committee.




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          (ee) “Shares” shall mean the common shares without nominal or par value of Nortel and “Share”
shall mean one common share without nominal or par value of Nortel, in each such case, subject to
adjustment pursuant to Section 11.




          (ff) “Stand-Alone SAR” shall mean a Stock Appreciation Right that is granted on a stand-alone
basis.




          (gg) “Stock Appreciation Right” or “SAR” shall mean a right, granted pursuant to Section 7
hereof, representing the right to receive upon the exercise thereof payment, in cash, Shares or any
combination thereof, as determined by the Committee, equal to the excess of the Market Value of one
Share over the Base Price or Subscription Price, whichever is applicable, on the terms and
conditions and calculated in accordance with the provision of Section 7 hereof.




          (hh) “Stock Exchanges” shall mean the NYSE and the TSX.




          (ii) “Subsidiary” shall mean, with respect to any Person, each corporation or other Person in
which the first Person owns or Controls, directly or indirectly, capital stock or other ownership
interests representing 50% or more of the combined voting power of the outstanding voting stock or
other ownership interests of such corporation or other Person and each “affiliated body corporate,”
within the meaning of Subsection 2(2) of the CBCA, with respect to such first Person.




          (jj) “Subscription Price” shall mean, (i) with respect to an Option, the price payable by a
Participant to purchase one Share on exercise of such Option, which shall not be less than 100
percent of the Market Value of a Share on the Effective Date of the grant of the Option covering
such Share and (ii) with respect to a Tandem SAR, the Subscription Price applicable to the Option
to which the Tandem SAR relates, in each such case, subject to adjustment pursuant to Section 11.




          (kk) “Successor” shall mean, with respect to any Person, a Person that succeeds to the first
Person’s assets and liabilities by amalgamation, merger, liquidation, dissolution or otherwise by
operation of law, or a Person to which all or substantially all the assets and/or business of the
first Person are transferred.




          (ll) “Tandem SAR” shall mean a Stock Appreciation Right granted in tandem with an Option.




          (mm) “Termination” or “Date of Termination” (or any derivative thereof) shall mean (i) the
date of termination of a Participant’s active employment with the Company that employs the
Participant (other than in connection with the Participant’s transfer to employment with any other
Company), whether such termination is lawful or otherwise, but not including a Participant’s
absence from active employment during a period of vacation, temporary illness, authorized leave of
absence or short or long-term disability, and (ii) in the case of a Participant who does not return
to active employment with the Company immediately following a period of absence due to vacation,
temporary illness, authorized leave of absence or short or long-term disability, the last day of
such period of absence.




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          (nn) “Termination Without Cause” shall mean a Participant’s Termination by the Company that
employs the Participant for any reason other than Cause or due to the Participant’s Retirement,
other than any such Qualifying Termination Without Cause.




          (oo) “Third Party Trust” shall mean a trust established pursuant to Section 3(c) with an
independent, unaffiliated bank or other trust company, as trustee, to hold Shares for delivery from
time to time to Participants upon exercise or settlement of Awards, that is established and
maintained in accordance with the applicable banking and trust laws of the relevant jurisdiction
and the requirements of Stock Exchanges.




          (pp) “TSX” shall mean The Toronto Stock Exchange.




          (qq) “Unissued Prior Plan Option Shares” shall mean those Shares that are subject to the
unexercised portion of a Prior Plan Option on January 1, 2006, to the extent such portion of the
Prior Plan Option thereafter expires or is forfeited, surrendered, cancelled or otherwise
terminated without the issuance or delivery of such Shares, but not including any Shares subject to
a Prior Plan Option that are withheld or otherwise not issued or delivered upon exercise of such
Prior Plan Option in order to satisfy all or any portion of the holder’s obligation to pay the
subscription price and/or withholding amounts related to the exercise of such Prior Plan Option.




          (rr) “Vested” (or any applicable derivative term) shall mean, with respect to an Award, that
the applicable conditions with respect to continued employment, passage of time, achievement of
Performance Criteria and/or any other conditions established by the Committee have been satisfied
or, to the extent permitted under the Plan, waived, whether or not the Participant’s rights with
respect to such Award may be conditioned upon prior or subsequent compliance with any
confidentiality, non-competition or non-solicitation obligations.




          (ss) “U.S. Award” shall mean an Award pursuant to which, as applicable, (i) in the case of
Options (including any Tandem SARs), the Subscription Price is stated and payable in United States
dollars (and, in the case of any Tandem SARs, any cash amount payable in settlement thereof shall
be paid in United States dollars), (ii) in the case of Stand-Alone SARs, the Base Price is stated
in United States dollars and any cash amount payable in settlement thereof shall be paid in United
States dollars or (iii) in the case of Restricted Stock Units or Performance Stock Units, any cash
amount payable in settlement thereof shall be paid in United States dollars.




     Section 3. Administration



          (a) Composition of Committee. The Committee shall consist of two or more individuals,
each of whom qualifies as an independent director, within the meaning of the rules of the Stock
Exchanges and other applicable securities legislative and regulatory requirements, and at least two
of whom qualify as (i) a “non-employee director” within the meaning of Rule 16b-3 under the
Exchange Act, and (ii) an “outside director” within the meaning of United States Treasury
Regulation Section 1.162-27(e)(3)) under the Code. In addition, the composition of the Committee
shall comply with all other applicable securities legislation and rules of the Stock Exchanges and
regulatory authorities.




