Exhibit 10.3


 


ARCH CAPITAL GROUP LTD.

Non-Qualified Stock Option Agreement


 


FOR GOOD AND VALUABLE
CONSIDERATION, receipt of which is hereby acknowledged, Arch Capital Group Ltd.
(the “Company”), a Bermuda company, hereby grants to                       ,
an employee of the Company on the date hereof (the “Option Holder”), the option
to purchase common shares, $0.01 par value per share, of the Company (“Shares”),
upon the following terms:


WHEREAS, the Option
Holder has been granted the following award under the Company’s [2002/2005]
Long Term Incentive and Share Award Plan (the “Plan”);


(a)           Grant.  The Option Holder is hereby granted an option
(the “Option”) to purchase                       
Shares (the “Option Shares”) pursuant to the Plan, the terms of which are
incorporated herein by reference.  The
Option is granted as of February 23, 2006 (the “Date of Grant”) and such grant
is subject to the terms and conditions herein and the terms and conditions of
the applicable provisions of the Plan. 
This Option shall not be treated as an incentive stock option as defined
in Section 422 of the Internal Revenue Code of 1986, as amended.  In the event of any conflict between this
Agreement and the Plan, the Plan shall control.


(b)           Status
of Option Shares.  Upon issue, the Option
Shares shall rank equally in all respects with the other Shares.


(c)           Option
Price.  The purchase price for the
Option Shares shall be, except as herein provided, $ 56.27 per Option Share,
hereinafter sometimes referred to as the “Option Price,” payable immediately in
full upon the exercise of the Option.


(d)           Term
of Option.  The Option may be exercised
only during the period (the “Option Period”) set forth in paragraph (f) below
and shall remain exercisable until the tenth anniversary of the Date of
Grant.  Thereafter, the Option Holder
shall cease to have any rights in respect thereof.  The right to exercise the Option shall be
subject to sooner termination as provided in paragraph (j) below.


(e)           No
Rights of Shareholder.  The Option
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
in the Company, either at law or in equity.


(f)            Exercisability.  Except as otherwise set forth in paragraph
(j) below, the Option shall become exercisable in three equal annual installments on the first, second and third anniversaries
of the Date of Grant, in each case subject to paragraph (j) below.  Subject to paragraph (j) below, the Option
may be exercised at any time or from time to time during the Option Period in
regard to all or any portion of the Option which is then exercisable, as may be
adjusted pursuant to paragraph (g) below.


(g)           Adjustments
for Recapitalization and Dividends. 
In the event that, prior to the expiration of the Option, any dividend
in Shares, recapitalization, Share split, reverse











split,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other such change affects the Shares such that they are
increased or decreased or changed into or exchanged for a different number or
kind of shares, other securities of the Company or of another corporation or
other consideration, then in order to maintain the proportionate interest of
the Option Holder and preserve the value of the Option, (i) there shall
automatically be substituted for each Share subject to the unexercised Option
the number and kind of shares, other securities or other consideration
(including cash) into which each outstanding Share shall be changed or for
which each such Share shall be exchanged, and (ii) the exercise price
shall be increased or decreased proportionately so that the aggregate purchase
price for the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.


(h)           Nontransferability.  The Option, or any interest therein, may not
be assigned or otherwise transferred, disposed of or encumbered by the Option
Holder, other than by will or by the laws of descent and distribution.  During the lifetime of the Option Holder, the
Option shall be exercisable only by the Option Holder or by his or her guardian
or legal representative.  Notwithstanding
the foregoing, the Option may be transferred by the Option Holder to members of
his or her “immediate family “ or to a trust or other entity established for
the exclusive benefit of solely one or more members of the Option Holder’s “immediate
family.”  Any Option held by the
transferee will continue to be subject to the same terms and conditions that
were applicable to the Option immediately prior to the transfer, except that
the Option will be transferable by the transferee only by will or the laws of
descent and distribution.  For purposes
hereof, “immediate family” means the Option Holder’s children stepchildren,
grandchildren, parents, stepparents, grandparents, spouse, siblings (including
half brother and sisters), in laws, and relationships arising because of legal
adoption.


(i)            Exercise
of Option.  In order to exercise the
Option, the Option Holder shall submit to the Company an instrument in writing
signed by the Option Holder, specifying the whole number of Option Shares in
respect of which the Option is being exercised, accompanied by payment, in a
manner acceptable to the Company (which shall include a broker assisted exercise
arrangement), of the Option Price for the Option Shares for which the Option is
being exercised.  Payment to the Company
in cash or Shares already owned by the Option Holder (provided that the Option
Holder has owned such Shares for a minimum period of six months or has
purchased such Shares on the open market) and having a total Fair Market Value
(as defined below) equal to the exercise price, or in a combination of cash and
such Shares, shall be deemed acceptable for purposes hereof.  Option Shares will be issued accordingly by
the Company, and a share certificate dispatched to the Option Holder within 30
days.