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          (b) Powers of the Committee. The Committee shall administer the Plan in accordance
with its terms. Subject to and consistent with the terms of the Plan, in addition to any authority
of the Committee specified under any other terms of the Plan, the Committee shall have full and
complete discretionary authority to:





     (i) interpret the Plan and instruments of grant evidencing Awards;




     (ii) prescribe, amend and rescind such rules and regulations and make all
determinations necessary or desirable for the administration and interpretation of the Plan
and instruments of grant evidencing Awards;




     (iii) determine those key employees of the Company who may be granted Awards, grant one
or more Awards to such employees and approve or authorize the applicable form and terms of
the related instrument of grant;




     (iv) determine the terms and conditions of Awards granted to any Participant,
including, without limitation, (A) the type, and number of Shares subject to, an Award,
including whether the Award shall be a Canadian Award or a U.S. Award, (B) the Subscription
Price or Base Price for Shares subject to an Award, if applicable, (C) the conditions to the
Vesting of an Award or any portion thereof, including terms relating to lump sum or
installment Vesting, the period for achievement of any applicable Performance Criteria as a
condition to Vesting and the conditions, if any, upon which Vesting of any Award or portion
thereof will be waived or accelerated without any further action by the Committee, (D) the
circumstances upon which an Award or any portion thereof shall be forfeited, cancelled or
expire, (E) the consequences of a Termination with respect to an Award, (F) the manner of
exercise or settlement of the Vested portion of an Award, including whether an Award shall
be settled on a current or deferred basis, (G) whether and the terms upon which an Award
shall be settled in cash, Shares or a combination thereof and (H) whether and the terms upon
which any Shares delivered upon exercise or settlement of an Award must continue to be held
by a Participant for any specified period;




     (v) determine whether and the extent to which any Performance Criteria or other
conditions applicable to the Vesting of an Award have been satisfied or shall be waived or
modified;




     (vi) amend the terms of any instrument of grant or other documents evidencing Awards;
and




     (vii) determine whether, and the extent to which, adjustments shall be made pursuant to
Section 11 and the terms of any such adjustments.



          (c) Establishment of Third Party Trusts. From time to time, the Committee may direct
one or more of the Companies to establish and maintain one or more Third Party Trusts, on such
terms and conditions as the Committee shall determine, and to contribute Shares and/or cash for the
purchase of Shares thereto, in such amounts as the Committee shall determine; provided that no
Third Party Trust shall be established or maintained with respect to a


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Participant if the Committee reasonably determines that, as a result thereof, such Participant
will be subject to early taxation or any increased amount of tax with respect to his or her
Award(s).




          (d) Effects of Committee’s Decision. Any such interpretation, rule, regulation,
determination or other act of the Committee shall be made in its sole discretion and shall be
conclusively binding upon all Persons.




          (e) Liability Limitation. No member of the Committee or the Board of Directors shall
be liable for any action or determination made in good faith pursuant to the Plan or any instrument
of grant evidencing any Award granted under the Plan. To the fullest extent permitted by law, the
Company shall indemnify and save harmless each person made, or threatened to be made, a party to
any action or proceeding in respect of the Plan by reason of the fact that such person is or was a
member of the Committee or is or was a member of the Board of Directors.




          (f) Delegation and Administration. The Committee may, in its discretion, delegate
such of its powers, rights and duties under the Plan, in whole or in part, to such committee,
Person or Persons as it may determine, from time to time, on terms and conditions as it may
determine, except the Committee shall not, and shall not be permitted to, delegate any such powers,
rights or duties (i) with respect to the grant, amendment, administration or settlement of any
Award of a Participant subject to Section 16 of the Exchange Act or otherwise to the extent
delegation is not consistent with the CBCA or the rules of any Stock Exchange or (ii) with respect
to the establishment or determination of the achievement of Qualifying Performance Criteria and any
such purported delegation or action shall not be given effect. The Committee may also appoint or
engage a trustee, custodian or administrator to administer or implement the Plan or any aspect of
it, subject to the exception of the immediately preceding sentence hereof.




     Section 4. Shares Subject to the Plan.



          (a) Aggregate Plan Limits. Subject to adjustment pursuant to Section 11, the maximum
aggregate number of Shares that may be delivered in connection with Awards granted under the Plan
shall not exceed the sum of (i) 122 million Shares, (ii) the number of Prior Plan Available Shares
and (iii) the number of Unissued Prior Plan Option Shares. Subject to adjustment pursuant to
Section 11, of such aggregate maximum number of Shares, (i) no more than an aggregate of 95 million
Shares may be delivered in connection with Awards of Restricted Stock Units and/or Performance
Stock Units and (ii) no more than an aggregate of 122 million Shares may be delivered in connection
with Awards of Incentive Stock Options. Any adjustment pursuant to Section 11 to the limitation on
the number of Shares available for Awards of Incentive Stock Option shall be consistent with the
requirements of Section 425 of the Code.




          (b) Tax Code Limits. During any five year period, a Participant may not be granted
Awards under the Plan of (i) Options and/or Stock Appreciation Rights covering more than an
aggregate of 25 million Shares or (ii) Restricted Stock Units and/or Performance Stock Units with
respect to more than an aggregate of 15 million Shares, in each such case, subject to adjustment
pursuant to Section 11.




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          (c) Certain Additional Limits. The number of Shares issuable to insiders of the
Company (as defined in the rules of the TSX for this purpose) under this Plan and all other Company
security-based compensation arrangements (also as defined in the rules of the TSX) shall not exceed
10% of the issued and outstanding Shares and the number of Shares issued to insiders within any one
year under all Company security-based compensation arrangements shall not exceed 10% of the issued
and outstanding Shares.




          (d) Computation of Available Shares. For purposes of computing the total number of
Shares available for grant under the Plan, Shares subject to any Award (or any portion thereof)
that has expired or is forfeited, surrendered, cancelled or otherwise terminated prior to the
issuance or transfer of such Shares and Shares subject to an Award (or any portion thereof) that is
settled in cash in lieu of settlement in Shares shall again be available for grant under the Plan.
Notwithstanding the foregoing, any Shares subject to an Award that are withheld or otherwise not
issued upon exercise of any Option or Stock Appreciation Right or settlement of any Award to
satisfy the Participant’s withholding obligations or in payment of any Subscription Price shall
reduce the number of Shares available for grant under the limitations set forth in this Section 4.




          (e) Source of Shares. Shares delivered to Participants in connection with the
exercise or settlement of Awards may be authorized but unissued Shares, Shares purchased in the
open-market or in private transactions or Shares held in one or more Third Party Trusts. From time
to time, the Board of Directors shall authorize the issuance, or the purchase of shares on the open
market or in private transactions, of such number of Shares as may be necessary to permit Nortel to
meet its obligations under the Plan.




     Section 5. Terms of Awards In General



          (a) Instrument of Grant. Each Award granted under the Plan shall be evidenced by an
instrument of grant, in such form or forms as the Committee shall approve from time to time, which
shall set forth such terms and conditions consistent with the terms of the Plan as the Committee
may determine. Each instrument of grant shall set forth, at a minimum, the type and Effective Date
of the Award evidenced thereby, the number of Shares subject to such Award, whether the Award is a
Canadian Award or a U.S. Award and the applicable Vesting conditions and may specify such other
terms and conditions consistent with the terms of the Plan as the Committee shall determine or as
shall be required under any other provision of the Plan. References in the Plan to an instrument
of grant shall include any supplements or amendments thereto.




          (b) Vesting Conditions. Subject to the terms of the Plan, the Committee shall
determine any and all conditions to the Vesting of all and/or any portion of Awards and shall
specify the material terms thereof in the applicable instrument of grant on, or as soon as
reasonably practicable following, the Effective Date of the Award. Vesting of an Award, or portion
thereof, may be conditioned upon passage of time, continued employment, satisfaction of Performance
Criteria, or any combination of the foregoing, as determined by the Committee, provided that (i)
except in connection with the death of a Participant, such conditions permit all or any portion of
any Award to become Vested no earlier than the first anniversary of the Effective Date of the
Award, (ii) performance conditions to Vesting of any portion of an Award




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will be measured over a period greater than one year, (iii) except in connection with the
death or Retirement of a Participant, Awards of Restricted Stock Units will not become Vested more
rapidly than ratably over the three (3) year period following the Effective Date thereof and (iv)
with respect to any Award that is intended to satisfy the requirements for “performance-based
compensation” under Section 162(m) of the Code, the applicable Performance Criteria shall be a
measure based on one or more Qualifying Performance Criteria determined by the Committee on or
prior to the Effective Date of such Award or as of any later time permitted under the applicable
provisions of Section 162(m) of the Code. Subject to compliance with Section 162(m) of the Code,
if applicable, the Committee may modify or supplement any Performance Criteria applicable to the
Vesting of an outstanding Award to the extent the Committee deems appropriate to reflect any
material change after the Effective Date of the Award in the relevant business operations of the
Company or applicable business unit or individual or group of Companies.




          (c) Discretion of the Committee. Notwithstanding any other provision hereof or of any
applicable instrument of grant, the Committee may (i) accelerate or waive any condition to the
Vesting of any Award, all Awards, any class of Awards or Awards held by any group of Participants
or (ii) if the Committee has reason to believe that grounds exist to terminate a Participant’s
employment for Cause, suspend the right of a Participant to exercise any Vested Award or receive
payment in settlement of any Vested Award pending resolution of such matter by the Company,
provided, however, that the Committee shall not have or exercise any discretion under this Section
5(c) or any other provision of the Plan (x) that would permit or result in Vesting of an Award (or
portion thereof) prior to the first anniversary of the Effective Date of such Award (except in the
event of a Participant’s death) or (y) to modify the terms or conditions of any Performance
Criteria or waive the satisfaction thereof with respect to any Award that is intended to satisfy
the requirements for “performance-based compensation” under Section 162(m) of the Code.




          (d) No Repricing. The Subscription Price for Shares subject to any Award of Options
and any related Tandem SARs and the Base Price for Shares subject to any Award of Stand-Alone SARs
may not be reduced after the Effective Date of the Award thereof, either directly or indirectly,
without prior shareholder approval, except for adjustments pursuant to Section 11 of the Plan.




          (e) Deferral of Payment or Other Settlement of Vested Awards. The terms and
conditions applicable to any Award (or portion thereof) granted to a Participant who is subject to
taxation under the Code and that constitutes “deferred compensation” subject to Section 409A of the
Code are intended to comply with Section 409A of the Code. The terms of any such Award (or portion
thereof) permitting the deferral of payment or other settlement thereof or providing for settlement
in cash in lieu of Shares shall be subject to such requirements and shall be administered in such
manner as the Committee may determine to be necessary or appropriate to comply with the applicable
provisions of Code Section 409A as in effect from time to time.