The Company shall not be
required to issue fractional Shares upon the exercise of the Option. If any
fractional interest in a Share would be deliverable upon the exercise of the Option
in whole or in part but for the provisions of this paragraph, the Company, in
lieu of delivering any such fractional share therefor, shall pay a cash
adjustment therefor in an amount equal to their Fair Market Value (or if any
Shares are not publicly traded, an amount equal to the book value per share at
the end of the most recent fiscal quarter) multiplied by the fraction of the
fractional share which would otherwise have been issued hereunder.  Anything to the contrary herein



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notwithstanding, the
Company shall not be obligated to issue any Option Shares hereunder if the
issuance of such Option Shares would violate the provision of any applicable
law, in which event the Company shall, as soon as practicable, take whatever
action it reasonably can so that such Option Shares may be issued without
resulting in such violations of law.  For
purposes hereof, Fair Market Value shall mean the mean between the high and low
selling prices per Share on the immediately preceding date (or, if the Shares
were not traded on that day, the next preceding day that the Shares were
traded) on the principal exchange on which the Shares are traded, as such
prices are officially quoted on such exchange.


(j)            Termination
of Service.


1.             In
the event the Option Holder ceases to be an employee of the Company due to his
death or Permanent Disability (as defined in the Company’s Incentive
Compensation Plan), the Option, to the extent not already exercisable in full,
shall become immediately exercisable in full and shall continue to be
exercisable by the Option Holder (or his Beneficiary or estate in the event of
his death) for a period of three years following such termination of employment
(but not beyond the Option Period).


2.             In
the event of termination of employment (other than by the Company for Cause, as
such term is defined in the Company’s Incentive Compensation Plan) after the
attainment of Retirement Age (as defined in the Company’s Incentive Compensation
Plan), the Option shall continue to become exercisable on the schedule set
forth in paragraph (f) above so long as the Option Holder does not engage in
any activity in competition with any activity of the Company or any of its
Subsidiaries other than serving on the board of directors (or similar governing
body) of another company or as a consultant for no more than 26 weeks per
calendar year (“Competitive Activity”) and shall continue to be exercisable by
the Option Holder (or his Beneficiary or estate in the event of his death) for
the remainder of the Option Period.  In
the event the Option Holder engages in a Competitive Activity, the Option, to
the extent then exercisable, may be exercised for 30 days following the date on
which the Option Holder engages in such Competitive Activity (but not beyond
the Option Period).


3.             In
the event the Option Holder ceases to be an employee of the Company after a
Change in Control (as defined below) due to termination by the Company not for
Cause on or before the second anniversary of the occurrence of the Change in
Control, the Option, to the extent not already exercisable in full, shall
become immediately exercisable in full and shall continue to be exercisable by
the Option Holder for a period of 90 days following such termination of
employment (but not beyond the Option Period).


4.             In
the event that the Option Holder ceases to be an employee of the Company for
any other reason, except due to a termination of the Option Holder’s employment
by the Company for Cause, the Option, to the extent then exercisable, may be
exercised for 90 days following termination of employment (but not beyond the
Option Period); provided that, in the event of a Redundancy (as defined below),
the Committee, in its sole discretion, may, in accordance with its authority
under the Plan, determine



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that the
Option, to the extent not exercisable, shall become exercisable and shall continue
to be exercisable by the Option Holder for a period of 90 days following such
termination of employment (but not beyond the Option Period).


5.             In
the event of a termination of the Option Holder’s employment for Cause, the
Option shall immediately cease to be exercisable and shall be immediately
forfeited.


6.             To
the extent the Option is not exercisable at the time of termination of employment
or the time the Option Holder enters into a Competitive Activity, as the case
may be, the Option shall be immediately forfeited.


7.             For purposes of this
Option, service with any of the Company’s Subsidiaries (as defined in the Plan) shall be considered to be service with
the Company.