11









 


     Section 6. Stock Options




          (a) General. The Committee may from time to time grant one or more Awards of Options
to key employees of the Company on such terms and conditions, consistent with the Plan, as the
Committee shall determine. The instrument of grant evidencing an Award of Options shall specify
the Subscription Price for each Share subject to such Option, the maximum term of such Option,
whether Tandem SARs are granted with respect to all or any such Options and whether such Options
(or any portion thereof) are intended to qualify as Incentive Stock Options.




          (b) Vesting Terms. Options granted under the Plan shall become Vested at such times,
in such installments and subject to such terms and conditions consistent with Section 5(b) hereof
(including satisfaction of Performance Criteria and/or continued employment) as may be determined
by the Committee and set forth in the applicable instrument of grant.




          (c) Subscription Price. The Subscription Price for each Share subject to an Option
shall not be less than 100% of the Market Value of a Share on the Effective Date of the Award of
such Option. The Subscription Price shall be stated and payable in Canadian dollars, if a Canadian
Award, and in United States dollars, if a U.S. Award.




          (d) Exercise of Vested Options. Vested Options may be exercised in accordance with
such procedures as may be established by the Committee, including procedures permitting the
exercise of Options through a broker-assisted sale and remittance program authorized by the
Committee. The Participant must pay or satisfy, in accordance with the terms of this Subsection
(d) and Section 15(b), the full amount of the Subscription Price and withholding amounts with
respect to such exercise and the Company may require as a condition to such exercise and/or the
issuance or delivery of Shares to a Participant upon the Participant’s payment or satisfaction of
such amounts in full in accordance with this Section 6(d) and Section 15(b) hereof. The
Subscription Price shall be payable on exercise of a Vested Option:





     (i) in Canadian dollars, if a Canadian Award, or in United States dollars, if a U.S.
Award, unless the Committee determines otherwise, and may be paid in cash, or by wire
transfer, certified cheque, banker’s cheque or bank draft or other similar methods of cash
equivalent payment acceptable to the Committee or any combination thereof;




     (ii) by the surrender and transfer of Shares then owned by the Participant to such
Person as the Committee may direct;




     (iii) by the withholding of Shares otherwise issuable upon exercise of such Vested
Option or by payment pursuant to a broker-assisted sale and remittance program authorized by
the Committee; or




     (iv) in any combination of the foregoing.



     Shares surrendered or withheld in accordance with clause (ii) or (iii) of this Subsection (d)
shall be valued at the Market Value thereof on the date of exercise, determined in Canadian dollars
if used to purchase a Share subject to a Vested Canadian Award or in United States dollars if used
to purchase a Share subject to a Vested U.S. Award. The Committee may impose, at any time, such
limitations and prohibitions on the use of Shares in payment of the Subscription



12









 






Price as it deems appropriate and shall determine acceptable methods of surrendering or
withholding Shares as payment of the Subscription Price.



          (e) Option Period. Unless the Committee provides for a shorter option period at or
after the Effective Date of an Award of Options and subject to Section 9 hereof, all or any part of
the Options covered by an Award shall, to the extent Vested, be exercisable, from time to time,
within the period commencing on the date such Option or part thereof becomes Vested and ending on
the day prior to the tenth anniversary of the Effective Date of such Award.




          (f) Incentive Stock Options. Options intended to qualify as Incentive Stock Options
may only be granted to employees of the Company within the meaning of the Code, as determined by
the Committee. No Incentive Stock Option shall be granted to any Participant if immediately after
the grant of such Award, such Participant would own stock, including stock subject to outstanding
Awards held by such Participant under the Plan or any other plan established by the Company,
amounting to more than ten percent (10%) of the total combined voting power or value of all classes
of stock of the Company. To the extent that the instrument of grant evidencing the Award of an
Option specifies that an Option is intended to be treated as an Incentive Stock Option, the Option
is intended to qualify to the greatest extent possible as an “incentive stock option” within the
meaning of Section 422 of the Code, and shall be so construed; provided, however, that any such
designation shall not be interpreted as a representation, guarantee or other undertaking on the
part of the Company that the Option is or will be determined to qualify as an Incentive Stock
Option. If and to the extent that the aggregate Subscription Price of Options subject to any
portion of any Award of Incentive Stock Options that become Vested in any calendar year exceeds the
$100,000 limitation of Section 422 of the Code, such Options shall not be treated as Incentive
Stock Options notwithstanding any designation otherwise. Certain decisions, amendments,
interpretations or other actions by the Committee and certain actions by a Participant may cause an
Option to cease to qualify as an Incentive Stock Option pursuant to the Code and, by accepting an
Award of Options hereunder, the Participant thereby consents and agrees in advance to any such
disqualifying action.




     Section 7. Stock Appreciation Rights



          (a) General. The Committee may from time to time grant one or more Awards of Stock
Appreciation Rights to key employees of the Company on such terms and conditions, consistent with
the Plan, as the Committee shall determine.




          (b) Tandem SARs. (i) Tandem SARs may be granted at or after the Effective Date of
the related Award of Options, and each Tandem SAR shall be subject to the same terms and conditions
and denominated in the same currency as the Option to which it relates and the additional terms and
conditions set forth in this Section 7.





     (ii) On exercise of a Tandem SAR, the related Option shall be cancelled and the
Participant shall be entitled to an amount in settlement of such Tandem SAR calculated and
in such form as provided in Subsection (d) below.



13









 






     (iii) Tandem SARs may be exercised only if and to the extent the Options related thereto
are then Vested and exercisable and shall be exercised in accordance with such procedures as
may be established by the Committee.



          (c) Stand-Alone SARs. (i) Stand-Alone SARs granted under the Plan shall become
Vested at such times, in such installments and subject to such terms and conditions consistent with
Section 5(b) hereof (including satisfaction of Performance Criteria and/or continued employment) as
may be determined by the Committee and set forth in the applicable instrument of grant.





     (ii)
The Base Price for each Share subject to a Stand-Alone SAR shall not be less than
100% of the Market Value of a Share on the Effective Date of the Award of such Stand-Alone
SAR.




     (iii) Unless the Committee provides for a shorter period at or after the Effective Date
of an Award of Stand-Alone SARs and subject to Section 9 hereof, all or any part of the
Stand-Alone SARs covered by an Award shall, to the extent Vested, be exercisable, from time
to time, within the period commencing on the date such Stand-Alone SARs or part thereof
becomes Vested and ending on the day prior to the tenth anniversary of the Effective Date of
such Award.



          (d) Exercise and Settlement. Upon exercise thereof and subject to payment or other
satisfaction of all related withholding obligations in accordance with Section 15(b) hereof, Stock
Appreciation Rights (and, in the case of Tandem SARs, the related Options) shall be settled by
payment or delivery, in cash, Shares or any combination thereof, as determined by the Committee, of
an aggregate amount equal to:




          the product of





	 	(A)	 	the excess of the Market Value of a Share on
the date of exercise over the Subscription Price or Base Price for a
Share under the applicable Stock Appreciation Right,




          multiplied by





	 	(B)	 	the number of Stock Appreciation Rights
exercised.




     Any cash payment in settlement of a Stock Appreciation Right shall be payable in Canadian
dollars, if made with respect to a Canadian Award, and in United States dollars, if made with
respect to a U.S. Award. To the extent any portion of Stock Appreciation Rights are settled in
Shares, such settlement shall be made by delivery of the greatest number of Shares having a Market
Value on the date of exercise equal to the amount so settled.



     Section 8. Restricted Stock Units and Performance Stock Units 



          (a) General. The Committee may from time to time grant one or more Awards of
Restricted Stock Units and/or Performance Stock Units to key employees of the Company on such terms
and conditions, consistent with the Plan, as the Committee shall determine.




14









 







          (b) Vesting Terms. Restricted Stock Units and/or Performance Stock Units shall become
Vested at such times, in such installments and subject to such terms and conditions consistent with
Section 5(b) hereof as may be determined by the Committee and set forth in the applicable
instrument of grant, provided that the conditions to Vesting of Restricted Stock Units shall be
based on the Participant’s continued employment, without regard to the satisfaction of any
Performance Criteria, and the conditions to Vesting of Performance Stock Units shall be based on
the satisfaction of Performance Criteria either alone or in addition to any other Vesting
conditions as may be determined by the Committee consistent with Section 5(b) hereof.




          (c) Settlement. Unless deferral of payment in settlement of Restricted Stock Units
and/or Performance Stock Units is permitted or required under the terms of the Award thereof,
Restricted Stock Units and Performance Stock Units shall be settled upon or as soon as reasonably
practicable following the Vesting thereof, subject to payment or other satisfaction of all related
withholding obligations in accordance with Section 15(b) hereof. Settlement shall be made in cash,
Shares or any combination thereof, as determined by the Committee. Settlement of Restricted Stock
Units and/or Performance Stock Units in Shares shall be made by delivery of one Share for each such
Restricted Stock Unit or Performance Stock Unit then being settled. Settlement of Restricted Stock
Units or Performance Stock Units in cash shall be made by payment of an aggregate amount equal to:




          the product of





	 	(A)	 	the Market Value of a Share on the applicable
settlement date specified by the Committee,




          multiplied by





	 	(B)	 	the number of Restricted Stock Units or
Performance Stock Units then being settled.




          Any cash payment in settlement of Restricted Stock Units or Performance Stock Units shall be
payable in Canadian dollars, if made with respect to a Canadian Award, and in United States
dollars, if made with respect to a U.S. Award.




          (d) Dividend Equivalents. The terms of an Award of Restricted Stock Units or
Performance Stock Units may include provision for the accrual of dividend equivalent amounts with
respect to cash dividends paid in the ordinary course to shareholders in respect of outstanding
Shares. If the Committee determines that dividend equivalent amounts will be accrued in respect of
Restricted Stock Units or Performance Stock Units subject to an Award, if and when cash dividends are paid with respect to Shares (other than any extraordinary dividend) to
shareholders of record as of a record date occurring during the period from the Effective Date of
the applicable Award to the date of settlement thereof, a number of additional Restricted Stock
Units or Performance Stock Units, as the case may be, shall be granted to the holder of such Award
equal to the greatest number of whole Shares having a Market Value, as of the payment date for such
dividend, equal to the product of (i) the cash dividend paid with respect to a Share multiplied by
(ii) the number of Restricted Stock Units or Performance Stock Units subject to such Award as of
the record date for the dividend. The additional Restricted




15









 






Stock Units or Performance Stock Units granted to a Participant shall be subject to the same
terms and conditions, including Vesting and settlement terms, as the corresponding Restricted Stock
Units or Performance Stock Units, as the case may be. The Committee may provide that, in lieu of
the grant of additional Restricted Stock Units or Performance Stock Units, dividend equivalent
amounts may be accrued and paid in cash, at the time and on the same terms and conditions, of
settlement of the corresponding Restricted Stock Units or Performance Stock Units, as the case may
be.




     Section 9. Consequences of Termination.