8.             “Change in Control” shall mean:


(A)            any
person (within the meaning of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), other than a Permitted Person, is or becomes the “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of Voting Securities representing 50% or more of the total voting
power or value of all the then outstanding Voting Securities; or


(B)              the
individuals who, as of the date hereof, constitute the Board of Directors of
the Company (the “Board”) together with those who become directors subsequent
to such date and whose recommendation, election or nomination for election to
the Board was approved by a vote of at least a majority of the directors then
still in office who either were directors as of such date or whose
recommendation, election or nomination for election was previously so approved,
cease for any reason to constitute a majority of the members of the Board; or


(C)              the
consummation of a merger, consolidation, recapitalization, liquidation, sale or
disposition by the Company of all or substantially all of the Company’s assets,
or reorganization of the Company, other than any such transaction which would
(x) result in more than 50% of the total voting power and value represented by
the voting securities of the surviving entity outstanding immediately after
such transaction being beneficially owned by the former shareholders of the
Company and (y) not otherwise be deemed a Change in Control under subparagraphs
(A) or (B) of this paragraph.


“Permitted Persons” means (A) the Company;
(B) any Related Party; (C) Hellman & Friedman or any of its
subsidiaries or investment funds managed or controlled by Hellman &
Friedman; (D) Warburg



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Pincus or any of its subsidiaries or any investment
funds managed or controlled by Warburg Pincus or any of its subsidiaries; or
(E) any group (as defined in Rule 13b-3 under the Exchange Act)
comprised of any or all of the foregoing.


“Related Party” means (A) a majority-owned
subsidiary of the Company; (B) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any majority-owned
subsidiary of the Company; or (C) any entity, 50% or more of the voting
power of which is owned directly or indirectly by the shareholders of the
Company in substantially the same proportion as their ownership of Voting
Securities immediately prior to the transaction.


“Voting Security” means any security of the Company
which carries the right to vote generally in the election of directors.


9.                                       “Redundancy”
shall mean termination of employment by the Company due to its need to reduce
the size of its workforce, including due to closure of a business or a particular
workplace or change in business process.  Whether a termination of
employment is due to a “redundancy” shall be determined by the Committee in its
sole and absolute discretion, such determination being final and binding on all
parties hereto and all persons claiming through, in the name of or on behalf of
such parties.


(k)           Obligations as to Capital.  The
Company agrees that it will at all times maintain authorized and unissued
share capital sufficient to fulfill all of its obligations under the Option.


(l)            Transfer
of Shares.  The Option, the Option
Shares, or any interest in either, may be sold, assigned, pledged,
hypothecated, encumbered, or transferred or disposed of in any other manner, in
whole or in part, only in compliance with the terms, conditions and
restrictions as set forth in the governing instruments of the Company,
applicable United States federal and state securities laws and the terms and
conditions hereof.


(m)          Expenses
of Issuance of Option Shares.  The
issuance of stock certificates upon the exercise of the Option in whole or in
part, shall be without charge to the Option Holder.  The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.


(n)           Withholding.  No later than the date of exercise of the
Option granted hereunder, the Option Holder shall pay to the Company or make
arrangements satisfactory to the Committee regarding payment of any federal,
state or local taxes of any kind required by law to be withheld upon the
exercise of such Option and the Company shall, to the extent



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permitted or
required by law, have the right to deduct from any payment of any kind otherwise
due to the Option Holder, federal, state and local taxes of any kind required
by law to be withheld upon the exercise of such Option.


(o)           References.  References herein to rights and obligations
of the Option Holder shall apply, where appropriate, to the Option Holder’s
legal representative or estate without regard to whether specific reference to
such legal representative or estate is contained in a particular provision of
this Option.


(p)           Notices.  Any notice required or permitted to be given
under this agreement shall be in writing and shall be deemed to have been given
when delivered personally or by courier, or sent by certified or registered
mail, postage prepaid, return receipt requested, duly addressed to the party
concerned at the address indicated below or to such changed address as such
party may subsequently by similar process give notice of:


If to the Company:


Arch Capital Group Ltd.:


Wessex House

45 Reid Street

Hamilton HM 12 Bermuda 

Attn:  Secretary


If to the Option
Holder:


The last address delivered to the Company by the Option Holder in the
manner set forth herein.


(q)           Governing
Law.  This agreement shall be
governed by and construed in accordance with the laws of New York, without
giving effect to principles of conflict of laws thereof.


(r)            Entire
Agreement.  This agreement and the
Plan constitute the entire agreement among the parties relating to the subject
matter hereof, and any previous agreement or understanding among the parties
with respect thereto is superseded by this agreement and the Plan.


(s)           Counterparts.  This agreement may be executed in two
counterparts, each of which shall constitute one and the same instrument.



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IN WITNESS
WHEREOF, the undersigned have executed this agreement as of the Date of Grant.


	
   

  	
  ARCH CAPITAL GROUP LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
					



 



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