          (a) Options/Stock Appreciation Rights. Unless otherwise determined by the Committee,
outstanding Options and/or Stock Appreciation Rights held by a Participant (or the executors or
administrators of such Participant’s estate, any person or persons who acquire the right to
exercise Options and/or Stock Appreciation Rights directly from the Participant by bequest or
inheritance or any other permitted transferee of the Participant under Section 10 hereof) as of the
Participant’s Date of Termination shall be subject to the following clauses (i) though (iv), as
applicable; except that, (x) in all events, the period for exercise of Options and/or Stock
Appreciation Rights shall end no later than the last day of the maximum term thereof established
under Section 6(e) or 7(c)(iii), as applicable, and (y) unless otherwise determined by the
Committee, any outstanding Options and/or Stock Appreciation Rights that are subject to Vesting
conditions based in whole or part upon the satisfaction of Performance Criteria and that have not
become Vested prior to the Participant’s Date of Termination shall immediately be cancelled and
forfeited and all rights and interests of the holder or beneficiary thereof shall thereupon
terminate, in all cases, for no consideration.





     (i) In the case of a Participant’s Termination due to Retirement, (x) those of the
Participant’s outstanding Options and/or Stock Appreciation Rights that have become Vested
prior to the Participant’s Date of Termination shall continue to be exercisable during the
period ending on the three (3) year anniversary of the Date of Termination and (y) those of
the Participant’s outstanding Options and/or Stock Appreciation Rights that have not become
Vested prior to the Participant’s Date of Termination shall become Vested and exercisable as
of the later of the Date of Termination and the one year anniversary of the Effective Date
of the Award thereof and thereafter shall continue to be exercisable for the remaining
portion of the period ending on the three (3) year anniversary of the Date of Termination.




     (ii) In the case of a Participant’s Termination due to death, (x) those of the
Participant’s outstanding Options and/or Stock Appreciation Rights that have not become
Vested prior to the Participant’s Date of Termination shall become Vested and exercisable as
of the Date of Termination and (y) all of the Participant’s outstanding Options and/or Stock
Appreciation Rights shall continue to be exercisable during the period ending on the two (2)
year anniversary of the Date of Termination.




     (iii) In the case of a Participant’s Termination due to the Participant’s resignation
or the Participant’s Termination Without Cause, (x) those of the Participant’s outstanding
Options and/or Stock Appreciation Rights that have not become Vested prior to the Date of
Termination shall be forfeited and cancelled as of such Date of



16









 






Termination and (y) those of the Participant’s outstanding Options and/or Stock
Appreciation Rights that have become Vested prior to the Participant’s Date of Termination
shall continue to be exercisable during the ninety (90) day period following such Date of
Termination.




     (iv) In the case of a Participant’s Termination due to a Qualifying Termination Without
Cause, (x) those of the Participant’s outstanding Options and/or Stock Appreciation Rights
that have become Vested prior to the Participant’s Date of Termination shall continue to be
exercisable during the Participant’s Extension Period and during the period ending ninety
(90) days immediately following the last day of such Extension Period, (y) those of the
Participant’s outstanding Options and/or Stock Appreciation Rights that have not become
Vested prior to the Participant’s Date of Termination but would have become Vested during
the Participant’s Extension Period subject only to the Participant’s continued employment
with the Company for all or a portion of the Extension Period shall remain outstanding and
shall become Vested and exercisable as of the scheduled date for Vesting as if the
Participant’s employment had continued during the Extension Period, and thereafter shall
continue to be exercisable during the remaining portion of the Extension Period and the
ninety (90) day period immediately following the last day of the Extension Period and (z)
subject to the proviso below, all other outstanding Options and/or Stock Appreciation Rights
shall be forfeited and cancelled as of the Participant’s Date of Termination; provided
however that if a Participant subject to this clause (iv) would have qualified for
Retirement had his or her employment with the Company continued for all or a portion of the
Participant’s Extension Period, the rights of such Participant (or any permitted transferee
thereof) with respect to his or her outstanding Options and/or Stock Appreciation Rights
shall be governed by clause (i) of this Section 9 effective as of the date the Participant
would have first qualified for Retirement.


Options and/or Stock Appreciation Rights that are not exercised prior to the expiration of the
exercise period following a Participant’s Date of Termination permitted under this Section 9(a)
shall automatically expire on the last day of such period.




          (b) Restricted Stock Units and Performance Stock Units. Unless otherwise determined
by the Committee, upon a Participant’s Termination for any reason, any then outstanding Restricted
Stock Units and Performance Stock Units that have not become Vested prior to the Participant’s Date
of Termination shall immediately be cancelled and forfeited and all rights and interests in respect
of such Restricted Stock Units and Performance Stock Units of the Participant (and the executors
and administrators of such Participant’s estate, any person or persons acquiring any interest
directly from the Participant by bequest or inheritance and any other permitted transferee of the
Participant under Section 10 hereof)) shall thereupon terminate, in all cases, for no
consideration.




          (c) Termination for Cause. Notwithstanding any other provision hereof or in any
instrument of grant, in the case of a Participant’s Termination for Cause, any and all then
outstanding Awards granted to the Participant, whether or not Vested, shall be immediately
forfeited and cancelled, without any consideration therefore, as of the commencement of the day
that notice of such termination is given.




17









 







     Section 10. Transferability.



          (a) Transfer Restrictions. Unless otherwise provided in the instrument of grant
evidencing an Award, no Award, and no rights or interests therein, shall or may be assigned,
transferred, sold, exchanged, encumbered, pledged or otherwise hypothecated or disposed of by a
Participant other than by testamentary disposition by the Participant or the laws of intestate
succession. No such interest shall be subject to execution, attachment or similar legal process
including without limitation seizure for the payment of the Participant’s debts, judgments, alimony
or separate maintenance.




          (b) Permitted Transfers. Notwithstanding the foregoing, the Committee may provide in
the applicable instrument of grant that an Award is transferable or assignable (a) in the case of a
transfer without the payment of any consideration, to the Participant’s spouse, former spouse,
children, stepchildren, grandchildren, parent, stepparent, grandparent, sibling, persons having one
of the foregoing types of relationship with a Participant due to adoption and any entity in which
these persons (or the Participant) own more than fifty percent of the voting interests and (b) to
an entity in which more than fifty percent of the voting interests are owned by these persons (or
the Participant) in exchange for an interest in that entity. Following any such transfer or
assignment, the Award shall remain subject to substantially the same terms applicable to the Award
while held by the Participant to whom it was granted, as modified as the Committee shall determine
appropriate, and, as a condition to such transfer, the transferee shall execute an agreement
agreeing to be bound by such terms. An Incentive Stock Option may be transferred or assigned only
to the extent consistent with Section 422 of the Code. Any purported assignment or transfer that
does not qualify under this Section 10 shall be void and unenforceable against the Company.




     Section 11. Alteration of Share Capital.



          (a) No Corporate Action Restriction. The existence of the Plan and/or the Awards
granted hereunder shall not limit, affect or restrict in any way the right or power of the Board of
Directors or the shareholders of Nortel to make or authorize (i) any adjustment, recapitalization,
reorganization or other change in the capital structure or business of any Company, (ii) any
merger, consolidation, amalgamation or change in ownership of any Company, (iii) any issue of
bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the capital
stock of any Company or the rights thereof, (iv) any dissolution or liquidation of any Company, (v)
any sale or transfer of all or any part of the assets or business of any Company or (vi) any other
corporate act or proceeding with respect to any Company. No Participant or any other Person shall
have any claim against any member of the Board of Directors or the Committee, or any Company or any
employees, officers or agents of any Company as a result of any such action.




          (b) Recapitalization Adjustment.





     (i) In the event that (A) a dividend shall be declared upon the Shares or other
securities of Nortel payable in Shares or other securities of Nortel, (B) the outstanding
Shares shall be changed into or exchanged for a different number or kind of shares or other
securities of Nortel or of another corporation or entity, whether through an



18









 






arrangement, plan of arrangement, amalgamation or other similar statutory procedure or
a share recapitalization, subdivision, consolidation or otherwise, (C) there shall be any
change, other than those specified in (A) or (B) above, in the number or kind of outstanding
Shares or of any shares or other securities into which such Shares shall have been changed
or for which they shall have been exchanged, or (D) there shall be a distribution of assets
or shares to shareholders of Nortel out of the ordinary course of business, then, if the
Board of Directors shall determine that an adjustment in the number or kind of Shares
theretofore authorized but not yet covered by Awards, in the number or kind of Shares
theretofore subject to outstanding Awards, in the Subscription Price or Base Price
applicable under any outstanding Awards, in the number or kind of Shares generally available
for Awards or available in any calendar year under the Plan and/or such other adjustment as
may be appropriate should be made, such adjustment shall be made by the Board of Directors
and shall be effective and binding for all purposes.




     (ii) In the case of any such adjustment as provided for in this Section, the
Subscription Price or Base Price shall be adjusted appropriately to reflect such adjustment.
No adjustment provided for in this Section shall require Nortel to issue a fractional Share
and the total adjustment with respect to each outstanding Award shall be limited
accordingly.




     (iii) Any adjustment made pursuant to this Section with respect to the terms of an
Option shall require a similar modification with respect to the terms of the Stock
Appreciation Right to which such Option relates.



     Section 12. Amendment and Termination From time to time the Board of Directors may,
in addition to its powers under the Plan, add to or amend any of the provisions of the Plan or
suspend or terminate the Plan or amend the terms of any then outstanding Award granted under the
Plan or its related instrument of grant; provided, however, that (a) no such amendment, suspension
or termination shall be made at any time to the extent such action would materially adversely
affect the existing rights of a Participant with respect to any then outstanding Award without his
or her consent in writing, provided that the Committee may amend the terms of, or suspend or
terminate, an Award of Incentive Stock Options at any time after the Effective Date of such Award
in a manner that results or could result in the failure of such Options to qualify or continue to
qualify as “incentive stock options” within the meaning of Section 422 of the Code without the
consent of the Participant, and (b) Nortel shall obtain shareholder approval of any amendment that
the Company determines constitutes a material amendment within the meaning of the applicable rules
of the NYSE (other than an amendment pursuant to the adjustment provisions of Section 11), and such
amendment shall become effective only upon shareholder approval thereof, including, without
limitation, any such amendment that would:




     (i) increase the maximum number of Shares for which Awards may be granted under the
Plan;




     (ii) reduce the Subscription Price or Base Price at which Options or Stock Appreciation
Rights may be granted below the price provided for in Sections 6(c) and 7(c);



19









 






     (iii) reduce the Subscription Price or Base Price of outstanding Options or Stock
Appreciation Rights;




     (iv) extend the term of the Plan or the maximum term of Options granted under the Plan;




     (v) change the class of persons eligible for grants of Awards under the Plan;




     (vi) increase the limits in Section 4;or




     (vii) a change which would permit all or any portion of an Award to become Vested prior
to the first anniversary of the Effective Date of such Award, other than in the event of the
death of a Participant.



     Section 13. Regulatory Approval. Notwithstanding anything herein to the contrary,
Nortel shall not be obligated to cause to be issued any Shares or cause to be issued and delivered
any certificates evidencing Shares pursuant to the Plan, unless and until Nortel is advised by its
legal counsel that the issuance and delivery of the Shares and such Share certificates is in
compliance with all applicable laws, regulations, rules, orders of governmental or regulatory
authorities in Canada, the United States and any other applicable jurisdiction, and the
requirements of the Stock Exchanges. Nortel shall in no event be obligated to take any action in
order to cause the issuance or delivery of Shares or such certificates to comply with any such
laws, regulations, rules, orders or requirements. The Committee may require, as a condition of the
issuance and delivery of such Shares or certificates and in order to ensure compliance with such
laws, regulations, rules, orders and requirements, that the Participant, or any permitted
transferee of the Participant under Section 9 hereof or, after his or her death, the Participant’s
estate, as described in Section 9 hereof, make such covenants, agreements and representations as
the Committee deems necessary or desirable.



     Section 14. No Additional Rights. No Person shall have any claim or right to be
granted Awards under the Plan, and the grant of any Awards under the Plan shall not be construed as
giving a Participant any right to continue in the employment of the Company or affect the right of
the Company to terminate the employment of a Participant. Unless otherwise determined by the
Committee, neither any period of notice, if any, nor any payment in lieu thereof, upon Termination
shall be considered as extending the period of employment for the purposes of the Plan.



     Section 15. Miscellaneous Provisions.



          (a) Shareholder Rights. A Participant shall not have the right or be entitled to
exercise any voting rights, receive any dividends or have or be entitled to any other rights as a
shareholder in respect of Shares subject to an Award unless and until such Shares have been paid
for in full and issued and certificates therefor have been issued to the Participant. A
Participant entitled to Shares as a result of the exercise of an Option or Stock Appreciation Right
or the settlement of a Restricted Stock Unit or a Performance Stock Unit shall not be deemed for
any purpose to be, or have any such rights as a shareholder of Nortel by virtue of such exercise or
settlement, except to the extent a Share certificate is issued therefor and then only from the date
such certificate is issued. No adjustment shall be made for dividends or distributions or other




20









 






rights for which the record date is prior to the date such share certificate is issued, other
than adjustments for dividend equivalent amounts to the extent provided under Section 8(d) hereof.




          (b) Withholding. The Company may withhold from any amount payable to a Participant,
either under this Plan or otherwise, such amount as may be necessary so as to ensure that the
Company will be able to comply with the applicable provisions of any federal, provincial, state or
local law relating to the withholding of tax or that any other required deductions are paid or
otherwise satisfied, including withholding of the amount, if any, includable in the income of a
Participant. The Company shall also have the right in its discretion to satisfy any such liability
for withholding or other required deduction amounts by retaining or acquiring any Shares, or
retaining any amount payable, which would otherwise be issued or delivered, provided or paid to a
Participant hereunder. The Company may require a Participant, as a condition to exercise of an
Option or Stock Appreciation Right or the settlement of a Restricted Stock Unit or a Performance
Stock Unit, to pay or reimburse the Company for any such withholding or other required deduction
amounts related to the exercise of Options or Stock Appreciation Rights or settlement of Restricted
Stock Units or Performance Stock Units.




          (c) Governing Law. The Plan, all instruments of grant evidencing Awards granted
hereunder and any other agreements or other documents relating to the Plan shall be interpreted and
construed in accordance with the laws of the Province of Ontario, except to the extent the terms of
the Plan or of any supplement or appendix to the Plan expressly provides for application of the
laws of another jurisdiction. The Committee may provide that any dispute as to any Award shall be
presented and determined in such forum as the Committee may specify, including through binding
arbitration. Any reference in the Plan, in any instrument of grant evidencing Awards granted
hereunder or in any other agreement or document relating to the Plan to a provision of law or to a
rule or regulation shall be deemed to include any successor law, rule or regulation of similar
effect or applicability.




          (d) Compliance with Laws of Other Jurisdictions. Awards may be granted to
Participants who are citizens or residents of a jurisdiction other than Canada or the United States
on such terms and conditions different from those under the Plan as may be determined by the
Committee to be necessary or advisable to achieve the purposes of the Plan while also complying
with applicable local laws, customs and tax practices, including any such terms and conditions as
may be set forth in any supplement or appendix to the Plan intended to govern the terms of any such
Award. In no event shall the eligibility, grant, exercise or settlement of an Award constitute a
term of employment, or entitlement with respect to employment, of any employee.




     Section 16. Effective Date and Term of Plan.



          (a) Effective Date. The Plan, and any amendments to the Plan, shall become effective
upon its or their adoption by the Board of Directors, subject to approval by the shareholders of
Nortel at the next annual meeting of shareholders of Nortel or any adjournment thereof, if
required. If the shareholders do not approve the Plan, or any amendments to the Plan requiring
shareholder approval, the Plan or such amendments shall not be effective, and any and all actions
taken prior thereto, including the making of any Awards subject to such approval being obtained,
shall be null and void or shall, if necessary, be deemed to have been fully rescinded.




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          (b) Termination. The Plan shall terminate on the date determined by the Board of
Directors pursuant to Section 12 hereof and no Awards may become effective under the Plan after the
date of termination, but such termination shall not affect any Awards that became effective
pursuant to the Plan prior to such termination. No Awards may be made after the tenth anniversary
of the effective date of the Plan.





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